Professional Documents
Culture Documents
Banking Dukki
Banking Dukki
B.K. GOYAL
M.Com., LL.B.
Associate Professor
Shri Ram College of Commence
University of Delhi
© B.K. Goyal
All rights reserved with the author.
Published by:
Singhal Law Publications
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Burari, SantNagar, Delhi-84, Ph. 27616474
* The publica tions have taken all possible precau tions in publishing this book, yet ifany
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Printed at:
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PREFACE TO THE TWELFTH EDITION
In this revised edition the text of most of the chapters has been improved
and a few latest cases and examinations question with hints have been
added. I am confident that the students will find the book of great value in
understanding the legal provisions of negotiable instruments, banking and
insurance.
PAGE
Examination Questions ... 2.33
Appendix: 11th Law Commission Report ... 2.38
I. Negotiation .............. 3.1-3.16
Meaning of Negotiation 3.1
Negotiation and Assignment distinguished 3.4
Indorsement or Endorsement 3.5
Kinds of Indorsements * 3.6
Negotiation Back ... 3.10
Leading Cases ... 3.13
Examination Questions ... 3.15
. Capacity, Liability and Discharge from Liability .............. 4.1-4.35
Capacity 4.1
Liability of the Parties 4.2
Liability of drawer of bill 4.3
Liability of drawer of cheque 4.3
Liability of maker of a note and acceptor of bill 4.8
Liability of indorser 4.9
Liability of intervening parties ... 4.10
Liability of transferor by delivery ... 4.10
Discharge of parties from Liability ... 4.11
Material Alteration ... 4.13
Distinction between material alteration and forgery 4.17
Leading Cases 4.18
Examination Questions 4.33
5. Presentment .............. 5.1-5.12
Acceptance ... 5.1
Presentment for Acceptance ... 5.2
Presentment for Payment ... 5.4
Time for presentment ... 5.6
Place of presentment ... 5.7
Presentment of Cheques ... 5.8
Presentment of demand instruments ... 5.9
Examination Questions ... 5.12
(vii)
PAGE
. Dishonour of an Instrument ... . ....... 6.1-6.9
Dishonour by non-acceptance 6.1
Dishonour by non-payment 6.2
Notice of dishonour 6.2
Reasonable Time 6.6
Protest and Protest for Better Security 6.7
Examination Questions 6.9
Crossing of Cheques ......... ... 7.1-7.25
Kind of Crossing 7.2
Who may cross a cheque 7.4
Payment of crossed cheques 7.5
Leading Cases ... 7.10
Examination Questions ... 7.22
Penalties in Case of Dishonour of Cheques for
Insufficiency of Funds ........ ... 8.1-8.48
Conditions to be fulfilled for prosecution of a drawer 8.3
Offences by Companies ... 8.14
Civil action against the drawer ... 8.15
Sections 143 to 147 ... 8.15
Leading Cases ... 8.18
Examination Questions ... 8.46
Control of Banking System by Reserve Bank of India ........ ... 9.1-9.34
Meaning of "Banking" and "Banking Company" and
Forms of Businss in which a banking company may engage 9.3
Classification of Banks . 9.5
Requirement as to Minimum Paid Up Capital & Reserves 9.6
Regulation of Capital and Voting Rights 9.7
Restrictions as to Payment of Dividend ' ... 9.8
Statutory Reserve Fund 9.8
Cash Reserve of Schedule Banks 9.9
Cash Reserve in case of Non-Scheduled Banks 9.9
Statutory Liquidity Ratio 9.9
Capital Adequacy Ratio ... 9.10
Restrictions on loans and advances ... 9.10
(viii)
PAGE
Power of Reserve Bank to Control Advances by Banking
... 9.11
... 9.11
Restriction on Opening of New, and Transfer of Existing
Place of Business ... 9.13
Maintenance of a Percentage of Assets ... 9.16
Inspection ... 9.16
Powers of the Reserve Bank to give directions ... 9.17
Amendments of provisions relating to Appointments of
Managing Directors etc. to be subject to previous
approval of the Reserve Bank ... 9.19
. Leading Cases ... 9.21
Examination Questions ... 9.34
0. General Principles of Insurance .............. 10.1-10.70
General Principles of Insurance ... 10.3
Definition of Life insurance, fine insurance, marine insurance
and contract of insurance ... 10.4
General Principles of Contract of Insurance ... 10.5
1. Insurable Interest ... 10.5
2. Indemnity ...10.11
3. Subrogation ... 10.12
4. Mitigation of Loss ... 10.13
5. Risk must attach . - ... 10.13
6. Contribution ... 10.14
-7. Proximate Cause ... 10.14
8. Utmost good faith ... 10.18
Policy not to be called in question on ground of
mis-statement after two years ... 10.22
Recasting of Section 45 Suggested ... 10.27
9. Interpretation of Liability Clauses in Favour of Insured ... 10.28
Leading Cases ... 10.31
Examination Questions ... 10.65
(ix)
PAGE
LEADING CASES
Meaning and Kinds of Negotiable Instruments
1. Mohammad Akbar Khan v. Attar Singh
AIR 1936 PC 171 ... 1.32
2. Surjit Singh and Others v. Ram Rattan Sharma
AIR 1975 Gau. 14 ... 1.34
3. Ponnuswami Chettiar v. P. Vellaimuthu Chettiar
AIR 1957 Mad 355 ... 1.36
4. Nanga v. Dhannalal
AIR 1962 Raj. 68 ... 1.37
5. Ashok Yeshwant Badeve v. Surendra Madhavrao Nighojakar
(2001) 3 SCC 726: AIR 2001 SC 1315 ... 1.40
Holder and Holder in Due Course
1. Lachmi Chand v. Madan Lai Khemka
AIR 1947 All. 52 ... 2.21
2. Singheswar Mandal v. Smt. Dita Devi
AIR 1975 Pat. 81 ... 2.23
3. Nunna Gopalan v. Vuppuluri Lakshminarasamma
AIR 1940 Mad. 631 ... 2.24
4. S.D. Asirvatham and Another v. Palaniraju Mudaliar
AIR 1973 Mad. 439 ... 2.26
5. U. Ponnappa Moothan Sons v. Catholic Syrian Bank Ltd.
(1991) 1 SCC 113 ... 2.28
6. Federal Bank v. Panicker Simor Carves Ltd.
AIR 1976 Ker. 5 ... 2.31
Negotiation
1. Firm Kalka Prasad Ram Charan v. Lala Kunwar Lai Thapar
1957 All. L.J. 209 ... 3.13
Capacity, Liability and Discharge from Liability
1. London Joint Stock Bank v. Macmillan and Arthur
(1918) AC 777 ... 4.18
2. Lala Prabhu Dayal v. The Jawala Bank
AIR 1938 AIL 374 ... 4.19
3. Canara Bank Limited v. I.V. Rajagopal
(1975) 1 MLJ 420 .„ 4.19
4. Allampati Subha Reddy v. Neelapa Reddy Ramana Reddy
AIR 1966 A.P. 267 ... 4.21
(x)
PAGE
5. Shivalingappa v. P.B. Puttoppa
AIR 1971 Mysore 273 ... 4.23
6. Bihta Co-operative Development and Cane Marketing Union
Ltd. v. Bank of Bihar
AIR 1967 SC 389 ... 4.24
7. Canara Bank v. Canara Sales Corporation Ltd.
AIR 1987 SC 1603 ... 4.27
8. Jayantilal Goel v. Zubeda Khanum
AIR 1986 AP120 ... 4.31
Crossing of Cheques
1. Bapu Lal Prem Chand v. Nath Bank Ltd.
AIR 1946 Bom. 482 ... 7.10
2. Indian Bank v. Catholic Syrian Bank Ltd.
AIR 1981 Mad. 129 ... 7.12
3. Great Western Railway Co. v. London and County
Banking Co.
1901 AC 414 7.13
4. M/s Tailors Priya v. MA Gulab Chand Dhanraj
AIR 1963 Cal 36 7.15
5. Indian Overseas Bank v. Industrial Chain Concern
(1990) 1 MLH (SC) 40: (1990) 1 SCC 484: 7.18
Penalties in Case of Dishonour of Certain Cheques for
Insufficiency of Funds
1. Modi Cements Ltd. v. Kuchil Kumar Nandi
(1998) 3 SCC 249: AIR 1998 SC 1057 8.18
2. Kusum Ingots & Alloys Ltd. v. Pennor Peterson Securities
Ltd.
(2000) 2 SCC 745: AIR 2000 SC 954 8.21
3. Dalmia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies
Ltd.
(2001) 6 SCC 463: AIR 2001 SC 676 8.23
4. Suganthi Suresh Kumar v. Jageeshan
AIR 2002 SC 681: (2002) 2 SCC 420 8.27
5. M.M.T.C. Ltd. v. Medchl Chemicals and Pharama (P) Ltd.
(2002) 1 SCC 234: AIR 2002 SC 82 8.28
6. Goaplast (P) Ltd. v. Chico Ursula D'souza
(2003) 3 SCC 232: AIR 2003 SC 2035 8.30
7. C.C. Alavi Haji v. Palapetty Muhammad
(2007) 6 SCC 555: (2007) 7 SCALE 380 ‘ / 8.33
(xi)
PAGE
8. Dashrath Rupsingh Rathore v. State of Maharashtra
(2014) 9 SCC 129 ... 8.35
9. Rangappa v. Sri Mohan
(2010) 11 SCC 441 ... 8.40
10. Laxmi Dyechem v. State of Gujarat and Others
(2012) 13 SCC 375 ... 8.43
Control of Banking System by Reserve Bank of India
1. Sajjan Bank v. Reserve Bank of India
AIR 1961 Mad 8 ... 9.21
2. Canara Bank v. P.R.N. Upadhyaya
(1998) 6 SCC 526 ... 9.26
3. Shivabhai Zaverbhai Patel v. Reserve Bank of India
AIR 1986 Guj 19 ... 9.28
4. Janata Sahakari Bank Ltd. v. State of Maharashtra
AIR 1993 Bom 252 ... 9.32
General Principles of Insurance
1. New India Assurance Co. Ltd. v. M/s Zuari Industries Ltd.
(2009) 8 SCC 70 ... 10.31
2. Simmond v. Cockell
(1920) 1 KB 843 ... 10.32
3. Harris v. Poland
(1941) 1 KB 462 ... 10.33
4. Central Bank of India v. Harford Fire Insurance Co. Ltd.
AIR 1965 SC 1228 ... 10.35
5. Castellain v. Preston
(1883) 11 QBD 380 ... 10.38
6. Pink and Others v. Fleming
(1899) 25 QBD 396 ... 10.40
7. Mithoolal Nayak v. L.I.C.
AIR 1975 SC 814 ... 10.41
8. Smt. Krishnawati Puri v. L.I.C.
AIR 1981 Delhi 19 ... 10.43
9. Manohar Lal v. L.I.C
Delhi 171 ... 10.44
10. Kami Bai v. L.I.C.
AIR 1981 M.P. 69 ... 10.45
11. Rati Lal & Co. v. National Security Insurance Co. Ltd.
AIR 1964 SC 1896 ... 10.46
(Xil)
PAGE
12. Howard v. Refugee Friendly Society
54QBD644 ... 10.47
13. Kasim Ali Bulbul v. New India Insurance Co.
AIR 1968 J&K 39 ... 10.48
14. Life Insurance Corporation of India v. Smt. G.M.
Channabasamma
(1991) 1 SCC 357 ... 10.51
15. Life Insurance Corporation of India v. Ajit Ganghadhar
Shanbhag
AIR 1997 Kant 157 ... 10.52
16. Life Insurance Corporation of India v. Asha Goel
AIR 2001 SC 549 ... 10.54
17. M/s Krishna Food & Banking Industry P. Ltd. v. M/s New
India Assurance Co. Ltd.
2008 (13) SCALE 747 ... 10.57
18. Smt. Dipashri v. Life Insurance Corporation of India
AIR 1985 Bom. 192 ... 10.61
CHAPTER T $S9EjSBSBBSB9BSHS
MEANING AND KINDS OF NEGOTIABLE
< INSTRUMENTS L
• Section 1 of the Act states that nothing herein contained affects any local
usage relating to any instrument in an oriental language. Accordingly, the
provisions of the Act do not apply to hundies, since they are governed by
the special customs and usages relating to them.
1.1
1.2 Meaning and Kinds of Negotiable Instruments
Meaning of Negotiable Instrument
The Negotiable Instruments Act defines a negotiable instrument in S.
13(1) as follows:
(iv) For off party can sue or be sued - Any far-off party liable on the
negotiable instrument can sue or be sued in his own name. For example,
if a cheque is wrongly dishonoured by a drawee bank, the holder of the
cheque can file a suit against the drawer of the cheque or against any
endorser directly. If in such a case, the suit is filed by the holder against
an indorser, the endorser can also file a suit against the’ drawer and the
drawer can file a suit against the drawee bank.
(b) Date - It is also a presumption under the Act, that every negotiable
instrument bearing a date, was made or drawn on such date (S.
118). It means that, though the instrument is anti-dated, or post
dated or drawn or made on Sunday or a public holiday, the
presumption holds good, unless the contrary is proved.
(h) Proof of protest - According to Section 119 of the Act, in a suit upon
an instrument which has been, dishonoured, the court shall, on
proof of protest, presume the fact of dishonour either by non-
acceptance or non-payment. Thus, protest is a prima facie evidence
of dishonour.
PROMISSORY NOTE0102
A promissory note is defined by S. 4 of the Act as follows:—
(d) "I promise to pay B Rs. 500 and all other sums which shall be due
to him."
(e) "I promise to pay B Rs. 500, first deducting thereout any money
which he may owe me."
(f) "I promise to pay B Rs. 500 seven days after my marriage with C."
(g) "I promise to pay B Rs. 500 on D's death, provided D leaves me
enough to pay that sum."
(h) "I promise to pay B Rs. 500 and to deliver to him my black horse
on 1st January next"
The instruments respectively marked (a) and (b) are promissory notes.
The instruments respectively marked, (c), (d), (e), (f), (g) and (h) are not
promissory notes.
QI. Discuss the essential characteristics of a 'promissory note’ with reference to the
relevant provisions of law and decided cases. [LL.B., D.U.]
Q2. What do vou understand bv oromissisory not? Discuss. rLL.B., D.U.]
Negotiable Instruments, Banking and Insurance 1.7
Thus, a promissory note contains a promise in writing by a specified
person to pay a certain sum of money to a specified person or to his order.
As said earlier a promissory note cannot be made payable to bearer except
by the Reserve Bank of India or by the Central Government. The usual form
of a promissory note is as follows:—
Jan. 1, 2016
Three months after date, I promise to pay Tarun Seth or order the
sum of rupees fifty thousand with interest thereon at 12 per cent
per annum for value received.
Stamp
Sd/-
Deepak Seth
The promissory note may take any other form as no particular form is
prescribed. But in any case it must satisfy the requirement of the Act which
gives an exhaustive definition of a promissory note. The document must
fulfill all the requisites of a promissory note. Though if is usual to mention
in a note that it is made for "value received", use of such a phrase is not
essential for the validity of a promissory note. To decide whether a document
is a promissory note or not description and language of the instrument as
a whole, the circumstances under which it was executed, the intention of
the parties manifest from the face of the instrument and the surrounding
circumstance have all to be taken into consideration. An instrument which
satisfies the requirements of the definition given in S. 4 must be held to be
a promissory note irrespective of whether it is negotiable or not [Chhabildas
Mangaldas v. Luhar Kohan Aija AIR 1967 Guj. 7].
The necessary parties to a promissory note are (1) the person who
makes the promise, and who is called the maker; (2) the person to whom
the promise is made, and who is called the payee.
From the definition as given above it is clear that the following are the
essentials of a promissory note:
(iii) "I have taken Rs. 500.00 from B and I am accountable to him for
the same with interest."
(v) "The amount which I have this day received from you in cash Rs.
100.00. This sum I am bound to pay to you."
The use of the word "promise to pay" is not necessary. Hoioever, it is essential
that the instrument must indicate a promise to pay. Similarly, the word "payable"
i.e. "Rs. 10,000 payable after one year" does not constitute a promissory
note. The words "payable on demand" implies a promise to pay.
This one receipt is hereby executed by Bhai Hira Singh, Attar Singh Kharbanda,
residents o/Hotifor Rs. 43,900 (Forty three thousand nine hundred ropees) half of
Q3. Is the following a promissory note: "I acknowledge myself to be indebted to X in Rs.
1,000/- to be payable after two years." [LL.B., D.U.]
Q4. Is the following a prornissoy note: “Mrs. X, I owe you Rs. 5,000/- for value rceived.”
[LL.B., D.U.]
Q5. Is the following a promissory note : "I have received Rs. 5,000/- which I have
borrowed from you and have to be accountable to you for the same with interest."
Negotiable Instruments, Banking and Insurance 1.9
which comes to tzuenty one thousand nine hundred and fifty received from the firm
of Lala Duni Chand Hari Chand Sethi for and on behalf of Captain Mohammed
Akbar Khan of Hoti. This amount is to be payable after 2 (two) years.' Interest
at the rate of Rs. 5-4-0 (Rs. five annas four) per cent per year to be charged-
Dated this 20th day of chetar (first month of-Hindu Calendar Year Sammat
1974) corresponding to April 1,1917.
The Privy Council held that the document was plainly a receipt for
money, containing the terms on which it was to be repaid.
In Bachan Singh v. Ram Avadh, ILR 1949 All, 713, it was held that an
implied undertaking inferred merely by the use of the word "debt" or
"pronote" is not sufficient to make the instrument a promissory note. In this
the document in question ran as follows; "I, of my free zoill and accord
aporoached A and borrozved from him the sum of Rs. 100 bearing interest at the
rate of annas eight per cent per mensem. I have, therefore, executed these fezo
presents by way of a promissory note so that it may serve as evidence and be of
use zohen needed." Held, the document was not a promissory note because
it did not contain an express undertaking to pay the amount mentioned in
the instrument.
As said earlier a mere acknowledgement of indebtedness does not
make a document a promissory note. But if in addition to an
acknowledgement of indebtedness there is an express promise to pay the
amount acknowledged to be due, the instrument is a promissory note. .
In Surjit Singh and Others v. Ram Rattan Sharma, A.I.R. 1975 Gau. 14,
a stamped document was in the following terms; "We have received the sum
of Rs. 9,240 (nine thousand tzvo hundred and forty only) from Shri Ram Rattan
Sharma ofThangal Bazar, Imphal. We have received Rs.9,240/- in cash today" and
it was signed by the maker. It contained a promise to repay the loan on
demand. It also contained an indorsement by a third party guaranteeing
repayment of the money The Gauhati High Court held that it was a
nromissorv note. The Court observed that "illustration fb) to the definition
1.10 Meaning and Kinds of Negotiable Instruments
(iii) "Rs. 1,000 balance’ due to you I am still indebted and do promise
to pay." Chandwick v. Allen ( 1.725) 1 Stra 706.
(iv) "We shall order the borrowed, moneys to be repaid", Sri Yerrugariti
Chinn a v. Kota Egiri, 1913 MWN 1005.
(vi} "We have executed this promissory note for a total sum of Rs.
2,400........ made up of............ On demand by you (we) will pay the
amount (due on) this promissory note along with compound interest
at 13 annas per cent per month with annual rests. (We) have executed
this promissory note." Balmukund v. Ambadas, AIR 1946 Nag. 81.
Negotiable Instruments, Banking and Insurance 1.11
(vii) I have already received Rs. 15,000 from Colombo AS shop for doing
-business of my own. I shall pay it after two years on demand by
you with interest at two annas per month per Rs. 100 to you or to
your order and receive back this promissory note/' T. Chettiar v.
A. Chettiar, AIR 1971 Mad. 290.
In K.A. Lona v. Dada Haji Ibrahim Hilari & Co., AIR 1981 Ker 86, it
was held that though there was no description beneath the signature of a
managing partner on a certain promissory note, yet the intention to bind
the firm was clearly revealed by the usage of the words : "We promise to
pay", and the execution of the promissory note on the letter-head of the
firm. \
3. The promise to pay should be unconditional06'Q7 Q8 Q8A - It is essential
to the validity of a promissory note that the promise to pay should be
unconditional or subject only to a condition which according to the ordinary
expection of mankind is bound to happen, although the time of its happening
may be uncertain (S. 4, para 2). On this point there are two illustrations (f)
and (g) to S. 4. Former of these two is : "I promise to pay to B Rs. 500 seven
days after my marriage with C", the latter is : "I promise to pay B Rs. 500 on
D -s death, provided D leaves me enough to pay that sum." The Act says that
none of these two is a promissory note.
Q6. Is the following a promissory note: “I promise to pay Johnson Rs. 500/- on the death
of Y provided Y leaven me suffifient to pay the aid sum, or if I shall otherwise be able
to pay." [LL.B., D.U.]
Q7. Is the following a promissory note : "I promise to pay B Rs. 5,000/- on the death of
C." [LL.B., D.U.J
Q8. Is the following a promissory note: "I promise to pay B Rs. 10,000/- one month after
the death of C." [LL.B., D.U.]
Q8A. Is the following a promissory note : “I promise to pay B Rs. 5 lakhs if he goes to
DIR DILI
1.12 Meaning and Kinds of Negotiable Instruments
(i) "I promise to pay B Rs. 500 thirty days after the arrival of the ship
Pargon at Calcutta." Palmer v.Prett, (1824) 27 R.R. 583.
(ii) "I promise to pay B Rs. 500 when he is twenty-one years old."
(iii) "I promise to pay B Rs. 500 out of money due to me from D as soon
as D pays it."
A letter requesting a loan stating that the amount lent will be repaid
is not a promissory note as the repayment is, dependent on the advance
being made (Dhond bhai v. Annaram, 13 Bom. 669). Therefore, the following
is not a promissory note :
• "I have already borrozued Rs. 2,000from you. Please send me Rs. 5,000 more
and the whole amount promise to return within two months."
6. The payee must be certain - The promissory note must point out with
certainty the party who is to receive the money, i.e. the payee must be
"certain person". Para 4 of section 5 says that the person to whom the payment
is to be made be a "certain person", zvithin the meaning of section 4, although he
is misnamed or designated by description only. For example a promissory note
payable to the manager of the bank" is payable to a "certain person" within
the meaning of S. 4. External evidence is admissible to identify the payee
when he is misnamed or designated by description only. The payee must
be capable of being ascertained on the date on which the promissory note
is made. For example, a note payable on a future date "to the members for
the time being" of a firm is invalid as the members are not capable of being
ascertained at the time of the execution. But an instrument may be made
payable, to the holder of an office without naming him.
Where the payee is misnamed but it is possible to identify him, the instrument
would be a valid promissory note. But where the payee cannot be identified, the
instrument would be invalid. In Lala Jelhaji v. Bhagu, (1901) 3 Bom. LR 699,
the instrument was the plaintiffs accounts book. It contained an unconditional
Q9. Is the following a promissory note : "I promise to pay M’s son Rs. 5,000 for value
received." (M has four sons.). [LL.B., D.U.]
Q10. Is the following a promissory note : "I promise to pay Y’s son Rs. 5,000 for value
---------.... j » /iri------- c------------------- s rir o r> tt 1
I
; 1.14
. .
Meaning and Kinds of Negotiable Instruments
In K. A. Loha v. Dada Haji Ibrahim Hilari& Co., AIR 1981 Ker. 86, an
instrument was addressed to a particular premisee and contained a promise
to pay without saying that the payment was to be made to "you". It was
held that the instrument clearly indicated the person who was to receive
the payment and was a valid promissory note.
In BrijRaj Saran v. Sahu R. Saran, AIR 1955 Raj. 85, the appellant wrote
a letter to the respondent stating: "In your account Rs. 4.668/15/- are due from
my son Mahesh Chandra. I shad pay the amount by December 1948. You rest
assured " It was held that it is not necessary that the payee is specifically
named after the words "I shall pay", or similar words provided that on
reading the instrument as a whole there is no doubt as to the person who
is the payee. In illustration (b) to S. 4 also, the word "to ivhom " do not appear
after the words "to be paid", but still the law gives this as illustration of a
promissory note. Thus, the contention of the appellant that the name of the
payee was not mentioned after the words "I shall pay " made the payee
uncertain was not accepted by the court.
(i) "I promise to pay B Rs. 500 and to deliver to him my black horse
on 1st January next." [Illustration (h) S. 4].
(ii) "I promise to pay B Rs. 500 and all other sums which shall be due
to him." [Illustration (d) to S. 4].
(iii) "I promise to pay B Rs. 500, first deducting any sum which he may
owe to me." [Illustratipn (e) to S. 4}.
Para 3 of S. 5 says that the sum payable may be "certain" within the
meaning of S. 4 and S.5 although it includes future interest or is payable
at an indicated rate or exchange, or is according to the course of exchange,
Negotiable Instruments, Banking and Insurance 1.15.
and although the instrument provides that, on default of payment of an
installment, the balance unpaid shall become due.
The Act does not require that the amount should be stated both in
words and figures. But this has become usual. Section 18 of the Act provides
that if the amount undertaken or ordered to be paid is stated differently
in figures and in words, the amount stated in words shall be the amount
undertaken or ordered to be paid.
' Act must also be intended by the parties at the time of its execution to be
a promissory note as understood by commercial persons in its popular sense
which means that unless it falls within the exception provided in the wider
definition of the Stamp Act, or is otherwise expressly or by implication
made not transferable, it must be intended by the parties to be negotiable
instrument.
The Reserve Bank of India has the sole right to issue Bank Notes in
India. It also has the right for a period to be fixed by the Central Government
to issue currency notes supplied to it by the Central Government. Thus,
Bank Notes and currency notes are not merely securities for money but
they are themselves money and legal tender for the amount represented
by them. Therefore, they have been excluded from the operation of the
Negotiable Instruments Act.
BILL OF EXCHANGE
Section 5 defines a bill of exchange as follows:—
"A promise or order to pay is not "conditional", within the meaning of this
section and section 4 by reason of the time for payment of the amount or any
instalment thereof being expressed to be payable on the lapse of a certain period
after the occurrence of a specified event which, according to the ordinary expect ion
of mankind, is certain to happen, although the time of its happening may be
uncertain.
The sum payable may be "certain", zvithin the meaning of this section and
section 4, although it includes future interest or is payable at an indicated rate of
exchange, or is according to that course of exchange, and although the instrument
provides that, on default of payment of an instalment, the balance unpaid shall
become due.
The person to whom it is clear that the direction is given or that payment is
to be made may be "certain person", zvithin the meaning of this section and section
4, although he is misnamed or designated by description only."
Three months after date pay to Ashok Kumar or order the sum of
Rupees fifty thousand only, for value received.
To Stamp
Ramesh Chand
Delhi.
2. The bill of exchange must contain an order to pay013 - The bill must
contain an order to pay as the essence of it is that the drawer orders the
drawee to pay money to the payee. Therefore, it must in its terms be
Q13. Is the following a valid bill of exchange: "Please pay X or order Rs. 2 lakhs sixty days
after sight.” A writer to B. [LL.B., D.U.]
Meaning and Kinds of Negotiable Instruments
imperative and not a mere request although it may be politely worded. For
example in Ruffv. Webb, (1974) 5 RR 773, Ruff was a servant of Webb. Webb
dismissed Ruff from service and for wages Webb gave Ruff an instrument
in the following words:
"Mr. Nelson will much oblige Mr. Webb by paying to J. Ruff or order, twenty
guines on his account." However, the excessive terms of politeness may lead
to an inference that there was no order. In Little v. Slackford (1882) 31, RR
726, an instrument running : "Mr. Little please do let the bearer have seven
pounds and to place them to my account and you ivill oblige..." was held not to
be a bill of exchange as the instrument did not show any “order to pay".
The instrument must contain an order to pay the money at all events
and not merely authorize the other to pay the money. In Hamilton v.
Spottiswood (1849) 80 RR 519 an instrument ran: "To Alexander Spottiswood,
Dear Sir, We hereby authorize you on our account, to the order of William Gentle,
the sum of six thousand pounds." The instrument was held not be a bill of
exchange.
The direction to the drawee need not be expressed by the word 'pay'
but any other word conveying the idea of 'payment', e.g. "credit in cash",
will be sufficient [Edison v. Colingridge, (1850) 19 LJCP 268]. A mere request
to pay to an account does not amount to an order.
(ii) "sixty days after the arrival of the ship 'Victory' at Mumbai.......... "
Palmer v. Pratt (1824) 2 Bing 185.
(iv) "Rs. 10,000 on the sale of 3 bales of cotton Hill v. Halford (1801)
2 BSP 413.
(v) "Debt that may come into existence at a future date....." Banburry
v. Lesset (1744) 2 Stark 1211.
Negotiable Instruments, Banking and Insurance 1 19
4. The sum payable must be money only and it must be certain - The
sum payable must be money only and it must be certain the sum payable
may be "certain" within the meaning of section 4 and section 5 although
it includes future interest or is payable at an indicated rate of exhange, or
is according to that course of exchange, and although the instrument provides
that, on defult or payment of an instalent, the balance unpaid shall become
due. (Section 5, para 3)
(i) the "drawer", i.e. the person who is the maker of the bill;
(ii) the "drawee" i.e. the person who is directed to pay the bill; and
(iii) the "payee" i.e. the person to whom or to whose order the amount
of the bill is payable, unless it is payable to bearer.
Where an instrument is drawn in the form of a bill and does not conatin
the name of the drawee, but is expressed to be payable at a certain place,
arid is accepted by a person residing at the place, it is a valid bill and the
acceptor is liable [Gray v. Milner, (1819) 2 RR 529]. Where an instrument
is drawn in the form of a bill, and is addressed to no one, it is not a vaid
bill [Fielder v. Marshall, 30 LJCP 158}.
7. The payee must be certain - A bill must state with certainty the
payee, i.e. the person to whom payment is to be made. Where a bill is
payable to bearer, the payee is indicated with certainty. Where a bill is not
payable to bearer, the payee must be named or otherwise indicated with
reasonable cetainty. A bill may be made payable to two or more payees
jointly or it may be made payable in the alternative to one of two or more
payees [S. 13 of the Act],
The person to whom it is clear that the direction is given or that the
payment is to be made may be "certain person", within the meaning of
section 4 and section 5, although he is misnamed a designated by description
only. (Section 5, para 4)
For example, (a) Pay A, (b) Pay A or order, (c) Pay to the order of A,
(d) Pay A and B, (e) Pay A or B, are various forms in which an instrument
may be made payable to order. But a bill payable to "A only" or payable
to "A and none else" is not a payable to order. However, a cheque crossed
"Account Payee only" is technically negotiable although in practice it is not
transferred.
In Raghunath v. Biharilal, AIR 1972 Mysore 159, an instrument signed
by Raghunath stated, "I promise to pay you (Bihari Lal) on demand the sum
of Rs. 7000/-................. " It was contended that there was no recitals in the
instrument that the amount is payable to the order of a certain person or
to the bearer and therefore it was not a promissory note. But the Mysore
High Court rejected this contention and held that even if the amount is
payable to a specified person it is a valid promissory note.
Bill in sets
When a bill is drawn in sets of three it is said to be "bill in sets". A
bill is drawn in this form when it is to be sent over long distance and there
is a consequent danger of loss or delay.
Negotiable Instruments, Banking and Insurance 1.23
Bill of exchange may be drawn in parts, each part being numbered and
containing a provision that it shall continue to be payable only so long as
the other remain unpaid. All parts together make a set; but the whole set
constitute only one bill and is extinguished when one of the parts, if a
separate bill, would be extinguished (S. 132).
Time fixed for the payment of bills drawn in one country payable in
another is called "usance”.
Accommodation Bill
/
A bill which is drawn by one person and accepted by another, without
consideration, merely to enable the drawer to raise money on the bill by discounting
it, is an accommodation bill as distinguished from a genuine trade bill. The party
accommodating is called the "accommodation party" and the party
accommodated is called the "accommodated party f'.
accommodation bills are provided in Sections 43, 59, 76 and 98 which are
reproduced below:
A negotiable instrument made, drawn, accepted, indorsed, or transferred
without consideration, or for a consideration which fails creates no obligation
of payment between the parties to the transaction. But, if any such party
has transferred the instrument with or without indorsement to a holder for
consideration, such holder, and every subsequent holder deriving title from
him, may recover the amount due on such instrument from the transferor
for consideration, or any prior party thereto (S. 43).
Thus, where an accomodated party pays the amount due under the
instrument, he cannot recover that amount from the person who lent his
name to the instrument. For example, if a bill is drawn by A and accepted
by B for the accommodation P (the payee). P endorser the bill to C. The bill
is dishonoured and P pays the amount of the bill to C. P cannot sue the
drawer A or the acceptor B.
No party to the instrument who has induced any other party to make,
draw, accept, indorse or transfer the same to him for a consideration which
he has failed to pay or perform in full shall recover thereon an amount
exceeding the value of the consideration (if any) which he has actually paid
or performed (S. 43, Exception II).
Any person who in- good faith and for consideration, becomes the
holder after maturity, of a promissory' note or bill of exchange made, drawn
or accepted without consideration, for the purpose of enabling some party
thereto raise money thereon, may recover the amount of the note or bill from
any prior party (S. 59, Proviso).
Under S. 76, non-presentment of an accommodation bill to the drawee
for payment does not charge the drawer as it provides that no presentment
for payment is necessary, and the instrument is dishonoured at the due date
for presentment if the drawee could not suffer damage from the want of
such presentment. S. 98(c) provides that no notice of dishonour is necessary
when the party charged on could not suffer damage for want of notice.
Treasury Bill
Treasury bills are those bills which.are drawn by a foreign Government
Negotiable Instruments, Banking and Insurance 1.25
country at their tender value and are disposed of in India in discharge of
their trading liabilities.
Documentary Bill
When the documents relating to the bill are also attached to it, the bill
is called a documentary bill. These documents may be bill of lading or
railway receipt, invoice, insurance policy etc. The documents are delivered
to the buyer only in acceptance or payment of bill. The documentary bill
is usually used in case of foreign trade.
Bill payable "on demand", "at sight" "on presentment", "after sight",
or "after date", etc.
Meaning
The maturity of a promissory note or bill of exchange is the date at
which it falls due. Every promissory note and bill of exchange which is
not expressed to be payable on demand, at sight or on presentment is at
maturity on the third day after the day on which it is expressed to be
payable (S. 22). Thus, a cheque, a bill or note payable on demand or at sight
or on presentment are not intitled to days of grace.
Illustrations
fa) A negotiable instrument, dated 29th January, 1878, is made payable
at one month after date. The instrument is at maturity on the third
day after the 28th February, 1878.
Illustration
A negotiable instrument, drawn on 1st July and payable thirty days
after sight is presented for acceptance on 10th July. The instrument shall
mature on 12lh August.
Illustrations
(a) A negotiable instrument dated 12th July payable one month after
date shall fall due for payment on 14th August.
(b) A negotiable instrument dated 12th July payable one month after
date shall fall due for payment on 16th August if due to the death
of an important leader the Government declares 14lh August as a
holiday.
CHEQUE
Section 6 defines a cheque as follows:
In Vijay Singh and Others v. Manali Malik and Co., 160 (2009) DLT
259, Delhi High Court held that if the cheque is not presented during the
life time of the drawer, it will cease to be a cheque after the death of the
drawer, since it ceases to be an order of a person entitled to make an order
to the bank to pay the money.
Qi4. How is a cheque different from a bill of exchange? Elaborate. [LL.B., D.U.]
1.30 Meaning and Kinds of Negotiable Instruments
2. Payable on demand - A cheque can be drawn "payable to bearer on
demand", but a bill of exchange cannot be so drawn though it can be made
payable to bearer after a certain time.
3. Days of grace - As a cheque is intended for immediate payment,
it is not entitled to any days of grace whereas in case of a bill of exchange
three days of grace are allowed while calculating the date of maturity in
case of time bills.
4. Crossing - A cheque may be crossed but not a bill except a bank draft.
5. Stopping payment - A cheque is a revocable mandate and its authority
can be revoked by countermanding payment. This is not so in the case of
a bill.
6. Stamp - A bill requires stamp but a cheque does not require any
stamp.
Bank Draft
A demand draft or bank draft is a bill of exchange drawn by a bank
on another bank or by a bank on its own branch usually instructing the latter
to pay a specified sum of money to the named payee or to his order on
demand. It is a negotiable instrument and similar to a cheque but not a
cheque as such because it cannot be drawn by a private individual. The draft
cannot be made payable to bearer as a cheque can be. It cannot easily be
countermanded as in the case of a cheque either by the person purchasing
it or by the bank to which it is presented. It is always payable on demand
like a cheque.
Section 85 A of the Act provides: "Where any draft, that is, an order
to pay money, drawn by one office of a bank upon another office of the same
bank for a sum of money payable to order on demand, purports to
Negotiable Instruments, Banking and Insurance 1.31
be indorsed by or on behalf of the payee, the bank is discharged by payment
in due course". (For payment in due course see S. 10). S. 131A provides that
sections 123 to 131 relating to crossing of cheques shall apply to any draft
as defined in S. 85 A as if the draft were a cheque.
The draft is drawn either against cash deposited at the time of their
purchase or against debit to current account with the banker. Banker charges
a small commission for its services.
Ambiguous Instrument
Section 17 provides that, "Where an instrument may be construed either
as a promissory note or bill of exchange the holder may at his election treat
it as either and the instrument shall be thenceforth treated accordingly." In
the following cases an instrument is treated as ambiguous:
1. Where in a bill the drawer and drawee are the same person;
Illustrations
(a) A bill is drawn by an agent acting within the scope of his authority
upon his principal. The instrument is ambiguous as the drawer and
drawee are the same person.
(b) A draws a bill on Y, a fictitious person; and negotiates it. The holder
may treat it as a note made by A.
1.32 Meaning and Kinds of Negotiable Instruments
LEADING CASES
Mohammad Akbar Khan v. Attar Singh
AIR 1936 PC 171
(A document which is primarily a receipt for money containing the terms on
it was to be repaid, even if coupled with a promise to pay it is not a promissory
note.)
Facts
The instrument in question in this case was in the following terms:
This one receipt is hereby executed by Bhai Hira Singh, Attar Singh Kharbanda,
residents of Hoti for Rs. 43,900 (forty three thousand nine hundred rupees) half
of which amount comes ta twenty one thousand nine hundred and fifty received
from the Firm ofLala Duni Chand Hari Chand Sethi for and on behalf of Captain
Mohammed Akbar Khan of Hoti. This amount to be payable after 2 (two) years.
Interest at the rate of Rs. 5.40 (Rs. five annas four) per cent per year to be charged.
Dated this 20th day of chetar (first month of Hindu Calendar (Year) Sammat
1974 corresoponding to April I, 1917.
Issue
Whether the impugned instrument was a promissory note or not?
Negotiable Instruments, Banking and Insurance 1.33
Decision of the Privy Council
Section 4 of the Negotiable instrument Act, 1881 says : A "promissory
note" is an instrument in writing (not being the bank note or a currency
note) containing an unconditional undertaking, signed by the maker, to pay
a certain sum of money only to, or the order of a certain person, or to the
bearer of the instrument." There are certain illustrations appended to the
section lettered (a) to (h) of which three only be set out:
"A signs instruments in the following terms:
(a) I promise to pay B or order Rs. 500/-.
(b) I acknowledge myself to be indebted to B in Rs. 1000 to be paid
on demand, for value received.
(c) Mr. B„ I.O.U. Rs. 1,000/-"
In the course of judgment their Lordships observed:
"It is indeed, doubtful whether a document can properly be styled
promissory note which has to be inferred from the words used. It is plain
that the implied promise to pay arising from an acknowledgement of a debt
will not suffice, for third illustration indicates that an I.O.U. is not a
promissory note, though of the implied promise to pay there can be no
doubt. Tire second illustration, however, seems to show that the express
words "I promise" or "I undertake" are unnecessary. The form of word is
taken from an early English case, Casbome v. Dutton reported in Selwyn's
N.P 11th Edition page 401 where according to the learned author the Court
stated that the words "to be paid" in the document there sued on amounted
to a promise to pay. Observing that the same words in a lease deed would
amount to a covenant to pay rent. It does not appear to form a useful general
illustration, except in the case of a document in that particular form of
words."
The Privy Council held that the document was a receipt for money containing
the terms on which it was to be repaid; and being primarily a receipt even if coupled
with a promise to pay it was not a promissory note, or a document which was
negotiable within the meaning of sections 4 and 13. In the course of his judgment
Lord Atkin said:
"Their Lordships prefer to decide this point on the broad ground that
such a document as this is not, and could not be intended to be brought
within a definition relating to documents which are to be negotiable
instruments. Such documents come into existence for the purpose of only
recording an agreement to pay money and nothing more, though of course,
zinneirioroFinn anH a crrpprnents eenerallv are not
F
5, J .34 Meaning and Kinds of Negotiable Instruments
Facts
One of the defendants (defendant No. 1) in the suit, in his capacity as
a partner of a two member registered partnership firm, Messers Bharat
Hardware Stores at Thangal Bazar Imphal, and on its behalf borrowed a
sum of Rs. 9,240 from the plaintiff and executed a promissory note promising
to repay the loan on demand. Another defendant (defendant No. 4) stood
surety guaranteeing the repayment of the loan. When the demand for
repayment was made by the plaintiff through registered letters a copy of
which was sent to the surety (defendant No. 4), defendants (defendant No.
1 and defendant No. 2), the other partners refused to accept the letters and
denied the alleged loan. They, however, admitted that defendant No. 1
received a sum of Rs. 7,808 payable with interest of Rs. 1,432. They however,
averred that by way of acknowledgement, defendant No. 1 and 2 put their
signatures on a blank piece of paper which was forged into a promissory
note. It has also been averred that the sum of Rs. 9,240 had been repaid to
the plaintiff but the defendants could not prove it. They also could not
explain as to why they refused to accept the registered notices issued to
them by registered post at their correct address. The plaintiff proved the
execution of the promissory note by the defendant No. 1 and also payment
of Rs. 9,240. He also proved the issue of registered letter to defendant Nos.
1 and 2.
