negotiable instruments

MET INSTITUTE OF MANAGEMENT

EVOLUTION & REVOLUTION OF NEGOTIABLE INSTRUMENTS AS FACILITATORS OF TRADE AND COMMERCE AND 10 YEARS TAKING FORWARD

A PROJECT REPORT ON LEGAL ASPECTS OF BUSINESS

GROUP MEMBERS:

INDEX
Sr. No.
Topic
Page No.
1.
Introduction

2.
Evolution of Negotiable Instruments

3.
What are Negotiable

Meaning & Definition

4.
Negotiable Instruments Act, 1881

5.
Types of Negotiable Instruments

Promissory Notes, Bills of Exchange & Cheques

6.
Characteristics of Negotiable Instruments

7.
Difference between the Negotiable Instruments

8.
Exceptions

9.
Section 134-137 of an International Law

10.
Dishonor of Negotiable Instruments

11.
Current Scenario

12.
Revolution of Payment System

13.
Future Prospects

14.
Case Study

Case Study 1: Moorvi Mercantile Bank v/s Union of India

Case Study 2:

15.
Conclusion

16.
References

1) INTRODUCTION
The world as a whole has been the “cradle of commerce” because this exchange is not only between individuals but also between peoples and nations. This naturally implies the existence of:
1) Wealth
2) Communication
Both of which are essential for growth of commerce. Unless there is a surplus of wealth and provision for communication, commerce will not grow.
EXAMPLE- In the primitive economic society when each tribe or family produced all that is needed and consumed all that it produced, need of commerce did not and could not arise. Only after the division of labor and consequent development of exchange, commerce began to grow. Once it started growing, it spread its invisible thread throughout the length and breadth of the world leading to its present day complex mechanism. These stages may be summarized as follows:
Need of Negotiable Instruments –
1. Non existence of commerce- In the early stage of economic life of man division of labor scarcely existed. Man produced what he needed and consumed all that he produced. Therefore commerce did not exist in this stage.

2. Trade in the form of barter- In the second stage, wants of the family became more numerous and many families found themselves with certain goods and surplus and deficient in certain other goods. These families wanted to exchange their surplus goods for those goods which they did not possess. This gave rise to “exchange of goods for goods, i.e., Barter system. Thus this is the place from where commerce may be said to have begun.

3. Money as a medium of trade and town as the centre of trade- Commerce reached into its third stage of growth when money was evolved as medium of exchange to remove the limitations of barter. Introduction of money began led to the extension of division of labour and specialization. People began to produce goods for certain local markets. Thus, division of labour was extended to a locality. Gradually a separate class of artisans and traders came into existence. They settled down at fixed places which came to be known as towns.
Growth of these towns gave great stimulus to commerce. The size of the market and the number of commodities exchanged in the market, both increased. Traders from other countries brought luxury articles, metals and ornaments for sale.

4. Economy and growth of commerce- Commerce continued to grow both in volume and space. After the decline of Guild system, a new class of people, ENTERPRENEUR class, came into existence. This class of people became a real intermediary between the producers and consumers. Further, growth of commercial enterprise took place. Trade began to assume fixed forms. Production began to be undertaken for the markets extended for the whole country. Division of labour received further impetus. Production was divided into several branches and each branch tended to be localized. Various economic activities came to be clearly marked off into distinct groups:

a) Agriculture
b) Trade
c) Commerce

5. World economy and the world market- Commerce entered into another stage of its growth when nations of the world were brought into commercial relationships through the invisible thread of trade. As a result of the geographical discoveries of the late 15th, 16th and 17th centuries new trade routes were opened up and commerce grew between nations.
2) EVOLUTION OF NEGOTIABLE INSTRUMENTS
The reasons for the necessity of the Negotiable Instruments: -
Historically, business developed by stages.
i. Pastoral stage ii. Agricultural stage iii. Handicrafts stage iv. Guild stage
v. Domestic stage and vi. Factory stage.

Pastoral stage: In primitive society man used things just as they were found in nature. With time, he learned to domesticate animals and breed them for food and clothing. Since he had to find pastures for his animals, he tended to lead a wandering life. But in this stage his work served mainly to support only him with his own needs and left very little surplus available foe exchange on a business basis.

Agricultural stage: In course of time, the nomadic tribes settled permanently at fixed places, built up the huts and shelters for their residences and began cultivating the land in common. Growing corns, grasses etc. became the main occupation. Agriculture emerged as the basic feature of economic living of man. He gradually produced more and then started to exchange it with other commodities. This was known as barter system.

Handicraft stage: In this stage manufacturing was limited to the human efforts to transform raw materials into finished goods. It included candle and soap making, spinning, weaving, making of clothes and shoes, blacksmithing, leather dressing, carpentry etc.

Guild stage: A guild is an association of persons following a similar occupation and it is formed to protect and promote the interest of its members through cooperative endeavors.

Domestic stage: A new class entrepreneur emerged as a link between producer and consumer. Now entrepreneur purchased the raw materials for the purpose of manufacture and sale nut did not do the processing himself. He took the risk of productions and sale. Out of the proceeds of his undertaking, he paid for the materials and labour. The amount left was his profit

Factory stage: In this stage an organized system of production under a single roof came to be identified as a factory. Large scale operations with the use of mechanized production processes resulted in producing good quality products at cheaper rates. However it was greatly influenced not only by its own processes but also by government under which it operates.