"We have received the sum of Rs. 9,240-(nine thousand two hundred and forty
only) from Shri Ram Rattan Sharma of Thangal Bazar Imphal. The above amount
7dH1 Iip wnriid nvt darrin-nd TA7z> J-irrviz? z>/■’/>? <7O ^/f/T/ x-zrr’l* /z
Negotiable Instruments, Banking and Insurance 1.35
Issue
Whether the impugned document was a promissory note within the
definition of S. 4 of the Act?
The essential ingredients of a promissory note are: (1) that the promise
to pay must be unconditional, (2) that the note must be in writing and signed
by the maker, (3) that the promise to pay must be of a certain sum of money,
and (4) that the promise to pay must be to, or to the order of, a certain person
or-to the bearer of the instrument.
The Court held that the impugned document has fulfilled all the above essential
ingredients of a promissory note. It further held that illustration (b) to the
definition shows that an acknowledgement of a receipt of the amount does
not take away the document from the category of a promissory note. The
Court observed that under S. 118 of the Act payment of consideration under
a promissory note is presumed, and it was the burden of the defendant to
disprove it.
Thus, the Court held the document in question was a promissory note
and decreed the suit against the partners and the firms but not gainst this
guarantor as he was not a partner of the firm.
1.36 Meaning and Kinds of Negotiable Instruments
Facts
In this case, a suit was brought against the petitioner by one Velaimuthu
Chettiar for the recovery of Rs. 1,177.80, the principal and interest due on
a promissory note dated 16.11.1950, for Rs. 1,000. The description of the
payee in the impugned promissory note was "son of Palaniandi Chettiar"
and a particular son of Palaniandi Chettiar was known to have lent the
amount to the maker although Palaniandi Chettiar had three other sons also
who never lent a pie to the petitioner and had not come into the picture
at all. Tire main plea on behalf of a petitioner was that the promissory note
was not executed in favour of a known and certain person and, so would
be invalid. It was vehemently urged that a promissory note in favour of
a person without his name being mentioned should be held to be totally
invalid and in operative, even though full consideration might have been
passed and the person lending was known with precision borrowing, and
though the description in the context, could refer only to him.
Issue
Whether the absence of the name of the payee in a promissory note will
make the note invalid though the payee was known with certainty even at
the time of execution?
QI5. Is the following a promissory note : "I promise to pay Rs. 1 lakh to P's daughter.1’
(P has two danphtersY
Negotiable Instruments, Banking and Insurance 1.37
In this case "son of Palaniandi Chettiar" who lent the money was the
plaintiff Vallaimuthu Chettiar, who swore to it, and it was not alleged by
the borrower, the defendant, that any of the three sons of Palaniandi Chettiar
had lent him a pie out of the amount in the promissory note. The other three
sons were far away and had nothing to do with the petitioner or the
promissory note. In this case though the name of the plaintiff was not
mentioned (perhaps by sheer slip or accident), the lender and borrower
knew it, and there was the description.
"Many a Hindu woman will not name her husband, to say from that
she had no husband will be absurd. Many a man is known by his caste
or village or official name, or surname, like Mudaliar, Ayyar or Rao,
Ambedkar, Gandhi, Nehru, Kirloskar, Prime Minister, Rajesh or Sandur etc.
and not by his personal name. To say that hundred of Raos. Mudulaiars,
Ayyars, Gandhis, Nehrus etc., might have been the persons who lent the
money, when the particular man who has lent the money is known, even
at that time beyond all doubt, to the lender and borrower is, in my opinion
disingenuous and meaningless."
Nanga v. Dhannalal
AIR 1962 Raj. 68
(There must be intention to create a promissory note.)
Facts
The document in question was executed on 5th December, 1951 and
according to the law then in force it required a stamp of Rs. ~/5/~ (five annas)
whereas it bore a stamp of Rs. -/4/- (four annas) only. The document was
held to be inadmissible in evidence by the learned Munsif, Gangapur,
holding that it was insufficiently stamped. On appeal, the learned Civil
Judge, Gangapur held that the provisions of Section 35 of the Stamp Act
related to procedural law and therefore, the admissibility of the document
should be determined according to the Stamp Law which is in force on the
date of the document is sought to be tendered in evidence and not according
to the law in force at the time of its execution. As the admissibility of the
document came in for consideration on 2nd November, 1957, and on that
date the stamp duty required was four annas he held that it was properply
stamped and was admissible in evidence. Against this decision, the
defendants, appealed to the High Court.
1.38 Meaning and Kinds of Negotiable Instruments
"Account of Badri son of Loharia and Jhunta son of Deva Patel by caste
Kharwal resident ofAmarpur Hitim datedMagsur Sudi Samvat 2008 corresponding
to 5th December, 1951. Interest at the rate of Rs. l/-per cent, p.m.
Rs. 1300/- in cash in words (Rupees thirteen hundred). British coin, borrowed
from Pannalal Phulchand Munim, Gangapur. This amount is payable on demand.
Shall pay this money to Pannalal Phulchand Munim of Gangapur with interest
wherever he shall demand it."
Left hand impression of Badri, Jhunta of Lakhan Two Two annas stamp
"Whatever is recorded above is correct. After taking the money we have put
our thumb impressions. By the pen of Btrdhichand scribe at the instance of Badri
and Jhunta."
Issues
1. Whether the instrument is a promissory note or not?
The Court was of the view that a promissory note besides fulfilling the
requirements as laid down in Section 4 of the Negotiable Instruments Act
must also be intended by the parties at the time of its execution to be a
promissory note as understood by commercial persons in popular sense
which means that unless it falls within the exception provided in the wider
definition of the Stamp Act, or is otherwise expressly or by implication
made not transferable, it must be intended by the parties to be negotiable
instrument. If the instrument does not fall within the above mentioned
exceptions and does not stand the test of negotiability, it will not be a
promissory note even though it contains an unconditional undertaking to
pay money.
Applying these tests to the document in question the Court found:
The Court held that the parties in the instant case never intended to
create a promissory note as understood in its popular sense. Merely because
they affixed a stamp of four annas which; was the requisite stamp duty
before the amendment of the Jaipur Stamp Law it cannot be inferred that
they intended to create a promissory note. Generally promissory notes are
not executed in account books of the nature which has been produced before
the Court in this case. Therefore, the document was held not a promissory
note.
The Court pointed that Section 36 of the Stamp Act has not been enacted
for protecting the rights of the parties but in the interests of the Government
revenue.
It was held that when a Court has determined the question that the
document admissible in evidence, it should be deemed to be admitted in
evidence for the purposes of Section 36 of the Stamp Act even though the
document has not been formally proved. The appeal, therefore, should be
rejected on this ground alone.
In Bull v. O' Sullivan [LR 6 QB 209], the Court laid down that a post
dated cheque payable to order was an instrument payable to order on
demand on its date. Later in 1877 in Gatty v. Fry [1877) 2 Ex D 265] the
Court held that a post-dated cheque is not payable on the day it is issued
but on the day of its date. After passing of the Bill of Exchange Act, 1882
it was held by the Court of Appeal in Re, ex p Richdnle [(1882) 19 Ch.D
409] that a post-dated cheque was equivalent to a bill of exchange payable
on a future date, namely, the date of the cheque.
"Post-dated cheques are not invalid, but the banker should not pay such
a cheque if presented before the date it bears. If, therfore, a cheque dated
on a Sunday is presented on the previous business day, it should be returned
with the answer 'post-dated'. A post-dated cheque, however, if presented
at or after its ostensible date, should be paid though the banker knows it
to be post-dated, and even if it has been presented before the date and
re: payment."
Negotiable Instruments, Banking and Insurance 1.41
In Chalmers and Guest on Bills of Exchange, Cheques and Promissory
Notes, 15th Edition, at p. 74, the concept of "post-dated cheques" has been
explained as under:
A cheque presented for payment before the date has arrived should be
returned 'post-dated'."
EXAMINATION QUESTIONS
1. What is meant by a negotiable instrument? Explain its essential
r
B 1 42 Meaning and Kinds of Negotiable Instruments
2. Is the following promissory note: "Pay to Mr. X Rs. 500 after the
death of Mr. Y provided he leaves me Rs. 300."
(c) 'Received from Naresh Jain of Karol Bagh, New Delhi, Rupees
one thousand only payable after two years with interest @
12% p.a.
Dated: 10-3-2015
(d) M/s Shyam & Co., Cloth Merchants, Chandni Chowk, Delhi
10-3-2015
To
Ramesh Chand
Nai Sarak, Delhi.
S.d/-
Partner
(revenue stamp affixed)
(e) "I promise to pay Rs. 5,000 to you with interest and any
amount which I have borrowed last month from you."
(e) No. The sum of money is not certain due to the use of the
expression "any other amount".
(a) "I promise to pay B Rs. 5,000 on A's death provided he leaves
me sufficient money to pay the said sum."
(b) "I promise to pay B Rs. 5,000 out of money due to me from
C as soon as C pays it."
Hints: (a), (b), (c) and (d): The instruments are not promissory notes
as they are not unconditional.
(a) "I promise to pay B Rs. 10,000 and to deliver 500 kgs of
basmati rice."
(b) "I promise to pay B Rs. 1,000 and all fines according to rule."
"Rs. 10,000 already received Rs. 5,000 is also required. Please send
it per bearer. The amount will be returned with 12% interest without
delay."
14. Define a bill of exchange and explain the statement that 'a cheque
is a bill of exchange with two special features."
(a) "Please pay X or order Rs. 6,000 sixty days after sight."
(c) "I promise to pay B Rs. 5,000 and all other sums which may
be due to him."
(d) "I promise to pay B Rs. 5,000, first deducting there out any
money which he may owe me."
20. Are the following valid Bills of Exchange? Decide giving reasons.
(i) "Mr. X, kindly pay the bearer Rs. 5,000/- and place the amount
to my account, for that I shall be very grateful to you. Yours
sincerely Y."
(iii) "A writes to B "Kindly pay X or order Rs. 5,000/- on the death
of Z."
(d) I promise to pay Rs. 1,000/- to "Son of X". There are two more
sons of X, however, it is admitted by A, that B's eldest son
of X had lent said sum to him.
(ii) "I promise to pay Rs. 500 to P's son" (P had three sons).
(a) Received Rs: 1,000 from "A" payable after two years.
(c) I promise to pay Rs. 11,000 to you after the death of D provided
he leaves sufficient funds to pay.
24. (a) What are the salient features of a valid Bill of Exchange?
(i) "I promise to pay M's son Rs. 500/- for value received."
(M has three sons).
(iii) "I promise to pay the bearer the sum of Rs. 5000/-"
2.1
2.2 Holder and Holder in Due Course
Parties to Cheque
The maker of a cheque is called the "drawer” i.e., the customer. "Drawee"
is the drawer's banker on whom the cheque is drawn. "Payee” is the person
named in the cheque to whom or to whose order the money is by the
cheque directed to be paid. The other parties to a cheque may be the holder,
the indorser and the indorsee which have been explained above.
The liability under section 138 of the Negotiable Instruments Act, 1881
is essentially against the drawer of the cheque. In Arsh Electronics Pvt. Ltd.
v. Telematica Star Ltd. .and Another, 172 (2010) DLT 340, it was held by
the Delhi High Court as follows :
"A conjoint reading of sections 7 and 138 of the said Act clearly indication
that it is only the drawer of the cheque who can be held responsible for
the offence under section 138 of the said Act. Exception to this rule is
provided in section 141 of the said Act which makes the persons other than
drawer liable for the offence under section 138 of the said Act, but only if
drawer is a company or firm or association of individual and in such an.
eventuality all such persons who at the time when the offence is committed,
were incharge or responsible for the conduct of the business of such company
or firm or association of individuals, would be deemed to be guilty for the
offence under section 138 of the said Act."
HOLDER01-02» °3-°4-Q4A
As said above the "payee" is the person named in the instrument, to
whom or to whose order the money is by the instrument directed to be
paid. Thus, an instrument originally belongs to the payee and he is entitled
to its possession. The payee may transfer it to any person in discharge of
his own debt. This transfer, if it is made in accordance with the provisions
of this Act, is called negotiation. Negotiation takes place in two ways. A
bearer instrument can be transferred by mere delivery and the person to
whom it is delivered becomes the holder. An order instrument can be
negotiated by indorsement and delivery and the indorsee becomes the
holder. Hence the holder means either the payee or the transferee (bearer
or the indorsee of an instrument. Accordingly, S. 2 of the (English) Bills
of Exchange Act, 1882, says that "holder means the payee or indorsee of a bill
or note, who is in possession of it or the bearer thereto." Tire definition contained
in S. 8 of our Negotiable Instrument Act, 1881 is of the same effect although
expressed in different words. It is reproduced below: .
QI. Give a critical analysis of the concept 'Holder' in the Negotiable Instruments Act,
1881. [LL.B, D.U.]
Q2. D borrowed Rs 5,000 from E and executed a promissory note in E's favour. E
renounced the world and disappeared. Can E's son S enfo'rce payment against D on
the maturity of the said promissory note? Decide. [LL.B, D.U.]
Q3. "The existing definition of the term 'holder' has given rise to various ambignities and
conflict of judicial opinions."
Comment and suggest improvement in the definition, if possible. [LL.B., D.U.j
Q4. How is the 'Holder' defined in the Negotiable Instruments Act, 1881? What are the
ambignities pointed out by the Law Commission in this definition and the relevant
amendments recommended by it? [LL.B., D.U.]
Q4A. What do you mean by the term 'Holder' of a negotiable instrument? Is the definition
of holder given in the Negotiable Instruments Act, 1881 free from anamalies? How
are the recommendations of Law Commission of India and the English Law on the
point helpful in this regard? [LL.B., D.U.]
2.4 Holder and Holder in Due Course
Where the note, bill or cheque is lost or destroyed, its holder is the
person so entitled at the time of such loss or destruction.
2. he must have the right to receive or recover the amount due thereon
from parties thereto.
1. The payee,
Suit by someone other than the holder. There are considerable differences
of judicial opinioin on the question whether a beneficial owner can maintain a suit
Negotiable Instruments, Banking and Insurance 2.5
on a negotiable instrument if he is not the holder. Some High Courts have held
that only a holder can bring a suit on a negotiable instrument, and no
person can sue on a negotiable instrument unless his name appears thereon
as the payee or indorsee, or unless the instrument is made payable to bearer
and he is in possession thereof. The prevalent view is that the beneficial owner
of an instrument if he is not the holder cannot therefore, bring a suit on it. Even
if the benamidar holder is impleader in the suit, the defect is not removed.
Similarly in Sarjoo Prasad v. Rampayari Debi, AIR 1950 Pat. 494, it was
held that the payee mentioned in the instrument or indorsee thereof is the
only person to sue, and the real owner or defendant will not be allowed
to prove that he is only a name lender. In this case A advanced a sum of
Rs. 2,459 to B under a hand note. The note was executed not in the name
of A but in the name of C who was name lender or a benamidar. On maturity
A brought an action to recover the amount. The High Court of Patna
rejected his claim as he was not entitled to the possession of the note "in
his own name" and therefore not the holder. To the same effect were the
decisions of Batcha Prasad v. Janki, AIR 1957 Pat. 380; Harikishore v. Gura
Mia (1930) 58 Cal. 752; Virappa v. Mahadevappa, AIR 1934, B. 356. In
Subbaraya v. Abirami, AIR 1965 Mad. 157, it was held that beneficial
ownership does carry with it a legal title to the property concerned and
a declaration that a person is the beneficial owner does not operate as
transfer of the right in the instrument by operation of law.
On the other hand some High Courts have held a different view namely that
S. 78 of the Act does not preclude any one other than the holder from suing on
a negotiable instrument and that a suit by a real owner is maintainable as he is
in a position to obtain a valid discharge of liability from the person liable thereon
(Lachmichand v. Madanlal, AIR 1947 All 52). This view was endorsed in
Bhagirath v. Gulab Kanwar, 1956 Raj 174, where it was said that a true owner
<an maintain a suit on a negotiable instrument if the holder is impleaded
in the suit as a co-plaintiff or as a defendant. In Pudma Prakash v. Lok Nath,
AIR 1964 Punj. 497 (F.B.) and in Lala Ram v. Ram Swamp, AIR 495, it was
2.6 Holder and Holder in Due Course
held that the crux of the problem is whether the plaintiff can give a valid
discharge.
2. he must become the holder before the amount become payable i.e.
before maturity; and
In Danlat Ram v. Nagindas, (1913) 15 Bom. L.R. 333, it was held that
if a debtor hands over a negotiable instrument to his creditor in discharge
In Bank of India v. State, 2010 (7) AD (Delhi) 885, it was held by the
Delhi High Court that if a cheque is handed over by a person to Bank with
clear understanding to the Bank that the cheque was towards the debt
payable to the bank it s not necessary that the cheque should be enclosed
in favour of the Bank. In such a case, the Bank was held to be a holder in
due course even when there was indorsement on the cheques. In Babulal
Jain v. Kewal Chand Jain, AIR 2008 (NOC) 434 (MP), a self-cheque was
issued and the words "or bearer" were not stuck off. The complainant, to
whom the cheque was issued was held to be a holder in due course.
2. Before maturity - The person must become the holder before the
amount becomes-payable. A person who takes a bill or note on the day
on which it becomes payable is not a holder in due course because he takes
it after it becomes payable as the instrument can be discharged at any time
on that day.
A bill of exchange payable on demand is deemed to be overdue when
it appears on the face of it to have been in circulation for an unreasonable
length of time. What is unreasonable length of time for this purpose is
question of fact [S. 36(3) of the (English) Bill of Exchange Act, 1882].
Negotiable Instruments, Banking and Insurance 2.9
A cheque is always payable on demand. However, a cheque is intended
for immediate or early payment and not for circulation. It can remain in
circulation for a maximum period of three months, according to RBI
Guidelines, from the date of the cheque. Earlier, this period was six months
according to trade custom and practice.
Even if an instrument has been paid off and it has not been withdrawn
from circulation, there is nothing to prevent a person to whom it has been
negotiated, for valuable consideration from becoming the holder in due
course provided he had no knowledge of payment, nor it was apparent
from the face of the instrument (Nunna Gopalan v. Vuppuluri
Lakshinarasamma, AIR 1940 Mad. 651, S.D. Asirvatham v. Palniraju, AIR
1973 Mad. 439).
English Law
Under the English law the only question to be considered is whether
the holder took the instrument in good faith (i.e. honest belief that the title
Q8. The test of good faith in Indian Law on 'Holder in due course' is stricter than the
English Law. Explain. \ fLL.3., D.U.]
2.10 Holder and Holder in Due Course
of the transferor is good) and once it is established that he did so, he is
entitled to the rights of a holder in due course notwithstanding that he was
careless, that he made no enquiry, and that he was informed of facts which
would have led a reasonable man to make further inquiry. According to
Section 90 of the (English) Bill of Exchange Act, "A thing is deemed to be
done in good faith within the meaning of this Act, where it is in fact done
honestly, whether it is done negligently or not."
Section 29 (1) of the (English) Bill of Exchange defines a holder in due course
asfbllows :
■ “A holder in due course is a holder who has taken a bill, complete and regular
on the face of it, under the following conditions, namely—
(a) That he became the holder of it before it was overdue, and without notice
that it had been previously dishonoured, if such was the fact;
(b) That he took the bill in good faith and for value, and that at the time the
bill was negotiated to him, he had no notice of any defect in the title of
the person who negotiated it."
Section 29(2) of the (English) Bill of Exchange Act provides that, "In
particular the title of the person who negotiates a bill is defective within
the meaning of the Act when he obtained the bill, or the acceptance thereof,
by fraud, duress or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith, or under such
circumstances as amount to fraud." According to Section 29(3) of the
(English) BE Act "A holder (whether for value or not), who derives title
to a bill through a holder in due course, and who is not himself a party
to any fraud or illegality affecting it, has all the rights of that holder in due
course as regards the acceptor and all parties to the bill prior to that
holder."
Indian Law
As regards requirement of good faith our law is stricter than English
Law on the. subject. English law only requires "good fiath" on the part
of the holder at the time of taking the instrument But under our Act
as the words used are "withour having sufficient cause to believe" etc.,
it seems that the intention of the legislature is to make due care and
caution on the part of the holder a test of his bonafides and that mere
good faith on his part will not suffice. Under the Indian law it is not
sufficient to show that the holder acquired the instrument honestly, if
in fact he was negligent or careless. In this respect, the Act seems to have
followed the old English rule laid down by Lord Tenterden in Gill v.
Cubitt, (1824)3 BSC 466, according to which due care and caution was
made the test of bonafides.
In the above Indian case, the plaintiff bank (the respondent)had allowed
credit facilities including cheque purchases upto a limit of .Rs. 35,00,000
to the firm, defendant 1. A promossory note was executed by defendants
2 to 4 being partners of the firm,in favour of their mother, defendant 5 for
an amount of Rs. 35,00,000 and the same was indorsed in favour of the
2.12 Holder and Holder in Due Course
plaintiff as security for the facilities granted to the first defendant. The first
defendant firm was supplying goods to defendant 6 (the appellant) and
used to receive payments by way of cheques. Accordingly defendant 6
drew two cheques on a Bank (Union Bank of India) in favour of the first
defendant payable to it or order. The cheques were purchased by the
plaintiff bank (the respondent) from the first defendant on valid
consideration and proceeds were credited by the bank (the respondent) on
account of the first defendant. On presentation the drawee bank (Union
Bank of India) returned the cheque with the remark "full cover not received".
The appellant (defendant 6) contended that the cheques were issued on
the understanding that the same would be presented only after consignment
of goods was despatched and first defendant having failed to despatch the
goods, defendant 6 could not pay the money in the bank and therefore the
cheques were not honoured; the plaintiff was only a collection agent; the
plaintiff was not a holder in due course and that the plaintiff acted negligently
and in disregard of the provisions of law.
The Supreme Court held that "in the instant case, there was an express
contract for providing the credit facilities. It should, therefore, necessarily
be inferred that there is also an implied contract to credit the proceeds of
the cheques in favour of the first defendant to his account before actually
receiving them. In such a situation the plaintiff need not make enquiries
about the transactions of supply of goods, etc. that were going on between
defendants 1 and 6. Even if defendant 1 has not supplied the goods in
respect of which the cheque in question were not issued by defendant 6
there was no cause, at any rate sufficient cause, for the plaintiff to doubt
the title of the first defendant nor can it be said that the plaintiff acted
negligently disregarding 'red flag' raising suspicion. Viewed from this
background it cannot be said that there was sufficient cause to doubt the
title nor is any scope to infer gross negligence on the part of the plaintiff."
The court summarised the legal position as follows
The Supreme Court in the instant case agreed with the Allahabad High
Court's decision in Durga Shah Mohal Lal Bankers v. Governor, General
in-Council, AIR 1952 All. 590, that mere failure of the plaintiff to prove
bonafides or absence of neelierence on his oart would not negative his claim
Negotiable Instruments, Banking and Insurance 2.13
as a holder in due course. The Court overruled Raghavji Vizpal v. Narandas
Parmanandas, (1906) 8 Bom. LR 921, in which the Mumbai High Court has
held that mere negligence would not invalidate the title of a person taking
a negotiable instrument in good faith and for value. Thus, the decision in
Raghavji case was agains the rule of "due care and caution".
In the English case Gill v. Cubitt, (1824) 3 B&C 466, a bill of exchange
was stolen during the night and taken to the office of a discount broker
early in the following morning by a person whose features were known,
but whose name was unknown to the broker and the latter being satisfied
with the name of the acceptor, discounted the bill, according to his usual
practice, without making any inquiry of the person who brought it. On
these facts it was held that the plaintiff had taken the bill under circumstances
which ought to have excited the suspicion of a prudent and careful man.
In England, the law laid down in Gill v. Cubitt is not law at present.
Q9. A 'holder in due course’ enjoys certain rights and privileges. Explain?[LL.B., D.U.]
Q10. Who is entitled to the protection granted to a holder in due course? [LL.B.; D.U.]
Negotiable Instruments, Banking and Insurance 2.15
A is estopped from setting up B's fraud and C is entitled to recover Rs.
15,000 from A.
For example, A, the holder of a bill, indorses it "B or order" for the
specific purpose that B may get it discounted. B does not do so and
negotiates it to C, a holder in due course. C acquires a good title to the
bill and all prior parties are liable to him.
Q11. A, by fraud, induces B to make a promissory note in his favour. A negotiates the note
to C who takes it as a ‘holder in due course’. C consequently, donates the note to D.
Discuss the rights of D against C, A and B with the help of statutory provisions.
Negotiable Instruments, Banking and Insurance 2.17
possessor, or indorsee who claims through the person who found or so
obtained the instrument is entitled to receive the amount due thereon from
such maker, acceptor or holder, or from any party prior to such holder,
unless such possessor or indorsee is, or some person through whom he
claims was holder in due course."
It means that the pleas on the part of the person liable on negotiable
instrument which had been lost or obtained by means an offence (say theft)
or fraud or for an unlawful consideration, cannot be set up against a holder
in due course. Here it must be noted that a holder in due course can purify a
defective title but he cannot create any title unless the instrument is payable to
bearer. For details see "Negotiation by unauthorised parties" in the next
chapter.
For example, a bill is payable to "A or order." It is stolen from A and
the thief forges A's signatures and indorses it to B who takes it as a holder
in due course. B cannot recover the money. On the other hand, if the bill
is payable to bearer and it is stolen and the thief delivers it to B, a holder
in due course, D can recover the amount of the bill.
In Firm Kalka Prasad Ram Charon v. Kanwar Lal, AIR 1957 All 104,
it was held that the indorsement on a negotiable instrument through which
a holder in due course claims must be genuine and, therefore, a forged
indorsement creates no title in favour of the holder in due course.
7. Estoppel against denying original validity of instrument - No
maker of a promissory note and no drawer of a bill of exchange or cheque,
and no acceptor of a bill of exchange for the honour of the drawer shall,
in a suit thereon by a holder in due course, be permitted to deny the
validity of the instrument as originally made or drawn (S. 120). This
specific provision is subject to general rule enacted in section 26. Therefore,
a person can deny the validity of a note on the ground that he was a minor
on the date of the note.
8. Estoppel against denying capacity of payee to indorsee - No maker
of a promissory note and no acceptor of a bill of exchange payable to order
shall, in a suit thereon by a holder in due course be permitted to deny the
payee's capacity, at the date of the note or bill (S. 121). Therefore, if a holder
in due course files a suit on a note, the maker of the note will not be
permitted to say that payee was a minor, a that he was of unsound mind
at the time of making of the note. Similarly, if a holder in due course files
a suit on a bill of exchange, the acceptor of bill of exchange cannot deny
the capacity of the payee.
9. Estoppel against denying signatures or capacity of prior party - No
**
• ' ~x— A-4 ~ Lw 1 *^11
> r»-» o ai il^co/Ti 1 1-
2.18 Holder and Holder in Due Course
holder, be permitted to deny the signatures or capacity to contract of any
prior party to the instrument (S. 122).
4. Title - A holder does not get a better title than that of his transferor,
but a holder in due course gets a better title than that of his transferor.
In Sangeshwar v. Gita Devi, AI.R. 1975 Pat. 81, it was held that the
maker of a promissory note can obtain the discharge of his debt by making
payment to the holder of the instrument alone and to no one else.
Payment by cheque
In K. Saraswuli alias K. Kalpana (Dead) v. P. S. S. Somasimdharam
Chettiar, (1989)4 S.C.C. 527, it was held that payment by cheque is an
ordinary incident of present day life, whether commercial or private, and
unless it is specifically mentioned that payment must be in cash payment
by cheque should be taken to be due payment if there was nothing to show
that if the cheque was presented for encashment on the date it was delivered
the cheque would not have been encashed, or that the bank had any time
declined to honour it for want of funds in the ordinary course, or that under
the arrangements made for payment of the cheque, even if it had been put
for encashment on the date it was delivered the cheque would not have
been encashed. Therefore, the submission that there was no money on the
date of delivery of the cheque to support payment of it and that it was
Negotiable Instruments, Banking and Insurance 2.21
subsequently when arrangements were made that the cheque was realized,
cannot be sustained.
LEADING CASES
Lachmi Chand v. Madan Lal Khemka
AIR 1947 AH. 52
(The term "holder" does not include a person who though in possession of
the instrument has not the right to recover the amount due thereon from the parties
thereto, though he is in possession of the instrument)
Facts
A promissory note was executed by Lala Lachmi Chand (defendant
appellant) on 25-8-1928 for a sum of Rs. 10,000 carrying a certain rate of
interest in favour of Shri 108 Baba Kali Kamliwala Ramnath Maniramji of
Rishikesh. On 28-7-1930 a sum of Rs. 4,000 was paid by the defendant. The
impugned note was renewed from time to time by the appellants and his
son Onkar Prasad. Lastly in 1939 a pronote was executed by them for a
sum of Rs. 13,302-11-00 by way of renewal of the pre-existing liability
under the former pronote. All the pro-notes were executed in favour of Shri
108 Baba Kali Kamliwala Ramnath Maniramji of Rishikesh, the payee. The
payee was the owner and manager of what became a registered society
as Baba Kali Kamliwala Panahaiti Khhetra Rishikesh in the year 1932. The
suit was instituted in the name of the registered body by its secretary and
the payee was not a party to the suit. The plaintiff-respondent contended
that he was the real creditor while the holder of the promissory note was
its benamidar and therefore could maintain the suit. The defendant-appellant
contended that the plaintiff not being the payee of the pronote could not
by reason of S. 78 read with S. 8 of the Act successfully enforce the liability
of the defendant under the pronote.
"Reading the two sections together it is clear that the person to whom the
payment should .be made in order to discharge the maker or the acceptor from all
liability under the instrument is the "holder " of the instrument or his accredited
agent, such as a banker acting as an agent for collection. The "holder" of a
promissory note is essentially the person xvho is entitled "in his own name". The
2.22 Holder and Holder in Due Course
words entitled "in his own name" are obviously most significant. The legislature
appears to have clearly intended to prevent any one from claiming the right
of a "holder" under the Act on the grounds that the ostensible holder is
the mere name-lender. The term "holder" therefore, does not include a
person who though in possession of the instrument, has not the right to
recover the amount due thereon from the parties thereto. The principle
enshrined in S. 78 of the Act is clearly in accord with the basic principle
underlying the law relating to negotiable instrument, viz. that the doctrine
of benami will introduce an element of uncertainty greatly hampering the
free circulation of negotiable instruments."
His Lordship quoted several decided cases and pointed out that the
principle enunciated in these cases is that "where a hand note is executed
in favour of a benamidar, it is not open to the promisor to assert that the
holder of the note is not the beneficial owner. Conversely, if a suit is to be
based upon the hand note it must be instituted by the holder zvhose name appears
on the note and not by any person who alleges that the original holder is his
benamidar and that he is the beneficial owner.
Further, it was observed that it has also been held that the real owner
is entitled to sue provided he is in a position to obtain a good discharge
from liability from the maker or acceptor of the instrument. If the person
who is ostensibly the holder of the promissory note is made a party to the
suit and in his presence it is alleged that the plaintiff is the real beneficiary
and he can prove his allegation by evidence or by the admission of the
ostensible holder of instrument there is no reason why such a suit should
not be maintainable.
Tirus, the Court held that the judicial opinion on the question whether
a suit lies at the instance of the real holder as distinguished from payee
or the indorsee of a promissory note is far from unanimous. The broader
view, however, which has been accepted in some cases was also followed
by the Court. Applying the principles enunciated above to the facts the
Court held that in the impugned case it is "impossible to hold that the
plaintiff (the registered society) was (while the suit was pending in the
Court below) or even now in a position to secure a discharge of the
defendant from all liability under the pronote in suit." The Court accordingly
held that the present case does not fall even within the scope of the
"broader principle" referred to above. The suit as instituted by the plaintiff
respondent could not succeed and the appeal was thus allowed.
Negotiable Instruments, Banking and Insurance 2.23
Singheswar Mandal v. Sint.Gita Devi
AIR 1975 Pat. 81
("Holder" of a promissory note means a person entitled in his own name to
the possession thereof and to receive or. recover the amount due thereon from the
parties thereto.)
Facts
A holder of a hand note made an arrangement that the plaintiff
respondent, one of his heirs (i.e., his daughter) and not other heirs (i.e. two
wives), would bte entitled to get the amount due under the hand note. But
no indorsement was made on the hand note in favour of the plaintiff. After
the holder's death, plaintiff filed the suit for recovery of the amount under
the hand note and the defendant second party (i.e. co-widows) admitted
about the said arrangement. Defendant No. 1 (the appellant) contested the
suit on various grounds, inter alia; that the plaintiff being not the holder
of the hand note in question, she had no right to institute the suit in
question.
Decision
The Court held that the suit was not maintainable as the plaintiff was
not an indorsee under section 82(c) of the Negotiable Instruments Act, nor
a transferee under Section 130 of the Transfer of Property Act.
In the present case hand note was not indorsed in favour of the plaintiff
nor did the recital in any way indicate intention of the creditor for the
payment of the ultimate dues by the debtor to the plaintiff. According to
2.24 Holder and Holder in Due Course
S. 8 "holder" of a promissory note means a person entitled in his own name to
the possession thereof and to receive or recover the amount due thereon from the
parties thereto. As the plaintiff did not answer any of the description mentioned
above, the defendant was not bound to make the payment to her and the plaintiff
had no right to institute the suit.
It was further observed that it was not a case either of any transfer of
the debt or claim which under the provisions of Transfer of Property Act
would be an actionable claim by the father to the plaintiff. In view of the
provisions of Section 130 of the Transfer of Property Act the transfer of
a actionable claim has to be effected only by the execution of an instrument
in writing signed by the transferor or his duly authorized agent and only
thereafter the rights and remedies of the transferor is to vest in the transferee.
Facts
On Dec. 10, 1933 the respondent executed a promissory note payable
on demand in favour of one Maldipati Tattabayan, defendant No. 2. Tire
respondent (maker) paid the amount due on the note after two days but
left the note in the hands of the payee. The payment was not noted on the
promissory note. After receipt of such payment the payee next day indorsed
the promissory note to another who had no knowledge of the fact of
payment The indorsee (petitioner) instituted the suit on the promissory
note against the maker (respondent).
Issue
Whether the indorsee was entitled to recover the money either from
the payee or the maker ?
Negotiable Instruments, Banking and Insurance 2.25
Decision of the Madras (now Chennai) High Court
It was held that under Sections 9, 22 and 60 the indorsee was entitled
to recover the amount both from the payee and the maker. Chief Justice
Leach quoted S. 9 and interpreted S. 22, S. 60 and S. 118 as follows:—
"Section 9 of the Act states that the term "holder in due course" means
any person who for consideration became the possessor of a promissory
note, bill of exchange, or cheque if payable to bearer or the payee or
indorsee, if payable to order before the amount mentioned in it became
payable and without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title. Section
22 says that the maturity of a promissory note or bill of exchange is the
date at which it falls due. It is to be observed that in the case of a
promissory note which is payable on demand, it does not become payable
until demand is made. On demand being made it falls due immediately.
Section 60 provides that a negotiable instrument may be negotiated (except
by the maker, drawee or acceptor at or after maturity) until payment or
satisfaction by maker, drawee or acceptor at or after maturity, but not after
such payment or satisfaction. Such payment means at or after maturity.
Section 118 says that until the contrary is proved, it shall be presumed that
every transfer of a negotiable instrument was made before its maturity; and
that the holder of a negotiable instrument is a holder in due course. In this
case, there is no evidence of any demand having been made on the
respondent before she paid the amount to the payee of the instrument
and it must, therefore, be taken that the indorsement to the petitioner
took place before maturity. According to the sections of the Act to which
reference has been made the petitioner is clearly entitled to recover from
the maker."
Facts
The defendant (appellants) executed a demand promissory note dated
6-4-1960 for a sum of Rs. 5,000 payable with interest at 12% per annum
in favour of one Peter Manickam. The said Peter Manickam indorsed the
promissory note for full amount in favour of the plaintiff respondent on
10.9.1964. Before the indorsement the amount of suit promissory note
was partially discharged to the extent of Rs. 3000 on 7.8.1961 apart from
the payment of interest upto 27.9.1961 to the original payee which was
not known to the indorsee and there was no mentioning of it on the
promissory note. It was urged on behalf of the appellants that the suit
promissory note had matured on the date of the indorsement by the original
payee in favour of the respondents herein namely on 10.9.1964 that
consequently S.59 of the Negotiable Instruments Act applied to the facts
of this case and therefore the respondent herein was entitled to claim only
the balance of amount-due under the promissory note after giving credit
for the sum of Rs. 3000 paid by the appellants to the original payee, and
not the full amount for which the promissory note was executed.
Issue
Whether the plaintiff-respondent was a bonafide holder in due course
and to what amount, if any, he was entitled?
It ivas held that the note xoas not overdue when the plaintiff took it
and could proceed as a holder in due course. Where payment by the maker
was not noted on the note and the indorsee was not aware of the payments,
he could claim as a holder in due course. The bonafide holder for value of
a promissory note cannot be affected by any previous demandfor payment
of which he had no notice. If a negotiable instrument remains current even
though it has been paid, there is nothing to prevent a person to whom it
has been indorsed for value without knowledge that it has been paid, from
suing. If the actual payment in discharge of the note cannot be set up
against such a holder much less 'can a demand for payment which was
not honoured be set up. "Where an indorsee of a promissory note payable
on demand is not aware that the promissory note has been discharged or
that any demand was made, he must be deemed to be a holder in due
course even if as a matter of fact the indorsement in his favour was made
after the discharge "
Therefore, it was held that the right of the respondent herein to sue
on the promissory note and recover the full amount due thereunder
fSTinnt hp sairl frn havp lipon zt-ffof+oA Kiz Q nt t-Ko A
2.28 Holder and Holder in Due Course
It was further observed that "Where the promissory note has no
indorsement of any payment and there is nothing to show that the indorsee
was aware of any payments to the indorser and he is a holder in due course;
he is entitled to recover according to apparent tenor of the instrument. If
the instrument has been discharged, the remedy of the persons paying is
to sue the original payee to refund the amount which he had to pay over
again. In the present case when the appellant paid sum of Rs. 3,000 to the
payee on 7.8.1961, and did not make an indorsement the same to the
respondent herein for full value, they alone must suffer the loss in preference
to the respondent herein."
Facts
..The plaintiff Bank had allowed credit facilities including cheque
purchases upto a limit of Rs. 35,00,000 to the firm, defendant 1. A promissory
not was executed by defendants to 4 being partners of the firm, in favour
of their mother, defendant 5 for an amount of Rs, 35,00,000 and the same
was endorsed in favour of the plaintiff bank as security for the facilities
granteed to the first defendant firm. Defandant 5 had also deposited the.
title deeds of her properties to create an equitable mortgage to secure the
repayment of the amounts due from the first defendant. The first defendant
was supplying goods to defendant 6 and used to receive payments by way
of cheques. Accordingly defendant 6 drew cheques on a Bank (Union Bank
of India) in favour of the first defendant firm payable to it or order. The
cheques were purchased by the plaintiff Bank from the first defendant firm
on valid considerations and proceeds were credited by the Bank on account
of the first defendant firm. On presentation, the Bank of defendant 6
returned the cheque with the remark "full cover not received". The appellant-
j_r—j—x z: a wprp issued on the understanding
Negotiable Instruments, Banking and Insurance 2.29
that the same would be presented only after consignment was depatched
and the first defendant having failed to despatch the goods, defendant 6
could not pay the money in the Bank and therefore the cheques were not
honoured; that he would not admit the purchase of cheques by the plaintiff
and that the plaintiff was only a collection agent and there being no
consideration for purchase, the plaintiff was not a holder in due course,
and the plaintiff acted negligently and in disregard of the provisions of law,
therefore, there was no vaild cause of action against the defendant.
Issue
Whether the instrument has been taken with due caution?
"29. Holder in due course.—(a) holder in due course who has taken a
bill, complete and regular on the face of it, under the following conditions,
namely.
(b) that he took the bill in good faith and for value, and that at the time
the bill was negotiated to him he had no notice of any defect in the title
of the person who negotiated it."
With the above ground of English law, the Supreme Court examined
the Indian law on the subject.
Gill case, is a case where a bill of exchange was stolen during the night,
and taken to the office of a discount broker early in the following morning
by a person whose features were known, but whose name was unknown
to the broker and the latter being satisfied with the name of the acceptor,
discounted the bill, according to his usual practice, without making any
inquiry of the person who brought it. On these facts it was held that the
plaintiff had taken the bill under circumstances which ought to have excited
the suspicion of the prudent man and careful man. Abbot, C.J. said:
In the instant case there was an express contract for providing the
credit facilities. It should, therefore, necessarily be inferred that there is also
an implied contract to credit the proceeds of the cheques in favour of the
first defendant to his account before actually receiving them. In such a
situation the plaintiff need not make inquiries about the transactions of
supply of goods etc. that were going on between defendant 1 and 6. Even
if defendant 1 has not supplied the goods in respect of which the cheque
in, question were issued by defendant 6 there was no cause, at any rate
sufficient cause, for the plaintiff to doubt the title of the first defendant nor
can it be said that the plaintiff acted negligently disregarding 'red flag'
raising suspicion. Viewed from tJ4is background it cannot be said that there
was sufficient cause to doubt the title nor is there any scope to infer gross
negligence on the part of the plaintiff.
Facts
For disbursement of wages a company (the second defendant) issued
a cheque dated 20.6.1984 for an amount of Rs. 593-93 in the name of an
employee, the first defendant, and drawn on State Bank of Travancore. The
first defendant who had an account in another bank by name in the Federal
Bank Limited, assigned the cheque for valid consideration in favour of that
Bank and collected the proceeds. In the meantime, the company (the second
defendant), the drawer, got information that the first defendant did
*not
pay off the workmen, advised the drawee bank to withhold payment when
cheque was presented. The holder bank thereupon sued for realization of
the amouht from the first defendant and the company. The first defendant
did not contest. The company resisted the action on the ground of failure
of consideration.
Issue
Whether the drawer (second defendant company) can be sued for
recovery of the amount of the cheque?
Tirus, by virtue of S.36 and the later part of S. 43 the plaintiff is entitled
to recover the amount due not only from the first defendant but also from
the second defendant, the drawer company, even though as between the
first defendant and the second defendant there was a failure of consideration.
EXAMINATION QUESTIONS
1. Write a short note on the concept of 'holder'.
7. 'The existing definition of the term 'holder' has given rise to various
ambiguities and conflict of judicial opinions." Comment and suggest
improvement, if possible.
10. (a) Give a critical analysis of the concept of'Holder in due course'
referring to the statutory provisions and judicial decisions on
the subject.
Hint: Yes, Sections 53 and 58. D has the knowledge that the title
of A was defective but he i.e. D is not a party to the fraud. In May
v. Chapman, (1847) M&W 355, a partner in a firm fraudulently
indorsed ai firm bill to D, in payment of a private debt. F was
cognizant of the fraud, but was not a party to it. D, indorsed the
bill to E who took it for value and without notice. E indorsed it to
F. It was held that F acquired E's rights.
17. Critically examine the concept 'Holder in due course' and bring out
the difference, if any, between the Indian law and the English law
referring to the statutory provisions and the case law on the subject.
19. (a) A "holder in due course' enjoys certain rights and privileges.
Explain.
(b) The test of good faith in Indian law on 'holder in due course'
is stricter than the English law. Elucidate.
20. Critically examine the concept "Holder in due course" and bring
out the differences "if any", between the Indian Law and the English
Law referring to the statutory provisions and the case law on the
subject.
21. (a) A 'holder in due course' enjoys certain rights and privileges.
Explain.
(b) The test of good faith in Indian Law on 'holder in due course'
is stricter than the English Law. Explain.
2.38 Holder and Holder in Due Course
46. The principal source of difficulties is the use of the word "entitled".
This word is of a very wide implication. A person may be entitled to an
instrument either as a payee or indorsee or, as a bearer if the instrument
is one payable to bearer. He may be entitled to it also by other modes of
We, therefore, think that the position should be made clear, by omitting
from the definition of "holder" the words "entitled in his own name to the
possession thereof and expressly enumerating the persons who are entitled
to be a holder, as in Section 2 of the Bills of Exchange Act, viz., "the payee
or indorsee of an instrument who is in possession of the instrument or the
bearer thereof."
Meaning of Negotiation01102
According to S. 14, when a promissory note, bill of exchange or cheque
is transferred to any person, so as to constitute that person the holder
thereof, the instrument is said to be negotiated."
As between such parties and any holder of the instrument other than
a holder in due course, it may be shown that the instrument was delivered
conditionally or for a special purpose only, and not for the purpose of
transferring absolutely the property therein.
Thus, the delivery of the negotiable instrument with the intention of passing
the property in the instrument is essential whether the instrument is payable to
| bearer or payable to the order of a certain person. The contract on a negotiable
instrument until delivery remains incomplete and revocable. The delivery is essential
not only at the time of negotiation but also at the time of making or drawing of
| negotiable instrument.
Negotiable Instruments, Banking and Insurance 3.3
In Bromage v. Llyod, (1847) 1 Exch 32, A owed B Rs. 1,000 and he made
a promissory note for the amount payable and died. The note was afterwards
found among his papers. It was held that B could not sue on it. In Bank
of Van Diemen's Land v. Bank of Victoria, (1871) L.R. 3 P.C. 526, A, a
drawee, after receiving a bill from B, a holder wrote his acceptance on it.
Before delivery he came to know that the drawer has become bankrupt and
cancelled his acceptance and returned the dishonoured bill to B. It was held
that there was no acceptance as A never delivered the bill so as to make
himself liable upon it.
In Arnold v. Cheque Bank, (1876) 1 C.P.D. 578, A, the holder of the Bill,
specially indorsed it to B and put it in a letter addressed to B. The letter
was put in the office letter box from where it was stolen. B's indorsement
on the bill was forged. It was held that the property in the bill remained
in A.
However, under S. 7 delivery is not essential to complete the contract
of acceptance on a bill, and the mere giving of notice of the acceptor's
acceptance to the holder or any person on his behalf is sufficient to complete
the contract because unlike the drawer or indorser he has no property in
the bill. But in other cases of contracts on negotiable instruments delivery
is essential for the completion of the contract. It may be noted here that
the drawee after his writing acceptance on the bill may change his mind
and cancel it before delivery or communication of acceptance, to the holder.
In Pragdas v. Dowlatram, (1887) ILR 11 Bom 257, it was held that such
communication of acceptance need not necessarily be to the holder of the
instrument at the time, it is enough if it is made to some party liable on
the instrument for it is meant for the benefit of all parties.
It was held in Latter v. White, (1872) L.R. 5 H.L. 578, that delivery to
a stake holder, or as held in Brind v. Hampshire, (1836) 1 M & W 365 to
the transferor's own agent for delivery is not such a delivery to the holder
as is contemplated by the section.
In Exparte Cote, (1873) 9 Ch. Aupp 27, Mellish L.J. said: "In this
country, where the sender of a letter cannot get it returned after it has
been posted, if the indorsee of a bill authorizes, the indorser to send the
bill through the post office, the bill as soon as it is posted becomes the
property of the indorsee..." In Norman v. Rickets, (1863) 3 TLR 182, the
plaintiffs wrote from London to the defendant in Suffolk asking her to send
a cheque for the amount due. The cheque was stolen in transit, and the
thief got it cashed. It was held that the posting of cheque was a good
delivery to the payee and the cheque operated as payment, In C.I.T. v.
3.4 ■ Negotiation
Ogale Glass Works Ltd., AIR 1954 S.C. 429, it was held that posting of
cheques in Delhi at the request of the addressee in payment of goods
supplied from a Native State amounted to payment in Delhi by the sender.
The Court laid down that as between the sender and the addressee it is
the request of the addressee that the cheque to be sent by post that makes
post office the agent of the addressee.
Provided that every dealing with the debt or other actionable claim
by the debtor or other person from or against whom the transferor
would, but for such instrument of transfer as aforesaid, have been entitled
to recover or enforce such debt or other-actionable claim (save where the
debt or other person is a party to the transfer, or has received express
notice thereof as hereinafter provided) be valid against such transfer.
INDORSEMENT OR ENDORSEMENT
When the maker or holder of a negotiable instrument signs the same,
otherwise than as such maker, for the purpose of negotiation on the back
or face thereof or on a slip of paper annexed thereto, or so signs for the
purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to indorse the same, and is called the "indorser"
(S.15).
An indorsement is the signature by the maker or holder of a negotiable
instrument for the purpose of negotiation. It is usually done on the back
of the instrument, although it may be even on the face thereof, or if no space
is left on the instrument, on a slip of paper attached to it, call "allonge".
By S. 8 the payee of an instrument is also holder, and so he may indorse
it. Section 51 prescribes that "every sole maker, drawer, payee or indorsee
3.6 Negotiation
or all of several joint makers, drawers, payee or indorsee, of a negotiable
instrument may, if the negotiability of such instrument has not been
restricted or excluded as mentioned in S. 50, indorse and negotiate the
same". Section 50 says in its first part that the unconditional indorsement
of a negotiable instrument followed by unconditional delivery transfer to
the indorsee the property therein with the right of further negotiation. The
second part of S. 50 deals with restrictive indorsement.
Kinds of Indorsements
An indorsement may be (i) "in blank" or (ii) in full. It may be (i)
absolute, (ii) restrictive, or (iii) conditional.
Indrosement 'in blank' and Indorsement 'in full' (Sections 16, 49, 54,
55 and 85(2))Q1 - S. 16 says that "if the indorser signs his name only, the
indorsement is said to be "in blank" and if he adds a direction to pay the
amount mentioned in the instrument to, or to the order of a specified
person, the indorsement is said to be "in full" and the person so specified
is called the "indorsee" of the instrument. In case of blank or general
indorsement, so long as the indorsement continues in blank, the property
in the instrument may pass by mere delivery in the same manner as an
instrument payable to bearer (S. 54) except in case of crossed cheques. An
indorsement in full or special indorsement specifies, in addition to the
signature of the indorser the person to whom or to whose order, the
instrument is payable. The efffect of indorsement in full is that the instrument
can be paid only to the indorsee and can be further negotiated by his
indorsement. The instrument remains payable to order.
Negotiable Instruments, Banking and Insurance 3.7
Section 49 provides that "holder of a negotiable instrument indorsed
in blank may, without signing his own name by writing above the indorser's
signature a direction in blank into an indorsement in full; and the holder
does not thereby incur the responsibility of an indorser.—For example, A
is the holder of a bill indorsed by B in blank. A writes above the indorser's
signature the words "Pay C or order". A is not liable as an indorser, but
the writing operates as an indorsement in full from B to C
The indorsement (e), (f) and (g) do not exclude the right of further
negotiation by C.
(a) The indorser of a negotiable instrument signs his name adding the
words "without recourse." Upon this indorsement he incurs no
liability.
Thus, an indorser can exclude or limit his liability in any of the three
ways:
Effect of Indorsement
Section 50 provides that "The indorsement of a negotiable instrument
followed by delivery transfers to the indorsee the property therein with
the right of further negotiation". Thus, the indorser impliedly represents
to his immediate indorsee that the instrument, when presented in due
course be paid when it falls due and if it is not paid at maturity, the indorser
will indemnify the indorsee provided that due notice has been given or
received by him.
Where the holder, without the consent of the indorsee, destroys or
impairs the indorser's remedy against a prior party, the indorser is
discharged from liability as if the instrument had been paid at maturity
(s.40).
For example, A is the holder of a bill of exchange made payable to the
order of B, which contains the following indorsements in blank:
First indorsement, "B"
Second indorsement, "C"
Third indorsement, "D"
Fourth indorsement, "E"
This bill A puts in suit against E and strikes out, without E's consent,
the indorsement of "C" and "D". A is not entiled to recover anything
from E.
Irregular indorsement
In Arab Bank Ltd. v. Ross, (1952) 1 All ER 709, a bill was drawn in
favour of "AB & Co." but was indorsed "AB", without the addition of the
words "& Co.". It was held that the indorsement was irregular and that
the indorsee was not a holder in due course, though he might be holder
for value.
Negotiation Back
If A indorses a bill to B, B in favour of C and C in favour D and D
in favour of E and E thereafter transfers the instrument by negotiation to
A, the result is to make A liable as original indorser and also as last
indorser. In other words, the instrument has been "negotiated back" to the
jslegotiable Instruments, Banking and Insurance 3.11
original holder. This is called negotiation back or taking up a bill. In the
above example, A cannot enforce, by a suit, payment of the instrument
against an intermediate party—B, C, D or E to whom he was previously
liable by reason of his prior indorsement, as the law does not permit
circuity of action. But such a result does not follow when the indorsement
of A is 'sans recourse', because in such a case A cannot be made liable as
an indorser and can therefore sue as indorsee all previous indorsers on the
bill except himself.
Lost instruments
The following rules are applicable in case of lost instruments:
1. Section 45 A provides that "Where a bill of exchange has been lost
before it is overdue, the person who was the holder of it may apply to the
drawer to give him another bill of the same tenor, giving security to the
drawer, if required, to indemnify him against all persons whatever in case
the bill alleged to have been lost shall be found again".
The Section further provides that if the drawer on request as aforesaid
refuses to give such duplicate bill, he may be compelled to do so.
2. The holder of the lost instrument should give notice of loss to all
the parties liable on it.
3. Section 81 provides that any person liable to pay, and called upon
by the holder thereof to pay, the amount due on the promissory note, bill
of exchange or cheque is before payment entitled to have it delivered up
to him. If the instrument is lost qr cannot be produced the person liable
to pay is entitled to be indemnified against any further claim thereon
against him.
4. Section 58 provides that when a negotiable instrument has been lost,
no possessor or indorsee who claims through the person who found the
instrument, is entitled to receive the amount due thereon from maker,
acceptor, or holder, thereof by means of an offence or fraud, or for an
unlawful consideration, no possessor or indorsee who claims through the
person who found or so obtained the instrument, is entitled to receive the
amount due thereon from such maker, acceptor or holder, or from any
party prior to such holder. Thus, the finder of the lost instrument gets no
title to it and cannot sue the party liable thereon for its payment. The true
owner is entitled to get back the instrument from the finder. Section 82
provides that the maker, acceptor, indorser respectively of a negotiable
3.12 Negotiation
instrument is discharged from liability to all parties to the instrument, if
the instrument is payable to bearer, or has been indorsed in blank, and such
maker, acceptor or indorser makes payment in due course of the amount
due thereon.
5. A finder of the lost instrument cannot lawfully transfer the instrument.
However, if he negotiates an instrument payable to bearer or one indorsed
in blank, to a holder in due course, the holder in due course gets a good
title to it and is entitled to get payment from the party liable thereon (S.58).
In case a finder transfers an order instrument, even the bona fide transferee
for value gets no title to it and is not entitled to sue on the instrument as
forgery does not convey any title. The indorsee in such a case will not be
a holder in due course. If the party liable to pay on the instrument makes
the payment to an indorsee under forged indorsement, he (i.e. the liable)
shall continue to be liable to the true owner.
Stolen Instrument
The position in case of stoten instruments is almost the same as explained
above in respect of lost instruments. The only difference is that the thief
is guilty of criminal offence and a finder is not. The thief does not acquire
any title to the instrument and therefore cannot enforce payment of it
against any party thereto. The true owner can sue the thief for recovering
the instrument or the money if he (i.e. the thief) has received it from the
maker, acceptor or drawee. But if the thief transfers an instruments payable
to bearer to a transfreee for value without notice of the theft, or to a holder
in due course, such a transferee or the holder in due course, as the case
may be, acquires good title to it against the thief and any party prior to
him.
Forged instruments
Where the signature of the maker, drawer or acceptor is forged on a
negotiable instrument, it is known as forged instrument. A forged signature
is inoperative. The holder, including holder in due course, of a forged
instrument cannot enforce payment thereon. If he manages to obtain
payment of the amount of the instrument, inspite of forgery, the person
who has made the payment can recover the amount paid by him as payment
under a mistake.
Forged indorsement
Where the signature of indorser on a negotiable instrument is forged,
it is called forged indorsement. A forged indorsement is a nullity and
therefore does not convey any title. Thus, there can be no indorsement
under a forged indorsement. The title of the indorser whose indorsement
is forged remains unaffected. For example, a bill is payable to A or order,
A indorses it to B and C forges B's indorsement and transfers it to D, D
is not a holder in due course. The result would be same if B's indorsement
is genuine, but A's indorsement is forged. If the party liable to pay on the
indorsement, he will continue to he liable to the true owner. The position
will be different in case of bearer instrument or the one which has been
indorsed in blank.09
LEADING CASES
Firm Kalka Prasad Ram Charan v. Lala Kunwar Lal Thaper
1957 AIL LJ. 209
(Forged endorsement creates no title in favour of holder in due course.)
Q9. A bill is indorsed : "Pay John Brown or order". John Brown indorses the bill in blank
and delivers it to B. B passes it by mere delivery to C. C purges B’s indorsement and
transfers it to D. Can D recover upon the bill? Discuss referring to statutory
3.14 Negotiation
Facts
Lala Baijnath Sayal purchased a draft of Rs. 4,000 drawn by Imperial
Bank of India, Delhi and payable to Lala Kunwar Lal Thapar at Kanpur.
The draft was duly posted and it was taken delivery of not by Kunwar
Lal Jhapar but by another person Inder Raj Sethi. Either Inder Raj Sethi
or some other person indorsed the draft as Kunwar Lal Thapar and handed
it over to firm Kalka Prasad Ram Charan. They in their turn made an
indorsement in blank in favour of Bharat Bank. This draft was entered in
a pay-in-slip and the draft along with the pay-in-slip was sent to Bharat
Bank. The Bharat Bank presented the draft for payment to Imperial Bank,
Kanpur, the drawee, and received the amount mentioned in the draft and
paid in that amount into the account of the appellant firm. Kunwar Lal
Thapar and Baijnath Sayal, after knowing the above, filed the suit against
the Imperial Bank of India, Delhi and Kanpur branches, the Bharat Bank
and the firm Kalka Prasad Ram Charan. The decree was asked for only
against the firm.
The first appellate court also held that the forged indorsement in
favour of the firm could not give it a title.
In the present case the firm Kalka Prasad Ram Charan took the draft
under a forged indrosement and, in turn, indorsed it to the Bharat Bank
for collection. The firm thus undoubtedly converted the draft to its own
use. It is true that it was the Bharat Bank that actually presented the draft
4-^ 4.1------ J------------------------ -- J -1 • • ’ • » i . .i ~ »
Negotiable Instruments, Banking and Insurance 3.15
credit to the firm in the latter's account with the Bank in respect of the
amount of the draft and so ultimately the firm at least derived an advantage
to the content of the draft amount and in the opinion of His Lordship. The
firm was bound to restore that advantage to the true owner. The customer
immediately upon crediting of the amount can withdraw the same and
have the use of it. This is an advantage which has, in this case, accrued
to the firm as a consequence of the conversion by it of the draft to its own
use.
It was further held that the parties who have no title to an instrument
because of the original forged indorsement, but have dealt with it must
each be held guilty of conversion and, in the opinion of His Lordship,
would be liable to the true owner for the amount of the draft (if he chooses
to waive the tort and sue any of them for the amount of the draft) except
the drawee who is protected by S. 85 of the Negotiable Instrument Act.
Thus, the appeal was dismissed.
EXAMINATION QUESTIONS
1. Distinguish between Negotiation and Assignment,
CAPACITY,LIABILITYAND DISCHARGE
CAPACITY OF PARTIES
LIABILITY OF PARTIES
The liability ofa drawer ofcheque is primary as in case ofdishonour the holder
of the cheque has no remedy against the banker. He can only sue the drawer.
In this case also the notice of dishonour must be given to, or received by
the drawer.
In Bengal Bank Ltd. v. Satyendra Nath, AIR 1952 Cal. 385, the defendant
(drawer) gave a cheque to the plaintiff in payment of the price of the goods.
The cheque was drawn on branch X of Bank A. The plaintiff sent the cheque
to Bank B for collection. Bank B sent the cheque to branch Y of Bank A
for realization. Branch Y realized the amount from Branch X but before
Branch Y made over the sum realized to Bank B, Bank A went into liquidation
and Bank B could not realize the money. It was held that the liability is
not affected if one branch pays another branch; the defendant drawer was
bound to pay his dues to the plaintiff.
QI. Write a note on Liability of the drawer of bill of exchange and drawer of cheque.
Negotiable Instruments, Banking and Insurance 4.3
(4) When the funds are not properly available to the payment of the
customer's cheque, e.g., in case of lien or set-off.
(11) When the customer has died and banker has received notice thereof.
(12) When the customer becomes insolvent and the banker has notice
thereof.
(13) When the customer becomes a person of unsound mind, and the
banker has notice thereof.
In London Joint Stock Bank Ltd. v. Macmillan, (1918) A.C. 777, when
a partner of a firm was leaving office in haste, a clerk presented a cheque
for his signature. The cheque contained absolutely no writing except the
figure "2" in the column of amount in figures. The partner signed the
cheque and left, paying no attention to the way it was written. The clerk
then completed it for £120 and absconded with the proceeds.. It was held
that the bank could debit the customer's account with £120. The Court
approved the principle laid down in Young v. Grote, (1827) 4 Bling 253
where the amount could be raised from £350 due to negligence of the
drawer.
In Prabhu Dayal v. Jazvala Bank, AIR 1938 All 374, the impugned
cheque was forged and the signatures on the cheque bore no resemblance
to the admitted signatures of the plaintiff. The customer did not take
reasonable care of his cheque book as he left it in an unlocked box and
because of that some one was in a position to steal a form from the cheque
book which was utilized in drawing money from the defendant-respondent
bank. The banker was held liable for the loss. The customer was no doubt
negligent, but bis negligence was not the proximate cause of the loss.
Thus, the first clause of the section provides that if a cheque payable
to order purports to be indorsed by or on behalf of the payee, and'the
banker on whom it is drawn pays it in due course the banker is discharged,
and he can debit his customers's account with the amount so paid though
the indorsement of the payee might tuna out to be a forgery or though the
indorsement might have been placed on the cheque by the payee's agent
without his authority. This is so because a banker can hardly be called upon
to acquaint himself with handwriting of several persons who may indorse
a cheque.
To claim protection under this section the payment must be a "payment
in due course" as defined in S. 10. For example, if a banker pays the amount
of a crossed cheque across the counter it is not payment in due course as
4.8 Capacity, Liability and Discharge from Liability
Clause (2) provides that the cheques originally drawn payable to bearer
shall not lose the bearer character notwithstanding any indorsement thereon
whether in full or in blank and whether such indorsement purports to
restrict or exclude further negotiation or not. Thus, the expression "once a
bearer instrument always a bearer instrument" is true in case ofcheques originally
payable to bearer.
Thus, the liability of the maker of a promissory note and acceptor of a bill
of exchange is primary. Liability is absolute and unconditional unless there
is a contract to the contrary. The expression "contract to the contrary" is
used to cover the case of accommodation bill and notes. Further, the
liability of the acceptor is conditional by the tenor of his acceptance. In case
of qualified acceptance for part of the amount or subject to some other term
he cannot be made absolutely liable on the bill. His liability arises from
acceptance and delivery of the bill.
The maker of a note is liable "to pay according to the apparent tenor
of the note and the acceptor of a bill is liable to pay according to the
apparent tenor of his acceptance. The payment must be made to the holder
of the note or bill and at maturity. In case of default of such payment, the
maker of a note or the acceptor of a bill is bound to compensate not only |
the holder of the instrument, but any-party to the note or bill or loss or
damage sustained by him and caused by such default.
Liability of indorser
Section 35 provides that "In the absence of a contract to the contrary,
whoever indorses and delivers a negotiable instrument before maturity,
without, in such indorsement, expressly excluding or making conditional
his own liability, is bound thereby to every subsequent holder, in case of
dishonour by the drawee, acceptor or maker, to compensate such holder
for any loss or damage caused to him by such dishonour, provided due
notice of dishonour has been given to, or received by such indorser as
hereinafter provided. Every indorser after dishonour is liable as upon an
instrument payable on demand." Thus, the liability of an indorser is
conditional provided the conditions mentioned in S. 35 are fulfilled. The
liability of the indorser does not arise until the instrument is indorsed and
delivered to the indorsee. Further the notice of dishonour must be given
or received by the indorser.
This bill A puts in suit against John Rozario and strikes out, without
John Razario's consent the indorsement by Peter Williams from John Rozario.
A is not entitled to recover anything from John Rozario.
4.10 Capacity, Liability and Discharge from Liability
Section 37 says that the maker of a note and the, drawer of a cheque
are liable as principal debtors, and all other parties are liable as sureties.
In case of bill until acceptance, the drawer is liable as principal debtor and
other parties are liable as sureties, but after acceptance, the acceptor is
liable as principal debtor and all other parties as sureties.
Section 38 lays down that "As between the parties so liable as sureties,
each prior party is, in the absence of a contract to the contrary, also liable
thereon as principal debtor in respect of each subsequent party." The
section carries an illustration which says: A draws a bill payable to his own
order on B, who accepts. A afterwards indorses the bill to C, C to D, and
D to E. As between E and B, B is the principal debtor, and A, C and D
are his sureties. As between E and A, A is the principal debtor, and C and
D are his sureties. As between E and C, C is the principal debtor and D
his surety.
Modes of Discharge
Sections 82 to 90 deal with discharge from liability which are discussed
below:
Thus, S. 78 says that the payment must be made to the holder and S.
82(c) says that if the instrument is bearer or indorsed in blank, payment
is a good discharge if it is payment in due course. According to S. 10
payment in due course means payment in accordance with the apparent
tenor of the instrument in good faith and without negligence to any person
in possession thereof under circumstances which do not afford a reasonable
ground for believing that he is not entitled to receive payment of the
amount therein mentioned."
Section 81 provides that when the instrument has been paid the holder
must deliver the instrument to the party paying him. However, where the
cheque is an electronic image of a truncated cheque, even after the payment
the banker who received the payment shall be entitled to retain the truncated
cheque. A certificate issued on the foot of the printout of the electronic
image of a truncated cheque by the banker who paid the instrument, shall
be prima facie proof of such payment.
Thus, any alteration which changes the legal character of the instrument,
or alters the liabilities of the parties, whether change is prejudicial or
beneficial is a material alteration.
Negotiable Instruments, Banking and Insurance 4.15
Alteration not vitiating the intrument - The following alterations do not
vitiate the instrument:
(ii) Alteration made with the consent of the parties liable on the
instrument,
(iv) Alteration made to carry out the common intention of the parties
(S. 87). For example, where the expression "or order" after the
name of the payee is inserted subsequently [Byrom v. Thomson,
(1839) II A & E 302].
to it, that the image so transmitted to it and received by it, is exactly the
same [S. 89 (3)].
8. Acceptor as holder - S. 90 provides that "if a bill of exchange which
has been negotiated is, at or after maturity, held by the acceptor in his own
right, all rights of action thereon are extinguished" This rule is based on
the general principle that a present right and liability united in the same
person cancel each other.
IMRleading casesM^MMB A
Facts
1 __
When a partner of a firm was leaving office in haste, a clerk presented
a cheque for his signature. The cheque contained no writing except the
figure "2" in the column for amount in figures with space before and after
2. The partner signed the cheque and left, paying no attention to the way
it was written. The clerk then completed it for £120 and absconded with
the proceeds.
The banker was held entitled to debit the customer's account with the
whole of the amount, i.e £120. Their Lordships discussed various cases
including Young v. Grote, 4 Bing 253, in which case the drawer's clerk
raised the figure from £50 to £350 as he had left enough space for writing
3 before 50 which was not noticed by the drawer's wife in whose custody
the drawer had kept certain blank forms of cheques signed by him.
Facts
The plaintiff-appellant was a customer of the defendant-respondent
bank. A cheque purporting to have been signed by the plaintiff in favour
of certain person. The impugned cheque was forged and the signatures on
the cheque bore no resemblance to the admitted signatures of the plaintiff.
The plaintiff had not taken sufficient care of his cheque book and because
of that some one was in a position to steal a cheque from the cheque book
which was utilized in drawing money from the defendant bank. The plaintiff
was negligent in leaving his cheque book in unlocked box in the small
"baithak" of his house where other persons had also access.
Facts
The plaintiff had a personal account with the Canara Bank Limited
(defendant) at its Madras Branch, on 6th April, 1964. He was the
representative of a reputed group of concerns in Coimbatore, popularly
known as M/s Lakshmi Mills Co. Limited, Coimbatore, and its sister
concerns at Madras. The group had a liaison office at Madras where a
telephone in the name of aforesaid entity was installed which was in the
sole administrative custody of the plaintiff. In the course of his official
duties, the plaintiff gave a cheque for Rs. 294.40 towards the telephone bill
for the aforesaid company. The cheque was drawn on the personal account
kept by the plaintiff with the defendant bank on 8th April, 1964 when the
cheque came for clearance, the defendant bank by mistake and oversight
did not honour the cheque, though the plaintiff had a sum of Rs. 652.83
to his credit in his account with the bank; On 24th April, 1964, the telephone
department informed the plaintiff of the dishonour of the cheque. The
plaintiff met the officials of the bank on the same day and the manager
of the Madras branch of the bank expressed regret for dishonouring the
cheque. The telephone department was requested through a letter by the
Madras office of the bank to represent the cheque but it was not interested
in such representation. As the telephone bill remained unpaid, the telephone
was disconnected on May 6, 1964. But on prompt steps taken by the
plaintiff it was restored on 7th May, 1964.
The plaintiff explained the facts to his employers but the plaintiffs
employers did not accept his explanation and on 15th June, 1964 his services
were terminated, and according to the plaintiff, on the sole ground that
the plaintiff did not pay the telephone bill in time. He contended that the
defendant bank was mainly responsible for dishonouring the cheque and
made a claim for compensation of damages against the defendant bank for
the loss of earnings for a period of five years which he estimated at Rs.
36,000 and also made a claim for a sum of Rs. 14,000 for loss of prestige
and status and for mental agony caused to him by losing his covetable job.
At the time of termination he was getting a salary of Rs. 600 p.m. besides
free boarding and lodging and a car for his conveyance. The defendant
bank contended that the plaintiff did not take immediate steps to avert the
consequences which would follow from the dishonour of the cheque and
mitigate the damage. The defendant ought to have issued a fresh cheque
on his account or utilized the other funds of his employer for paying the
telephone bill and he, not having taken such steps, cannot claim the
exaggerated amount of Rs. 50,000. The plaintiff got a part-time job ot Rs.
285 p.m. and that job was from 1st Sep. 1964 to 31st Dec, 1966 and from
Negotiable Instruments, Banking and Insurance 4.21
Decision
The Court held that the disconnection of the telephone was due to
dishonour of the cheque and that the dishonour was due to the negligence
of the bank. It said that when the cheque was dishonoured, the bank "ought
to have issued a credit note or paid off cash to the telephone department
and advise to treat the return of the cheques as of no consequence. But,
on the other hand, a casual letter was written asking the District Manager,
Telephones to represent the cheque. Mere expression of regret is not the
answer to the situation. It is expected of the bank to honour its customer's
cheque if it has sufficient funds in his hands. If it fails to do so, it will be
liable to damages. The reason is obvious. It injuriously affects the reputation,
credit and integrity of the customer. Even S. 32 of the Act provides that the
drawee of a cheque having sufficient funds of the drawer in his hands, properly
applicable to the payment of such cheque must pay the cheque when duly required
so to do, and in default of such payment, must compensate the drawer for any
loss or damage caused by such default."
It was held that "the dismissal of the plaintiff from the service of his
employer was due to the disconnection of the telephone of the group
companies which action had a definite impact on the dishonour of the
cheque. It has not been brought out that the employer had any serious
complaint against the plaintiff prior to the dishonour of the cheque."
After applying S. 73 of the Indian Contract Act, 1872 the Court azvarded
Rs. 10,000 as special damages, and a sum ofRs. 4,000 as general damages towards
the loss of prestige, status and mental agony as azvarded by the trial Court.
Facts
In this case a promissory note was alleged to have been executed on
22-7-1959. The plairitiff contended that it was executed on 29-7-1959, but
the HpfpnHant nlnaHpH that it woe ovomto/i '~>r).r7 igko
4.22 Capacity, Liability and Discharge from Liability
bring the suit within the period of limitation the plaintiff after erasing the
figure '2' wrote the figure '9'. It was found that the figure of '9' was
rewritten after the old figure had been erased. There was no evidence on
either side explaining about the suspicious nature of the document. The
plaintiff failed to prove that the alteration was made either with the consent
of the parties or in order to effectuate the common intention of the parties.
Issue
When there is no evidence on either side explaining about this suspicious
nature of the document due to alteration of figure '9' in place of some
figure, what course should the Court take?
Coming to the facts of the case the Court said: "In the absence of any
explanation on behalf of the plaintiff who seeks the enforcement of the document,
it is obvious that the plaintiff must fail, as the onus was on him to show that the
material alteration was.made either with the consent of the parties or in order to
effectuate the common intention of the parties. In the absence of any such plea
the presumption, as stated earlier, is that material alteration was made subsequent
to the execution of the document. In view of the presumption of the irresistible
conclusion is that the suit promissory note is void under S. 87 of the
Negotiable Instruments Act and it cannot, therefore, be enforced in court
of law.
Facts
An endorsement made in pencil on the back of a promissory note in
respect of payment of a part of the amount by the maker was alleged to
have been erased.
Facts
Tire first plaintiff, Bihta Co-operative Development and Cane Marketing
Union Ltd. was a society registered under the Bihar and Orissa Co-operative
Societies Act, 1935. The second plaintiff was Secretary of the Union at the
time when the suit was filed in 1951. Under a resolution, dated 16th April,
1947 of the Executive Committee of the Union, the defendant no. 6, Bubu
Lal Verma, Joint Secretary of the Union, the defendant no. 7, Ram J. Verma,
the Treasurer of the Union were jointly authorised to withdraw moneys
of the Union from the 1st defendant, the Bank of Bihar Ltd., with which
it had a running account.
On 26th May, 1948, defendant no. 6 and defendant no. 7 went to the
bank to encash a cheque on behalf of the Union and then they came to know
that the funds in the account of the Union wTere not sufficient to meet the
cheque. Meanwhile, on 16th April, 1948 a sum of Rs. 11,000 had been
withdrawn from the said account by means of cheque which did not come
out of the cheque book of the Union and that a loose cheque form surrendered
by an ex-constituent of the bank issued to someone on the 23rd March, 1948
Negotiable Instruments, Banking and Insurance 4.25
had been converted into a cheque purporting to bear the signatures of
defendant no. 6 and defendant no. 7. The spurious cheque bore the signature
of defendant no. 7 but the purported signature of defendant no. 6 was
found to be a forgery at the trial of the suit. The suit was instituted by the
two plaintiffs against seven defendants.
The High Court agreed with the finding of the Sub-ordinate Judge that
defendants 4, 5 and 7 were parties to the conspiracy, resulting in the
withdrawal of the sum of Rs. 11,000 but absolved the manager. The High
Court held that there was no negligence or lack of reasonable precaution
on the part of the Union. It further held that treasurer of the Union may
have been a party to the conspiracy which culminated in the withdrawal
of the money through the disputed cheque, but the Union could not be said
to be negligent or lacking in reasonable precaution merely because of that.
However the High Court allowed the appeal of the Bank on the ground
of jurisdiction which was, not accepted by the Supreme Court.
In the above case the plaintiffs had in their employ a confidential clerk
who had been with them, for some years. They left to him the copying of
their books and filling up cheques for signatures. The usual practice in the
4.26 Capacity, Liability and Discharge from Liability
office of the plaintiffs seems to have been for the clerk to present cheques
for signatures to get petty cash usually for £3. On a certain day, the clerk
made out a cheque for £2 and asked one of the partners to sign it which
the partner did. As the clerk did not turn up the next day, the partners
became suspicious and went to the bank. There they learned that the clerk
had presented a cheque for £120 which had been paid. The clerk absconded
with the money. The learned trial judge found that at the time when the
cheque was presented to the partner for signature the figure '2' was written
with enough space on either side for insertion or additional figures and
the clerk had taken advantage thereof and altered the figure '2' to 120. It
was held by learned Lord Chancellor that leaving blank spaces on either
side of the figure '2' in the cheque amounted to a clear breach of duty which
the customer owed to the banker. The plaintiffs were held negligent with
regard to the cheque and their action against the bank failed. According
to Lord Shaw the responsibility of what happens between the signature
and presentation of cheque, a period wholly in the customer's control, lies
entirely with him.
In the present case, "the finding is that one of the signatures was forged
so that there never was any mandate by the customer at all to the banker
and the question of negligence of the customer in between the signature
and the presentation of the cheque never arose. Not only was there negligence
on the part of the banker'in not ascertaining zvhether the signatures on the cheque
were genuine, the circumstances attending the encashment of the cheque show
conclusively that the banker was negligent and some of its office bearers fraudulent
rightfrom the beginning.... There was no negligent on the part of the customer
according to whose resolution, the cheque had to be signed jointly by two
persons. The fraud could only be perpetrated because of the complicity of
the employees of the Bank, no doubt, with the help of one of the office
bearers of the Union. The dishonesty of the particular officer of the Union
was not the proximate cause of the loss to the Bank."
Thus, the appeal succeeded, the judgement of the Patna High Court
was set aside and that of the subordinate Judge restored.
Negotiable Instruments, Banking and Insurance 4.27
Canara Bank v. Canara Sales Corporation Ltd.
AIR 1987 SC 1603
(If the signature on the cheque is not genuine there is no mandate on the bank
to pay. A document in cheque form on which the customer's name as drawer is
forged, is a mere nullity. The bank can succeed only when it establishes adoption
or estoppel.)
Facts
The plaintiff was a private limited company with its head office at
Mangalore. It had a current account with the appellant Bank (the first
defendant) in its Mangalore Bunder branch. The Managing Director of the
Company and the General Manager of a sister concern of the company had
been authorised to operate the said current account of the plaintiff with
the Bank. The second defendant, Y.V. Bhat, who was the Chief Accounts
Officer of the plaintiff company at that time, was incharge and custody of
the cheque books issued by the Bank to the plaintiff company. In March,
1961, the second defendant was absent from duty for some time. During
that period one A. Shenoy, who was the Assistant of the second defendant
was directed to bring the accounts upto date. During this process, he
noticed certain irregularities in the account and brought this to the notice
of the plaintiff. On verification, it \>vas found that cheques purporting to
bear the signature of the Managing Director Shri V.S. Kudva were encashed
though they did not bear his signature. In other words signature were
forged.
The special audit disclosed that the second defendant had withdrawn,
in all, a sum of Rs. 3,26,047.92 under 42 cheques with forged signature on
various dates between the year 1957 and 1961. During the said period the
appellant Bank ’used to send to the plaintiff respondent pass sheets
containing the debit and credit entries in the current account of the plaintiff
with the Bank every month and at the end of every half year ending 30th
June and 31st December, a letter used to.be sent asking the respondent to
confirm that the balance in its account with the Bank was as mentioned
in the letter. Till March 1961, the correctness of the entries in the pass sheets
and half yearly statements was not questioned by the plaintiff. The accounts
of the plaintiff company were being audited as required by the Companies
Act by chartered accountants.
The suit was filed on behalf of the company for recovery of the amount
against the Bank on the plea that the amount of nearly 31 lakhs as per the
4.28 Capacity, Liability and Discharge from Liability
forged cheques were not utilized for the purpose of the plaintiff, that they
were not acquiescence on ratification, open or tacit, on the part of the
plaintiff, that the plaintiff was unaware of the fraud till the new accountant
discovered it.
The appellant Bank contended, that the plaintiff was not entitled to
recover the amount on account of its own negligence. It was further
contended that there was settlement of accounts between the parties from
time to time and as such the plaintiff was not entitled to reopen the same
and claim the sums paid under the cheques in question.
Decision of the Trial Court and Division Bench of the High Court
The trial Court did not accept the contentions of the Bank and passed
a decree for the sum claimed with interest at 6% from the date of the suit
till the recovery of the amount. The Division Bench of the Mysore (now
Karnataka) High Court confirmed the judgement of the trial court.
The principle settled by the House of Lords was pressed into service
before the Supreme Court in Bihta Co-operative Development and Cane
Marketing Union v. Bank of Bihar. The principle that if the signature on
the cheque is genuine there is a mandate by the customer to the bank to
pay was reiterated. It was also held in this case that if an unauthorised
person got hold of such a cheque and encashed it, the bank might have
had a good defence but, however, if the signatures on the cheque or at least
one of the signatures are or is not genuine, there is no mandate on the bank:
to pay and the question of any negligence on the part of the customer, such
as leaving the cheque book carelessly so that a third party could easily get
hold of it would afford no defence to the bank. The Supreme Court
distinguished Macmillan case observing, that if any of the signatures was
forged the question of negligence of the customer in between the signature
and the presentation of the cheque never arose.
The Supreme Court held that there is a duty on the part of the customer
to inform the bank of the irregularities when he comes to know of it. But
by mere negligence one cannot presume that there has been a breach of
duty by the customer to the bank. The customer should not by his conduct
facilitate payment of money on forged cheques. In the absence of such
circumstances, mere negligence will not prevent a Customer suing the bank
for recovery of the amount. For negligence to constitute estoppel it is
necessary to imply the existence of some duty which the party against
whom estoppel is alleged owes to the other party. In the present case after
the irregularities were discovered, immediate action was taken. Therefore,
in the absence of any evidence of the plaintiffs involvement, the plaintiff
cannot be non-suited on the ground of negligence or inaction. Thus, a case
of acquiescence also cannot be flourished against the plaintiff.
The Supreme Court held that American Law is different from the law
that obtains in England. On the questions involved in this appeal, it is the
law that obtains in England which had been followed in India. "The
authorities in England have more or less consistently held that there is no
duty on the part of the customer to intimate the banker about any error
that may be seen in the pass book and that he will be entitled to claim any
amount paid on a forged cheque though there may be some negligence or
4.30 Capacity, Liability and Discharge from Liability
inaction on his part in not being careful to discover the errors in the pass
book or other documents. In the instance case, there is no evidence to show
that anyone other than the second defendant knew that the forged cheques
had been encashed. After the matter was discovered, immediate action was
taken."
The Supreme Court relied upon the decision of the Privy Council in
Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., (1985) 2 All ER 947,
in which the facts were more or less identical. Their Lordships of the Privy
Council, summed up the law as follows:
The Supreme adopted the reasoning indicated above. The appeal was
dismissed. Khalid, J.’, said:
"Unless the Bank is able to satisfy the Court of either an express condition
in the contract ivith its customer or an unequivocal ratification it will not be
possible to save the bank from its liability. The banks do business for their
benefit. Customers also get some benefit. If banks are to insist upon extreme
care by the customers in minutely looking into pass book and the statements
sent by them, no bank perhaps can do profitable business. It is common
knowledge that the entries in the pass books and the statements of account
sent by the bank are either not readable, decipherable or legible. There is
always an element of trust between the bank and its customer. The bank's
business depends upon this trust. Whenever a cheque purporting to be by a
customer is presented before a bank it carries a mandate to the bank to pay. If
a cheque is forged there is no such mandate. The bank can escape liability only
if it can establish knowledge of the customer of the forgery in the cheques. Inaction
]\fegotiable Instruments, Banking and Insurance 4.31
for continuously long period cannot by itself afford a satisfactory ground for the
bank to escape the liability. The plaintiffin this case swung into action immediately
on the discovery of the fraud committed by its accountant as in the case before
the Privy Council."
The Supreme Court concluded at the end that there is no duty for a customer
to inform the bank offraud committed on him of which he was unaware. Nor can
inaction for a reasonably long time in not discovering fraud or irregularity be made
a defence to defeat a customer in an action for loss. Thus, the contentions put
forward by the bank were not accepted. Judgement of the High Court and that
of the Trial Judge upheld.
Facts
The defendant appellant was a man of affluence. He was visiting
regularly the plaintiff respondent who was a tawaiff A suit was filed for
recovery of Rs. 8,000 under a promissory note which was said to be executed
on 23-4-1974. The allegation was that the amount was said to be borrowed
as a hand loan and when it was refused a legal notice was sent dated
26-11-1976 but the same was returned unserved. The suit was filed on
16-12-1976. The defendant appellant contended that there was no need or
necessity for him to borrow the amount. Secondly, whenever he visited the
house of the plaintiff-appellant he was consuming liquor and when he was
under the influence of intoxicant drinks, may be, his signature was obtained.
Therefore, even if there is any execution of such document it was not done
in consciousness. Thirdly, that the pro-note is materially altered as the date
has been later inserted.
In Halsbury's Laws of England, 4th Edition, 4th Volume ,at page 460
it is stated : '
The High Court held that "a look to pro-note itself makes it apparent
that the date, which is in different ink, that is, other than the ink that has
been used for the body of the pro-note, is a subsequent introduction into
the document. This insertion also amount to material alteration."
The High Court referred to the case of Verco Pvt Ltd. v. Newandram
Naraindas, AIR 1974 Mad 4 where it was held that even a fresh insertion
of the date or any other material particular will constitute material alteration
within the meaning of section 87 of the Negotiable Instruments Act.
Negotiable Instruments, Banking and Insurance 4.33
In the present case His Lordship had no doubt whatsoever to hold that the
date 23-4-1974 bad been inserted later on and that had not been explained by the
plaintiff. Therefore, the instrument was held to be void. In viezv of this it was
needless to consider whether consideration had passed on the defendant.
EXAMINATION QUESTIONS
1. (a} Distinguish between material alteration and forgery in a
negotiable instrument.
Hint: A will not succeed in this suit as alteration of the date of the
instrument is a material alteration (Outhwaite v. Luntly, (1815) 4
Camp 179; A. Subba Reddy v. N. Ramana Reddy, AIR 1966 AP 267).
8. State the facts, issues and the principles of law as laid down in Pirbhu
Dayal v. Jwala Bank, AIR 1938 All 374
12. State precisely the cases in which the banker is justified or bound to
dishonour cheques.
13. A drew a bearer cheque on Toney Bank payable to B for eight thousand.
On the cheque he wrote the amount thus in words 'Eight thousand',
in figures Rs. 8000/-. B added 'y' after 'eight' so to read like 'eighty'.
He also inserted one '0' after 8000 and made it to read 80000/-. He
Negotiable Instruments, Banking and Insurance 4.35
them put a 'comma' also after 80 so that it read like this Rs. 80,000/-.
Toney Bank unsuspectingly paid Rs. 80,000 to B who later on absconded.
Does A have any cause of action against the bank?
Meaning of Acceptance
In American Express Bank Ltd. v. Calcutta Steel Co., (1993) 2 SCC 199,
it was held that "acceptance" in regard to a bill of exchange is a technical
term. It does not mean "taking" or "receiving". Acceptance of a bill of
exchange is the signification by the drawee of his assent to the order of the drawer.
In commercial parlance acceptance of a bill of exchange is the drawee's signed
engagement to honour the bill of exchange as presented. The contract of the
acceptor is a new and independent one. It comes within the rules as to
consideration for a contract on a negotiable instrument, and like every
contract on a negotiable, instrument, is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto.
As between a drawer and a drawee, the latter is to be under an
obligation to accept a bill of exchange drawn by the former. Thus, it is a
well-settled rule of commercial law that no one but the person upon whom
it is drawn, or his duly authorised agent, can accept a bill except for need
or honour.
The usual mode of accepting bill of exchange is for the drawee to write,
'accepted' across the face of the bill and then sign his or its name underneath.
Acceptance on the back of the bill of exchange is also sufficient. In all cases
it is essential that the acceptance should be on the bill itself otherwise it
is a mere nullity.
Delivery of bill of exchange is essential to complete the acceptance of
the bill. For example, A draws a bill on B payable to C for Rs. 10,000. B
receives the bill for acceptance. B writes his acceptance on it. Afterwords,
he comes to know that A has become bankrupt. B cancells his acceptance
and returns the dishonoured bill to the drawer A. This is no acceptance,
as B has not delivered the bill so as to make himself liable on the bill.
C 1
F
5.2 Presentment
From the aforesaid provision it would appear that presentment for acceptance
is necessary only of a bill of exchange payable after sight. With respect to other
bills there is no express provision in the Act requiring presentment of
acceptance before presenting them for payment and there is nothing in the
Act to prevent such bills being presented for acceptance. But whether the
bill is payable after sight or at sight or on demand, acceptance by the drawee is
necessary before he can be fixed with liability on it. In Jagjivan Mavji v.
Ranchhor Das, AIR 1954 SC 554, it was held that in a bill payable after
sight there are two distinct stages, firstly when it is presented for payment
but when the bill is payable on demand both the stages synchronize and
there is only one presentment, which is both for acceptance and for payment.
In case of a bill payable at sight or on demand as there is only one
presentment if the bill is not paid, it is really dishonoured for non-acceptance.
A bill payable after sight must be presented zvithin a reasonable time after
it is drawn. The drawee and other persons liable on the bill will be discharged
if the bill is not presented as aforesaid. If there is delay in presentment of
the bill for acceptance it will increase the time of payment and thus there
will be more risk of the drawee becoming insolvent. According to S. 105,
in determining reasonable time regard shall be had to the nature of the
instrument and the usual course of dealing with respect to similar
instruments; and in calculating such time, public holidays shall be excluded.
Reasonable time depends on facility of communication and interest of the
drawer, indorser and holder.
S. 63 provides that the holder of a bill must allow the drawee forty
eight hours (exclusive of public holidays, to consider whether he will or
will not accept the bill. The acceptance, if given, will be effective from the
day of presentation of the bill for acceptance. Section 83 provides that if
the holder allows more time, all the previous parties not consenting to such
allowance are discharged from liability to such holder. Thus, the holder
should allow the drawee only forty-eight hours to consider whether he will
accept the bill or not.
"Let us now consider the exception to S. 64. It is not the case that in
the case of all promissory notes no presentment is necessary. Sections 62,
64, 67, 68 and 68 deal with promissory notes and provide for presentment
and record the consequences of non-presentment. The exception to S. 64
deals with a promissory note payable on demand; the proper place of the
exception would have been below S. 74 which deals with negotiable
instruments payable on demand. The exception to S. 64 deals with a
promissory note alone and says that where it is payable on demand but
is not made payable at a specified place, no presentment is necessary. The
fact that the exception deals with the consequences of non-presentment,
cannot be taken as enlarging the natural meaning of S. 64. The true method
of providing an exception is to take a case which but for the exception
would fall within the general rule, but it is impossible to do so in this
particular case. If S. 64 stands as it does, the exception must be taken as
PTYl'ncr tn -J4- --
5.6 Presentment
language of S. 64. This section should be given its plain meaning and the
exception to it must be read as more or less an independent rule of law/'
Place of presentment
Presentment for payment of instrument payable at a specified place
and notdsewhere.—A promissory note, bill of exchange or cheque made,
drawn or accepted payable at a specified place and not elsewhere must,
in order to charge any party thereto, be presented for payment at that
place.
Presentment of Cheques
Presentment of cheque to charge drawer.—Subject to the provision
of Section 84 a cheque must, in order to charge the drawer, be presented
at the bank upon which it is drawn before the relation between the
drawer and his banker has been altered to the prejudice of the drawer.
(S. 72)
<c) as against any party if after maturity, with knowledge that the
instrument has not been presented—
Q. State the cases when presentment for payment is unnecessary. [LL.B., D.UJ
Negotiable Instruments, Banking and Insurance 5.11
or promise to pay the amount due therein in whole or in part,
or otherwise waives the right to take advantage of any default
in the presentment for payment;
(d> as against the drawer, if the drawer could not suffer damage
from the want of such presentment. (S. 76)
Liability of banker for negligently dealing with bill presented for payment -
When a bill of exchange, accepted payable at a specified bank, has been
duly presented payable at a specified bank, has been duly presented
there for payment and dishonoured, if the banker so negligently or
improperly keeps, deals with or delivers back such bill as to cause loss
to the holder, he must compensate the holder for such loss. (S. 77)
EXAMINATION QUESTIONS
1. Write short notes on the following;
(1) When a bill is properly presented for acceptance, and the drawee
makes default in accepting it. If there are several drawees not being
partners the bill is said to be dishonoured by non-acceptance if any
one of them refuses to accept the bill.
(2) When the presentment for acceptance is excused and the bill is not
accepted. (Also see section 61)
(4) When the drawee gives a qualified acceptance, the bill may be
treated dishonoured. (Also see section 86)
DISHONOUR BY NON-PAYMENT
Dishonour by non-payment.— A promissory note, bill of exchange
or cheque is said to be dishonoured by non-payment when the maker
of the note, acceptor of the bill or drawee of the cheque makes default
in payment upon being duly required to pay the same. (S. 91)
NOTICE OF DISHONOUR0
Section 93 provides as follows :
If the notice is duly directed and sent by post and miscarried, such
miscarriage does not render the notice invalid."
(d) when the party entitled to notice cannot after search be found;
or the party bound to give notice is, for any other reason, unable
without any fault of his own to give it;
(f) when the party entitled to notice, knowing the facts promises
unconditionally to pay the amount due on the instrument.
(p) No damage - When the party charged could not suffer damage for
want of notice, no notice of dishonour is necessary. In Chunilal v.
Amerendra, AIR 1953 Assam 94, it was held that no notice of
dishonour is necessary under this clause when a cheque is
dishonoured on account of the fact that the drawer has no account
or had closed his account because no question of damage by reason
of absence of notice of dishonour arises.
Reasonable Time
Section 106 deals with the time of giving notice of dishonour and S. 107
deals with the time for transmitting such notice. Both these sections are
reproduced below:
NOTING
Section 99 provides as follows :
Section 100 provides that where the fact of dishonour has been noted,
the holder may also have the fact of dishonour and noting certified by the
notary public. The certificate which the holder will get from the notary
public certifying the fact of dishonour is called a protest. The special
advantage of a protest is that the fact of dishonour can be easily proved
and under S. 119 the court shall on proof of protest presume the fact of
dishonour. Like noting, protest is also not compul-sory in case of inland
bills.
(b) the name of the person for whom and against whom the instrument
has been protested;
(d) when the note or bill has been dishonoured, the place and time of
dishonour, and, when better security has been refused, the place
and time of refusal;
A notary public may make the demand mentioned in clause (c) of this
section either in person or by his clerk or, where authorized by agreement
or usage, by registered letter.
Notice of protest
Section 103 provides that "all bills of exchange drawn payable at some
other place than the place mentioned as the residence of the drawee, and
which are dishonoured bv non-acceptance, may, without further
Negotiable Instruments, Banking and Insurance 6.9
Section 104-A provides that "For the purposes of this Act, where a bill
or note is required to be protested within a specified time or before some
further proceedings is taken, it is sufficient that the bill has been noted for
protest before the expiration of the specified time on the taking of the
proceeding and the formal protest may be extended at any time thereafter
as of the date of noting."
EXAMINATION QUESTIONS
1. "Notice of dishonour to the drawer of a negotiable instrument is
absolutely necessary, and unless and until it is given, the holder has
no cause of action against him." Explain and Illustrate.
CROSSING OF CHEQUES
A cheque is said to be crossed when it bears across its face two parallel
transverse lines. The lines are usually drawn on the left hand top corner
of the cheque. A crossing is a direction to the paying banker to pay the
money generally to a bank or to a particular bank as the case may be. Thus,
crossing affects the mode of payment of cheque. But it does not affect the
transferability. Although crossing is a material alteration but it is permitted
under S. 125 of the Act. A specimen of crossing is as follows:
72 Crossing of Cheques
Kinds of Crossing01
Crossing is mainly of two kinds, namely—
General Crossing.—S. 123 says, "Where a cheque bears across its face
an addition of the words "and company" or any abbreviation thereof,
between two parallel transverse lines, or of two parallel transverse lines
simply, either with or without the words "not negotiable", that addition
shall be deemed to be a crossing', and the cheque shall be deemed to be
crossed generally."
QI. Explain in brief 'General', 'Special' and 'Account Payee' crossing of cheques.
ni n nH1
Negotiable Instruments, Banking and Insurance 7.3
Thus, "A person who takes a cheque marked "not negotiable" takes it
at his own risk, and his title to the money got by its means is as defective,
as his title to the cheque itself." [Great Eastern Railway Co. v. London and
Country Banking Company (1901) A.C. 414]
Case.—In Great Western Railway Co. v. Landon and Country Banking
Co., (1901) A.C. 414, A obtained by fraud from B a cheque crossed "not
negotiable". A indorsed the cheque and got it encashed at a bank other than
tire drawee bank. B sued the indorsee bank for conversion. It was held that
as A had obtained the cheque by fraud, he had no title to it, and could not
give the bank valid title to the cheque or money. Thus, the bank was held
liable for the amount of the cheque.
Example.—A cheque payable to bearer is crossed generally and marked
"not negotiable". The cheque is stolen by A who negotiates it to B who takes
7.4 Crossing of Cheques
it good faith and for value. B deposits the cheque in his own bank and his
banker collects the amount of the cheque from the paying banker. The
paying banker and the collecting banker are both exonerated from liability
under section 128 and section 131 respectively. However, B is liable to pay
the money to the true owner and he does not obtain any better title than
that of the immediate transferor who had stolen the cheque.
In M/s Tailors Priya v. M/s Gulabchand Danraj, AIR 1963 Cal. 36, it
was held that a cheque payable to order or bearer and crossed "A/c Payee"
or "A/c Payee only", but without the indorsement "not negotiable", is a
negotiable instrument and maybe negotiated, but the collecting banker has
a duty to put the money, when collected, to the account of the payee
indicated, and into no other account.
The collecting banker would not collect the "Account payee" cheque
for none other than the payee. In case, the collecting banker collects it for
someone else it would be deprived of the statutory protection afforded to
it by section 131 of the Act. Since the collecting banker would not like to
be charged for negligence he would certainly collects the cheque for the
payee only. In such a case, indorsement of such a cheque by the payee,
would be superfluous. Therefore, Sinha, J., of the Calcutta High Court in
the aforesaid case observed that this curious position in law should be
corrected by legislation.
m a
Negotiable Instruments, Banking and Insurance 7.5
Section 125 provides that where a cheque is uncrossed, the holder may
cross it generally or specially; Where a cheque is crossed generally, the
holder may cross it specially.
Where a cheque is crossed generally or specially, the holder may add
the words "not negotiable". Section 125 further provides that where a
cheque is crossed specially, the banker to whom it is crossed, may again
cross it specially to another banker, his agent, for collection.
03. "Section 131 of the Negotiable Instruments Act, 1881 confers protection to a
collecting banker receiving payment of a cross cheque in case the title of the
customer to it is proved defective." State the essential requirements for claiming
such protection. Discuss with the help of decided cases the standard of care
expected of a collecting banker to enable it to claim this protection. [LL.B.,
D.UJ
04. With the help of decided cases, describe the standard of care expected of a
collecting banker to enable it to. claim the protection of section 131 of the Nego
tiable Instrument Act, 1881. What are the other requirements of that section?
[LL.B., D.UJ
05. Discuss the protection available to a collecting banker under Section 131 of the
Negotiable Instruments Act, 1881 with the helps of decided cases.
it i n nni
Negotiable Instruments, Banking and Insurance 7.7
Explanation II.— It shall be the duty of the banker who receives
payment based on an electronic image of a truncated cheque held with
him, to verify the prima facie genuiness of the cheque to be truncated
and any fraud, forgery or tampering apparent on the face of the instrument
that can be verified with due diligence and ordinary care.
"Whether the transaction of paying in any given cheque coupled with the
circumstances antecedent and present was so out of ordinary course that it ought
to have aroused doubt in the banker's mind and caused him to make inquiries?"
"The test of negligence for the purpose of S. 131 of the Act is zvhether the
transaction ofpaying in any given cheque coupled with the circumstances antecedent
and present is so out of the ordinary course that it ought to arouse doubts in the
banker's mind and cause him to make inquiries ivhen there is anything to arouse
suspicion that the cheque is being zvrongfully dealt with in being paid into the
customer's account. However, the banker is not called upon to be abnormally
suspicious. As a general rule a banker before accepting a customer, must take
reasonable care to satisfy himself that the person in question is ofgood reputation;
and if he fails to do so he zvill run the risk offorfeiting the protection given by
S. 131 of the Act but 'reasonable care' will depend on the facts and circumstances
of the case. The courts have tended to accept the practice and procedures zvhich
bankers lay dozvn for themselves, but that can by no means be decisive."
The following are the cases where a collecting banker may be held liable
for negligence:
(3) When he collects cheque payable to an official for his private account.
(7) When he collects a cheque crossed "account payee" for the account
of a person other than the payee [Anupama Stationery v. Vishnu
Vardhana Enterprises., (1987)62 Comp. Cas.271 Karn].
In United Bank of India v. Bank of Baroda, AIR 1997. Mad 23, the
collecting bank (defendant - appellant) sent for realization and payment
to the paying banker (plaintiff - respondent) a demand draft purported to
be drawn on Bank of Baroda for Rs..11,260 and payable to Mr. A. N.
Rangarajan. The demand draft was forged but the plaintiff bank made the
payment to the collecting bank in good faith and even without waiting for
the advise from the purported issuing branch of the plaintiff bank. Thus,
the defendant bank received payment of the forged instrument. It was
proved that the defendant bank was negligent in opening the account of
a person on whose account the demand draft was collected. The paying
banker sued the collecting banker to recover back Rs. 11,260 with interest.
It was held that the collecting banker was negligent and thus could not
claim protection under Section 131, 131A of the Act. The opening of the
account and deposit of the draft was held to be part of one scheme.
7.10 Crossing of Cheques
LEADING CASES
Bapu Lal Prem Chand v. Nath Bank Ltd.
AIR 1946 Bom. 482
(Negligence is essentially a question of fact and it must depend upon the
circumstances of each case whether negligence has been proved or not. The test
of negligence is whether the transaction of paying in any given cheque coupled
with the circumstances antecedent and present was so out of ordinary course that
it ought to have aroused doubts in the banker's mind and caused him to make
inquiries.)
Facts
On 5th February, 1945 a firm of merchants issued a generally crossed
cheque upon Laxmi Bank Ltd. (paying banker) for the sum of Rs. 4000/
- payable to the plaintiff appellant or bearer. On the same day the plaintiff
dispatched the cheque to his commission agent but was stolen during
transit. On 26th Jan., 1945 one Nemchand Amichand Gandhi opened an
account by paying to the credit of that account Rs. 300/- in cash. Although
the name of the depositor was Gandhi he signed his application form as
N.A. Gandhi. The manager of the defendant bank accepted the reference
of Modi, the cashier of the branch, and also made certain inquiries of Modi
as to the position and status of Gandhi at the time of opening the account
of Gandhi. On 30th Jan., 1945 Gandhi withdrew from his account by a
cheque a sum of Rs. 225. On 7th Feb., 1945 Gandhi withdrew a further sum
of Rs. 50 by drawing another cheque and on the same day paid into his
account the cheque for Rs. 4,000/- which had been drawn in favour of the
plaintiff and of which the plaintiff claimed to be the true owner. On Sth
Feb., 1945 Gandhi drew a cheque for Rs. 3,800/- on his account and
withdrew the amount. The plaintiff as the true owner of the cheque for
Rs. 4000/- filed the suit against the defendant bank which pleaded protection
afforded by S. 131. The plaintiff contended that the defendant bank acted
with negligence although in good faith.
Issue
Whether on the facts established the defendant bank has discharged his
burden of proving that he acted without negligence?
In this case the manager of the defendant bank accepted the reference
of Modi, the cashier of the branch, and also in fact made certain inquiries
of Modi as to the position and status of Gandhi. The Court said it zoas not
obligatory upon the defendant bank to make further inquiries about the customer,
and having failed to make inquiries they are not guilty of negligence.
Under all the circumstances of the case, the defendant bank has
established that there was no negligence on his part in collecting the cheque
of Gandhi and crediting it to his account and therefore, the defendant bank
7.12 Crossing of Cheques
is protected by S. 131 of the Negotiable Instruments Act, 1881, and is not
liable to the plaintiff for conversion.
Indian Bank v. Catholic Syrian Bank Lid.
AIR 1981 Mad. 129
(An introduction by an employee of the bank who knows nothing about new
customer cannot always be regarded as trust worthy. The bank has to shoiv absence
of negligence not merely in the act of receiving payment of the cheque but at all
stages of the transaction culminating in the cashing of the cheque.)
Facts
An account was opened on 7-6-1969 with the Salem branch of the
appellant bank with a small sum of Rs. 300. The account was opened on
the recommendation of a customer who could not be said to be respectable
and without testing the credentials of the person desirous of opening the
account. The very next day a sum of Rs. 200 had been withdrawn and thus
only a sum of Rs. 100 was left as a balance in the account. On 13-6-1969
a demand draft of Rs. 20 from the respondent bank whose amount had
been altered by means of clever forgery for Rs. 29,000, a considerable large
amount, was presented for collection to the appellant bank. The appellant
bank sent the draft on the very same day to the respondent bank for
clearance. The said bank unsuspectingly paid the draft amount of Rs.
29,000 to the appellant bank by means of a cheque in due course. However,
on 14.6.1969, the Salem branch office of the respondent bank came to know
from its Singallar branch that the Singallar branch had issued a draft of
Rs. 20 only and payable by the branch office at Cochin and no drafts of
Rs. 29,000 had been issued. At once, the respondent bank at Salem got in
touch with the Agent of Salem branch of the appellant bank and informed
him of the fraud that had been committed. But, unfortunately, by then the
appellant bank had already paid a large part of the draft amount to its
customer under the self-cheque. The respondent then filed a suit against
the appellant for recovery of Rs. 29,000 on the ground that the appellant
had been negligent while opening a current account in the name of its
impugned customer by reason of its negligence and want of good faith and
forged cheque had come to be wrongly converted. The appellant bank
pleaded the protection of S. 131 and S. 131A of the Negotiable Instruments
Act, 1881.
Decision
The court held that the appellant bank was not entitled to benefit of Sections
131 and 131A as it acted negligently. It said that opening of the account had been
done negligently and "the draft had been put into the account so shortly after the
Negotiable Instruments, Banking and Insurance 7.13
opening of the account as to lead to the inference that it forms part of the opening
ffie account and consequently the negligence in opening the account has to be
treated as negligence in the matter of realisation of the cheques as well.
The Court further said that in such a case the bank which honoured
the draft could not be said to be guilty of contributory negligence merely
because it failed to make enquiries from its branch which issued the draft
before the same was cleared and the amount thereon was credited to the
account of the new customer and he withdrew it.
Great Western Railway Co. (plaintiff-appellant)
v.
London and County Banking Company (defendant-respondent)
1901 AC 414
(Payment should be received on behalf of and for a "customer". A banker who
allows the facility of collection to a stranger does so at his own risk.)
Facts
Higgins by false pretences obtained in Nov., 1898 from Great Western
Railway (appellants) a cheque drawn by them on the London and County
Banking Company (respondents) payable to Higgins or order, crossed "&
Co/' and "not negotiable". This cheque Higgins took to the respondents'
branch, indorsed it and handed to the bank clerk. At Higgins's request a
part of the amount ($ 250) was placed to the credit of a particular account
with the bank and the balance ($ 1171.10) respondents crossed the cheque
to themselves and sent it to their head office in London, where it was
passed through the clearing house and paid. After it was paid, Higgins'
fraud was discovered and the appellants sued the respondents for the
amount (S 1421.10) of the cheque. At the trial Court it was found that for
twenty years the respondent's branch had paid cheques, some crossed,
some not crossed, to Higgins at the counter in a similar manner. None of
them were marked "not negotiable". Higgins never had any account with
the bank. It was found that defendants received the payments in good faith
and without negligence. It was also found that they received it for Higgins
and not for themselves and that Higgins "customer" within S. 82 of the
English Bill of Exchange Act, This decision was affirmed by the Court of
Appeal. Sections 81 and 82 of the (English) Bill of Exchange Act, 1882
provided as follows:-
"S. 81. Effect of not negotiable" crossing on holder.—Where a person
takes a crossed cheque which bears on it the words "not negotiable", he
shall not have and shall not be capable of giving a better title to the cheque
7.14 Crossing of Cheques
S. 82. Protection to collecting banker.—Where a banker in good faith
and without negligence receives payment for a customer of a cheque
crossed generally or specially to himself, and the customer has no title or
a defective title thereto, the banker shall not incur any liability to the true
owner of the cheque by reason only of having received such payment.
A banker receives payment of a crossed cheque for a customer within
the meaning of S. 82 notwithstanding that he credits his customer's account
with the cheque before receiving payment thereof."
Note.— It may be noted that S. 82 cited above has been repealed and
substituted as follows:
"S. 82, Protection to collecting banker.—(1) Where a banker, in good
faith and without negligence—
(a) receives payment for a customer of an instrument to which this
section applies; or
(b) having credited a customer's account with the amount of such an
instrument receives payment thereof for himself, and the customer
has,no title or a defective title, to the instrument, the banker does
not incur any liability to the true owner of the instrument by reason
only of having received payment thereof.
(2)..............
(3) ........... "
Decision
It was held that the cheque having been obtained by fraud of the
appellant holder who had no title to the cheque, and could not give to the
bank title to the cheque dr the money, and that the bank was liable for the
amount for the cheque.
In the course of his judgment Lord Brampton said: "The object of section
81 is obvious. It is to afford to the drawer or the holder of a cheque who
is desirous of transmitting it to another person as much protection as can
be reasonably afforded to it against dishonesty or accidental miscarriage
in the course of its transit, if he will only take the precaution to cross it,
with the addition of the words "not negotiable" so as to make it difficult
to get such cheque so cashed until it reaches the destination." While applying
that section to the present case His Lordship stated that having obtained the cheque
by false pretence Higgins could not give a better title to anybody else. The
protection of a collecting banker could not be availed because the money had
already been given to Higgins in exchange for the cheque and the money paid to
the respondents has been received on their own account to reimburse a'nd not on
1
Facts
The plaintiff instituted a suit in City Civil Court, Calcutta under Rule
2, Order XXXVII of the Code of Civil Procedure claiming a decree on
dishonoured cheque drawn by the defendant and payable to the plaintiff
or order. The cheque was crossed generally and is marked with the words
"a/c payee only". Those words were written within the transverse lines
of the crossing. On behalf of the defendant it was contended that cheque
was not a negotiable instrument within the meaning of S. 13 of the Negotiable
Instruments Act, 1881 and that a suit on it under Rule 2 Order XXXVII Code
of Civil Procedure was not maintainable at all. Rule 2 Order XXXVII C.P.C.
bears the heading "Summary Procedure on Negotiable Instruments". The
7.16 Crossing of Cheques
Bachawat, J. of the High Court held that a cheque marked "a/c payee
only" is a bill of exchange and consequently the plaintiff was entitled to
institute a suit on it under Order XXXVII C.P.C. Therefore, Bachawat, J.
din not decide the question whether such a cheque is a negotiable instrument
within the meaning of S. 13 of the Negotiable Instrument Act, 1881. However,
he noticed that according to English decision, the marking "a/cpayee “ on a
crossed cheque payable to order or bearer is no part of the crossing: " the words
do not restrict transferability, nor it seems the negotiability of the cheque, the
words refer to the banker and not to the transferee and constitute a direction to
the banker and not to the transferee and constitute a direction to the banker that
the proceeds of the cheque collected by him are to be placed to the credit of the
payee specified in the cheque... In practice the collecting banker usually declines
to collect a cheque so marked for an account other than that of the payee and
marking therefore indirectly restrains the negotiability of the cheque. The position
of the paying banker honouring the cheque with the knowledge that the
proceeds of the cheque are going otherwise than to the specified payee is
not quite clear, see Chalmer's Bill of Exchange 12th Edition, pages 253-4."
Sinha, J. of the High Court, in a separate judgment, also held that the
City Civil Court had jurisdiction to pass a decree in the suit filed under
the provisions of Order XXXVII of the C.P.C. in this case as the heading
of the order cannot control the substantive provisions of Rule 2.
Sinha, J. also dealt with the other point, namely, the nature of a cheque
indorsed and/or crossed with the words "a/c payee only".
both in England and India that I am enable to depart from that view on
the strength of my own feeling about it. The matter should however, be
corrected by legislation. /, therefore, hold that according to the law as it stands
at present, a cheque pavable to order or bearer and crossed "a/c payee" or "a/c
payee only" but without the indorsement, "not negotiable", is a negotiable
instrument and may be negotiated, but the collecting banker has a duty to put
the money, when collected into the account of the payee indicated, and into no
other account."
Sinha, J. agreed with the order made by Bachawat, J.
Indian Overseas Bank v. Industrial Chain Concern
(1990) 1 MLJ (SC) 40: (1990) 1 SCC 484:
(1990) 67 Comp. Cas. 255
(The test of negligence for the purpose of Section 131 of the Act is whether
the transaction of paying in any given cheque is so out of the ordinary course that
it ought to arouse doubts in the banker's mind and cause him to make inquiries.
The banker is bound to make inquiries when there is anything to rouse suspicion
that the cheque is being -wrongfully dealt with in being paid into the customer's
account. However, the banker is not called upon to be abnormally suspicious. As
a general rule a banker before accepting a customer, must take reasonable care to
satisfy himself that the person in question is of good reputation; and forfeiting
the protection given by Section 131 of the Act but 'reasonable case' will depend
on the facts and circumstances of the case. The Courts have tended to accept the
practices and procedures -which bankers lay down for themselves, but that can be
no means be decisive.)
Facts
One Sethuraman (henceforth S), was manager of the respondent firm
'Industrial Chain Concern'. He, representing himself as the sole proprietor
of the firm, approached the manager of a branch of the appellant bank for
opening of a current deposit account there with overdraft facility in the
name of the firm. The manager of the bank deposed that he had refused
the request for overdraft facility. But S then requested for opening of a
current deposit only so that his request for overdraft facility might be
considered after about one year when his business will improve. Though
the address of the firm mentioned by S was far off from the branch
(Nungambakkam Branch) of the bank but on the inquiry of the manager,
S had maintained that he had preferred that branch due to his acuqintance
with the manager. The manager also glaced through some business
correspondence and supply orders in the name of Industrial Chain Concern
shown by S though he did not check up the address given in the
Negotiable Instruments, Banking and Insurance 7.19
correspondence by the companies. As the manager of the bank knew S,
being his erswhile classmate, he gave the introduction and on that basis
an ordinary current deposit account was opened by account opening form
under the title Industrial Chain Concern on the cash deposit of Rs. 100 on
October 3, 1974. The respondent, Industrial Chain Concern, averred that
S as its manager had received drafts and cheques amounting to Rs. 26,383.49
sent by the parties to whom the firm had supplied goods and that he after
opening a "fictitious account' in the aforesaid branch of the bank, paid in
the stolen drafts and cheques and the bank collected them and allowed S
to withdraw the same defrauding the respondent. The respondent filed a
suit for recovery of the amount with interest alleging the bank as being
guilty of negligence and conversion. The trial court decreed the suit and
the High Court dismissed the bank's appeal.
Issue
Whether the bank is guilty of negligence and conversion?
EXAMINATION QUESTIONS
1. Distinguish between an open cheque and a crossed cheque.
2. Distinguish between account payee and not negotiable crossing.
3. Discuss the law relating to crossed cheques with special reference
to the liability of the collecting banker in respect thereof.
4. Write a short note on non-liability of a banker receiving payment
of cheque.
Hint: Explain protection of collecting banker.
5. State the facts, issues and the principles of law as laid down in
Indian Bank v. Catholic Syrian Bank Lid.
6. What are the requirements to be fulfilled to claim protection by
collecting banker of a crossed cheque under Section 131 of Negotiable
Instrument Act, 1881?
7. (a) What do you mean by 'Not-negotiable crossing'?
(b) X drew a cheque payable to B or order, crossed it 'Account
Payee only'. Can B indorse it in favour of C? Decide with the
help of decided cases.
Hint: A cheque payable to order or bearer and crossed 'Account
Payee only' is a negotiable instrument and may be negotiated but
Negotiable Instruments, Banking and Insurance 7.23
the collecting banker has a duty to put the money, when collected,
into the account of the payee indicated, and into no other account
(Tailors Priya v. Gulabchand, AIR 1963 Cal. 36).
8. A drew a cheque in favour of B and crossed 'Not negotiable'. Can
B indorse this cheqtie to C? If you think that B can indorse, what
kind of title will C have?
Hint: A person who takes a cheque crossed 'not negotiable' has no
better title to it than his immediate transferor, and the true owner
can always reclaim it or the amount due on it, no matter what has
been done to it, although the bank which pays the cheque and the
bank which collects it are both protected, provided that the payment
and the collection have been made in good faith and without
negligence (sections 128 and 131). The crossing of cheque 'not
negotiable' does not render the instruments non-transferable; it
only deprives the instrument of the incident of negotiability (Tailors
Priya v. Gulabchand, AIR 1963 Cal 36). If the holder has a good
title, he can still transfer it with a good title; but if his title is
defective, his transferee will not have a better title and he (transferee)
cannot claim the rights of a holder in due course even if he purchased
the instrument in good faith and for consideration. Therefore, in the
present problem B can indorse the cheque to C but C's title will not
be better than that of B.
9. A cheque payable to bearer is crossed generally and is marked "not
negotiable."
The cheque is lost or stolen, and comes into the possession of B who
takes it in good faith and gives value for it. B pays the cheque into
his own bank, and his banker presents it, and obtain payment for
his customer from the banker upon which the cheque is drawn. Is
B liable to refund the money to the true banker? Also state the
liability of paying and collecting banks.
Hint: B is liable to refund the money to the true owner as the cheque
was crossed "not negotiable". B does not get better title than that
of his immediate transferor, who was either finder or thief of the
cheque. As regards the true owner, B is in the same position as his
immediate transferor who was either finder or thief of the cheque.
Both the paying and the collecting bakers are protected in this case
under Sec. 128 and Sec. 131, respectively.
10. A draws a cheque payable to bearer and hands it over to B, who
crosses it and endorses it in favour of,C and delivers it to him. D
7.24 Crossing of Cheques
steals the cheque from C and presents it for payment before the
bank which makes the payment over the counter. C sues the bank.
Decide.
Hint: A crossed cheque has to be presented through a banker i.e.
cannot be paid across the counter. Therefore, C can sue the banker
for paying the cheque across the counter.
11. A is the payee of a crossed cheque marked "payee account only".
A endorses the cheque in favour of B and delivers it to B.
(i) Is this negotiation valid?
(ii) Can B realize the amount of the cheque?
Hint: See hint to Q. No. 7 (b).
12. A, by means of false pretences, obtains from B a crossed cheque
"not negotiable" He (A) took the cheque to a bank (D) who paid
it. B brings an action against the. bank (D) for conversion of the
amount of the cheque. Will he succeed. Discuss citing statutory
provisions and judicial pronouncements on the subject.
Hint: See Hint to Q. No. 8.
13. Write short notes on the following:
(i) Payment in due course;
(ii) Effect of material alteration;
(iii) Effect of "not negotiable" crossing;
(iv) Collecting banker's liability.
14. Mohan, by means of false pretence, obtained a cheque of Rs. 4000
from Sohan. The cheque was crossed "not negotiable". Mohan got
the cheque encashed at the counter of Bank "B". Mohan used to get
such cheques encashed from this bank for the last 20 years without
opening an account with the bank. The bank had no problems
during this period. After sometime Sohan came to know that Mohan
got the cheque by fraudulent means and sued bank "B" for
conversion. Can Sohan succeed against the Bank?
Hint: In Great Western Railway Co. v. London & County Banking
Co., (1901) AC 414, it was held that a person who has no sort of
account with a bank, but is merely in the habit of encashing cheques
across the counter is not a customer. The facts of this case were
similar to the facts of this problem. In the aforesaid case it was held
that as the drawer had obtained the cheque by fraud, he had no
title to it, and could not give to the bank any title to the cheque or
Negotiable Instruments, Banking and Insurance 7.25
the money and that the bank was liable for the amount of the
cheque. Therefore, in the present problem, Sohan is entitled to sue
the Bank "B" as it had made the payment out of due course, that
is, making payment of the crossed cheque across the counter and
to a person who is not its customer. The bank is, therefore, negligent.
15. "Section 131 of the Negoitable Instrument Act, 1881 confers
protection to a collecting banker receiving payment of a crossed
cheque in case the title of the customer to it is proved defective."
State the essential requirements for claiming such protection. Discuss
with the help of decided cases the standard of care expected of a
collecting banker to enable it to claim this protection.
■■■■■k chapter 8 .a—
PENALTIES IN CASE OF DISHONOUR
d OF CERTAIN CHEQUES FOR
INSUFFICIENCY OF FUNDS
debtor liability.
(ii) The cheque must have been presented to the drawee bank, either
personally or through a collecting banker.
(iii) The cheque must have been returned unpaid by the drawee-bank
either because of the amount of money standing to the credit of that
Q1A. "The object of bringing section 138 of the Negotiable Instrument Act, 1881 is to
inculcate with faith in the efficacy of banking operations and credibility in
transacting business on negotiable instruments’. Discuss the above statement,
referring to case law on the subject.
Negotiable Instruments, Banking and Insurance 8.3
account is insufficient to honour the cheque or that if exceeds the
amount arranged to be paid from that account by an agreement made
with the bank.
(iv) The payee or holder of the cheque must have made a demand, in
writing, for payment, within 30 days of the receipt of the information
by him of dishonour of cheque from the paying or collecting banker.
(v) The drawer must have failed to make the payment within 15 days of
receipt of the notice.
(vi) Section 142 provides that a written complaint should have been
made to a court, not inferior to that of a metropolitan Magistrate or
Judicial Magistrate of the first class, normally within one month of
the date on which the cause of action arose.
In Dashrath Rupsingh Rathor v. State of Maharashtra, (2014) 9 SCC129,
it was held that offence is complete upon dishonour, prosecution for such
offence is deferred till the time the cause of action for such prosecution
accrues to the complainant. The proviso to section 138 simply postpones the
actual prosecution of • the offender till such time he fails to pay the amount
within the statutory beriod prescribed for such payment. The scheme of
section 138 thus not c>hly saves the honest drawer of cheque but also gives a
chance to even the dishonest one to make amends and escape prosecution.
Q2. “Section 138 of the Negotiable Instrument Act, 1881 was enacted to punish
unscrupulous drawers of cheques who, though purport to discharge their liability
by issuing cheques, have no intention of really doing so. Apart from civil liability,
criminal liability is sought to be imposed by the said provision on such unscrupu
lous drawer of cheques. However, with a view to unnecessary prosecution of an
honest drawer of the cheque, the prosecution under section 138 of the Act has been
made subject to certain conditions.” Enumerate and analyse the conditions for the
successful applicability of section 138 of the Act, referring to case law on the subject.
[LL.B., D.U.]
Q3. (a) When is dishonour of a cheque is an offence? [LL.B., D.U.J
(b) A issued a cheque for 5,000 in favour of B towards the payment of monthly
rent. The cheque was presented for encashment by B through his banker.
However,the same was referred unpaid by the banker of A due to reason
"payment stopped by drawer”. B approaches you for advice. What action B can
take? Will B succeed in case a complaint under section 138 of the Negotiable
Instrument Act is filed? [LLJB., D.U.]
8.4 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
other liability. Under Section 139 there is a legal presumption that the holder
of a cheque which falls within Section 138 received it for the discharge of a
debt or liability. The drawer may rebut the presumption by proving to the
contrary.
A cheque given as a gift, or donation, or in discharge of a moral
obligation, or for the unlawful or illegal consideration is not covered by
Section 138.
In Shivaji v. Lognathan, (1996) 85 Comp. Cas. (Mad.), it was Jield that the
payment of capitation fee and refund thereof were not for an unlawful
purpose within the meaning of Section 23 of the Indian Contract Act, 1872.
The refund of fees was held to be in discharge of legally enforceable debt or
liability.
In Uplanche Mallikarjun v. Ratkanti Vimala, 1998 IS J (Banking) 175
(AP), it was held that if the payment by way of cheque is made as a gift or
charity, it is not a payment for a legally enforceable debt or liability.
In C.V. Alexander v. Joseph Chacko, (1995) 82 Camp Cas. 368, it was held
that a cheque given in discharge of the drawer's liability as a surety would
fall under section 138. Thus, the debt or liability in respect of which the
cheque was issued need not necessarily be that of the drawer. It may that of
third party to the payee.
In M.S. Narayana Menon v. State ofKerala, (2006) 6 SCC 39, it was held
that the court shall presume a negotiable instrument to be for consideration
unless and until after considering the matter before it, it either believes that
the consideration does not exist or considers the non-existence of the
consideration so probable that a prudent man ought, under the circumstances
of the particular case, to act upon the supposition that consideration does not
exists. Thus, initial burden of proof is on accused to rebut the presumptions
under sections 118 and 139 by raising a probable defence. If he discharges the
said burden, the onus thereafter shifts on to the complainant to prove his
case. Whether the initial burden has been discharged by accused is a
question of fact. Burden of proof on the accused is not heavy. He need not
disprove the prosecution case in its eiyirety He can discharge its burden on
the basis of preponderance of probabilities through direct or circumstantial
evidence.
In Sudhir Kuntar Bhalla v. Jagdish, (2008) 7 SCC 137, it was held that
offence under Section 138 was made out only if cheques were in discharge
of debt or other liability but not when they were issued as a security.
In Rangappav. Srimohan, AIR 2010 SC 1898, it was held that what courts
have to consider is whether ingredients of offence enumerated in section 138
Negotiable Instruments, Banking and Insurance 8.5
have been met, the court has to consider whether accused was able to rebut
statutory presumption contemplated under section 139. (Section 139 provides.
"It shall be presumed, unless the contrary is proved, that the holder of a
cheque received the cheque of the nature referred to in section 138, for the
discharge, in whole or in part, of any debt or other liability.") The Supreme
Court also stated the standard of proof for rebutting the presumption. The
accused can rely on the prosecution materials to prove defence.
The Court said : "Section 139 is an example of a reverse onus clause that
has been included in furtherance of legislative objective of improving the
credibility of negotiable instrument. While section 138 of the Act specifies a
strong criminal remedy in relation to the dishonour of cheques, the rebutable
presumption under section 139 is a device to prevent undue delay in the
course of litigation. However, it must be remembered that the offence made
punishable by section 128 can be better described as a regulatory offence since
the bouncing of a cheque is largely in the nature of a civil wrong whose impact
is usually confined to the private parties involved in commercial transactions.
In such a scenario, the test of proportionality should guide the construction
and interpretation of reverse onus clauses and the defendant accused cannot
be expected to discharge an unduly high standard of proof."
The Court further said : "The reverse onus clauses usually impose
evidentiary burden and not a persuasive burden. Keeping this in view, it is
a settled position that when an accused has to rebut the presumption under
section 139, the standard of proof for doing so is that of "preponderance of
probabilities." Therefore, if the accused is able to raise a probably defense
which creator doubts about the existence of a legally enforceable debt or
liability, the prosecution can fail. The accused can rely on the materials
submitted by the complaint in order to raise such a defense and it is
conceivable that in some cases the accused may not need to adduce evidence
of his/her own."
In Indus Airways (P.) Ltd. v. Magnum Aviation (P.) Ltd., (2014) 12 SCC
539, it was held that if at the time of entering in to a contract, it is one of the
conditions of the contract that appellant purchaser had to pay the amount in
advance and there is breach of such condition then the appellant purchaser
may have to make good a loss that might have occasioned to the seller but that
does not create a criminal liability under section 138 of Negotiable Instrument
Act, 1881. The payment by cheque in the nature of advance payment
indicates that at the time of drawing of cheque, there was no existing liability.
The Court said "If a cheque is issued as an advance payment for purchase of
the goods and for any reason purchase order in nqt carried to its logical
conclusion either because of its cancellation or otherwise, and materials or
8.6 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
goods for which purchase order was placed is not supplied, the cheque
cannot be held to have been drawn for an existing debt or liability."
r
(2) Presentment of the cheque to the drawee-bank
The cheque must have been presented to the drawee-bank, either personally
or through a collecting banker, within six months from the date in which it
was drawn, or within the period of its validity, whichever is earlier. However,
unless the drawer establishes the actual date of drawing, the cheque would
be presumed to be drawn on the date it bears.
In Anil Kumar Saxvhney v. Gulshan Rai, (1994) 79 Camp Cas. 150, the
Supreme Court held that a postdated cheque is only a bill of exchange when
it is written or drawn and it becomes a cheque under the Act with effect from
the date it bears and attracts the provisions of Section 138. Earlier Kerala
High Court held in Manoj K. Seth v. K. J. Fernandez, (1991) 73 Comp. Cas.
441, that for the purposes of Section 138, a post dated cheque has to be
considered to have been drawn on the date it bears, and the condition
prescribed in the section is satisfied if the cheque is presented for payment
within six months (now this period is three months) from the date the cheque
bears.
In Goaplast (P) Lid. v. Shri Chico Vrsula D 'Souza, (2003) 3 SCC 232, it was
held that Section 138 of the Act is attracted if a post-dated cheque issued by
a person to settle his debt or other liability is stopped for payment by the
drawer even before the date of the cheque.
In MSR Leathers v. S. Palaniappa, (2013) 10 SCC 568, it was held that
neither section 138 nor section 142 or any other provision contained in the
Negotiable Instrument Act forbids the holder or payee for encashment on any
number of occasions within a period of six (now three months as per RBI
Guidelines) or within a period of its validity, whichever is earlier. Therefore,
prosecution of the accused on the basis of fresh cause of action arising out
of subsequent presentation of cheque even when original cause of action
was time barred was held permissible as long as conditions mentioned
under section 138 are satisfied. This was reiterated by the Supreme Court in
Kamlesh Kumar v. State of Bihar, (2014) 2 SCC424. In this case, on dishonour
of the cheque on 25-10-2008, although a legal notice dated 27-10-2008 was
issued to the appellant (drawer of the cheque ) by making a demand for
payment of the amount of the said cheque, but no complaint was filed under
section 138 of the Act on the basis of the said notice. Thereafter, the said
cheque was again presented before the bank on 10-11-2008 for encashment,
but it was again dishonoured. Consequently, another legal notice dated 17-
12-2008 was issued to the appellant on the basis of the said dishonour of the
cheque on 10-11-2008. On no response to the said notice dated 17-12-2008, the
complaint was filed against the appellant.
Negotiable Instruments, Banking and Insurance 8.7
In Laxmi Dyechem v. State of Gujarat, (2012) 13 SCC 375, it was held
that dishonour of cheque for reasons such as "account closed", "payment
stopped", "refer to the drawer", "signature do not match" are only species
of the first of the two contingencies mentioned in section 138. The first
contingency is "either because of the amount of money standing to the
credit of that account is insufficient to honour the cheque held, is a genus.
If there is a dishonour of cheque due to mismatch between signatures on
cheque drawn and specimen available with the bank, such dishonour to
qualify for prosecution under section 138 shall have to be preceded by
statutory notice where drawer is called upon and has opportunity to arrange
payment of the amount covered by the cheque . It is only when the drawer
| despite receipt of such notice and opportunity to make the payment within
the time stipulated under the statute does not pay the amount that it would
be considered an offence, hence punishable. Even in such a case, there should
be lawfully recoverable debt or liability.
(3) Reasons for dishonour
The cheque must have been returned unpaid by the drawee-bank either
because of insufficiency of funds in the drawer's account on which it is
drawn, or because the cheque exceeds the amount arranged to be paid from
the account by an agreement made with the bank. The section is not
applicable to cheques returned unpaid for technical reasons such as
irregularity of an endorsement or a discrepancy between the amount in
words or figures.
In Modi Cements Ltd. v. Kuchil Kumar Nandi, AIR 1998 SC 1057: (1988)
3 SCC249, the Supreme Court, while elaborating the elements of insufficiency
of funds on the date ofissue ofcheque observed that "If a person drawsacheque
with no sufficient funds available to his credit on the date of issue, but makes
the arrangement or deposits the amount thereafter before the cheque is put
in the bank by the drawer and the cheque is honoured, in such a situation
drawing a presumption of dishonesty on the part of the drawer under
section 138 would not be justified. Section 138 of the Act gets attracted only
when the cheque is dishonoured."
In Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 3 SCC 249, it was
further held that even though the cheque was dishonoured by reason of
"stop-payment" instruction, an offence under section 138 could still be
made out. It was held that presumption under section 139 is attracted in such
a case and therefore, the court has to presume that the cheque was received
by the holder for the discharge, in whole or in part, of any debt or other
liability. Of course, this a rebuttable presumption.
8.8 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
In Voltas Ltd. v.HiralalAganvalla, (1971) 71 Comp. Cas. 273, it washeld
that the drawee-bank's endorsement "refer to drawer" while returning the
cheque in question necessarily meant, as per banking custom, that the
cheque had been returned for insufficiency of funds on the drawer's account.
However, in M. Y. Maharishi v. Tagore Financiers, (1995) 83 Comp. Cas. 444,
it was held that where a cheque is returned "refer to drawer," it was a matter
of evidence during the trial whether the real reason for dishonour was
insufficiency of funds.
(4) Dishonour/demand notice to drawer.
The payee or holder in due course of the cheque, as the case may be, must
have made a demand for payment by giving notice, in writing, within 30
days of receipt of information by him from the bank (paying or collecting
banker) as unpaid. In Satyanaryana Gowda v. B. Rangarappa, (1997) 88
Comp. Cas. 433, it was held that the notice is required to be issued by the
holder and is not required to be served on the accused, within 30 days of
receipt of the information of the dishonour of the cheque. It was further held
in this case that unsigned notice issued by the holder's advocate was
sufficient. In K. Madhu v. Omega Pipes Ltd., (1996) 85 Comp. Cas. 267, it was
held that if the payee has dispatched the notice to the drawer's correct
address reasonably ahead of the expiry of 15 (now 30 as per Amendment Act,
2002) days, it can be regarded that he had made the demand by giving the
notice within the statutory period.
In Tomy Jacob Kattikkaran v. Thomas Manjaly, AIR 1998 SC 366, the
Supreme Court held that if it was established that the payee or holder in due
course as the case may be, did not serve the notice on the drawer within the
period prescribed under section 138 of the Act, the acquittal of the drawer
was justified.
In K. Bhaskaran v. Sankaran Vidyan Balan, (1999) 7SCC 510, it was held
that the payee has to make a demand by 'giving a notice' in writing. The
failure on the part of the drawer to pay should be within 15 days 'of the receipt' of
such notice^ Thus, 'giving notice' in this context is not the same as 'receipt of
notice'. Giving is the process of which receipt is the accomplishment. It is for
the payee to perform the former by sending the notice to the drawer at the
correct address and for the drawer to comply with clause (c) of the proviso
to Section 138 of the Act. The words in clause (b) of the proviso to Section 138
shows that payee has the statutory obligation to 'make a demand' by giving
notice. The thrust in the clause is on the need to 'make a demand'. It is only
the mode for making such demand which the legislature has prescribed. A
payee can send the notice for doing his part for giving the notice. Once it is
despatched his part is over and the next depends on which the sender does.
Negotiable Instruments, Banking and Insurance 8.9
The principle of Section 27 of the General Clauses Act, 1897 apply to a notice
sent by post with the correct address written on it and it is deemed to have
been served on the sendee unless he proves that it was not really served and
that he was not responsible for such non-service.
In Dahnia Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd.
(2001) 6 SCC 463: AIR 2001 SC 676, it was held that to constitute an offence
under section 138 of the Act, the complainant is obliged to prove its
ingredients which include the receipt of notice by the accused under clause
(b). It is not the "giving" of the notice which makes the offence but is the
receipt of the notice by the drawer which gives cause of action to the
complainant within the statutory period. In this case the accused replied to
the first notice stating that he had received only empty envelop and the
complainant sent a second notice which was duly acknowledged, the
complaint filed on the basis of the second notice was held maintainable.
InD. Vinod Shivappa v. Nanda Belliappa, (2006) 6 SCC 456, the Supreme
Court highlighted and reiterated all the aspects. Elaborately dealing with the
situation where notice could not be served on the addressee for one or the
other reason, such as his non availability at the time of delivery, or premises
remaining locked on account of his having gone elsewhere etc., it was
observed that if in each such case, the case is understood to mean that there
has been no service of notice, it would completely defeat the very purpose
of the Act. It would then be very easy for an unscrupulous and dishonest
drawer of a cheque to make himself scarce for sometime after issuing the
cheque so that requisite statutory notice can never be served upon him and
consequently he can never be prosecuted. It was further observed that once
the payee of the cheque issues notice to the drawer of the cheque, the cause
of action to file a complaint arises on the expiry of the period prescribed for
payment.
Similarly in C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555,
it was held that where the payee dispatches the notice by registered post with
correct address of the drawer of the cheque, the principle incorporated in
Section 27 of the General Clauses Act would be attracted; the requirement of
clause (b) of proviso to 138 of the Act stands complied with and cause of
action to file a complaint arises on the expiry of the period prescribed in
clause (c) of the said proviso for payment by the drawer of the cheque.
Nevertheless, it would be without prejudice to the right of the drawer to
show that he had no knowledge that the notice was brought to his address.
The Supreme Court stated that the Court has already held that when a
notice is sent by registered post and is returned with a postal endorsement
'refused7 or 'not available in the house7 or 'house locked7 or 'shop closed' or
8.10 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
"addressee not in station', due service has to be presumed [vide Jagdish
Singh v. Nathu Singh; State ofM.P. v.Hiralal, Raja Kumari v. P Subharamana
Naidu]
In Smt. Shamshad Begum v. B. Mohammad, (2008) 13 SCC 77, it was held
that once notice has been sent by registered post with acknowledgement due
to a correct address, it must be presumed that the service of notice has been
made effective. It was further held that it is not necessary that the five acts
constituting an offence under Section 138, NI Act, 1881 "should have been
perpetrated at the same locality. It is possible that each of those five acts
could be done at five different localities.
(5) Drawer's failure to pay.
The drawer of the cheque must have failed to pay the amount of money
to the payee or, as the case may be, to the holder in due course of the cheque,
within 15 days of the receipt of the demand notice. It implies that the drawer
gets 15 days time from the date of receipt of the notice, to pay the amount of
the cheque which has been dishonoured. Thus, the payee or the holder in due
course, as the case may be, has to wait for 15 days anticipating payment of
the amount of the cheque by the drawer. If the drawer does not pay till the
expiry of the 15 days time, the cause of action arises on the 16th day.
(6) Filing a written complaint.
Section 142 provides that a written complaint should have been made to
the court of a metropolitan or a first-class judicial magistrate or a superior
court by the payee or as the case may be, the holder in due course of the
cheque within one month from the date on which the cause of action arose
under clause (c) of the proviso to Section 138. The Amendment Act, 2002 has
given discretion to the court to waive the period of one month if the
complainant satisfies the court that he had sufficient cause for not making a
complaint within one month of the date on which the cause of action arose.
In Poomasree Agencies v. Universal Enterprises, (1995) 83 Comp. Cas.
66, the drawer received the notice on 9th June, 1993. It was held that the 15
days period expired on 24th June, 1993 and the complaint should have been
filed on or before 24th July, 1993. "Fifteen" days period has been substituted
by "thirty" days vide Act 55 of 2002.
In SKD Lakshmanan Fire Works v. K. V Sivaramkrishnan, (1995) 84
Comp. Cas. 446, the Full bench of the Kerala High Court held that successive
cause of action may arise on the basis of one cheque when the cheque is
repeatedly presented and dishonoured within the period prescribed in
Section 138. However, in view of Section 300 of Criminal Procedure Code,
1973 only pne conviction is possible. A similar view has been expressed by
Negotiable Instruments, Banking and Insurance 8.11
some other High Courts. Earlier the Division Bench of Kerala High Court
held in N.C. Kumar & Son v. Annepura, (1992) 74 Comp. Cas. 848, has held
that once cause of action has arisen, limitation will begin to run, and it cannot
be stopped by presenting the cheque again so as to create a fresh cause of
action and a fresh period of limitation. Some other High Courts expressed
the same opinion.
In Veera Exports v. T. Katavathy, it was held that "it is always open to a
drawer to voluntarily revalidate a negotiable instrument, including a cheque."
The validity period of a cheque is only 6 months.
In Prem Chand Vijay Kumar v. Yashpal Singh, (2005) 4 SCC 417, it was
held that cause of action within the meaning of Section 142 (b) arises and can
arise only once. Another cause of action would not arise on repeated
dishonour on presentation of same cheque again subsequent to non-payment
after the first notice. If dishonour of a cheque has once snowballed into a
cause of action it is not permissible for a payee to create another cause of
action with the same cheque. The period of one month for filing the complaint
will be reckoned from the day immediately following the day on which the
period of fifteen days from the date of thezreceipt of the notice by the drawer
expires.
In Shankar Finance and Investments v. State ofA.P., (2008) 8 SCC 536, it
was held that it was permissible to lodge a complaint in the name of payee
proprietory concern itself.
In Indra Kumar Patodia v. Reliance Industries Ltd., AIR 2013 SC 426,
it was held that a complaint in writing without signature is maintainable
when such complaint is subsequently verified by the complainant and
process is issued by the Magistrate after due verification. If legislative
intended complaint was also required to be signed by the complainant, it
would have used different language. In the present case, complaint was filed
within time and on the direction of the Magistrate, verification was recorded
by solemn affirmation by authorized representation of the complainant and
after according and securing his signature, Magistrate passed an order
issuing summons against the accused under section 138/142 of the Negotiable
Instrument Act.
In MSR Leathers v. S. Palaniappan, (2013) 1 SCC 177, it was held that by
amendment, section 142(b) proviso now permits payee to institute prosecution
proceedings against a defaulting drawer even after expiry of one month.
Therefore, if failure of payee to file a complaint within prescribed period was
to result in "absolution" under section 142(b), proviso would not have been
added to negate that consequence.
8.12 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
Defence which may not be allowed in any prosecution under section 138
Section 140 provides :
"It shall not be a defence in a prosecution of an offence under section 138
that the drawer had no reason to believe when he issued the cheque that the
cheque may be dishonoured on presentment for the reasons stated in the
section."
Thus, section 140 has categorically ousted the role of mens rea in the cases
of dishonour of cheque. It means that irrespective of whether the accused had
any intention to issue a cheque Which is likely to be dishonoured, the mere fact
of dishonour is sufficient to make him liable for the criminal liability if other
ingredients of the offence are satisfied.
Cognizance of offences
Section 142(1) provides:
(1) Not withstanding anything contained in the Code of Criminal
Procedure, 1973 (2 of 1974), —
(a) no court shall take cognizance of any offence punishable under
section 138 except upon a complaint, in writing, mode by the
payee or, as the case may be, the holder in due course of the
cheque;
(b) such complaint is made within one month of the date on which
the course of action arises under clause (c) of the proviso to
section 138 :
Provided that the cognizance of a complaint may be taken by
the court after the prescribed period, if the complaint satisfies
the court that he had sufficient cause for not making the
complaint with such period;
(c) no court inferior to that of a Metropolitan Magistrate or a
Judicial Magistrate of the first class shall try any offence
punishable under section 138.
Section 142(1) has already been discussed :
In K. Bhaskaran v. Sankaran Vidyan Balan, (1999) 7SCC 510, it was held
by a twojudge, Bench of the Supreme Court thatfive acts [namely, (i) drawing
of cheque, (ii) presenting of cheque to the bank, (iii) dishonour of cheque by
the drawee bank, (iv) giving of notice in writing to the drawer of the cheque
demanding payment of the cheque amount and (v) failure of the drawer to
making the payment within the statutory period of receipt of notice) were
done in five different localities any one of the courts exercising jurisdiction in
any one of the five local areas can become the place of trial for the accused
under section 138 of the Negotiable Instrument Act, 1881.
Negotiable Instruments, Banking and Insurance 8.13
However, in Dashrath Rupsingh Rathore v. State of Maharashtra,
(2014) 9 SCC 129, three Judge Bench of the Supreme Court overruled the
earlier twojudge Bench decisions given in Bhaskaran and other cases of the
Supreme Court and held that a complaint of dishonour of cheque can be filed
only to the Court within whose local jurisdiction where the cheque is
dishonoured by the bank on which it is drawn. To nullify this decision an
amendment was made in the Negotiable Instrument Act, 1881 in 2015 and
section 142(2) was inserted which reads as follows :
//
courts, all the cases shall be transferred to the court having jurisdiction
under section 142(2) before which the first case was filed.
OFFENCES BY COMPANIES
Section 141 of the Act provides that if the person committing an offence
under Section 138 is a company, the company itself as well as every person
who was incharge of, and was responsible to, the company for the conduct
of the business of the company, shall be deemed to be guilty of offence and
shall not be liable in a case where he establishes that the offence was
committed without his knowledge, or that he had exercised all the due
diligence to prevent the commission of such offence.
Where a person is nominated as a Director of a Company by virtue of his
holding any office or employment in the Central Government or State
Government or a financial corporation owned or controlled by the central
government or the state government, as the case may be, he shall not be liable
for prosecution under this chapter [Chapter XVII sections 138 to 147 of the
Negotiable Instruments Act 1881].
Explanation to the section provides that for the purposes of this section
(Section 141), —
(a) "company" means any body corporate and includes a firm or other
association of individuals, and
(b) "director", in relation' to a firm, means a partner in the firm.
Section 141 does not make all partners of a firm liable. Liability is fastened
only on those who, at the time of the commission of the offence, were
incharge of and were responsible to the firm for the conduct of its business.
Primary responsibility is on complainant to make necessary averments in
complaint and establish the fact that when the offence was committed by
accused were in charge of and responsible to the firm for conduct of its
business. Obligation of accused to prove to the contrary arises thereafter
only. There is no presumption that every partner knows about the transaction.
[Monaben Ketanbhai Shah v. State of Gujarat, (2004) 7 SCC 15]
It is not necessary to reproduce language of Section 141 verbatim in the
complaint. If the substance of the allegations made in the complaint fulfil
requirements of the said section, complaint has to proceed and is required to
be tried. [Ketanbhai Shah v. State of Gujarat, (2004) 7 SCC 15]
Under the scheme of the Act, if the person committing an offence under
section 138 of the Act is a company, by application of Section 141 it is deemed
that every person who is in charge of and responsible to the company for
conduct of the business of the company as well as the company are guilty of
the offence. A person who proves that the offence was committed without
Negotiable Instruments, Banking and Insurance 8.15
his knowledge or that he had exercised all due diligence is exempted from
becoming liable by operation of the proviso to Section 141 (1). [S. V. Muzumdar
v. Gujarat State Fertilizer Co. Ltd., (2005) 4 SCC 173}
The liability arises from being in charge of and responsible for the
conduct of business of the company at the relevant time when the offence
was committed and not on the basis of merely holding a designation or office
in a company. Conversely, a person not holding any office or designation in
a company may be liable if he satisfies the main requirement of being in
charge of and responsible for the conduct of business of a company at the
relevant time. Liability depends on the role one plays in the affairs of a
company and not on designation or status. Thus, merely being a director of
a company is not sufficient to make the person liable under section 141. A
director or officer (except managing director or joint managing director) in
a company cannot be deemed to be in charge of and responsible for the
conduct of the business of the company at the relevant time. [S.M.S.
Pharmaceutical Ltd v. Neeta Bhatia, (2005) 8 SCC 89].
In Aneeta Hada v. Godfather Travels and Tours (P) Ltd., (2008) 13 SCC
703, it was held that there was a complaint against Director (authorised
signatory) who signed the cheque. Company was not joined as an accused.
A three-judge Bench of the Supreme Court unanimously quashed the
criminal proceedings against the appellant (director).
LEADING CASES
Modi Cements Ltd. v. Kuchil Kumar Nandi
(1998) 3 SCC 249: AIR 1998 SC 1057
(Drawer entitled to make deposits or make arrangementsfor sufficiency offunds
in his account before presentation. Section 138 is attracted only when the cheque is
dishonoured. Even ifa cheque is dishonoured because of'stop payment' instruction
to the bank, Section 138 would get attracted.)
Facts
The respondent/accused carries on business as a sole proprietor of
certain business concerns including construction of concerns. He purchased
from the appellant large quantities of cement on credit. He incurred on 23-
3-1994 a liability/ debt of Rs. l,10,53,520.30payable to the appellant towards
the purchased price of the cement supplied by them to the respondent. In
Negotiable Instruments, Banking and Insurance 8.19
was barred by limitation. The High Court quashed the complaint holding
that the same was barred by the time as the complaint had allegedly failed
to file it within the statutory period from the date of accruing of the cause of
action.
Issue
Whether, on the facts and circumstances, the High Court was right in
quashing the complaint filed by the appellant?
Decision of the Supreme Court
The Supreme Court held that to constitute an offence under section 138
of the Act, the complainant is obliged to prove its ingredients which include
the receipt of notice by the accused under clause (b). It is to be kept in mind
that it is not the "giving" of the notice which makes the offence but it is the
"receipt" of the notice by the drawer which gives the cause of action to the
complainant to file the complaint within the statutory period.
The Court relied on K. Bhaskaran v. Sankaran Vaidhyan Balan, (1999) 7
SCC 510 in that case the Court considered the difference between "giving"
of a notice and "receipt" of the notice and held:
"1. On the part of the payee he has to make a demand by 'giving a notice'
in writing. If that was the only requirement to complete the offence on the
failure of the drawer to pay the cheque amount within 15 days from the date
of such 'giving', the travails of the prosecution would have been very much
lessened. But the legislature says that failure on the part of the drawer to pay
the amount should be within 15 days of the receipt' of the said notice. It is,
therefore, clear that 'giving notice' in the context is not the same as receipt of
notice. Giving is a process of which receipt is the accomplishment. It is for the
payee to perform the former process by sending the notice to the drawer at
the correct address.
2. In Black's Law Dictionary 'giving of notice' is distinguished from
'receiving of the notice': ' A person notifies or gives notice to another by
taking such steps as may be reasonably required to inform the other in the
ordinary course, whether or not such other actually comes to know of it'. A
person 'receives' a notice when it is duly delivered to him or at the place of
his business.
3. If a strict interpretation is given that the drawer should have actually
received the notice for the period of 15 days to start running no matter that
the payee sent the notice on the correct address, a trickster cheque drawer
would get the premium to avoid receiving the notice by different strategies
and he could escape from the legal consequences of section 138 of the Act It
must be borne in mind that the court should not adopt an interpretation
Negotiable Instruments, Banking and Insurance 8.25
which helps a dishonest evader and clips an honest payee as that would
defeat the very legislative measure.
4. In Maxwell's Interpretation of Statutes the learned author has
emphasized that 'provisions relating to giving of notice receive liberal
interpretation'. The context envisaged in section 138 of the Act invites a
liberal interpretation for the person who has the statutory obligation to give
notice because he is presumed to be the loser in the transaction and it is for
his interest the very provision is made by the legislature. The words in clause
(b) of the proviso to section 138 of the Act show that the payee has the
statutory obligation to 'make a demand' by giving notice. The thrust in the
clause is on the need to 'make a demand'. It is only the mode for making such
demand which the legislature has prescribed. A payee can send the notice for
doing his part for giving the notice. Once it is dispatched his part is over and
the next depends on what the sendee does.
5. It is well settled that a notice refused to be accepted by the addressee
can be presumed to have been served on him.
6. Here the notice is returned as unclaimed and not as refused. Will there
be any significant difference between the two so far as the presumption of
service is concerned? In this connection a reference to section 27 of the
General Clauses Act will be useful. The section reads thus:
7. Meaning ofservice by post: Where any Central Act or Regulation made
after the commencement of this Act authorizes or requires any document to
be served by post, whether the expression 'serve' or either of the expression
'give' or 'send' or any other expression is used, then, unless a different
intention appears, the service shall be deemed to be effected by properly
addressing, pre-paying and posting by registered post, a letter containing
the document, and unless the contrary is proved, to have been effected at the
I time at which the letter would be delivered in the ordinary course of posts'."
The Supreme Court stated that Section 27 of the General Clauses Act
deals with the presumption of service of a letter sent by post. The despatcher
the cheque was received by the holder for the discharge, in whole or in part,
of any debt or liability. Of course this is a rebuttable presumption. If the
accused shows that in his account there were sufficient funds to clear the
amount at the time of presentation of the cheque for encashment at the
drawer bank and that the stop-payment notice had been issued because of
other valid causes including that there was no existing debt or liability at the
time of presentation of cheque for encashment, then offence under section
138 would not be made out. The important thing is that the burden of so
proving would be on the accused. Thus; the High Court cannot quash a
complaint on this ground.
Therefore, the Supreme Court set aside the judgment of the High Court
and directed to Metropolitan Magistrate, G.T. Chennai to proceed with the
complaints against the respondents in accordance with the law. The Supreme
Court allowed the respondents to take, at the trial, pleas available to them
including those taken herein.
Goaplast (P) Ltd. v. Chico Ursula D'SouzaQ4
(2003) 3 SCC 232: AIR 2003 SC 2035
(Where a drawer issues a cheque to a person a post dated cheque and instructs
the bank not to make payment and consequently the cheque is dishonoured then,
notwithstanding that payment was stopped prior to the due date of the cheque,
Section 138 becomes applicable)
Facts
On 20-7-1992, the respondent sent to the appellant a number of post
dated cheques, two of which were dated 10-12-1994 and 10-4-1995, in
discharge of a certain liability. On 12-2-1993, the respondent wrote to the
appellant denying his liability to pay the amounts under the said cheques on
the ground that the cheques were issued under a mistaken belief of liability
and asked the appellant to treat the said cheques as invalid. Simultaneously,
the respondent instructed the drawee bank to stop payment of the said
cheques. The cheques when presented for payment, after the due date,
bounced. After issuing the statutory notice, the appellant filed a complaint
against the appellant under s. 138 of the Negotiable Instruments Act.
Misreading Anil Kumar Sawhney v. GulshanRai, (1993) 4 SCC 424, both the
trial court and the High Court held that before the due date the instruments
Q4. A issued post dated cheques totalling Rs. 5 lakh in favour of “X & Company (Pvt.)
Ltd.’ for purchasing a dream bike. The first cheque was dated 1st July, 2013. A
instructed its banker to stop payment any cheque on 25th June, 2013. When "X &
Company (Pvt.) Ltd.
* presented the cheque on 1 st July, 2013, it was returned unpaid
by the banker of 'A'. X & Company (Pvt.) Ltd. approaches you for advice.
Negotiable Instruments, Banking and Insurance 8.31
were merely bills of exchange and not cheques and that, therefore,
countermanding of the cheques at that stage did not attract section 138.
Issue
Whether stop payment of post-dated cheque prior to the date of cheque
by the drawer and presentation of the cheque by the payee after the due date
of the cheque can amount to a penal offence under section 138 of the
Negotiable Instrument Act? z
notice by registered post with correct address of the drawer of the cheque,
the principle incorporated in Section 27 of the General Clauses Act would be
attracted; the requirement of clause (b) of proviso to Section 138 of the Act
stands complied with and cause of action to file a complaint arises on the
expiry of the period prescribed in clause (c) of the said proviso for payment
by the drawer of the cheque. Nevertheless, it would be without prejudice to
the right of the drawer to show that he had no knowledge that the notice was
brought to his address.
The Court also considered the implication of Section 114 of the Indian
Evidence Act, 1872 insofar as the service of notice under the said proviso is
concerned. Section 114 of the Indian Evidence Act, 1872 reads as follows:
"Section 114 —Court may presume existence of certain facts.—The
Court may presume the existence of any fact which it thinks likely to have
happened, regard being had to the common course of natural events, human
conduct and public and private business, in their relation to the facts of the
particular case."
Section 27 of the General Clauses Act is extracted below:
"Section 27: Meaning of service by post. —Where any Central Act or
Regulation made after the commencement of this Act authorizes or requires
any document to be served by post, whether the expression 'serve' or either
of the expressions 'give' or 'send' or any other expression is used, then,
unless a different intention appears, the service shall be deemed to be
effected by properly addressing, prepaying and posting by registered post,
a letter containing the document, and, unless the contrary is proved, to have
been effected at the time at which the letter would be delivered in the
ordinary course of post".
According to Section 114 of the Indian Evidence Act, when it appears to
the Court that the common course of business renders it probable that a thing
would happen, the Court may draw presumption that the thing would have
happened unless there are circumstances in a particular case to show that the
common course of business was followed. Thus, Section 114, enables the
Court to presume the existence of any fact which it thinks likely to have
happened, regard being had to the common course of natural events, human
conduct and public and private business in their relation to the facts of the
particular case. Consequently, the court can presume that the common
course of business has been followed in particular cases. When applied to
communication sent by post, Section 114 enables the Court to presume that
in the common course of natural events, the communication would have
been delivered at the address of the addressee. But the presumption that is
raised under Section 27 of the General Clauses Act is far stronger presumption.
Negotiable Instruments, Banking and Insurance 8.35
Further, while Section 114 of the Indian Evidence Act refers to a general
presumption, Section 27 refers to a specific presumption.
Section 27 gives rise to a presumption that service of notice has been
effected when it is sent to the correct address by registered post. In view of
the said presumption, when stating that a notice has been sent by registered
post to the address of the drawer, it is unnecessary to further aver in the
complaint that in spite of the return of the notice unserved, it is deemed to
have been served or that the addressee is deemed to have knowledge of the
notice. Unless and until the contrary is proved by the addressee, service of
notice is deemed to have been effected at the time at which the letter would
have been delivered in the ordinary course of business.
The Supreme Court held that this "Court has already held that when a
notice is sent by registered post and is returned with a postal endorsement
'refused7 or 'not available in the house' or 'house locked' or 'shop closed' or
'addressee not in station", due service has to be presumed (vide Jagdish
Singh v. Nathu Singh; State ofM.P. v. Hira Lai; Raja Kumariv. P. Subbarama
v. Naidu). It is therefore, mainifest that in view of the presumption available
under Section 27 of the Act, it is not necessary to aver in the complaint under
Section 138 of the Act that service of notice was evaded by the accused or that
the accused had a role to play in the return of the notice unserved."
There is no material difference between Section 114 of the Evidence Act
and Section 27 of the General Clauses Act. Therefore, it was held that when
the notice is sent by registered post by correctly addressing the drawer of the
cheque, the mandatory requirement of issue of notice in terms of clause (b)
of proviso to Section 13 8 of the Act stands complied with. It is then for the
drawer to rebut the presumption about the service of the notice and show
that he had no knowledge that the notice was brought to his address or that
the address mentioned on the cover was incorrect or that the letter was never
tendered or that the report of the postman was incorrect. This interpretation
of the provision would effectuate the object and purpose for which proviso
to Section 138 was enacted, namely, to avoid unnecessary hardship to an
honest drawer of a cheque and to provide him an opportunity to make
amends.
Therefore, the appeal was dismissed.
Dashrath Rupsingh Rathod v. State ofMaharashtra & Anr
[2014] 9 SCC 129
(1. Territorial jurisdiction for filing of cheque dishonour complaint is restricted
to the court within whose territorial jurisdiction the offence is committed, which is
the location where the cheque is dishonoured is returned unpaid by the bank on which
8.36 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
it is drawn. 2. Place of issuance or delivery of the statutory notice or where the
complainan t chooses topresen t the chequefor encashmen t by his bank are not relevan t
for purposes of determining territorial jurisdiction for filing of cheque dishonour
complaints.)
Note: To nullify first part of the decision an amendment was made in the
Negotiable Instruments Act in 2015 and section 142(2) was inserted for this
purpose Section 142(2) provides that the offence under section 138 shall be
tried only by a court within whose local jurisdiction (a) if the cheque is
delivered for collection through an account, the branch of the bank where the
payee or holder in due course, as the case may be, maintains the account, is
situated; or (b) if the cheque is presented for payment by the payee or the
holder in due course otherwise through his account, the branch of the drawee
bank where the drawee maintains his account, is situated.)
Facts
Criminal appeal No. 1593 of 2014 : The Respondent-accused, having
purchased electronic items from the Appellant-company, issued the cheque
in question drawn on UCO Bank, Tangi, Orissa which was presented by the
Complainant-company at State Bank of India, Ahmednagar Branch,
Maharashtra as its branch office wTas located at Ahmednagar. The cheque was
dishonoured by UCO Bank, Tangi, Orissa. A Complaint was filed before
JMFC, Ahmednagar. An application was filed by the Respondent-accused
under Section 177 CrPC questioning the jurisdiction of the JMFC Ahmednagar,
who held that since the demand notice was issued from and the payment was
claimed at Ahmednagar, he possessed jurisdiction to try the Complaint. The
High Court disagreed with the conclusion of the JMFC, Ahmednagar that the
receipt of notice and non- payment of the demanded amount are factors
which will have prominence over the place wherefrom the notice of demand
was issued and held that JMFC, Ahmednagar did not have the territorial
jurisdiction to entertain the Complaint.
Issues :
(i) When offence of dishonour of cheque is committed under section 138 of
the Negotiable Instruments Act, 1881?
(ii) Which court has territorial jurisdiction in case of dishonour of cheque
under section 138 of the Negotiable Instruments Act, 1881?
Decision of the Supreme Court
The Supreme Court quoted section 138 and 142 of the Negotiable
Instruments Act, 1881 for reference. It also quoted sections 177,178 and 179
of the Code of Criminal Procedure, 1973. Section 178 of the Code of Criminal
Procedure explicitly states that every offence shall ordinarily be inquired into
Negotiable Instruments, Banking and Insurance 8.37
and tried by a Court within whose local jurisdiction is was committed. Section
179 of that Code is of similar tenor. The Supreme Court held as follows :
" (i) An offence under Section 138 of the Negotiable Instruments Act, 1881 is
committed no sooner a cheque drawn by the accused on an account
being maintained by him in a bank for discharge of debt/liability is
returned unpaid for insufficiency of funds or for the reason that the
amount exceeds the arrangement made with the bank.
(ii) Cognizance of any such offence is however forbidden under Section 142
of the Act except upon a complaint in writing made by the payee or
holder of the cheque in due course within a period of one month from the
date the cause of action accrues to such payee or holder under clause (c)
of proviso to Section 138.
(iii) The cause of action to file a complaint accrues to a complainant/payee/
holder of a cheque in due course if
(a) the dishonoured cheque is presented to the drawee bank within a
period of six months from the date of its issue.
(b) If the complainant has demanded payment of cheque amount
within thirty days of receipt of information by him from the bank
regarding the dishonour of the cheque and
(c) If the drawer has failed to pay the cheque amount within fifteen
days of receipt of such notice.
(iv) The facts constituting cause of action do not constitute the ingredients of
the offence under Section 138 of the Act.
(v) The proviso to Section 138 simply postpones/ defers institution of criminal
proceedings and taking of cognizance by the Court till such time cause
of action in terms of clause (c) of proviso accrues to the complainant.
(vi) Once the cause of action accrues to the complainant, the jurisdiction of
the Court to try the case will be determined by reference to the place
where the cheque is dishonoured.
(vii) The general rule stipulated under Section 177 of Code of Criminal
Procedure applies to cases under Section 138 of the Negotiable Instruments
Act. Prosecution in such cases can, therefore, be launched against the
drawer of the cheque only before the Court within whose jurisdiction the
dishonour takes place except in situations where the offence of dishonour
of the cheque punishable under Section 138 is committed along with
other offences in a single transaction within the meaning of Section
220(1) read with Section 184 of the Code of Criminal Procedure or is
covered by the provisions of Section 182(1) read with Sections 184 and
220 thereof." (para 56)
In the course of the Judgement the Supreme Court discussed a number of
cases. Some of the cases are discussed below :
8.38 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
In K. Bhaskaran v. Sankaran Vaidhyan Balan (1999) 7 SCC 510, the court
held:
"The offence under Section 138 of the Act can be completed only with the
concatenation of a number of acts. The following are the acts which are
components of the said offence: (1) drawing of the cheque, (2) presentation of
the cheque to the bank, (3) returning the cheque unpaid by the drawee bank,
(4) giving notice in writing to the drawer of the cheque demanding payment
of the cheque amount, (5) failure of the drawer to make payment within 15
days of the receipt of the notice.
It is not necessary that all the above five acts should have been perpetrated
at the same locality. It is possible that each of those five acts could be done at
five different localities. But a concatenation of all the above five is a sine qua
non for the completion of the offence under Section 138 of the Code. In this
context a reference to Section 178(d) of the Code is useful. It is extracted
below:
"178. (a)-(c)
(d) where the offence consists of several acts done in different local areas,
it may be enquired into or tried by a court having jurisdiction over any of such
local areas."
Thus it is clear, if the five different acts were done in five different localities
any one of the courts exercising jurisdiction in one of the five local areas can
become the place of trial for the offence under Section 138 of the Act. In other
words, the complainant can choose any one of those courts having jurisdiction
over any one of the local areas within the territorial limits of which any one
of those five acts was done. As the amplitude stands so widened and so
expansive it is an idle exercise to raise jurisdictional question regarding the
offence under Section 138 of the Act."
InShrilshar Alloy Steel Ltd. V. Jayaswals Neco Ltd. (2001) 3 SCC 609, the
dishonoured cheque had been presented for encashment by the complainant/
holder in his bank within the statutory period of six months (now this period
is three months) but by the time it reached the drawer's bank the
aforementioned period of limitation had expired. The question before the
three-judge Bench of the Supreme Court was where the bank within the
postulation of section 138 read with section 3 and 72 of the Negotiable
Instruments was the drawee bank or the collecting bank. It was observed that
non-presentation of the cheque to the drawee bank within the period specified
in the section would absolve the person issuing the cheque of his criminal
liability under section 138 of the Negotiable Instrument Act. This decision
Negotiable Instruments, Banking and Insurance 8.39
clarifies that the place where a complainant may present the cheque for
encashment would not confer or create territorial jurisdiction, and in this
respect runs counter to the essense of Bhaskaran.
In Prem Chand Vijay Kumar v. Yashpal Singh (2005) 4 SCC 417, instead
of the five Bhaskaran concomitants, only four have been spelt out.
In MosarafHossain Khan v. Bhagheeratha Engg. Ltd. (2006) 3 SCC 658, a
two-judge Bench of the Supreme Court expressed the view that, "where the
territorial jurisdiction is concerned the main factor to be concerned is the
place where the alleged offence was committed". In this case a complaint
under section 138 of the Negotiable Instruments Act was filed and cognizance
was taken by the Chief Judicial Magistrate, Birbhum at Suri, West Bengal for
the dishonour of a number of cheques issued by the accused company which
had its headquarters in Emakulam, Kerala where significantly the accused
company's bank on whom the dishonoured cheques had been drawn was
located. Several judgements were referred by the court to, but not Bhaskaran.
The third ingrient in Bhaskaran, i.e. the returning of the cheque unpaid by the
drawee bank, was not reflected upon. It was held that cause of action arose
in West Bengal. Similarly, in Om Hemrajni v. State ofU.P. (2005) 1 SCC 617,
the Court held that in the context of sections 177 to 180 of the Code of Criminal
Procedure "For jurisdiction the emphasis is on the place where the offence is
committed".
The court also mentioned three recent decisions of the Supreme Court in
para 33 of the judgement. This para is as follows :
"Three recent decisions need be mentioned at this stage which have
followed Bhaskaran and attempted to reconcile the ratio of that case with the
subsequent decisions in Ishar Alloy Steels and Harman Electronics. In
NishantAgganval v. Kailash Kumar Sharma (2013) 10 SCC 72 this Court was
once again dealing with a case where the complaint had been filed in Court
at Bhiwani in Haryana within whose territorial jurisdiction the complainant
had presented the cheque for encashment, although the cheque was drawn on
a bank at Gauhati in Assam. Relying upon the view taken in Bhaskaran this
Court held that the Bhiwani Court had jurisdiction to deal with the matter.
While saying so, the Court tried to distinguish the three-judge Bench decision
in Ishar Alloy Steels (supra) and that rendered in Harman Electronics case
(supra) to hold that the ratio of those decisions did not dilute the principle
stated in Bhaskaran case. That exercise was repeated by this Court in FIL
Industries Ltd. v. Imtiyaz Ahmad Bhat (2014) 2 SCC 266 and in Escorts Ltd.
v. Rama Mukherjee (2014) 2 SCC 255 which too followed Bhaskaran and held
that complaint under Section 138 Negotiable Instrument Act could be instituted
at any one of the five places referred to in Bhaskaran's case."
8.40 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
The three-judge Bench in the present case did not subscribe to the view
stated in Bhaskaran. The reasons stated are as follows :
"Section 138 is a penal provision that prescribes imprisonment upto two
years and fine upto twice the cheque amount. It must, therefore, be interpreted
strictly, Section 138 is in two parts. The enacting part of the provision makes
it abundantly clear that what constitutes an offence punishable with
imprisonment and/or fine is the dishonour of a cheque for insufficiency of
funds etc. in the account maintained by the drawer with a bank for discharge
of a debt or other liability whether in full or part. The language used in the
provision is unambiguous and the ingredients of the offence clearly discernible
viz. (a) Cheque is drawn by the accused on an account maintained by him
with a banker, (b) The cheque amount is in discharge of a debt or liability and
(c) The cheque is returned unpaid for insufficiency of funds or that the
amount exceeds the arrangement made with the bank. But for the proviso that
comprises the second part of the provision, any dishonour falling within the
four comers of the enacting provision would be punishable without much
ado. The proviso, however, draws an exception to the generality of the
enacting part of the provision, by stipulating two steps that ought to be taken
by the complainant holder of the cheque before the failure of the drawer gives
to the former the cause of action to file a complaint and the competent Court
to take cognizance of the offence. These steps are distinct from the ingredients
of the offence which the enacting provision creates and makes punishable. It
follows that an offence within the contemplation of Section 138 is complete
with the dishonour of the cheque but taking cognizance of the same by any
Court is forbidden so long as the complainant does not have the cause of
action to file a complaint in terms of clause (c) of the proviso read with Section
142"
The Court further said :
"A proper understanding of the scheme underlying section 138 of the
Negotiable Instruments Act would thus make it abundantly clear that while
the offence is complete upon dishonour, prosecution for such offence is
deferred till the time the cause of action for such prosecution accuses to the
complainant."
In view of the view above, the appeal was allowed with the direction that
the complaint be returned to the complainant for further action in accordance
with law.
Rangappa v. Sri Mohan
(2010) 11 SCC 441
(1. Section 138 can be attracted in case of dishonour of post-dated cheque on
account of "stop payment" instructions sent by drawer to his bank. 2. If the accused
Negotiable Instruments, Banking and Insurance 8.41
is able to raise a probable defence which creates doubts about the existence ofa legally
enforceable debtor liability, the prosecution canfail. In thiscase, the appellant wasnot
able to contest the existence of a legally enforceable debt or liability. Hence, his
conviction was held proper.)
Facts
As per the respondent-complainant, the chain of facts unfolded in the
following manner. In October 1998, the accused had requested him for a hand
loan of Rs. 45,000 in order to meet the construction expenses. In view of their
acquaintance, the complainant had paid Rs. 45,000 by way of cash. On
receiving this amount, the appellant-accused had initially assured repayment
by October 1999 but on the failure to do so, he sought more time till December
2000. The accused had then issued a cheque bearing No. 0886322, post-dated
for 8-2-2001 for Rs. 45,000 drawn on Syndicate Bank, Kudremukh Branch.
Consequently, on 8-2-2001, the complainant had presented this cheque
through Karnataka Bank, Ranebennur for encashment. However, on 16-2-
2001 the said Bank issued a return memo stating that the 'Payment has been
stopped by the drawer' and this memo was handed over to the complainant
on 21-2-2001. The complainant had then issued notice to the accused in this
regard on 26-2-2001. On receiving the same, the accused failed to honour the
cheque within the statutorily prescribed period and also did not reply to the
notice sent in the manner contemplated under Section 138 of the Act.
Following these developments, the complainant had filed a complaint (under
Section 200 of the Code of Criminal Procedure) against the accused for the
offence punishable under Section 138 of the Act.
The appellant-accused had raised the defence that the cheque in question
was a blank cheque bearing his signature which had been lost and that it had
come into the hands of the complainant who had then tried to misuse it. The
accused's case was that there was no legally enforceable debt or liability
between the parties since he had not asked for a hand loan as alleged by the
complainant.
The trial judge found in favour of the accused by taking note of some
discrepancies in complainant's version. As per the trial judge, in the course
of the cross-examination the complainant was not certain as to when the
accused had actually issued the cheque.
However, an appeal against acquittal, the High Court reversed the
findings and convicted the appellant-accused. The High Court in its order
noted that in the course of the trial proceedings, the accused had admitted
that the signature on the impugned cheque was indeed his own. Once this fact
has been acknowledged, section 139 of the Negotiable Instrument Act
mandates a presumption that the cheque pertained to a legally enforceable
8.42 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
debt or liability. This presumption is of rebuttable nature and onus is then on
the accused to raise a probable defence. With regard to the present facts, the
High Court found that the defence raised by the accused was not probable.
The accused appealed to the Supreme Court.
Issue before the Supreme Court
Whatis the proper interpretation of section 139 of the Negotiable Instrument
Act which shifts the burden of proof on to the accused in respect of cheque
bouncing cases?
Decision of the Supreme Court
The Supreme Court agreed with the High Court's view that the accused
did not raise a probable defence. The Court said, "The defence by the
appellant-accused of the loss of a blank cheque was taken up belatedly. In the
"stop payment" instructions sent to his Bank, the accused had mentioned the
date of the cheque different to that of the complainant's version. Moreover,
the High Court rightly noted that if the accused had indeed lost a blank
cheque bearing his signature, the question of his mentioning the date of the
cheque could not arise. Furthermore, the instructions to "Stop payment" had
not even mentioned that the cheque had been lost. A perusal of the trial record
also shows that the accused appeared to be aware of the fact that the cheque
was with the complainant. Furthermore, the very fact the accused had failed
to reply to the statutory notice under section 138 of the Act leads to the
inference that there was merit in the complainant's version. Apart from not
raising a probable defence, the appellant accused was not able to contest the
existence of a legally enforceable debt or liability."
The Court further said, "the fact that the accused had made regular
payments to the complainant in relation to the construction of his house does
not preclude the possibility of the complainant having spent his own money
for the same purpose. As per the record of the case, there was a slight
discrepancy in the complainant's version, insofar as it was not clear whether
the accused had asked for a hand Ioan to meet the construction-related
expenses or whether the complainant had incurred the said expenditure over
a period of time. Either way, the complaint disclosed the prima facie existence
of a legally enforceable debt or liability since the complainant has maintained
that his money was used for the construction expenses. Since the accused did
admit that the signature on the cheque was his, the statutory presumption
comes into play and the same has not been rebutted even with regard to
materials submitted by the complaint."
Hence, the Supreme Court did not find any reason to interfere with the
final order of the High Court, which recorded a finding of conviction against
the appellant.
Negotiable Instruments, Banking and Insurance 8.43
Regarding the standard of proof for rebutting the presumption the Court
said that it is a settled position that when an accused has to rebut the
presumption under section 139, the standard of proof for doing so is that of
"preponderance of probabilities". Therefore, if the accused is able to raise a
probable defence which creates doubts about the existence of a legally
enforceable debt or liability, the prosecution can fail. The accused can rely on
the materials submitted by the complainant in order to raise such a defence.
Laxmi Dyechem v. State of Gujarat and Others
(2012) 13 SCC 375
(Dishonour ofa cheque on the ground that the "Signature do not match" or that
the "image is notfound" which too implies that specimen signatures do not match the
signature on the cheque can constitute a dishonour within the meaning ofsection 138
of the Negotiable Instrument Act.)
Facts
The appellant is a proprietorship firm engaged in the sale of chemicals. It
has over the past few years supplied Naphthalene Chemicals to the respondent
company against various invoices and bills issued in that regard. The
appellant's case is that a running account was opened in the books of account
of the appellant in the name of the respondent-company in which the value
of the goods supplied was debited from time to time as per the standard
accounting practice. A sum of Rs.4,91,91,035/- (Rupees Four Crore Ninety
One Lac Ninety One Thousand Thirty Five only) was according to the
appellant outstanding against the respondent-company in the former's books
of accounts towards the supplies made to the latter. The appellant's further
case is that the respondent-company issued under the signatures of its
authorised signatories several post dated cheques towards the payment of
the amount aforementioned. Several of these cheques (one hundred and
seventeen to be precise) when presented were dishonoured by the bank on
which the same were drawn, on the ground that the drawers' signatures were
incomplete or that no image was found or that the signatures did not match.
Ihe appellant informed the respondents about the dishonour in terms of a
statutory notice sent under Section 138 and called upon them to pay the
amount covered by the cheques. It is common ground that the amount
covered by the cheques was not paid by the respondents although according
io the respondents the company had by a letter dated 30.12.2008, informed
he appellant about the change of the mandate and requested the appellant
o return the cheques in exchange of fresh cheques. It is also not in dispute that
fesh cheques signed by the authorised signatories, according to the new
nandate to the Bank, were never issued to the appellant ostensibly because
he offer to issue such cheques was subject to settlement of accounts, which
8.44 Penalties in Case of Dishonour or Cheques for Insufficiency of Funds
had according to the respondent been bungled by the outgoing authorised
signatories. The long and short of the matter is that the cheques remained
impaid despite notice served upon the respondents that culminated in the
filing of forty different complaints against the respondents under Section 138
of the Negotiable Instruments Act before the learned trial court who took
cognizance of the offence and directed issue of summons to the respondents
for their appearance. It was at this stage that Special Criminal Applications
No.2118 to 2143 of 2009 were filed by Shri Mustafa Surka accused No.5 who
happened to be one of the signatories to the cheques in question. The principal
contention urged before the High Court in support of the prayer for quashing
of the proceedings against the signatory to the cheques was that the dishonour
of cheques on account of the signatures 'not being complete' or 'no image
found' was not a dishonour that could constitute an offence under Section 138
of the Negotiable Instrument Act.
Relying on the decision of the Supreme Court in Vinod Tanna and Another
v. Zaher Siddique and Others (2002} 7 SCC 541, the High Court held that
dishonour of a cheque on the ground that the signatures of the drawer of the
cheque do not match the specimen signatures available with the bank, would
not attract the penal provisions of section 138 of the Negotiable Instrument
Act, 1881.
Issue
Whether the provisions of section 138 of the Negotiable Instrument Act
are attracted in case where a cheque is dishonoured on the ground that the
signatures of the drawer of the cheque do not match the specimen signatures
available with the bank.
Decision of the Supreme Court
The Supreme Court set aside judgement and order passed by the High
Court and dismissed the special criminal applications filed by the respondents.
The Court also ordered that the trial court shall proceed with the trial of the
complaints filed by the appellants expeditiously.
The Supreme Court referred to a number of cases in course of its judgement.
Some of these cases are discussed below :
In Modi Cements Ltd. V. Kuchil Kumar Nandi : (1998) 3 SCC 249, the
question was whether dishonour of cheque on the ground that the drawer
had stopped payment was a dishonour punishable under section 138 of the
Negotiable Instrument Act. The Court held in this case that even though the
cheque is dishonoured by reason of "stop-payment" instruction an offence
under section 138 could still be made out. The presumption under section 139
is attracted in such a case. The accused can show that the "stop payment"
Negotiable Instruments, Banking and Insurance 8.45
instructions were not issued because of insufficiency or paucity of funds but
for other valid causes including that there was no existing debt or liability at
the time of presentation of cheque for encashment.
In NEPC Micon Ltd. v. Magna Leasing Ltd. (1999) 4 SCC 253, the cheques
issued by the appellant-company in discharge of its liability were returned by
the company with the comments 'account closed'. The question was whether
a dishonour on that ground for that reason was culpable under section 138 of
the Negotiable Instrument Act. Relying upon a three-judge Bench decision of
this Court in Modi CementsLtd. v. Kuchil Kumar Nandi (1998) 3 SCC249, this
Court held that the expression " the amount of money................... is insufficient
to honour the cheque" is a genus of which the expression 'account being
closed' is a specie.
InM.M.T.C. Ltd. and Another v. Medchl Chemicals and Pharma (P.) Ltd.
and Another (2002) 1 SCC 234, it was held that in cases where the dishonour
was on account of "stop payment" instructions of the drawer, a presumption
regarding the cheque being for consideration would arise under section 139
of the Act. To the effect was the decision of the Supreme Court in Goaplast
(P.) Ltd. v. Chico Unsula D'souza and Another: (2003) 3 SCC 232, where the
Court held that "Stop payment" instructions and consequent dishonour of
the cheque of a post-dated cheque attracts provisions of section 138.
A three-judge Bench of this Court in Rangappa v. Sri Mohan (2010) 11
SCC 441 approved the above decision and held that failure of the drawer of
the cheque to put up a probable defence for rebutting the presumption that
arises under Section 139 would justify conviction even when the appellant
drawer may have alleged that the cheque in question had been lost and was
being misused by the complainant.
After discussing the above cases the Supreme Court said :
"The above line of decisions leaves no room for holding that the two
contingencies envisaged under Section 138 of the Act must be interpreted
strictly or literally. We find ourselves in respectful agreement with the
decision in NEPC Micon Ltd. (supra) that the expression "amount of money
.................. is insufficient" appearing in Section 138 of the Act is a genus and
dishonour for reasons such "as account closed", "payment stopped", "referred
to the drawer" are only species of that genus. Just as dishonour of a cheque
on the ground that the account has been closed is a dishonour falling in the
first contingency referred to in Section 138, so also dishonour on the
ground that the "signatures do not match" or that the "image is not found",
which too implies that the specimen signatures do not match the signatures
on the cheque would constitute a dishonour within the meaning of Section
138 of the Act. This Court has in the decisions referred to above taken note of
situations and contingencies arising out of deliberate acts of omission or
8.46 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
commission on the part of the drawers of the cheques which would inevitably
result in the dishonour of the cheque issued by them. For instance this Court
has held that if after issue of the cheque the drawer closes the account it must
be presumed that the amount in the account was nil, hence insufficient to
meet the demand of the cheque. A similar result can be brought about by the
drawer changing his specimen signature given to the bank or in the case of a
company by the company changing the mandate of those authorised to sign
the cheques on its behalf. Such changes or alteration in the mandate may be
dishonest or fraudulent and that would inevitably result in dishonour of all
cheques signed by the previously authorised signatories. There is in our view
no qualitative difference between a situation where the dishonour takes
place on account of the substitution by a new set of authorised signatories
resulting in the dishonour of the cheques already issued and another
situation in which the drawer of the cheque changes his own signatures or
closes the account or issues instructions to the bank not to make the
payment. So long as the change is brought about with a view to preventing
the cheque being honoured the dishonour would become an offence under
Section 138 subject to other conditions prescribed being satisfied. There
may indeed be situations where a mismatch between the signatories on the
cheque drawn by the drawer and the specimen available with the bank may
result in dishonour of the cheque even when the drawer never intended to
invite such a dishonour. We are also conscious of the fact that an authorised
signatory may in the ordinary course of business be replaced by a new
signatory ending the earlier mandate to the bank. Dishonour on account of
such changes that may occur in the course of ordinary business of a company,
partnership or an individual may not constitute an offence by itself because
such a dishonour in order to qualify for prosecution under Section 138 shall
have to be preceded by a statutory notice where the drawer is called upon and
has the opportunity to arrange the payment of the amount covered by the
cheque. It is only when the drawer despite receipt of such a notice and despite
the opportunity to make the payment within the time stipulated under the
statute does not pay the amount that the dishonour would be considered a
dishonour constituting an offence, hence punishable. Even in such cases, the
question whether or not there was a lawfully recoverable debt or liability for
discharge whereof the cheque was issued would be a matter that the trial
Court will examine having regard to the evidence adduced before it and
keeping in view the statutory presumption that unless rebutted the cheque is
presumed to have been issued for a valid consideration/'
EXAMINATION QUESTIONS
1. When dishonour of a cheque is an offence?
Negotiable Instruments, Banking and Insurance 8.47
2. A cheque was given to B as his birthday gift. It was duly presented
by B but returned with the remarks "insufficient funds". Can B
prosecute A under section 138 of Negotiable Instrument Act, 1881.
Hint: No. There must be legally enforceable debt which is not the case
here.
3. (a) When dishonour of a cheque is an offence?
(b) Whether dishonour of cheque in the following cases in an
offence?
(i) A cheque given on one's birthday dishonoured due to
insufficient funds,
(ii) X, the drawer of a cheque, issued a cheque to meet a debt
without any funds on date of issue in the bank.
Hints: (i) No.
(ii) Depends on the circumstances. If the money is deposited in the
bank or arrangement is made with the bank so that the cheque can be
honoured at the time of presentment, then it is not an offence;
otherwise it is (Modi Cements Ltd. v. AT.K. Nandi, AIR 1998, SC
1057).
4. Discuss the amendments made in the Negotiable Instruments Act in
2002.
Notes: The Negotiable Instruments Act, 1881 has been amended by
the Negotiable Instruments (Amending arid Miscellaneous
Provisions) Act, 2002 as the existing provisions in the Negotiable
Instruments Act, 1881, namely sections 138 to 142 have been found
deficient in dealing with dishonour of cheques. The Act 55 of2002 has
made, the following amendments in the Negotiable Instrument Act,
1881, namely:
(i) to increase the punishment as prescribed in section 138 from
one year to two years;
(ii) to increase the period as prescribed in section 138 for issue of
notice by the payee to the drawer from 15 days to 30 days;
(iii) to exempt those directors from prosecution under section 141 of
the Act who are nominated as directors of a company by virtue
of their holding any office or employment in the Central
Government or State Government or a financial corporation
owned or controlled to the Central Government, or the State
Government, as the case may be.
8.48 Penalties in Case of Dishonour of Cheques for Insufficiency of Funds
(iv) to provide discretion to the Court under section 142 to waive
the period of one month if the complainant satisfies the Court
that he had sufficient cause for not making a complaint within
one month of the date on which the cause of action arises under
clause (c) of the proviso to section 138.
(v) to give power to court to try cases summarily;
(vi) to provided for mode of service of summons;
(vii) to provide for evidence on affidavit;
(viii) to make bank's slip prima facie evidence of certain facts; and
(ix) to make the offence compoundable.
5. When is dishonour of a cheque an offence? What is the procedure to
be followed to file a criminal complaint in such a case?
6. "The object of bringing Section 138 on statute book is to inculcate
faith in the efficacy of banking operations and credibility in transacting
business on negotiable instruments."
I
Before 1936, there were no special provisions of law in respect of banking
companies which used to be governed by the Indian Companies Act, 1930,
except the Reserve Bank of Indian Act which itself was passed in 1934 and
consequently the Reserve Bank of India was established on April 1,1935. In
1936 some new provisions were introduced in the Indian Companies Act,
1913 relating to companies. But these provisions proved inadequate and the
necessity to bring a new legislation for banking companies was felt. Abuse
of powers by persons controlling some banks, absence of measures for
safeguarding the interests of depositors and economic interest of the country
were some of the causes to bring a new legislation which ultimately came
into force on 16th March, 1949 in the form of the Banking Companies Act,
1949. The Act was passed to consolidate and amend the law relating to
banking. The Act was later amended in 1965 in the form of the Banking
Companies Act, 1949. The Act was passed to consolidate and amend the law
relating to banking. The Act was later amended in 1965 and a new name "The
Banking Regulation Act, 1949" was given to it. The Act extends to the whole
of India. The provisions of the Act are in addition to and not, except as
provided in the Act, in derogation of the Companies Act, 2013 and any other
law for the time being in force. The Act does not apply to a primary
agricultural credit society, a co-operative land mortgagee bank and any'
other co-operative society, except in the manner and to the extent specified
in part.V of the Act. Section 4 of the Act gives powers to the Central
Government and the Reserve Bank of India to suspend the operation of all
or any of the provisions of the Act, either generally or in relation to any
specified banking company for a specified period mentioned in the section.
Banks
1 I 1
Co-operative Banks Rural Banks Commercial Banks
I
Domestic Banks Foreign Banks
(These are the banks (These are banks which
which are incorporated are incorporated outside
in India.) India and operate in India.)
9.6 Control of Banking System by Reserve Bank of India
2. On the basis of the banks listed in the Second Schedule of the Reserve
Bank of India Act, 1934, the banks can be classified as follows :
Banks
approved securities, partly in cash and partly in the form of such securities
an amount which shall not be less than the minimum required as stated
above.
Companies incorporated in India.—Section 11 of the Banking Regulation
Act, 1949 the requirement as to minimum paid up capital and reserves are
as follows:
1. If a banking company has a place of business in more than one
state, but having no place of business in Bombay (Mumbai).or
Calcutta (Kolkata), the aggregate amount of paid up capital and
reserves shall not be less than 5 lakhs of rupees. If a banking
company has a place of business in more than one state and also have
a place of business in Bombay or Calcutta or both, the aggregate
amount of paid up capital and reserve shall not be less than 10 lakhs
of rupees.
2. If a banking company has all its places of business in one state
none of which is situated in the city of Bombay or Calcutta, the
aggregate value of its paid up capital and reserves shall not be less
than 1,00,000 rupees in respect of its principal place of business plus
10,000 rupees in respect of each of its other places of business
situated in the same district in which it has a principal of business,
plus 25,000 rupees in respect of each place of business situated
elsewhere in the state otherwise than in the same district. This is
subject to a total of 5,00,000 rupees. If a banking company has only
one place of business and it is not in Bombay or Calcutta,
therequirementrfor aggregate value of paid up capital and reserves
is 50,000 rupees.
3. If a banking company has all its places of business in one state, one
or more of which is or are situated in the city of Bombay or Calcutta, z
the aggregate amount of paid up capital and reserves shall not be
less than 5 lakhs of rupees, plus 25,000 rupees in respect of each
place of business situated outside the city of Bombay or Calcutta, as
the case may be. This is subjectto a total of ten lakhs of rupees.
(3) Any officer making an inspection under sub-section (1) may examine
on oath any director or other officer or employee of the banking
company in relation to its business, and may administer an oath
accordingly.
The Banking Regulation Act, 1949 9.17
(4) The Reserve Bank shall, if it has been directed by the Central
Government to cause an inspection to be made, and may, in any
other case, report to the Central Government, if it is of the opinion
after considering the report that affairs of the banking company are
being conducted to the detriment of the interests of its depositors,
may, after giving such opportunity to the banking company to make
a representation in connection with the report as, in the opinion of
the Central Government, seems reasonable, by order in writing:—
(a) prohibit the banking company to receive fresh deposits;
(b) direct the Reserve Bank to apply under S. 38 for the winding
up of the banking company:
Provided that the Central Government may defer, for such period as
it may think fit, the passing of an order, upon such terms and
conditions as it may think fit to impose. ,
(5) The Central Government may, after giving a reasonable notice to the
banking company, publish the report submitted by the Reserve
Bank or such portion thereof as may appear necessary.
Explanation— For the purposes of the section, the expression "banking
company" shall include:—
(i) in the case of banking company incorporated outside India, all its
branches in India; and
(ii) in the case of a banking company incorporated in India :—
(a) all its subsidiaries formed for the purpose of caryying on the
business of banking exclusively outside India;
(b) all its branches whether situated in India or outside India.
Powers of the Reserve Bank to give directions—
the Reserve Bank to give directions to banking companies generally or to a
particular banking company. The section is reproduced below:—
"(1) Where the Reserve Bank is satisfied that—
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the aflairs of any banking company beingconducted
in a manner detrimental to the interests of the depositors, or
in a manner prejudicial to the interests of the banking
company; or
(c) to secure the proper management of any banking company
11,,.
9.18 Control of Banking System by Reserve Bank of India
LEADING CASES
Sajjan Bank (Private) Ltd. v. Reserve Bank of India
AIR 1961 Mad 8
(The power given to the Reserve Bank of India under S. 22 of the Reserve Bank
of India is o/quasi-judicial character and not arbitrary.)
Facts
The Sajjan Bank (Private) Ltd., which is carrying on business at Alandpur,
originated from Sajjan and Co. Ltd., which was incorporated in November
1944 with the main object of carrying on money-lending business. In May
1946, the company was converted into a banking company and in November
of that year its name was changed into Sajjan Bank (Private) Ltd. All its
shares are held by its three directors who were said to be closely related. The
Banking Companies Act, 1949 (now called The Banking Regulation Act,
1949), came into force on 16.3.1949.
Section 22 of the Act provided amongst other things that every banking
company in existence at the commencement of this Act should before the
expiry of six months from such commencement and, every other company
before commencing banking business in India, apply in writing to the
Reserve Bank for a licence under the section to carry on banking business.
The section further provided that the Banking Companies in existence at the
commencement of the Act could continue to carry on their banking business
till final orders were passed on their application for licence.
On 14.9.1949, the petitioner bank applied under S. 22 of the Act, to the
respondent for a licence to carry on banking business. The Officers of the
Reserve Bank inspected the petitioner bank under S. 22 of the Act in July
1952. A report of that inspection was prepared on 11.10.1949. The inspection
revealed the existence of certain defects in the working of the bank. The
Reserve Bank therefore decided to keep in abeyance the consideration of the
question of issuing a licence evidently with a view to watch the progress of
the bank in eradicating the defects pointed out by the inspection report.
-9.22 Control of Banking System by Reserve Bank of India
Issues
1. Whether Section 22 of the Act was unconstitutional in so far as it
proceeded to restrict the fundamental right of the petitioner to carry
the banking business?
2. Whether action of the respondent was arbitrary?
3. Whether the procedure by the respondent was illegal?
Issue
Whether the impugned award of the Ombudsman is sustainable?
Facts
The two petitioners, who were promoters of a proposed Urban
Cooperative Bank, had applied for such licence by their application of 12111
September, 1980.
Therein they have mentioned thatChaklashi town (in which the proposed
Urban Co-operative Bank was to be established) was having population of
about 30,000 and as per the census of 1971 the population was 20900. A case
The Banking Regulation Act, 1949 9.29
was sought to be made out for the necessity and feasibility of the proposed
co-operative bank by citing various needs of different kinds of business,
industries, etc. On that application, the Reserve Bank by its letter dt. 27th
September, 1980 asked the Assistant District Registrar of Co-operative
Societies, Nadiad, to conduct a preliminary survey of the area of operation
of the proposed bank with the assistance of its promoters and their State/
District central co-operative bank to identify the potentials for the growth of
the proposed bank i.e. potential for deposit mobilization as well as lending,
particularly lending to small scale and cottage industries. In pursuance
thereof a Joint Report prepared by the Assistant District Registrar and the
Manager of Kaira District Central Co-op. Bank Ltd. was sent by the letter dt.
21 October, 1980.
2. However, by the letter dt. 3rd March, 1982, the Reserve Bank refused
the licence after considering the preliminary survey report and the Joint
Su rvey Report and observed that the areas of operation of the proposed bank
was limited to Nagar Panchayat, Chaklashi and the inclusion of non-urban
area was not permissible in the area of operation of a Urban Co-operative
Bank and it was further observed that Chaklashi was reported to have the
population of 9000 (urban population) and was served by two commercial
banks and therefore there was existing adequate banking facility. It was also
observed that the Chaklashi and the surrounding villages were predominantly
agricultural in character and the preliminary and joint studies showed that
there was little scope for industrial advances and therefore a need for
organizing a new primary (Urban) co-operative bank was not established
and, therefore, the Reserve Bank refused the licence and refused the registering
authority to proceed with the registration of the co-operative bank.
3. A further representation was made by the promoters by letter dt. 22nd
March, 1982 and thereby an attempt was made to rebut the points made by '
the Reserve Bank for refusing the licence. It appears that on 10lh April 1982
there was a meeting and some further discussion in pursuance thereof the
promoters had written a letter dt. 13 May, 1982 reminding about fresh
decision. It appears that there was some further discussion on 8th June 1982
and in pursuance of that discussion the promoters by their letter dt. 21s! June
1982 forwarded more details and facts justifying the grant of the licence.
4. Taking into consideration the various representations, the Reserve
Bank by its letter dt. 4th May 1983 took a decision wherein it is observed that
the area of operation of the proposed bank was predominantly agricultural
in character and was adequately served by the existing banking structure
and that the area did not have adequate non-agncultural business potential
so as to sustain another new urban bank as a viable unit.
9.30“ Control of Banking System by Reserve Bank of India
However, the petitioners were not satisfied and they made further
representation by letters dt. 15lh July 1983 and Is' August 1983 and therein it
was complained that even though the petitioners were refused licence on the
ground that the area was predominantly agricultural and was served by
existing banking facilities and did not have adequate non-agricultural
business potential, yet another Urban Co-operative Bank, namely, Natpur
Co-op. Bank Ltd. Nadiad was allowed to open a branch at Chaklashi by the
Reserve Bank; and therefore the refusal to the petitioners seem to be
unjustified. This was replied by the Reserve Bank by its letter dt. 11 August
1983 and it was pointed out that opening of a new bank and a new branch of
an existing bank were altogether different things and that an area which
could not sustain a new Co-op. Bank and can sustain a new branch of an
existing Co-op. bank and they stood entirely on different footing. It was also
pointed out that the matter of the petitioners was considered on merits and
studies were conducted and the results showed that there were no special
and adequate factors in justification of a new urban Bank in Chaklashi
functioning as a viable unit.
The petitioner, therefore, came to the High Court.
Issue
Whether the decision of the Reserve Bank of India refusing licence to the
petitioners was vitiated?
Issue
Whether the Circulars issued by the Reserve Bank of India are not
binding on Co-operative Banking Societies?
I
I
I
CHAPTER 10
Risk and uncertainly are part of life. A person may die at an early age.
He may suffer from accident, destruction of goods and property from fire,
sea perils and many other causes. It is to provide against risk and uncertainty
of the aforesaid nature that insurance came into being. Insurance does not
avoid or eliminate the loss arising from uncertain events; it only spreads
the loss over a larger number of people who insure themselves against that
risk. Thus, it is a co-operative device to spread the loss caused by an
uncertain event which is covered by insurance over a large number of
persons who are also exposed to the same risk and insure themselves
against the risk.
The risks which can be insured have increased in number and extent.
Insurance business can mainly be divided into two categories, namely—
life insurance business and general insurance business./'General insurance
business" means fire, marine or miscellaneous insurance business, whether
carried on singly or in combination with one or more of them (S. 6-B of
The Insurance Act, 1938).
The law of insurance is contained in the following four Acts:
1. The Insurance Act, 1938
2. The Life Insurance Corporation Act, 1956
3. The Marine Insurance Act, 1963
4. The General Insurance Business (Nationalisation) Act, 1972
The provisions of the Insurance Act, 1938 are applicable to both life
and general insurance business in so for as these are not inconsistent with
those contained in the special Acts governing them. All types of insurance
business have been nationalised in India—life insurance business in 1956
and general insurance business in 1972v In this chapter general principles
of life, fire, and marine insurance contracts have been discussed.
in
10.4 General Principles of Insurance
Definition of life insurance, five insurance, marine insurance and
contract of insurance
The Insurance Act, 1938 gives the definitions of fire insurance business
(S. 6-A), life insurance business (S. 11), marine insurance business (S. 13-
Al and miscellaneous insurance business (S. 13-B) but does not give the
definition of contract of insurance or the definition of any other special type
of contract of insurance; only S. 3 of the Marine Insurance Act, 1963
prescribe a definition of contract of marine insurance.
Contract of life insurance—A contract of life Insurance is a contract
in which one party agrees to pay a specified sum upon the happening
of a certain event, contingent upon the duration of human life, in
consideration of the immediate payment of a smaller sum or certain
equivalent periodical payments by another. The consideration is called
the premium. It is payable either in one lump sum, e.g., single premium
or by successive periodical payments depending upon the terms of the
policy and usually by way of periodical payments. In case of periodical
payments, payment on or before the due date, is generally the condition
precedent to the continuance of the policy. A contract of life insurance or
assurance is not a contract of indemnity. The person who promises to pay
a specified sum is called the insurer or assurer; and the other party is called
the insured or assured.
Contract of fire insurance—A contract of fire insurance is a contract
whereby one party undertakes to indemnify another, against loss by, or
incidental to, fire, happening within an agreed period, in return for
payment in lump sum or by installments. It is a contract of indemnity.
Contract of marine insurance—Section 3 of the Marine Insurance
Act, 1963 says that, "contract of marine insurance is an agreement whereby
the insurer undertakes to indemnify the assured in the manner and to
the extent thereby agreed, against marine losses, that is to say, the losses
incidental to marine adventure." It is thus a contract of indemnity against
loss, incidental to marine adventure, accruing to ship, cargo, freight, or
other subject-matter of a policy, during an agreed voyage or voyages or
during a specified length of time. It need not be limited to the actual loss
sustained, as in fire insurance, not be limited to the actual loss sustained,
as in fire insurance, but is generally based on value agreed to in advance,
which may be greater or less than the risk involved. The consideration for
the policy is called premium. The person who undertakes the risk is called
the insurer or underwriter.
Contract of insurance—A contract of insurance is a contract whereby, one
party, in consideration of sum of money called premium, undertakes to van certain
Law of Insurance 10.5
specified sum of money on death or on happening of any contingency dependant
on human life or to indemnify the other party against loss by or incidental to fire
or against marine losses or to make good the losses of another against any other
specified risk. The party undertaking the risk is called the insurer, assurer
or underwriter and the party whose loss is to be made good is called the
insured or assured. The document which contains the terms and conditions
of the contract of insurance is called a "policy", and the insured is, therefore,
also called a policy-holder. The consideration which the insured has to pay
to the insurer to undertake the risk is called the "premium". The amount
for which the policy is taken is called the "insured amount" or "policy
amount". The thing or goods or property which is insured is calied the
"subject matter" of insurance.
The four essentials of a contract of insurance are: (1) definition of the
risk, (2) duration of the risk, (3) premium and (4) amount of insurance.
A contract of insurance is a contingent contract as defined in S. 31 of
the Indian Contract, 1872. It is not a wager under S. 30 of the Indian
Contract Act, 1872. The general principles of the law of contract apply to
a contract of insurance.
2. Indemnity
A contract of insurance except life, personal accident and sickness
insurance is a contract of indemnity. In Castellain v. Preston, 1883,11 Q.B.D.
380, BREETT, L.J., said:—
"The very foundation, in my opinion, of every rule which has been
applied in insurance law is this, namely, that the contract of insurance
contained in a marine or fire policy is a contract of indemnity, and of
indemnity only, and that this contract means that the assured, in case of
loss against which the policy has been made, shall be fully indemnified,
but shall never be more than fully indemnified".
In Castellain's case, Preston entered into a contract to sell his hosue
which he had insured against fire. Before the completion of the sale the ,
house was partly damaged by fire. The insurer indemnified the insured.
The buyer also paid the agreed price and completed the sale, and thus there
was gain to the seller by the insurance. But the insurer came to know of
this and sued the insured. It is argued on behalf of the insurer that there
was no loss due to the fire, as the insurer received the agreed price from
the buyer, and therefore there was nothing for which the insured had to
be indemnified by the insurer. The Court upheld the contention of the
insurer and ordered Preston to refund the amount received from the insurer.
Thus, indemnity is the fundamental principle in contracts of fire, marine,
burglary and other property insurance. It means that the insured will be
* Bottomary is a contract by which a ship owner borrows money for equipment, repairs, etc. pledging
10.12 General Principles of Insurance
paid the actual amount of loss not exceeding the amount of the policy as
the object of a contract of insurance is to put the insured in the same
financial position, as nearly as possible, after the loss as if the loss had not
taken place and the insured is not entitled to make a profit of his loss. In
the absence of the principle of indemnity the insured might, be tempted
to bring about the event insured against in order to get the money and there
may be tendency to insure the goods or property for more than their value
which will be against, public interest.
A contract of indemnity is a contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor
himself or by the conduct of any other person as contempeated in S. 124
of the Indian Contract Act, 1872. But indemnity, as applicable to marine
insurance, must not be an indemnity, as contemplated by the Indian Contract
Act, as the loss in such a contract is covered by the contract itself and such
loss is not caused to the assured by the conduct of the insurer nor by the
conduct of any other person [State of Orissa v. United India Insurance Co.
Ltd., AIR 1997 SC 2671].
In actual practice the terms of the policy may prevent indemnity of
actual loss. For example, the actual loss may be. greater than the sum
insured and policy may be subject to average clause. In marine policies,
the contract is to indemnify 'in manner and to the extent agreed' (S. 3
Marine Insurance Act, 1963). Thus, in practice there is only a commercial
indemnity rather than a strict common law indemnity.
Life insurance, personal accident and sickness insurance form an
exception to the indemnity principle as no money payment can indemnify
for loss of life or bodily injury. Moreover, valued policies where the value
of the subject-matter is agreed beforehand, are strictly speaking also an
exception.
3. Subrogation
The doctrine of subrogation is a corollary to the principle of indemnity
and applies to fire and marine insurance. According to it, the insurer steps
into the shoes of the insured when he has paid the actual loss suffered by
the ' insured
as the insured is not allowed to make a profit out of his loss. In other words
the insurer is entitled to the advantage of every right of the insured against
a third party. This applies to all policies of insurance which are contracts
of indemnity.
Speaking of the doctrine of subrogation BRETT, L.J., said as follows
in Castellain y. Preston, (1883) QBD 380:—
Law of Insurance 10.13
"The doctrine does not arise upon any of the term of the contract of
insurance, it is only another proposition which has been adopted for the
purpose of carrying out the fundamental rule (of indemnity) which I have
mentioned, and it is a doctrine in favour of the underwriters or insurers
in order to prevent 'the assured from recovering more than a full indemnity;
it has been adopted solely for that reason......... Now it seems to me that
in order to carry out the fundamental rule of insurance law, this doctrine
of subrogation must be carried to the extent which I am now about to
endeavour to express, namely, that as between the underwriter and the
assured, the underwriter is entitled to the advantage of every right of the
assured, whether such right consists in contract fulfilled or unfulfilled, or
in remedy for tort capable of being insisted or already insisted on, or in
any other right, whether by way of condition or otherwise, legal or equitable
which can be, or has been exercised or has accrued, and whether such right
could or could not be enforced by the insurer in the name of the assured
by the exercise or acquiring of which right or condition the loss against
is insured, can be, or has been diminished."
In Scottish Union and National Insurance Co. v. Davis, (1970) 1 Lloyd's
Rep 1, it was held that it is necessary for this right to arise that the insured
has been fully paid. In Napier v. Hunter, (1993) AC 713, it was held that
subrogation is concerned only with the loss against which the policy is
addressed rather than any general loss.
4. Mitigation of Loss
In case the event insured against happens, the insured must take all
necessary steps to mitigate or minimise the loss as if he were not insured
to preserve the property. The insured must act as a prudent uninsured
person would do in similar circumstances, otherwise the insurer can avoid
the payment of loss attributable to his negligence. Thus, an insured is
bound to do his best under the circumstances, but he is not bound to do
at his own peril.
7. Proximate Cause0304
'"Where there is a succession of causes which must have existed in
order to produce the loss, or which has in fact contributed, or may have
contributed to produce it, the doctrine of proximate cause has to be applied
for the purpose of ascertaining which of the successive causes is the cause
Q3. What is the importance of "doctine of proximate course" in marine insurance? Explain.
[LL.B., D.U.]
Q4. Sugar bags loaded on a ship were insured against lossby sea water. A rat made a hole in the pipe
of the ship. Sea water leaked through that hole into the ship and damaged sugar in the bags lying
there. Whether insurance company is liable to pay this loss under policy of ship's goods?
1LL.B..D.U.1
Law of Insurance 10.15
to which the loss is to be attributed within the intention of the policy." M.N.
Srinivasan—Principles of Insurance Law, 8th Edition 2008, Page 275.
An insurer is only liable to pay for loss which has been proximately
caused by a pei 5. insured against. In Pink v. Fleming it was held that
proximate cause or causa proximo means "in law the immediate and not
the remote cause is to be considered in measuring the damages." Where
there is a succession of causes which must have existed in order to
produce a particular result, the direct and proximate cause i.e. the last
cause must be looked into and the others rejected although the result
would not have been produced without their concurrence.
In Ley land Shipping Co. v. Norwich Union Fire Insurance Society Ltd.,
(1918) AC 350: All ER 443 HL, the learned judge gave a new dimension
to the concept. He explained that the proximate cause of an event is the
real and efficient cause to which an event may be attributed. Where the causes
are successive the peril insured against may be the last cause for the loss
in which case it can safely be said that the loss is caused by the peril insured
against. On the other hand, if the peril insured against is not the last cause
for the loss but it is only a preceding cause, the question arises whether
the last cause is a mere sequence of the preceding cause, the peril insured
against, or was there a break in the chain of causation? If the connection
between the preceding cause and the last cause is not interrupted by
intervention of a fresh cause, the peril insured against will have to be
treated as the real and the efficient cause and the insurer will be liable.
On the other hand, if the connection between the preceding cause and the
last cause is interrupted by intervention of a fresh cause, which is not a
mere reasonable and probable consequence directly and naturally resulting
in the ordinary course of events from the peril insured against the insurer
will not be liable. Thus, proximate cause does not mean the "nearest in'
time." It is the 'cause which is truly proximate in efficiency.' It is the
"effective or predominant cause." It is the cause which sets the other causes
in motion.
The rule of causa promixa is applicable in all types of insurance contracts.
To make a marine insurer liable the insured must prove the following :
(b) that the peril is one that is insured against in the policy; and
(c) that the peril insured against is the proximate cause for the loss
sustained.
1046 General Principles of Insurance
In Pink v. Fleming, (1899) 25 QBD 396 LORD ESHER said: "The question
can only arise where there is succession of causes which must have existed
in order to produce the result. There that is the cause, according to the law
of marine insurance, the last cause only must be looked to and the others
rejected, although the result would not have been produced without them."
In this case a cargo of oranges was insured. The peril insured was collision
with another ship. The ship collided and put into port for repairs, the
oranges were taken on lighter and then reloaded which caused damage
to the oranges. It was held that the proximate cause of the damage was
not collision but due to mishandling while unloading and reloading of the
oranges, and therefore, loss could not be recovered.
In LeylandShipping Co. Ltd. v. Norwich Union Fire Insurance Society
Ltd., (1918) A.C. 350, it was explained by the learned judge that the proximate
cause of an event is the real and efficient cause to which the event may be attributed
and the application of the doctrine varies according to the question whether the
loss was caused by the peril insured against. Here a ship was insured under
a time policy against perils of sea, but consequences of hostilities were
excepted. While on a voyage from S. America to Havre the ship was
torpedoed by a German submarine, but although she was struck forward
and tended to settle down by the head she reached Havre with the aid of
tugs. There the vessel was moored in the inner harbour, where she grounded
on each ebb tide and floated again on each flood, but after a few days her
bulk heads 'gave way, and she sank, becoming a total loss. It was held that
the grounding was not a new cause of the loss, but that the proximate cause
was still the torpedoing, which had been expressly excepted by the terms
of the policy, so that the underwriters were not liable. Lord Shaw stated
that The proximate cause is "the cause which is Truly proximate in
efficiency". The efficiency of a cause may have been preserved, though
other causes in the meanwhile sprung up. If the ultimate event is the result
of such an efficient cause, it will be regarded as the "proximate cause"
though not proximate in time.
In Scaramanga v. Stamp (1880), 5 G.P.D. 295, a ship, which was insured
against "hostilities", ran on a sunken wreck of another vessel, torpedoed
by an enemy submarine, which happened to be lying at the place of the
accident, it was held that the insurer was not liable for the loss, as "hostilities"
were not the proximate cause of the loss but the accident of the sunken
vessel, lying at the place where it lay. On the other hand, in William &
Co. v. North of England Indemnity Association, (1917) 2 KB 527, when an
enemy had purposely sunk a vessel at the entrance of a port, in order to
damage vessels entering therein, it was held that the loss was recoverable,
being covered bv a similar clause as the above, in the oolicv.
Law of Insurance 10.17
In Hamilton Fraser & Co. v. Pandorf & Co., (1887) 12 App. Cas. 518.
the cargo (rice) was insured against damage by sea water. During the
voyage, rats made a hole in a pipe which connected the bathroom with
the sea with the result that sea water got through this hole and damaged
the rice. It was held that the proximate cause of damage being sea water,
the insured was entitled to damages, the rats being a remote cause. In
another case, where hides and tobacco were shipped in the same vessel,
and the hides became polluted by reason of sea water during a storm, and
the stench from them spoiled the tobacco, the damage thus caused was held
as having been proximately caused by perils of the sea.
In Taylor v. Dunbar, (1899) 38 L.J.C.P. 178, a ship carrying meat was
delayed by storm. The meat became decomposed and had to be thrown
overboard. It was held that the loss of meat was not a loss by the perils
of the sea, the proximate cause being delay, although the delay was caused
by a peril insured against.
Thus, an insurer is only liable to pay for loss which has been proximately
caused by a peril insured against. The principle is most vigorously applied
to contract of marine insurance where there are more chances of succession
of causes leading to a loss, some of which may not be insured against.
Section 55 of the Marine Insurance Act, 1963 provides that "unless the policy
otherwise provides, the insurer is liable for any loss proximately caused by a peril
insured against. " Thus, in order to recover loss under a marine policy the loss
(i) must have arisen from any of the "accepted perils ", and (ii) the "accepted
perils" must be the proximate cause of the loss. It further provides that (a) an
insurer is not liable for loss attributable to the wilful misconduct of the
assured but in the absence of a contract to the contrary, he is liable for loss
caused by a peril insured against although the loss would not have occurred
but for the misconduct of the master or the crew; (b) unless the contract'
otherwise provides, insurer of ship or goods is not liable for loss caused
by delay although the delay is caused by a peril insured against; (c) subject
to the contract to the contrary, the insurer is also not liable for loss caused
by ordinary wear and tear, ordinary leakage and breakage and by inherent -
vice or nature of the subject matter nor for any loss presumably caused
by rats or injury to machinery not proximately caused by maritime peril.
Thus, S. 55 of the Marine Insurance Act 1963 adopts the principles laid
down in the aforesaid cases.
In New India Insurance Company Ltd. v. M/s Zuari Industries, (2009)
8 SCC 70, the complainant had taken two insurance policies—one policy
was fire policy and the other was a consequential loss due to fire policy.
On Tanuarv 8. 1999 at about 3.20 n.m. there was a short cirmitintr in the
10.18 General Principles of Insurance
main switch board installed in the sub-station receiving electricity from the
“State Electricity Board, which resulted in a flashover producing over
currents. The flashover and over currents generated excessive heat. The
paint on the panel board was charred by this excessive heat producing
excessive smoke and soot and the partition of the adjoining feeder developed
a whole. The smoke/soot along with the ionised air travelled to the generator
compartment where also there was a short circuiting and the generator
power also tripped. As a result the entire electric supply to the plant
stopped and due to the stoppage of electric supply, the supply of water/
steam to the waste heat boiler by the flue gases at high temperature
continued to be fed into the boiler, which resulted in damage due to fire.
It was held that the fire was the efficient and active cause of the damage.
Had the fire not occurred, the damage would not have occurred. There was
no intervening agency which was independent source of damage. It was
further held that duration of the fire is not relevant. As long as there is
a fire which caused the damage the claim is maintainable even if the fire
is for a fraction of a second.
Q5. "Contracts of Insurance are uberrimae fides" Elucidate with the help of judicial decisions and
statutory provisions on the subject. [LL.B., DiU.J
Q6. "Insurance is a contract based on utmost good faith and if it is not observed, the other party
may avoid the contract." Explain with the help of decided cases the scope of this duty.
[LL.B., D.U.)
Q7. What d'o you understand by the statement that the contracts of insurance are "contacts of
uberrimae fides"? Describe the extent of the assured's duty of disclose. What is the object and
scope of S. 45 of the Insurance Act, 1938? [LL.B., D.L?}
Law of Insurance 10.19
question is whether any particular circumstance was in fact material, and
not whether the party believed it to be so. This is the position of law of
insurance for centuries in England.
The duty to disclose all material facts to the insurer arises from the fact
that many of the relevant circumstances are within the exclusive knowledge
of one party, and it would be impossible for the insurer to obtain the facts
necessary for him to make a proper calculation of the risk he is asked to
assume without this knowledge. Accordingly law of insurance'requires the
prospective insured not merely to refrain from actively misleading the
insurer but he must also disclose all material circumstances.
In the leading case, Caster v. Boehm, (1766) 3 Burr 1905, (this case
concerned a policy which had been taken out against the taking of a fort
by a foreign enemy) Lord Mansfield said:
"Insurance is a contract upon speculation. The special facts, upon
which the contingent chance is to be computated, lied most commonly in
the knowledge of the insured only; the underwriter trust to his
representation, and proceeds upon the confidence that he does not keep
back any circumstance in his knowledge, to mislead the underwriter into
a belief that the circumstance does not exist, and to induce him to estimate
the.risk as if it did not exist. The keeping back such circumstances is a fraud
and, therefore, the policy is void. Although the suppression should happen
through mistake without any fraudulent intention yet still the underwriter
is deceived and the policy is void; because the risk run is really different
from the risk understood and intended to be run at the time of the
agreement.... Good faith forbids either party, by concealing what he privately
knows, to draw the other into a bargain from his ignorance of the fact and
his believing the conirary."
In London Assurance v. Mansel, (1879} 11 Ch.D 363, (this case concerned
life insurance policy) Jessel, MR. observed "... whether it is life or fire or
marine assurance I take it good faith is required in all cases and though
there may be certain circumstances from the peculiar nature of marine
insurance which require to be disclosed and which do not apply to other
contracts of insurance, that is rather, in my opinion, an illustration of the
application of the principle, than a distinction in principle."
In India the duty to disclose in the case of marine insurance is prescribed
by S. 19 and S. 20 of the Marine Insurance Act, 1963. S. 19 states that a
contract of insurance is a "contract based upon the utmost good faith, and
if the utmost good faith be not observed by either party, the contract may
be avoided by the opposite party." S. 20 lays down as follows:—
10.20 General Principles of Insurance
"S. 20. (1) Subject to the provisions of this section, the assured must
disclose to the insurer before the contract is concluded, every material
circumstance which is known to the assured and the assured is deemed
to know every circumstance which in the ordinary course of business,
ought 'to be known to him. If the assured fails to make such disclosure,
the insurer may avoid the contract
(2) Every circumstance is material which would influence the judgment
of prudent insurer in fixing the premium or determining whether he will
take the risk." ’
The provisions of Marine Insurance Act in India are in pan materia with
the English Act in this respect. In Krishnawati Puri v. L.I.C., AIR 1975
Delhi 16, it was observed that the "test of what is material fact and the
degree of good faith which is required is otherwise the same in all classes
of insurance." The Act uses the words "prudent insurer" which means that
in a dispute the court must apply the objective standard of business usage
and disregard the exacting standard of a particular insurer. "Circumstances
that need not be disclosed include those diminishing the risk and matters
of common knowledge generally or in the insurer's business. The prospective
assured must disclose material circumstances, that he knows or ought to.
know."
The following facts have been held to be material:
(1) Facts which suggest that the subject matter of insurance is exposed
to more than ordinary danger from the peril insured against. For
example in case of highly inflammable goods the risk of loss by
fire is more as compared to other goods.
(2) Facts which suggest that the purpose of the assured in taking out
an insurance policy is not based on good faith.
(3) All facts relating to the previous history of the assured which are
relevant for the contract of insurance. For example the question
whether the insurance proposal has been rejected by any other
company is material. Similarly the question whether the proposer
has ever been a claimant under the insurance policy is material,
Kasim Ali Bulbul v. The India Insurance Co.
(4) All facts are material which the assured knows that they are
regarded by the insurer as material.
(5) Facts relating to serious ailment, health and habits of the assured
are material.
The duty of disclosure continues down to the time when the contract
Law of Insurance ■ 10.21
between the date of the proposal and (that of final acceptance of the risk
by the insurance company that is, the date of the concluding of the contract),
that alteration must be disclosed [Looker v. Law Union and Rock insurance
Co. Ltd., (1928) 1 K.B., 554). In United India Insurance Co. Ltd. v. M.K.J
Corporation, (1996) 6 SCC 428, it was held that good faith is a continuing
obligation. Even after entering into the contract, no material alteration can
be made by insurer in the terms of the contract without consent of the
insured. Just as the insured has a duty to disclose, similarly it is the duty of the
insurers and their agents to disclose all material facts ivithin their knoivledge since
obligation of good faith applies equally with the assured.
If a person fills in a proposal form for a prospective insured he acts
as the agent of the insured and not as the agent of -the insurer even if the
form is filled in by an insurance agent. Thus, in Bigger v. Rook Life
Assurance Co., (1902) 1 K.B. 516, the agent filled in wrong answer, and the
applicant signed without reading the proposal or checking the particulars
given. Held, the applicant was guilty of non-disclosure, and the policy was
void. Similarly, in Newsholme Brother v. Road Transport and General
Insurance Co., (1929) 2 K.B. 365,, agent was told the true facts, but for some
unexplained reasons fill in wrong answers, and the applicant signed without
checking what the agent had written. It was held that the insurers were
not liable.
In Dewsons Ltd. v. Bonnin, (1922) 2 AC 413, it was held that where
the terms of a policy of insurance the proposal form is made the basis of
the contract of insurance, the insurer will not be liable if any of the statements
contained in the proposal form are untrue, whether they are on material
points or not. In this case a statement as to the place of garaging the lorry
was untrue, the claim of the insured under the policy failed although the
statement in question was not material. Thus, by inserting this warranty
of truth or "basis clause" in policies insurer can save himself from the
trouble of proving that untrue statement by the assured in the proposal
form were material, in other words, that, but for untruth they would not
have accepted the risk for the premium agreed. The courts in England tend
to construe the "basis of the contract" clauses strictly against due insurance
companies. The questions of legislating against such clauses have been
considered by the Law Reform Committee (1957-5th Report) but. no definite
recommendation was made.
In Mutual Life Insurance Company of New York v. Ontario Metal
Products Co. Lid., (1925) AC 344, no "basis clause" was contained in the
policy and the non-disclosure or misstatement was not material to the
10.22 General Principles of Insurance
assured was asked for the name of any physician who had treated him
during the last five years before he took out the insurance. To this be
replied that he had received no treatment during the period in question,
and this was obviously untrue. The result of medical examination for the
insurance had revealed excellent health and therefore, had the facts
concealed been disclosed, it would not have influenced a prudent insurer
so as to induce him to refuse the risk or to alter the premium.
Section 45 ofthe Insurance Act, 1938 enacts a special provision of law
in this connection. The section is as follows:—
"45. Policy not to be called in question on ground of misstatement
after two years.QSQ9Q9A—No policy of life insurance effected before the
commencement of this Act shall, after the expiry of two years from the
date of commencement of this Act and no policy of life insurance effected
after the coming into force of this Act shall, after the expiry of tiva years
from the date on which it was effected, be called in question by an
insurer on the ground that a statement made in the proposal for insurance
or in any report of a medical officer, or referee or friend of the insured,
or in any other document leading to the issue of the policy, was inaccurate
or false, unless the insurer shows that such statement was on a material
matter or suppressed facts which it was material to disclose and that it
was fraudulently made by the policy-holder and that the policy holder
Q8. A, aged 48, had her attack in 2002 for which he had open heart surgery' in Laxmi Hospital. In
2005, he insured his life with Life Insurance Corporation of India (LIC) for Rs. 5,00,000. In the
proposal form to the question "Have you suffered any heart ailment?" A gave a negative
answer. A doctor of LIC examined the health of A but he recommanded A's life to be insured.
After 4 years of insurance of insurance policy, A died by another heart attack. Can Life
Insurance Corporation of India refuse to pay the sum insured to the nominee of the policy?Can
claimant plead estoppels and bar of Section 45 of the Insurance Act, 1938? Decide. [LL.B.,
D.U.]
Q9. The assured Kundon, had insured his life under a policy issued by the LIC of India on 1st
November, 2009 for a sum of Rs 65,000 In an answer to the question in the proposal from he
had stated as follows:
"Have you suffered from mental derangement within past three years? Answer: 'No', whereas
in fact he had, though not aware of the fact, been in confinement for mental derangement a
years ago."
Kundan died on 1st March, 2012. Sudha, wife of Kundon, claim the amount under the policy
as the person entitled to it. The LIC of India resists the claim on the ground that the assured,
Kundan, concealed the material fact regarding the mental derangement at the time of the
proposal. How will you decide. Discuss with referance to the statutory provisions and the case
law on the subject. [LL.B., E>UJ
Q9A. X insured his life with Birla Sun Life Insurance Company Ltd. At the time of the proposal-, he
replied to a number of questions, contained in the proposal form, including as to whether he
Was a graduate or not. He replied in affirmative. But in fact, he could not pass his graduation
degree examination. After 3 vears of this nolicv. he met with an accident and died Can X
Law of Insurance 10.23
knew at the time of making it that the statement was false or that it
suppressed facts which it was material to disclose:
"Provided that nothing in this Section shall prevent the insurer from
calling for proof of age at any time if he is entitled to do so, and no policy
shall be deemed to be called in question merely because the terms of
the policy are adjusted on subsequent proof that the age of the life
insured was incorrectly stated in the proposal."
It would be noticed that the operating part of S. 45 states in effect that
no-policy of life insurance effected after the coming into force of the Act shall, after
the expiry of two years from the date on zvhich it zvas effected, be called in question
by an insurer on the ground that a statement made in the proposal for insurance
or in any report of a medical officer, or referee, or friend of the insured, or in any
other document leading to the issue of the policy, was inaccurate or false. The
second part of the section is in the nature of a proviso zvhich creates an exception;
it lays dozvn that if the insurer shozvs that such statement zvas on a material matter
or suppressed facts which it zvas material to disclose and that it was fraudulently
made by the policy-holder and that the policy-holder knew at the time of making
it that the statement was false or that it suppressed facts which it was material
to disclose, then the insurer can call in question the policy effected as a result of
such inaccurate or false statement.
Tire three conditions for the application of the second part of S. 45 as
pointed out by DAS S.K., J. in Mithoo Lai Nayak v. LIC, (1962) 32 (S.C.)
Comp. Cas. 177, AIR 1962 S.C. 814, are—
(a) the statement must be on a material matter or must suppress facts
which it was material to disclose;
(b). the suppression must be fraudulently made by the policy-holder;
and
(c) the policy-holder must have known at the time of making the
statement that it was false or that it suppressed facts which it was
material to disclose.
The test of materiality is, therefore, super-imposed by the statute on
the terms and conditions of the proposal. The contractual freedom of the
insurers has been severely restricted by Indian legislature. The insured has
thus been sufficiently protected and the resulting contract cannot be
rescinded merely upon proof that the information is inaccurate unless all
the three conditions of S. 45 are satisfied. In this sense Indian law is a
distinct advance upon the English law.
10.24 General Principles of Insurance
"Fraud" means and includes any of the following acts committed by
a party to a contract, or with his connivance or by his agent, with intent
to deceive another party thereto or his agent; or to induce him to enter into
the contract:—
1. the suggestion, as a fact, of that which is not true by one who does
not believe it to be true;
2. the active concealment of a fact by one having knowledge or belief
of the fact;
3. a promise made without any intention of performing it;
4. any other act fitted to deceive.
5. any such act or omission as the law specially declares to be
fraudulent
In Mithoo Lal Nayak v. LIC, AIR 1962 SC 814, it was observed that
consideration of material facts when making a proposal for insurance by
one having knowledge and belief of fact would fall under S. 17 of the
Contract Act and the policy issued would be vitiated thereby.
Coming back to S. 45 of the Insurance Act, 1938 it has been held in
Vaid Mahesh Chandra v. LIC, (1968) 38 Comp. Cas. 767, that the section
does not apply merely because the assured died within two years of the
date of the policy. Again in New India Assurance Co. v. Sulochana
Chaudhrani, (1962) 32 Com. Cas. 1029 Assam, it was held that S. 45 applies
also to cases where the assured dies within two years of the date of the
policy, if the insurer seeks to avoid the policy only after the expiry of two
years from the date of the policy.
The policy does not become effective from the date the formal document
is executed or issued. The phraseology used in S. 45 relates to a date from
which the policy of insurance becomes effective and such date would be
the date of acceptance of the proposal from which the risk on the life of
the proposer is covered, Sheoshanker v LIC, (1973) 43 Comp. Cas. 284
(Bom.).
In All India General Insurance Co. Ltd. v. S.P. Maheshwari, AIR 1960
Mad. 848, it was held that the insurance company is entitled to avoid the
policy on the grounds of deliberate misrepresentation about drinking habit
and non-disclosure of venereal disease. Again in New India Assurance Co.
v. Sulochana Chaudhrani, (1962) 32 Comp Cas. 1029 (Assam), it was held
that if the assured is accustomed to heavy drinking it is a material fact.
But a statement concerning the literacy of the insured or observance of
__ i. *—:~i t.. f-xanA\ aa
Law of Insurance 10.25
In Mithoo Lal Nayak v. LIC, AIR 1962 SC 814, the assured, fraudulently
made a false statement relating to his health. It was held that the mere fact
that the insurance company had the assured examined by its own doctor
will not relieve him from the legal consequences of the false statement.
In Krishnawatt v. LIC of India, AIR 1975 Delhi 19, it was held that
the Corporation was entitled to avoid the policy on the grounds available
to the insurers under S. 45 of the Insurance Act, 1938, as the assured not
only failed to disclose what it was material for him to disclose, but he made
a false statement to the effect that he had never suffered from any disease
of the heart.
The Supreme Court in its decision in LIC v. Asha Goel (2001) 2 SCC
160: AIR 2001 SC 549, analysed S. 45 in terms of its operative points a
follows:
"On a fair reading of Section 45 of the Insurance Act it is clear that
it is restrictive in nature. It lays down three conditions for applicability of
the second part of the section namely: (a) the statement must be on a
material matter or must suppress facts which it was material to disclose;
(b) the suppression must be fraudulently made by the policy-holder; and
(c) the policy-holder must have known at the time of making the statement
that it was false or that it suppressed facts which it was material to disclose.
Mere inaccuracy or falsity in respect of some recitals or items in the proposal
is not sufficient. The burden of proof is on the insurer to establish these
circumstances and unless the insurer is able to do so there is no question
of the policy being avoided on ground of misstatement of facts. The contracts
of insurance including the contract of life assurance are contracts uberrima
fides and every material fact must be disclosed, otherwise, there is a good
ground for rescission of the contract. The duty to disclose material facts
continues right up to the conclusion of the contract and also implies any
material alteration in the character of the risk which may take place between
the proposal and its acceptance. If there are any mis-statements or there
is suppression of material facts^ the policy can be called into question. For
determination of the question whether there has been suppression of any
material facts, it may be necessary to also examine whether the suppression
relates to a fact which is in the exclusive knowledge of the person intending
to take the policy and it could not be ascertained by ah enquiry by a
prudent person."
In PC. Chacko v. L.I.C. of India, (2008) 1 SCC 321 : AIR 2008 SC 424,
it was held that misstatement by itself was not material for repudiation
of the policy unless the same is material in nature. But a deliberate wrong
answer which has a great bearing on the contract of insurance, if discovered
10.26 General Principles of Insurance
may lead to the policy being vitiated in law. The purpose of taking a policy
of insurance is not very material. It may serve the purpose of social security
but then the same should not be obtained with a fraudulent act by the
insured.
In Dipashri, Widow of Vilas Anandrao Talpade v. Life Insurance
Corporation of India, 1984 (2) Bom CR 155 : AIR 1985 Bom. 192, PENDSE,
J. said:
"In the first instance, there was no suppression whatsoever by the
deceased. It was not necessary for the deceased to disclose trivial ailments,
like fever, flue or dysentary. There is nothing to warrant the conclusion
that the deceased had consulted Medical Practitioner within five years
prior to the taking out of the policy. The concept of consultation with
Medical Practitioner is entirely different from securing medical certificate
on the ground that the person is down with fever. The perusal of the
proposal form leaves no manner of doubt that it is not each and every petty
ailment which has to be disclosed by the proposer and what it required
to be disclosed is a serious ailment. The deceased was not suffering from
any serious ailment and was a young man of 41 years age at the time of
taking out the policy. The Medical Practioner on the panel of the Corporation
had examined him and in these circumstances, it is futile for the Corporation
to claim that the deceased was suffering from any serious ailment. In my
judgement, the non-disclosure of the fact that the deceased was sufferingfrom fever
or down with flue on some occasions is not a material matter and, therefore, the
failure to disclose the same cannot be construed as suppression of the relevant fact.
As laid down by the Supreme Court, it is not suppression of the fact which is
sufficient to attract second part ofS. 45 of the Insurance Act but what is required
is that such suppression should be fraudulently made by the policy holder. The
expression "fraudulently" connotes deliberate and intentional falsehood or
suppression and some strong material is required before concluding that
the policy holder had played fraud on the Corporation."
In Life Insurance Corporation of India v. Smt. G. M. Channabasama, (1991)
1 SCC 357, it was held that the burden of proving that the insured had
made false representation and suppressed material facts is undoubtedly
on the insurer. If the insurer fails to discharge this burden the life insurance
policy cannot be called in question by the insurer.
In Life Insttrance Corporation of India v. Ajit Gangadhar Shanbhag,
AIR 1997 Kant 157, the Karnataka High Court held that when there is no
violation of any statutory duty on the part of the Corporation and in view
of the fact that the matter arises out of a contract between the insurer and
' Law of Insurance 10.27
| insured and there being several disputed questions of fact, a writ cannot
. be issued.
j In Life Insurance Corporation of India v. Asha Goel, AIR 2001 SC 549,
it was held that the insured remains duty-bound to disclose any material
alteration in the character of the risk, which might occur in the period
between the proposal and its acceptance. Titus, the duty to disclose facts
continues right upto the conclusion of the contract. It was further held that
ordinarily the High Court should not entertain a writ petition filed under
Article 226 of the Constitution for a mere enforcement of a claim under
contract of insurance. The pros and cons of the matter in the context of the
facts and situation of the case should be carefully weighted and appropriate
decision should be taken. Ir> -;c;p where claim by an insured or a nominee
*
is repudiated by the ins ing a serious dispute and the Court finds
the dispute to be a b- one which requires oral and documentary
evidence for its determi .■n then the appropriate remedy is a civil suit
and not a writ pc der Article 226 of the Constitution. Similarly,
where a plea of fr. aded by the insurer and on examination is found
prima facie have ind oral and documentary evidence may become
necessary for determination of the issue raised, then writ petition is not
an appropriate remedy.
Q10. A lady X, aged 68, very nerous about the safety of her costly Jewellary insured it for Rs. 90,000
against theft and fire with AB Insurance Company. One day, while goint out, X kept the
jewellary in the grate under coal which was ready for lighting up. On return, unmind he about
the jewellary, she lit the grate which resulted in total distinction of the insured jewellary. X's
claim under the policy has been subjected by the AB Insurance company on the ground that
the insurance policy destruction of tire jewellaryby fine ary at a place where no fine eight to be
and, maeover, jewellary was destroyed due to the grass neghigence of policy holder X.
Disscuss the principles of interpretation which should be applied in deciding the claim of X and
decide whether X's claim has been nightly rejected by the company.
10.30 General Principles of Insurance
was whether there was a loss by fire within the meaning of the
policy; where the damage was done to the insured property in
place where the fire was intended to be. It was held that the risk
against which the plaintiff is insured include the risk of insured
property coming unintentionally in contact with fire and being
thereby destroyed or damaged, and it matters not whether fire
comes to the property or insured property comes to the fire. The
words of the policy are as descriptive of one as the other and the
honourable judge said, "I cannot read into the contract a limitation
which is not there. To enable me to accept the contention of the
underwriters, I should have to read something into the contract
some words as "unless the insured property comes into contact
with fire in a place where fire is intended to be."
3. Ambiguity in the language of the policy (contra proferentum)—As
a policy is prepared by the underwriters any ambiguity therein
must be. taken most strongly against the underwriters by whom
it has been prepared. If a policy is reasonably susceptible of two
constructions, that one will be adopted which is more favourable
to the insured. (Anderson v. Fitzerald, (1853) 4 HLC 484; Co
operative Assurance Co. v. Sachdeva, AIR 1936 Lah. 685; Baxendale
v. Harvey (1859) 28 L.J. Exch. 236; Harris v. Poland (1941) 69 LL
Kep. 35 KB). The warranties particularly are to be read liberally
in favour of the assured and against the insurance company. In the
Central Bank of India v. The Hardford Fire Insurance Ca. Ltd., AIR
1965 SC 1228, it was held that contra preferentum rule had no
application in that case as there was no ambiguity. In Joel v. Law
Union & Crown Insurance Company (1908) 2 K.B. 863, it was held
that rule of contra proferentum is applicable equally whether the
contracts of fire, marine or life insurance.
In United India Insurance Co. Ltd. v. Pushpalaya Printers, (2004) 3
SCC 694: AIR 2004 SC 1700, it was held by the Supreme Court that
it is a settled law that if there is any ambiguity or a term is capable
of two possible interpretations, one beneficial to the insured should
be accepted consistent with the purpose for which the policy is
taken, namely to cover the risk on the happening of a certain event.
In this case the word "impact" in the instant policy was construed
against the appellant. ~
4. Efusdem generis rule—It is well known rule of construction that
where a particular (not heterogenous collection of items)
enumeration is followed by such words as "and others" or "etc."
Law of Insurance 10.31
then such expressions are usually limited to matters eiusdem generis
with those specifically enumerated.
5. Incorporation of proposal form and statements in policy—Where
the proposal form or answers in the declaration form are declared
on the basis of the contract, they will form part of the contract.
However, in case of inconsistency between the proposal form and
the policy, the policy would prevail.
LEADING CASES
Nezo India Insurance Company Ltd. v. Mis Zuari Industries Ltd.
(2009) 8 SCC 70
Note—This case deals with the principle ofproximate cause and interpretation
of fire policy.
Facts
The complainant (respondent in this case) had taken two insurance
policies— one policy was a fire policy and the other was a consequential
loss due to fire policy. On January 8, 1999 at about 3.20 p.m. there was a
short circuiting in the main switch board installed in the sub-station receiving
electricity from the State Electricity Board, which resulted in a flashover
producing over currents. The flashover and over currents generated
excessive heat producing smoke and soot and the partition of the adjoining
feeder developed a whole. The smoke/soot along with the ionized air
travelled to the generator compartment where also there was short circuiting
and the generator power also tripped. As a result, the entire electric supply
to the plant stopped and due to the stoppage of electric supply, the supply
of water/steam to the ’waste heat boiler by the flue gases at high temperature
continued to be fed into the boiler, which resulted in damage to the boiler.
The complainant approached the Insurance Company informing it
about the accident and making its claim. The Insurance Company contended
that the loss to the boiler and other equipments was not caused by fire,
but by stoppage of electric supply due to short circuiting in the switch
board.
Issue
Whether the flashover and fire was the proximate cause of the damage
in question?
Facts
The plaintiffs premises were insured against loss or damage by (inter
alia) burglary, house breaking or theft. The policy contained the following
clause: "warranted that the said premises are always occupied". The plaintiff
and his wife and no other person resided at that place which was used as
a shop also. On Sunday June 21, 1919 during the currency of the policy
the plaintiff and his wife left the premises unattended between 2.30 p.m.
and 11.30 p.m. except for a short interval between 6 p.m. and 7 p.m. when
the plaintiff was on the premises. On the return of the plaintiff and his wife,
it was found that during their absence the premises had been broken into
and some of the contents of the value of £ 400 had been stolen. The
defendant insurer, refused their liability.
Decision
It was held that the words "premises are always occupied" does not
mean that premises are never to be left unattended. It means that premises
are to be used continuously and without interruption, for occupation that
is to say as a residence and not merely as a lock up ship which is left
unoccupied after business hours.
It was observed that it is a ivell known principle of insurance law that if the
language of a warranty in a policy is ambiguous it must be construed against the
Q11. Reena has an insurance policy against theft and house breaking, with a condition that her
house shall always remain occupied. The house was left unattended on one Sunday between
2 p.m. and 7 p.m., when she had gone to see her ailing mother. On her return she found the locks
of her safe broken and her jewellery worth Rs. 20,000 missing. Reena claims the loss under the
policy from the insurer. Decide, stating the principles of interpretation of insurance policy with
reference to decided cases, if any. [LL.B., D.U.]
Law of Insurance 10.33
underwriter who has drawn the policy and inserted the warranty for his own
protection.
The Court said: "if the premises are used for residential as well as for
business purposes, it is obvious that a thief would never know at what
moment the occupation which the warranty requires and which has been
secured. The defendant has not stipulated for the continuous presence of some
one in the premises, which he could have done by providing that the premises were
never to be left unattended. There must therefore be judgment for the plaintiff."
Harris v. Po/andQ12'Q13,Q14,Q15
(1941) 1 K.B. 462
Note—The case deals with the proper construction of the words "loss by
fire".
Facts
The plaintiff took a "Lloyd's Householder's Comprehensive Policy" of
insurance with the defendant and other underwriters, insuring the contents
of her flat, including jewellery against loss or damage caused (inter alia)
by fire. For purposes of protection against theft, on leaving her flat one day,
she concealed the jewellery in the unlighted grate under coal and wood,
which were ready for lighting. On returning in the evening she inadvertently
lit the fire and the jewellery was partly destroyed and partly damaged. The
underwriters repudiated liability contended that the loss was not covered
since it did not fall within the terms of the policy which only applied to
"loss or damage caused by fire", because the damage had been done to
the insured property by fire in a place where it was intended i.e. in the
grate. On the other hand, it was contended on behalf of the insured (plaintiff) .
that the indemnity in the policy is against any "loss or damage by fire"
to the property. The fact that the plaintiff in ignorance caused the loss does
not affect it.
Q12. State the facts of Harris v. Polland (1941) All ER 204 and exaplain the rules applied for proper
construction of the phrase ' loss by fire' in a Fire Insurance Policy. [LL.B., D.U.]
QI3. State the main rules of construction of an insurance policy elaberating how the judiciary
applied there ruler in the case of Harris v. Poland (1941) All ER 204. [LL.B., D U.}
Q14. A took a "compehensive policy" of insurance with Company B, insuring the constent of her
flat, including jewellary, against loss by theft, On leaving her flat one day, she canceled the
jewellary in the grate under coal and wood, which was ready for lighting. On returning in the
evening, she inadvertently lit the fire, and the jewellary was damaged. Decide with the help
of case law. [LL.B., D.U.]
10.34 General Principles of Insurance
Issue
Whether there was a loss by fire within the meaning of the policy,
where the damage was done to the insured property in a place where the
fire was intended to be?
Decision
. /t was held that “it mattered not whether the property had gone to the fire
or the fire had gone to the property. There had been ignition of insured property
not intended to be ignited, and the loss falls within the plain words of the policy."
In the course of his judgment ATKINSON J. said: "I have no doubt that
the ordinary man when insures against loss by fire believes that he is
insuring against every kind of loss which he may suffer from the more or
less compulsory use of fire by himself or his neighbour."
His Lordship said in the text books there is no clear consensus as to
the meaning of the words "loss or damage caused by fire" which might
force him to hold that they have acquired a recognised meaning to which
one can give effect. There is difference of opinion or ambiguity in the text
books; and ambiguity is fatal to the underwriter's case as in case of ambiguity
the interpretation most favourable to the insured must be adopted. If there
is no ambiguity each term in the policy and each phrase in the policy prima
facie to be construed according to its ordinary meaning and not upon the
presumed intention of the parties. Guided by these principles His Lordship
said :—
"In my judgment the risks against which the plaintiff is insured included
the risk of insured property coming unintentionally in contact with fire and
being thereby destroyed or damaged, and it matters not whether that fire
comes to the insured property or the insured property comes to fire. The words
of the policy are just as descriptive of one as the other and I cannot read
into the contract a limitation which is not there. To enable me to accept
the contention of the underwriters, I should have to read something into
the contract some such w’ords as "unless the insured property is burnt by
coming in contract with fire in a place where fire is intended to be."
The test of liability according to Holt's Reports referred to in the case
is this: "Has something been consumed by fire which was not intended
to be consumed?" If the fire is cause of the damage, it maters not whether the
fire was properly or improperly lighted but the question is whether the fire
occasioned the damage.
ATKINSON J. based his views in substance on what Byles, J. said in
Evert v. The London Assurance, 19 C.B. (NS) 126. In this rasp it wac
Law of Insurance 10.35
construed as ordinary people would construe them. They mean loss or
damage either by ignition of the article consumed or by ignition of part of the
premises where the article is, in the one there is a loss in the other damage
caused by fire. ATKINSON J. said, "I think there is loss or damage caused by
fire zohen there has been ignition of insured property which was not intended to
be ignited, or when insured property has been damaged otherwise than by ignition
as a direct consequence of the ignition ofother property not intended to be ignited."
NOTES—A fire policy protects the assured against fire. There is no
fire unless there is ignition. Mere heating, however intense, is not fire.
"Loss or damage caused by fire" means loss or damage either by ignition
of the articles consumed, or by ignition of that part of the premises, where
the article is. In one case there is loss, in the other case there is a damage
caused by fire. The cause of the fire is immaterial, unless it was the deliberate
act of the assured. Fire may be caused by the negligence of the assured
himself or his servants. Fire does not include explosion. If, however, the
explosion is caused by fire or if explosion causes fire which causes the loss,
the loss is covered. Same is the case with , lightening and electricity.
"Any loss resulting from apparently necessary and bona fide efforts to
put out a fire, whether it be the spoiling goods by water or by throwing
articles of furniture out of the window, or even by destroying a neighbouring
house by explosion for the purpose of arresting fire; in fact every loss
directly, if not indirectly at least consequently resulting from fire is within
the policy," Stanley v. Western Instirance Co. (1868) 37 L.J. Ex. 73, at page
75 per Kelly, C.B.
In Austin v. Drewe. (1815) 4 Camp. 360, sugar was damaged not by
smoke but by the excessive heat but nothing took fire; it was held that
assured could not recover. It may be noted here that if the heat is caused
by actual ignition of the Premises where the sugar is kept the damage shall
be deemed as "damage by fire", although the sugar is not actually burnt.
The Central Bank of India Ltd. v. The Hartford Fire Insurance Co. Ltd.
AIR 1965 SC 1228
Note—A clause in a policy terminating the policy at any time by either party
is valid.
Facts
By a policy the respondent insurance company insured the appellant
as the mortgagee and a firm of the name of Bombay Import and Export
Agency as the owners against loss suffered by destruction of or damage
10.36 General Principles of Insurance
fire between March 20,1947 and March 20,1948. The insurance was subject
to various conditions and one of them (clause 10) was that "This insurance
may be terminated at any time at the request of the insured" and "this insurance
may also at any time be terminated at the option of the co." (insurer), no notice
to that effect being given to the insured", in which case the insurance
company shall be liable to repay on demand a rateable proportion of the
premium for the unexpired term of the policy. By mutual agreement the
policy was extended to cover riot risks occurring between July 18,1947 and
August 17, 1947.
From early 1947 the whole of the Punjab including the town of Amritsar
was disturbed by serious riots which preceded the partition of India. On
or about July 23,1947 some of the insured goods were looted; the information
of it was given to the insurance company and thereafter on August 7,1947,
the insurance company served a notice to the insured that goods lying in
the godown at Backarwana Bazar, Amritsar be removed to a safe locality
before the 10th August, 1947 otherwise the policy would stand terminated
at 4 p.m. on the 10th August, 1947. The insured did not remove the goods
to any other place by the stipulated time and were lost as the godown was
burnt down by rioters on August 15,1947. Insured claimed damage which
the insurance company refused. Hence the action. On behalf of the insured
it was contended (i) that policy could be terminated only for a reasonable
cause; (ii) that the clause 10 was unreasonable; (iii) that there being ambiguity
the clause be interpreted in favour of the insured; and (iv) that the Insurance
Co. could not avoid liability by termination.
Issue----------------------------------------------- ;—
Whether the policy had been terminated on August 10, 1947?
Castellain v. Preston
(1883) 11 QBD 380
Note—The case deals with the rule of indemnity and subrogation.
Facts
The defendants-assured owned certain premises in Liverpool, and in
March, 1878, they effected an insurance on buildings against loss by fire
with an insurance company- The policy was in the usual form giving the
insurers the option of reinstating the property. In July, 1878, the defendants
agreed to sell the premises for £ 3,100 and received some money as deposit.
The contract was to be completed on a day within two years to be named
by the defendants. In August, 1878 a fire occurred which damaged part
of the buildings, and a claim was agreed at £ 330. The insurers paid the
sum to the defendants (assured) in ignorance of the contract made for the
sale of the property. The contract for sale was eventually completed in
December, 1879, and the balance of the purchase money was then paid to
the defendant (assured) by the purchasers.
The insurance company claimed to be repaid by the defendants
(respondents-assured) the sum of £ 330 paid by them, on the ground that
a contract of fire insurance was a contract of indemnity and that in the
circumstances the defendants (assured) had not lost anything in fact, because
the contract of sale of property had been duly completed, and the defendants
had suffered no loss by -fire; and the insurance company also claimed to
be subrogated to the rights of the defendants, under that contract of sale,
to the extent of the sum off 330.
In the trial Court CHITTY, J., gave judgment for the defendants, and
the insurance company then appealed.
Decision of the Court of Appeal
The Court upheld the contentions of the insurance company and allowed
it to claim £ 330 on the ground of doctrine of indemnity and subrogation.
Speaking of indemnity BRETT, L.J., said:
"The very foundation, in mv opinion, of every rule which has been
applied to insurance law is this, namely, that the contract of insurance
contained in a marine or fire policy is a contract of indemnity, and of indemnity
only, and that contract means that the assured, in case of any loss against which
Law of Insurance 10.39
the policy has been made, shall be fully indemnified, but shall never be more than
fully indemnified."
Speaking of the doctrine of subrogation, he said:—
"That doctrine does not arise upon any terms of the contract of insurance;
it is only another proposition which has been adopted for purpose of
carrying out the fundamental rule which I have mentioned, and it is a
. doctrine in favour of the underwriters or insurers in order to prevent the
assured from recovering more than a full indemnity; it has been adopted
solely for that reason. Now it seems to me that in order to carry out the
fundamental rule of insurance law, this doctrine of subrogation must be
carried to the extent which I am now about to endeavour to express,
namely, that as between the underwriter and the assured, the underwriter
is entitled to the advantage of every right of the assured, whether such right
consists in contract, fulfilled or unfulfilled, or in remedy for tort capable
of being insisted or already insisted on, or any other right, whether by way
of condition or otherwise, legal or equitable, which can be or has been
exercised or has accrued, and whether such right could not be enforced
by the insurer in the name of the assured, by the exercise or acquiring of
which right or condition the loss against which the assured is insured, can
be, or has been diminished."
Notes—1. The indemnity and subrogation principles forbade the vendor
of insured premises in the above case to keep the insurance payment and
the full purchase price. But in this type of case the insurance company need
pay no indemnity for a loss it covered, and for which it received premiums
and the loss instead falls on the purchaser. Therefore, to protect himself
the purchaser of immovable property should insure it in his own name.
2. In Page v. Scottish Insurance Corporation, (1929), 98 L.J., K.B. 308,
it was decided that the right of subrogation only arises when the insurer
has actually paid the loss. In case of subrogation the underwriter cannot
sue in his own name. His rights are the rights of the assured. The underwriter
has no right to subrogation unless and until he fully indemnifies the
assured under the policy. The right arises on payment of the whole loss.
If the property is insured for less than its actual value, the insurer will not
enjoy this right on payment of the policy amount.
3. In Yorkshire Insurance Co. Ltd. v. Nisbett Shipping Co. Ltd., (1961)
2 All E.R. 487, it was held that subrogation does not mean that the insurer
can compel the assured to pay over more than he was paid under the
policy. Tire assured can keep windfalls. In this case a ship, insured for
72,000 was lost following a collision with » Canadian vpccoI ar>.rl fho
10.40 General Principles of Insurance
the Canadian owners the assured recovered the value of the ship in Canadian
currency—some 36,000 dollars. Meanwhile, however, the pound sterling
had been devalued, so that the dollars, when remitted to Britain, yielded
some 1,26,000. The assured repaid the insurers 72,000 received earlier
under the policy, but the insurers claimed that under the doctrine of
subrogation they were also entitled to the windfall of 54,000. The Court
rejected the contention of the insurer.
Facts
A cargo of oranges was insured, free from particular average, unless
the ship be stranded, sunk or burnt or unless damage be consequent on
collision with any other ship. The ship collided and put into port for
repairs, a portion of the oranges and lemons were taken on lighters and
then re-loaded. When the ship arrived at the port of discharge, a portion
of the fruit had gone bad. The evidence showed that the damage had been
partly caused by the delav and partly by the handling of the fruit which
necessarily took place in discharging and re-shipment of it for the purpose
of the repairs.
Decision
It was held that the proximate cause of the loss was not the collision or any
peril of the sea. It zvas the perishable character of the articles combined with the
handling in one case and the delay in the other, which caused the damage. Hence
the underwriters were held not liable. As per LORD EISHER, MP. the judgment
is as follows:—
"It is well settled that by the law of England there is a distinction in
this respect between cases of marine insurance and those of other liabilities
in cases upon the proximate cause of the loss. In the case of an action for
damage of which the breach is an efficient cause or cause causends; but in
cases of marine insurance only the proximate cause can be regarded. This question
can only arise where there is a succession of causes which must be existed in order
to produce the result. There that is the cause, according to the law of marine
insurance, the last cause only must be looked to and the others rejected, although
the result zvould not have been produced zvithout them. Here there is such a
succession of causes. First there was the collision. Without that no doubt
the loss would not have happened. But would such loss have resulted from
the collision alone? Is it the natural result of a collision that the ship should
Law of Insurance 10.41
be taken to a port for repairs, and that the cargo, being of a kind that must
be injured by handling, it should be injured in such removal? A collision
might happen without any of these consequences if it had not been for the repairs
and for the removal of the cargo for the purpose of such repairs and for the
consequent delay and handling of the fruits, the loss would not have happened.
The collision may be said to have been a cause, and an effective cause of
the ship's putting into a port and of repairs being necessary to remove the
fruit and such removal necessarily caused the damage to it. The agent,
however, which proximately caused the damage to the fruit, was the
handling though no doubt the cause of the handling was the repairs, and
the cause of the repairs was the collision. According to the English law of
marine insurance only the last cause can be regarded. There is nothing in
the policy to say that the underwriters will be liable for loss occasioned
by that. To connect the loss with any peril mentioned in the policy, the
plaintiffs must go back two steps and that according to English law, they
are not entitled to do."
Facts
In 1942, one Mahajan Deolal sent a proposal for the insurance of his
wife. He was examined by Dr. D. D. Desai who submitted two reports, one
with the proposal form and one confidential report. The confidential report
showed that Mahajan Deolal was anaemic, had a dilated heart and his right
lung showed indications of an old attack of pneamonia or pleurisy and that
he was a total physical wreck. Nothing came out of this proposal and it
lapsed.
In 1943, Mahajan Deolal consulted and was treated by one Dr. P.N.
Lakshmanan, Consulting Physician at Jabalpur, for anaemia oedema of the
feet, diarrhoea and fainting on exertion. In 1944, Mahajan Deolal made a
fresh proposal for insurance of his life. Against the question in the proposal
form whether he had consulted any medical man for any ailment within
the last five years, he gave the answer "No". He also did not disclose any
of his ailments. After medical examination by one Dr. Kapadia the proposal
was accepted and a policy for Rs. 25,000 issued on March 13,1945. The
policy lapsed for non-payment of premium but was received in July, 1946.
In Nov., 1946, Mahajan Deolal died. His assignee, the appellant, made a
demand for Rs. 26,000/- but the Company on Oct. 1, 1947, repudiated it
on the ground that the policy had been obtained bv deliberate misstatement
10.42 General Principles of Insurance
Decision
It was held that the insured, Mahaian Denial, was guilty of fraudulent
suppression of material facts relating to his health and the Company was
entitled to avoid the policy under S. 45 of the Insurance Act. 1938.
It was observed that in view of the language of the section two years
could not be counted from the date of the revival of the policy. Thus, S.
45 was applied to the case as two years had elapsed since the policy was
effected. The Court said that second part of S. 45 entitled the Company
to repudiate the contract even after the expiry of two years if three
conditions were fulfilled viz; (1) the statement was on a material matter
or there was a suppression of fact which was material to disclose (2) the
suppression was fraudulently made by the policy-holder; and (3) the
policy-holder must have known at the time of making of the statement
that it was false or that it suppressed facts which it was material to
disclose. When Mahajan Deolal was treated in 1943 by Dr. P.N. Lakshmanan
he was suffering from serious ailments. He must have known that it is
material to disclose this but "made false statement that he had not been
treated by any doctor for any serious" ailment. There was deliberate suppression
of materialfactsfraudulently made by Mahajan Deoloal. Even though the Company
had got Mahajan Deolal examined by four doctors before issuing the policy, it ivas
not estopped from questioning the policy. It had no means of knowledge that
Mahajan Deolal had been treated by Dr. P.N. Lakshmanan for serious ailments.
It was further held that the appellant was not entitled even to a
refund of the money paid as premium as one of the terms of the policy
was that all monies paid belonged to Company if the policy was vitiated
by fraudulent suppression of material facts. To such a contract neither
S. 65 nor S. 64 of the Indian Contract Act had any application.
It was also held that the assignee had no insurable interest in the life
of the assured and cannot sue on the policy. As the title of the assured was
defective, he cannot transfer a better title to the assignee.
Law of Insurance 10.43
Sint. Krishnazoati Puri v. L.I.C. of India
AIR 1975 Delhi 19
Note—The case deals with the non-disclosure of material matter
Facts
Dharam Pal Puri insured his life with the Life Insurance Corporation
and took out four policies between 12-10-1959 to 15-6-1964 amounting in
aggregate to Rs. 85,000. He died on 5-8-1964. His widow, the plaintiff
appellant, instituted the suit against the Corporation on the ground that
she was the assignee. The Corporation resisted the suit mainly on the
ground that Dharam Pal Puri was suffering from heart disease, that he
knew about his ailment, that he had consulted doctors about his disease
but fraudulently suppressed these facts. In the proposal form and the
personal statements he made declarations knowing them to be false because
he never disclosed to the Corporation that he was suffering from heart
disease. On evidence it was found that Dharam Pal Puri had suffered from
heart diseases, consulted doctors but did not disclose this in the proposal
form or his personal statement although three doctors who examined
Dharam Pal Puri deposed that in their opinion the deceased was fit to be
insured at the time of their examination.
Decision
It was held that non-disclosure of heart disease was a material matter
and that the insured, Dharm Pal Puri, had fraudulently suppressed the fact
which was material to be disclosed and he knew the statements to be false
when he made them.
It was further held that the fact that the insured was examined by three
doctors of the Corporation and that they deposed that in their opinion the
person was fit to be insured at the time of their examination did not
advance the claim of the plaintiff-claimant. The Corporation did not know
that there was a fraudulent suppression of facts and that the material
statements made by the insured in the proposal were the basis on which
the policy was issued.
Thus, it was held that the Corporation was entitled to avoid the claim
on the policy under S. 45 of the Insurance Act, 1938.
10.44 General Principles of Insurance
Manohar Lal v. L.I.C. of India
AIR 1981 Delhi 171
Note—The case deals with the meaning of material matter.
Facts
The plaintiff Manohar Lal took a joint life policy on his life and the
life of his wife, Sita Rani, from Sun Light of India Insurance Co. Ltd. on
May 23, 1956 for a period of 25 years in the amount of Rs. 25,0007. He paid
the annual premium of the Rs. 906/-. The term of the policy was that in
the event of death of either of them before the date of maturity the sum
assured was payable to the survivor. Sita Rani died on June 22, 1957. The
plaintiff made a claim on the defendant, Life Insurance Corporation of
India, which took over the assets of the Sun Light Insurance by virtue of
Act 31 of 1956. The Corporation repudiated the claim on the ground that
the plaintiff was guilty of fraudulent misrepresentation. In the proposal
form which the plaintiff filled up, the question put to him was to state his
'(c)(i) Profession, (ii) Exact nature of duties." The answer of the plaintiff
was "Tutor and photographer." The plaintiff was in fact working as a
"labourer" in Birla Cotton Mills, at a monthly salary of Rs. 120/-.
Decision
It zvas held that the wrong description of occupation in the proposal for
insurance zvould not avoid the policy. The plaintiff would have been insured
at the same rate of premium had he described himself as a factory hand
or a mill worker. The same premium would have been payable in that case.
There is no fraud upon the Corporation nor had they sustained any injury
by plaintiffs description of himself as a photographer and tutor.
The Court said if the financial status of the proponent is a material fact
in the eyes of the insurers they should ask the question in plain terms.
"Under the general law of insurance an insurer can avoid a policy if he
proves that there has been misrepresentation or concealment of material
fact by the assured. What is material is that zvhich would influence the mind
of a prudent insurer in deciding zvhether or not to take the risk. What was not
asked from the proponent at the time he made the proposal and the
personal statement obviously could not form the basis of the contract."
There was no statement on the subject of income in the proposal or any
other document leading to the issue of the policy. "The burden under S. 45
zvas on the insurer to show that the suppression of the fact zvas a circumstance
zohich it zvas material to disclose and its suppression was fraudulent and that the
policy-holder lenezv at the time of making it that his statement about occupation
zvas false, that it suppressed facts zohich it zvas material to disclose. Nothing short
Law of Insurance 10.45
of the deliberate fraud has to be proved by the insurer if the policy is called in
question after three years. " The Corporation had utterly failed to discharge
the onus.
Thus, the court held that the plaintiff was entitled to the decree for
Rs. 25,000 with interest.
Facts
The husband of the plaintiff insured his life with the defendant/
respondent with effect from 18-3-1970 which was to mature on 1-3-1976
for Rs. 25,000. The insured died on 8-8-1971 on account of congestive
cardiac failure. The insured had declared his age 48 years in the proposal
as well as in his personal statement and had submitted the horoscope in
proof of his age on the basis of which the respondent had admitted the
said age. On the death of the insured, his widow, the appellant, made a
claim for Rs. 25,000, as nominee of the insured. The respondent repudiated
the claim of the insured. The respondent repudiated the claim of the
plaintiff-appellant on the ground that at time of insurance the insured was
of non-insurable age of 60 but he had induced the respondent to insure
him giving a false statement about him. The insurer sought to prove the
age on basis of (i) Partnership Deed between him and other persons filed
with the Registrar of firms, (ii) application with Income-tax Department
filed for registration of firm, and (iii) entries in voters list.
Decision
The Court held that when the documents showed that the insured was
more than 60 years of age at the time of taking the policy, the lower age
as shown in the proposal and admitted by the insurer could not be taken
to be correct age.
The Court said that S. 45 of the Insurance Act, 1938 enables the insurer
to readjust the premium payable by the insured when the age stated is
found to be incorrect on calling for the proof of age after issuance of the
insurance policy on the basis of age that was mentioned in the proposal.
The proviso does not take away the right of the insurer under the body
of the section to avoid the policy on the ground of fraud.
The insured on the date of the proposal very well knew that he was aged over
and nhovp 60 years. knozvrn? this fact, he deliberately made a false statement about
10.46 General Principles of Insurance
his age that he was only 48 years of age. By making this statement he led the
respondent to insure his life and thus practiced a fraud. In this viezv of the matter,
the court held that the policy cannot be enforced.
Thus, the respondent was held to be right in avoiding the policy and
refusing the payment of the claim.
Issue
Whether the letter of cover can be admitted in evidence?
Facts
In the year 1877 James Howard, through an agent of the insurance
company (Refugee Friendly Society), effected a policy of insurance on the
life of his father for a particular sum upon a weekly premium of a certain
amount. Shortly after he had made the contract with the agent a policy of
insurance was sent to him. The policy contained a provision that the
amount of the insurance should be paid to the nominee of the assured. In
1881 another policy was effected through another agent for a particular
sum. Both the policies were made out in the name of the father John
Howard but signed by James Howard. In 1885 John Howard, the father,
discovered that his life had been so insured, objected to its being done, and
gave notice to the insurance company that he was no party to the contract.
Both classes of premium had been regularly paid by James Howard down
10.48 General Principles of Insurance
to the time when John Howard objected to the insurance on his life, the
joint total amounted to £231.
Decision
It was held that the policy was a policy by James Howard effected on the life
of his father, and the contract was prohibited by reason of the want of interest
on the part of James in the life of his father. He had gone on paying on the
footing of these policies from 1877 as regards one, down to 1885, and from
the year 1881 as regards another, down to the year 1885.
It ivas held that the policies were wagering policies. In case of a wager is
a man deposits a stake in hands of a stakeholder, is entitled to recover the
stake at any time before it is paid over to the third party. But in this case
the insurance company was not a stake-holder but it was the other
contracting party.
Main issues
1. Was the plaintiffs right to claim extinguished by lapse of time?
2. Was the plaintiffs suit not within time?
3. Was the plaintiff guilty of suppression of material facts and false
representation at the time of obtaining the policy from defendant
and as such was the policy of insurance void and unenforceable
and not binding on the defendant?
Decision
The High Court held that it was physically impossible for the plaintiff
till the 5th May, 1961 to give a complete and detailed list of the loss
sustained by him as his books were with the police till that date. Therefore,
to that date plaintiff had an explanation or a jurisdiction in not supplying
the detailed list to the company within 15 days of the damage.
The suit was instituted on 1st Feb., 1962 which was clearly about a year
after the rejection of the claim by the defendant. Therefore, in terms of
condition 13 of the policy the right of the plaintiff to recover the suit
amount was extinguished. The Court held that the condition of instituting
legal proceeding within three months of the rejection of the claim of the
insured by the insurance company is not against S. 23 and S. 28 of the
Indian Contract Act, 1872. Section 28 reads as under:
"Every agreement by which any party thereto is restricted absolutely
from enforcing his rights under or in respect of any contract, by the usual
legal proceedings in the ordinary tribunals, or which limits the time within
which he may thus enforce his rights, is void to that extent."
Section 23 lays down that the following agreements as unlawful:
"If they are forbidden by law; or are of a nature that if permitted they
would defeat the provisions of any law; or are fraudulent; or involve or
imply injury to the person or property of another; or if the court regards
them as immoral or opposed to public policy."
The Court discussed various cases on. this point and held that various
authorities have already settled this issue. In Porter's Law of Insurance (6th
Ed.) page 195 it is stated that insurance may lawfully limit the time within
which &n action may be brought to a period less than that allowed, by the
10.50 General Principles of Insurance
statute of limitation and that the true ground, on which the clause limiting
the time of claim rests and is maintainable is that, by the contract of the
parties the right to indemnify in case of loss and the liability of the company,
therefore, do not become absolute, unless the remedy is sought within the
time fixed by the condition in the policy.
In AIR 1962 J & K 15 it was held as follows.
"What Section 28 forbids is not extinguishment of the right or liabilities
of a party to a contract on the happening of a specified event but the
limiting of tKe time within which a party may enforce its rights. A party
will have no right to enforce, if the rights have already been extinguished
by the contract. In such a case there can be no question of the time for the
enforcement of the rights being limited."
In the present case even if the plaintiff was entitled to any relief he
had forfeited all rights under the policy when he failed to bring his suit
within three months of 25th Feb., 1961 when his claim was rejected by the
insurance company. Tlius, the suit was clearly time-barred. (The students
should note that after passing of the Indian Contract (Amendment) Act,
1997 every agreement which extinguishes the rights of any party thereto
or discharge any party thereto, from any liability, under or in respect of
any contract the expiry of a specified period so as to restrict any party from
enforcing his rights is void to that extent).
Question No. 8 of the policy were as under 8(a) Has the property been insured
in the past or at the present time ? 8(b) Have you sustained loss? Give full
particulars.
To both these queries the plaintiff had said 'No'. In fact that plaintiff had
insured the goods of his shop with another insurance company in the year 1957
and during thc;t year also his shop zvas gutted by fire. He made a claim for Rs.
25,000/'-from the insurance company, but his claim zvas settled at Rs. 14,807.
The Court held that although the plaintiff was an illiterate person^ who
did not know English the answers to various questions were recorded by
the inspector of the insurance company after making the plaintiff understand
all the questions. Thus, the Court held that the plaintiff had made a false
statement in reply to question No. 8. Therefore, the policy -was void. The Privy
Council held in AIR 1921 PC 195 that if untrue answers are given in a
proposal form the contract is void. The materiality or otherwise of the truth
told is not at all material. In AIR 1962 SC 814 it was held as follows :
"Where according to terms of life insurance policy, all moneys that had
been paid in consequence of policy would belong to the insurance company
if the policy was vitiated by reason of a fraudulent suppression of material
Law of Insurance 10.51
facts by the insured, and the contract is held on the ground of fraud, the
party who has been guilty of fraud or a person who claims under him
cannot ask for a refund of the money paid. It is a well established principle
that courts will not entertain an action for money had and received where
in order to succeed, the plaintiff has to prove his own fraud. Further, in
case where there is a stipulation that by reason of breach of warranty by
one of the parties to the contract the other party shall be discharged from
the performance of his part of the contract, neither S. 65 nor S. 64 of the
Contract Act, 1872 has any application."
In view of the above authorities the Court held that the plaintiff was
not entitled to claim any compensation for fire having been caught by the
goods in his shop. In the present case question No. 8 was very material and
withholding of the information from the insurance company zoould automatically
absolve the insurance company from any liability under the contract.
Therefore, the plaintiff suit was dismissed.
Facts
Four policies were respectively taken out for Rs. 20,000 on July 30,1959,
for Rs. 20,000 on July 16, 1960, for Rs. 10,000 on July 16, 1960 and for Rs.
25,000 on August 23, 1961. The assured died on October 14, 1961 in a
hospital for turbercular patients. The last policy was thus of a date only
about two months before the death of the insured. It was contended on
behalf of the appellant that since the last policy was of a date only about .
two months before the death of the insured it cannot be believed that he
did not know about his illness. Even the earlier three policies had been
taken out only a short time earlier, and having regard io the nature of the
disease it must be assumed that the insured was fraudulently suppressing
the relevant fact. On the other hand on behalf of the respondent (wife of
the deceased) it was contended that although the assured died of tuberculosis
but neither he nor any member of the family had any knowledge of his
illness at the time of taking out the policies. He was keeping good health
and actively taking part in his business and discovery of the disease which
accounted for his early demise was made very late. The trial court accepted
the defence and dismissed the suit filed by the wife of the insured. On
appeal the High Court, on a consideration of the evidence led by the parties
and the arguments addressed on their behalf, held that thp dpfpndant had
10.52 General Principles of Insurance
failed to prove that the insured was suffering from diabetes or tuberculosis
at the time of filing of the proposals for the insurance policies or that he
had given any false answer in his statements or suppressed any material
fact which he was under a duty to disclose. The finding of the trial court
that the assured had committed fraud on the defendant Corporation in
taking out the policies was reversed.
Issue
Whether the assured had given any false answer in his statements or
suppressed any material fact which he was under a duty to disclose?
Issue
Whether a writ should be issued considering the nature of the claim?
Issue
Whether the LIC be directed to pay the sum, as directed by, the learned
Single Judge in favour of the claimant?
Facts
M/s Krishna Flour and Oil Mills ('Mill') is a partnership firm while
M/s Krishna Food and Baking Industry Pvt. Ltd. ('Company') is a company
registered under the Companies Act, 1956 as applicable to the State of
Jammu & Kashmir. Both the units were located in Nawab Bazar, Srinagar,
in the State of Jammu & Kashmir. Both were sister concerns. Rajendra
Kumar Sawhney was Chairman of the Company as also main partner of
the Mill. The Company was dealing in manufacturing bread, biscuits, cakes
and other bakery items. It is the case of the complainants that during the
period of disturbances caused by militancy in early nineties of the last
century, Mr. Praneet Sawhney, only son of Rajendra Kumar Sawhney was
shot dead by the terrorists on March 27, 1990 in his office. Immediately
thereafter, operations of both the units were suspended and the complainants
had to migrate to Delhi. It was stated that there was "watch and ward staff
as also some other personnel who looked after the premises and stocks and
raw materials lying in the units. It was also stated in the complaints that
the complainants were able to transfer records from Srinagar to Delhi.
According to the complainants, they had obtained three separate
insurance policies from M/s New India Assurance Co. Ltd. (Insurance
Company). Items covered were: (1) Stock of Wheat, Wheat products and
packing material and goods of like nature of Krishan Flour & Oil Mills for
Rs. 40 lakhs; (2) Stocks of raw material like flour, maida, ghee, chemicals
etc. in godowns belonging to Krishna Food & Baking Industries; for Rs.
25 lakhs and (3) Plants Machinery installed in Krishna Food & Baking
Industries, factory buildings, electric fittings for Rs. 53 lakhs. Terrorism
was one of the terms covered by the Insurance Policy.
10.58 General Principles of Insurance
According to the complainants, in the morning of November 12,1991,
certain terrorists attacked the company as well as the Mill and set them
on fire. Substantial damage had been caused to the building, plant,
machinery and electricity fittings; the raw materials lying in the units were
destroyed; stocks which were in both the units were either destroyed or
substantially damaged. In view of the insurance coverage, a demand was
made by the complaints to the Insurance Company to get the survey done
and to pay the amount of loss sustained by the complainants. The Insurance
Company, however, did not do anything in the matter for a quite long time.
The complainants got the survey done through their surveyors and
demanded the amount to which they were entitled to. The Insurance
Company, however, did not make payment. The complainants approached
the National Commission by filing three complainants. The Insurance
Company repudiated the claim of the complainants. At a belated stage,
survey was carried out by the Insurance Company and assessed the damage
to the plant, machinery, building and electricity fittings to the extent of Rs.
31,373/- and nothing more. With regard to the raw materials and stocks,
the amount was substantially curtailed by the Insurance Company inter
alia, on the ground that the stocks were perishable in nature and had
become unfit for human consumption. It had become worthless at the time
of mishap in 1991. It was also contended that in the absence of proper
'watch and word stiff, there was pilferage of stocks and raw materials by
intruders as well as by the staff members of the complainants' Company
and Mill.
The National.Commission went into the merits of the matter and held
that the complainants were entitled to certain reliefs. The claim put forward
by the complainants, in respect of stock and raw materials, was for
Rs. 37,78,618/-. The Insurance Company recommended to settle the
claim in respect of stock and raw materials of the complainants at
Rs. 5,18,619/-. In a subsequent report, however, the surveyors gave a figure
of Rs. 4,33,122/- for settlement of the claim.
But the Insurance Company repudiated the claim The National
Commission held that there was no pilferage and taking into account the
weather conditions in Srinagar, it could not be held that the raw materials
had become worthless or unfit for human consumption. It was held by the
National Commission that the claimants were entitled to Rs. 4,53,122/-.
In respect of building, plant, machinery and electricity fittings, the
Insurance Company started that the complainants were entitled only to
Rs. 31,373/- against the policy amount of Rs. 53 lakhs. The National
Commission directed the Insurance Company to make payment of
Law of Insurance 10.59
• Rs. 31,373/- towards damage to building with interest at the rate of 12%.
Being aggrieved by the order passed by the National Commission, three
appeals were filed by the complainants. It wras submitted that the appeals
deserve to be allowed by directing the Insurance Company to pay the full
amount with interest at the rate of 18% from November, 1991 and costs.
Two appeals were filed by the Insurance Company. In the appeals, it was
contended by the Insurance Company that the National Commission was
in error in granting relief in favour of the complainants. Canara Bank,
assignee of the two insurance policies, filed two appeals. It submitted that
i the entire amount to which the complainants were entitled in respect of
! the raw materials policy and plant policy ought to have been ordered to
be paid to the Bank. It was urged on behalf of the complainants that the
appeals filed by Canara Bank were not maintainable in view of Section 3
of the Jammu & Kashmir misgrants (Stay of Proceedings) Act, 1997. On
■ behalf of Canara Bank it was contended that the provisions of 1997 Act
had no application to the instant cases. It was asserted that as on date, the
amount to which the Bank was entitled and complainants were liable to
pay, exceeded Rs. five crores. The Bank, therefore, had the right to get the
entire amount to which the complainants were held entitled to.
Issue
(1) Whether the complainants were entitled to claim compensation
towards building, plant, machinery and electricity fittings, raw
materials, and stocks?
(2) Whether Insurance Company be directed to make payment to
Canara Bank and not to the complainants in respect of the amount,
if any, to be paid to the complainants in respect of raw materials
plant, etc.?
Decision of the Supreme Court
The Court held:
"Taking into consideration the entire facts and circumstances, in our
opinion, the complainants are entitled to claim compensation towards
building, plant, machinery and electricity fittings, raw materials and stocks."
The complainants were held entitled to the following :
Stocks : Rs. 37,78,619/-
Raw Materials: Rs. 23,79,195/-
Plant and Machinery, Factory Building, Electricity Fittings :
Rs. 25,81,600/-
10.60 General Principles of Insurance
It was further held thdt the claims but forward by Canara Bank were
well founded. Therefore, both the appeals of Canara Bank were allowed
and the Insurance Company was directed to make payment to Canara
Bank and not to the complainants in respect of the amount to be paid to
the complainants in regard to raw materials policy and plant policy.
In the course of judgement, C.K. Thakkar, J. said:
"Having heard the learned counsel for the parties and having gone
through the records and proceedings as also the judgmeht of the National
Commission, it is clear that the complainants were able to establish the
claims put forward by them. It is not in dispute by and between the parties
that the Insurance Policy covered several acts including terrorism and fire.
It has come in evidence and has been believed by National Commission
that the son of the Managing Director w'as killed in March, 1990 by terrorist
attack. It is in the light of the said incident that the Managing Director had
to leave Srinagar and to return to Delhi. It was because of the said incident
that the operation of both the units was suspended. Thus, it was not a case
wherein the complainants did not undertake the activities which were
required to be undertaken by them, but they could not operate the units
and carry on business. No fault, therefore, can be found against the
complainants for suspending the operation of both the units. The
complainants obviously cannot suffer because of non-production in the
Mill as well as in the Company. The National Commission was, therefore,
not right in reducing any amount on the ground that certain stocks and
raw materials were unfit for human consumption. It was not intentional
or deliberate act on the part of the complainants in stopping production
and allowing the stocks and raw materials to get spoiled or damaged and
by making them unfit 'for human consumption. It was because of the
militant activities and terrorism that the Company and the Mill could not
do business and produce goods. Reduction of amount by the National
Commission on that count was, therefore, unjustified and in our opinion;
that part of the order requires interference by this Court.
As regards pilferage by intruders and staff members, except ipse dixit
on the part of the Insurance Company, no material whatsoever has been
placed on record in support of such allegation. The National Commission,
in our opinion, was justified in not accepting such bare assertion without
any evidence or concrete material in support of such plea. In fact, a finding
has been recorded by the National Commission that the godowns were
"full when they were set on fire." Watch and ward staff wrere protecting
the Mill and the Company. There was also a Police post nearby both the
units.
Law of Insurance 10.61
Smt Dipashri v. Life Insurance Corporation of India
AIR 1985 Bom. 192
(The non-disclosure of the fact that the deceased was suffering from fever or
down with flue on some occasions is not material matter and, therefore, the failure
to disclose the same cannot be constructed as suppression of the relevant fact.)
Facts
The appellant was petitioner in this case. The petitioner's husband was
employed as a clerk in Mackinnon Mackenzie Private Limited for about
19 years. The deceased husband of the petitioner took out a double benefit
policy while in the employment. The deceased husband submitted to
respondent, that is Life Insurance Corporation of India, a proposal for issue
of an Endowment Policy for 20 years for Rs. 30,000/- on July 5 1975. The
monthly premium of the said policy were to be paid directly through the
salary saving scheme of Mackinnon Mackenzie Private Limited. The policy
was taken out by the deceased husband as provision for future and the
monthly premiums were paid regularly as per the contract of insurance.
Prior to the acceptance of the policy by the LIC, the deceased husband was
examined by doctors on the panel of the LIC and after the doctors certified
about the sound health of the petitioner's husband, the proposal was
accepted by the LIC and the policy was issued on July 7,1975. On October
4,1977, the petitioner's husband while lighting the stove in the kitchen,
accidently sustained severe bums. He was taken to the nursing home and
from there to a hospital but succumbed to his injuries on October 8, 1977
The doctor issued certificate certifying the death occurred due to toxaemi
following 50% bums sustained accidentally by the deceased. It was not ir
dispute that the bums were suffered in the accident when stove caught fire
On October 24,1977, the petitioner (the nominee under the policy) addressee
a letter to the senior Divisional Manager (Respondent) requesting to settle
the insurance claim under the policy. The petitioner was informed by the
Senior Divisional Manager by letterdated August 25, 1978 that the LIC
repudiates all liabilities under the policy as the deceased had deliberately-
made misstatements and with held material information regarding the
health at the time of effecting assurance with the Life Insurance Corporation.
The petitioner pointed out that her husband died at a very young age
of 43 years and the LIC should not jump to the conclusion that the deceased
was suffering from piles, giddiness and influenza merely from the fact that
the deceased had taken sick leave from his office. The petitioner had to
bring up three minor children when her husband died in the unfortunate “
accident. The petitioner (poor widow) was serving as a maid servant to
10.62 General Principles of Insurance
Issue
Whether the petitioner was entitled to the claim under the policy?
Decision of the Bombay High Court
The Court held that the refusal of the Corporation to pay a pittance
of an amount to the poor widow was, in fact, the gross abuse of the powers.
Section 43 of the Life Insurance Corporation of India Act, 1956, inter
alia, provides that Section 45 of the Insurance Act shall apply to the .
Corporation as it applies to any other insurer. Under the provisions of
Section 45 of the Insurance Act, it is not open for the Corporation to
question any policy merely on the ground that the statement made in
the proposal was inaccurate or false, after the expiry of two years from
the date of commencement of the policy. The Corporation can repudiate
the policy if it is shown that such statement by the policy holder was
on a material matter and was fraudulently made.
Before the Corporation accepted the proposal of the deceased, a
confidential report of the Medical Examiner was secured by the Corporation.
The Medical Officer a Doctorate in Medicine was attached to a General
Hospital and was on the panel of the Corporation. The report unmistakably
establishes that the deceased was enjoying sound health. The report was
made by the Medical Examiner after examining the deceased thoroughly
and the Corporation had not proceeded to accept the proposal of the
deceased only on the statements made in the printed form but on the basis
of the report received from the Medical Officer.
PENDSE, J. said:
"Now even assuming that the certificate issued by the employer is
correct and the deceased had in fact secured sick leave on the relevant dates
by production of Medical Certificate, it cannot be concluded that the
deceased was in fact suffering from the bleeding piles or hypertension. In
my judgement, the ailmept of bleeding piles, influenza and dysentery are
very minor and trival ailments and the failure to disclose such ailments
in the proposal form cannot be treated as a suppression of the relevant
particulars. The deceased might have very well felt that it is not necessary
to state that he had suffered from the flue, dysentery or common cold
because such ailment has no bearing whatsoever to the longevity of the
person. It is well known that people in Bombay do not consult Medical
Practioners for such petty ailments like flue, fever or dysentery but the
medical certificates are required to be produced before the employer in
accordance with the service conditions and the mere fact that the medical
certificate is produced for obtaining sick-leave cannot lead to thp ronrhicir»r»
Law of Insurance 10.63
that the deceased had taken treatment from the medical practioner. The
reliance on the certificate issued by the employer would not help the
Corporation because the medical certificate issued in December 1972 merely
recites that the deceased was suffering from hypertension. It nowhere
refers to the deceased suffering from giddiness or blood pressure or
weakness. The Corporation has raised false bogie of inaccurate statements
only to defeat the just claim of the poor widow and the action of the
Corporation deserves to be deplored."
PENDSE, J. further said:
"Even assuming that the deceased had made incorrect or false statements
about his ailment, still that fact itself would not suffice for the Corporation
to repudiate the contract in view of the clear-cut provisions of Section 45
of the Insurance Act. Tire concept of consultation with the Medical Practioner
is entirely different from securing medical certificate on the ground that
the person is down with fever. The perusal of the proposal form leaves
no manner of doubt that it is not each and every petty ailment which has
to be disclosed by the proposer and what is required to be- disclosed is
a serious ailment. The deceased was not suffering from any serious ailment
and was a ypung man of 41 years age at the time of taking out the policy.
The Medical Practioner on the panel of the Corporation had examined him
and in these circumstances, it is futile for the Corporation to claim that the
deceased was suffering from any serious ailment. Iia my judgement, the
non-disclosure of the fact that the deceased ivas suffering from fever or
down with flue on some occasions is not a material matter and, therefore,
the failure to disclose the same cannot be construed as suppression of the
relevant facts. As laid down by the Supreme Court, it is not suppression
of the fact ivhich is sufficient to attract second part of Section 45 of the
Insurance Act but what is required is that such suppression should be
fraudulently made by the policy-holder. The expression "fraudulently"
connotes deliberate and intentional falsehood or suppression and some
strong material is required before concluding that the policy holder has
played a fraud on the Corporation. I my judgement, on the facts and
circumstances of the present case, it is impossible to come to the conclusion
that the deceased had suppressed any material facts and such suppression
was done fraudulently .... The second part of Section 45 of the Insurance
Act is not, at all, attracted to the facts of the case and it is not open to
the corporation to repudiate the contract."
The Corporation was directed to pay the amount due under the policy
along with interest at the rate of 15% from the date of lodging of the claim
e. October 24, 1977 till payment.
i.
20.64 Genera] Principles of Insurance
OTHER CASES
In Economic Transport Organisation v. Charan Spg. Mills (P) Ltd.
(2010) 4 SCC 114, it was held that the contract of insurance is a contract
of indemnity. It was further held that where insurer pays to the insured
value of goods lost due to negligence of a third party, rights and remedies
of the insured against such third party stand transferred to and vested in
insurer. Such equitable assignments of rights and remedies of insured in
favour of the insurer, implied in a contract of indemnity is known as
"subrogation".
In Amravati District Central Co-op. Bank Ltd. v. United India Fire and
General Insurance Co. Ltd., (2010) 5 SCC 294, it was held that in interpreting
documents relating to contracts of insurance, the duty of the court is to
interpret the words in which the contract is expressed by the parties,
because it is not for the court to make a new contract, however reasonable,
if the parties have not made it themselves. Moreover, the terms of the
agreement have to be strictly construed to determine the extent of liability
of the insurer. It is further held in this case that "excess" clauses are
commonly used in insurance contracts. In insurance parlance, the term
"excess" in the excess clause in the policy refers to "that part of the amount
of loss, under each claim, which is not covered by the policy" or the
"amount that the policy-holder has, by agreement, to bear or contribute
to each insurance claim". In other words it limits the liability of the insurer
in regard to each claim only to the amount of loss, in excess of the sum
specified in the excess clause which the insured has agreed to bear (either
himself or by securing other insurance coverage).
In United India Insurance Co. Ltd. v.Kantika Colour Lab, (2010) 6 SCC
449, it was held that contracts of insurance are generally in the nature of
contracts of indemnity. Except in the case of contracts of life insurance,
personal accident and sickness or contracts of contingency, such as a transit
risk contract, all other contracts of insurance entitle the assured for the
reimbursement of actual loss that is proved to have been suffered by him.
The happening of the event against which insurance cover has been taken
does by itself entitle the assured to claim the amount stipulated in the
policy. It is only upon the proof of the actual loss, that the assured can claim
reimbursement of the loss to the extent it is established, not exceeding the
amount stipulated in the contract of insurance which signifies the outer
limit of the insurance company's liability.
In Export Credit Guarantee Corporation of India Ltd. v. Garg Sons
International, (2014) 1 SCC 686, it was held that the terms of the insurance
Law of Insurance 10.65
contract have to be construed strictly. Every attempt should be made to
harmonise the terms thereof.
EXAMINATION QUESTIONS
1. Contracts of Insurance are "uberrima fides “. Elucidate with the help
of judicial decisions and statutory provisions on the subject.
2. (a) What is doctrine of causa proxima in a Marine Insurance?
(b) Fruits loaded on a ship were insured against damage consequent
on collision with any other ship. During the course of voyage
insured ship collided with another ship and thereby damaged
which rendered it necessary for her to put into a port for repairs.
When the ship arrived at the port of discharge after repairs a
portion of fruit had gone bad. Is insurance company liable for
the loss ?
Hint: See Pink v. Fleming, (1899) 25 QBD 396 and Leyland Shipping Co.
Ltd. v. Norwich Union Fire Insurance Society Ltd., (1918) AC 350.
3. (a) Define insurable interest. Is it essential in a contract of insurance?
(b) Can a father insure life of his son who is dependent on his father
for his livelihood?
Hint: A father cannot insure the life of his son who is dependent on
his father for his livelihood.
4. (a) What is insurable interest?
(b) Whether A has insurable interest in the life of following persons?
(i) In the life of his father who is dependent and with whom he had
strained relations.
(ii) His girl friend with whom he is engaged for marriage.
Hint: (i) A cannot insure the life of his father who is dependent^and
with whom he had strained relations as in this case A has no insurable
interest in the life of such father.
(ii) A cannot insure the life of his girl friend even when he is engaged
with her for marriage as he has no insurable interest in her life.
5. (a) Contracts of insurance are of utmost good faith. Explain.
(b) One D insured his life with L.I.C. In the proposal there was a
fraudulent suppression of heart attacks which D had in recent
past. However, doctors of L.I.C. gave the opinion that D was fit
to be insured at the. time of their examination. Whether
10.66 General Principles of Insurance
Corporation can avoid the claim under section 45 of Insurance
Act 1938?
Hint: The mere fact that the insured company had the assured examined
by its own doctor will not relieve him from the legal consequences of
the false statement. (Mithoo Lai Nayak v. LIC, AIR 1962 SC 814).
6. To prevent misuse of the "Basis Clause", Sec. 45 of the Insurance Act,
1938 puts some limits on the rights of the insurer with respect to a
policy of life insurance. Explain these limits by referring to that statutory
provision and the facts of a relevant case.
7. (a) Distinguish between the Doctrine of Causa-proxima and the
Doctrine of utmost good faith in a contract of insurance.
(b) Sugar bags loaded on a ship were insured against loss by sea
water. A rat made a hole in the pipe of the ship. Sea w’ater leaked
through that hole into the ship and damaged sugar in the bags
lying there. Whether insurance company is liable to pay this loss
under policy of ship's goods?
Hint: The facts of this problem are similar to the facts of Hamilton
Fraser & Co. v. Pondorf & Co. (1887). It was held in this case that the
proximate cause or damage was sea water and thus the insurer was
held liable.
8. State the facts, issues and the principles of law laid down in Mithoolal
Nayak v. LIC (AIR 1962 SC 814).
9. (a) What is insurable interest?
(b) Can A insure the life of his aged and retired father?
(c) Can A insure the life of his girl friend?
Hints : (b) A cannot insure the life of his aged and retired father as
A does not have insurable interest.
(c) A cannot insure the life of his girl friend due to absence of insurance
interest.
10. (a) What do you mean by the principle of 'utmost good faith'?
(b) A was suffering from shortness of breath and congested heart
got his life insured with LIC for Rs. 1,00,000 by concealing these
ailments in answering questions about his health. After one year
he died of heart failure. Will his nominee get the insured amount
from LIC?
Law of Insurance 10.67
Hint: The nominee of the deceased will not get the insured amount
from LIC as A did not disclose the ailments in answering questions
about his health. (Swit. Krishna Wati Puri v. LIC, AIR 1975 Del 19).
11. A was suffering from heart disease for which she underwent open
heart surgery in 1950. After one year she insured her life with LIC for
Rs. 5 lac but did not disclose anything about her heart ailment or open
heart surgery. After 5 years, she died of heart attack. Can nominee of
A claim on the insurance policy? Decide in the light of S. 45 of the
Insurance Act, 1938.
Hint: The instant case is covered by second part of S.45. The nominee
cannot claim on the insurance policy. [Mithoolal Nayak v. LIC, (1962)32
Comp. Cas. (SC)}
12. (a) What is insurable interest in a contract of insurance?
(b) Can a son insure the life of his father who is independent. Hint:
Seethe heading "Insurable Interest" in the text.
13. A took a "Householder's Comprehensive Policy" of insurance with
the defendant, insuring the contents of her flats including jewellery,
against loss or damage caused by fire. On 31.12.2000 while leaving her
flat, for protection against theft, she concealed the jewellery in the
grate under coal and wood, which were ready for lighting. On returning,
she inadvertently lit the fire and jewellery got damaged. Will A succeed
upon the claim under the above said policy?
Hint: There had been ignition of insured property not intended to be
ignited and the loss falls within the plain words of the policy. [Harris
v. Poland, (1941ft K.B. 462].
14. The insured owes a duty to disclose every material fact, of which he
knows or ought to know before the contract of insurance is made.
Discuss this statement in the light of the decided cases, i.e., "Mithoolal
Nayak v. LIC and "Smt. Krishna Wati Puri v. LIC"
15. Explain the doctrine of "Proximate causa" in the context of marine
insurance. Refer to Pink v. Fleming, (1890) 25 QBD 396.
16. X took a 'Comprehensive Policy' of insurance with company Y, insuring
the contents of her flat, including jewellery, against loss by theft or
damage caused by fire. For purposes of protection against theft, on
leaving her flat.one day, she (X) concealed the jewellery in the grate
under the coal and wood, which was ready for lighting. On returning,
in the evening, she (X). inadvertently lit the fire and, as a result, the
jewellery was damaged.
10.68 General Principles of Insurance
She (X) files a claim against company Y. Will she succeed? Decide
referring to the judicial decision on the subject.
Hint: Y will succeed. [Harris v. Poland, (1941) 1 K.B. 462].
17. "It islrue of all types of insurance contracts that it is the duty of both
the parties to help each other in reaching to a right conclusion, by
disclosing all material facts relating to the contract of insurance and
not to hold each other at arm's length in defence of their conflicting
interests." With the help of leading cases, explain the nature and scope
of this duty. What could be the consequences, if this duty is not carried
out?
18. Reena has an insurance policy against theft and house breaking, with
a condition that her house shall always remain occupied. The house
was left unattended on one Sunday between 2 p.m. and 7 p.m., when
she had gone to see her ailing mother. On her return she found the
locks of her safe broken and her jewellery worth Rs. 20,000 missing.
Reena claims the loss under the policy from the insurer. Decide, stating
the principles of interpretation of insurance policy with reference to
decided cases, if anv.
Hint: In Simmond v. Cockell, (1920)1 K.B. 843, it was held that the
words "premises are always occupied" does not mean that premises
are never to be left unattended. It means that premises are to be used
continuously and without interruption. If the language of a warranty
in a policy is ambiguous it must be construed against the underwriter
(Simmond v.. Cockell, (1920) 1 KB 843). Reena is entitled to the insurance
claim.
19. A son insured the life of his father with whom he had strained relations.
The father was independence of son. Whether contract of insurance
in such a case is valid and binding? What are the rights of insurance
company in such a case?
Hint: The contract in the aforesaid case is not valid as the son does
not have insurable interest, in this case, in the life of his father.
20. A insured his house against fire. He agreed to sell the house to B.
Before sale was Completed fire took place and damaged the house. A
received claim for loss form the insurance company. After this, sale
was completed and A received full sale consideration from B. Discuss
the rights of the insurance company in such a case.
I