These were the different stages of evolution of business. However it was noted that the growth was very slow and the system was very complex. There were different instruments used to purchase different commodities in different stages. The system of exchange was such that it led to confusion and various complexities. To avoid such confusion and to operate the business activities smoothly negotiable instruments were introduced.

3) NEGOTIABLE INSTRUMENTS (Meaning & Definition)
Exchange of goods and services is the basis of every business activity. Goods are bought and sold for cash as well as on credit. All these transactions require flow of cash either immediately or after a certain time. In modern business, large number of transactions involving huge sums of money takes place every day. It is quite inconvenient as well as risky for either party to make and receive payments in cash. Therefore, it is a common practice for businessmen to make use of certain documents as means of making payment. Some of these documents are called negotiable instruments.
Meaning of Negotiable Instruments
The concept of negotiability is one of the most important features of commercial paper. A negotiable instrument is a written document, signed by the maker or drawer, and containing an unconditional promise to pay (or order to pay) a certain sum of money on delivery, or at a definite time, to the bearer (or to the order).
To understand the meaning of negotiable instruments let us take a few examples of day-to-day business transactions.
EXAMPLE
Suppose Pankaj, a wholesaler has sold toys to Ajinkya for Rs 1,00,000/- on three months credit. To be sure that Ajinkya will pay the money after three months, Pankaj may write an order addressed to Ajinkya that he is to pay after three months, for value of toys received by him, Rs.1,00,000/- to Pankaj or anyone holding the order and presenting it before him (Ajinkya) for payment. This written document has to be signed by Ajinkya to show his acceptance of the order. Now, Pankaj can hold the document with him for three months and on the due date can collect the money from Ajinkya. He can also use it for meeting different business transactions. For instance, after a month, if required, he can borrow money from Bharat Lalwani for a period of two months and pass on this document to Bharat Lalwani. He has to write on the back of the document an instruction to Ajinkya to pay money to Bharat Lalwani, and sign it. Now Bharat Lalwani becomes the owner of this document and he can claim money from Ajinkya on the due date. Bharat Lalwani, if required, can further pass on the document to Nitin after instructing and signing on the back of the document. This passing on process may continue further till the final payment is made.
In the above example, Ajinkya who has bought toys worth Rs. 1,00,000/- can also give an undertaking stating that after three month he will pay the amount to Pankaj. Now Pankaj can retain that document with himself till the end of three months or pass it on to others for meeting certain business obligation (like with Bharat Lalwani, as discussed above) before the expiry of that three months time period.
You must have heard about a cheque. What is it? It is a document issued to a bank that entitles the person whose name it bears to claim the amount mentioned in the cheque. If he wants, he can transfer it in favour of another person. For example, if Sneha issues a cheque worth Rs. 10,000/ - in favour of Neha, then Neha can claim Rs. 10,000/- from the bank, or he can transfer it to Udit to meet any business obligation, like paying back a loan that he might have taken from Udit. Once he does it, Udit gets a right to Rs. 10,000/- and he can transfer it, if required. Such transfers may continue till the payment is finally made to somebody. In the above examples, we find that there are certain documents used for payment in business transactions and are transferred freely from one person to another. Such documents are called Negotiable Instruments.

Thus, we can say negotiable instrument is a transferable document, where negotiable means transferable and instrument means document. To elaborate it further, an instrument, as mentioned here, is a document used as a means for making some payment and it is negotiable i.e., its ownership can be easily transferred.
Thus, negotiable instruments are documents meant for making payments, the ownership of which can be transferred from one person to another many times before the final payment is made.

Definition of Negotiable Instrument
According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means “promissory note, bill of exchange, or cheque, payable either to order or to bearer”.
Explanation
(i) A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it shall not be transferable.
(ii) A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank.
(iii) Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.
A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or -some of several payees.

4) NEGOTIABLE INSTRUMENTS ACT, 1881
The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the provision of the English Negotiable Instrument Act were applicable in India, and the present Act is also based on the English Act with certain modifications. It extends to the whole of India except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of India Act provides that no person in India other than the Bank or as expressly authorised by this Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand. This Section further provides that no one except the RBI or the Central Government can make or issue a promissory note expressed to be payable or demand or after a certain time. Section 32 of the Reserve Bank of India Act makes issue of such bills or notes punishable with fine which may extend to the amount of the instrument. The effect or the consequences of these provisions are:
1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on demand or after a certain time.

2. A bill of exchange cannot be made payable to the bearer on demand though it can be made payable to the bearer after a certain time.

3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a person’s account with a banker.
Objectives:
Describe the meaning and marketing of cheques, crossing of cheques and cancellation of crossing of a cheque;
Explain capacity and liability parties to a negotiable instruments; and
Understand various provisions of negotiable instrument Act, 1881 regarding negotiation, assignment, endorsement, acceptance, etc. of negotiable instruments.

5) TYPES OF NEGOTIABLE INSTRUMENTS
According to the Negotiable Instruments Act, 1881 there are just three types of negotiable instruments i.e., promissory note, bill of exchange and cheque. However many other documents are also recognized as negotiable instruments on the basis of custom and usage, like hundis, treasury bills, share warrants, etc., provided they possess the features of negotiability.
1) Promissory Note
Suppose you take a loan of Rupees Five Thousand from your friend Salim. You can make a document stating that you will pay the money to Salim or the bearer on demand. Or you can mention in the document that you would like to pay the amount after three months. This document, once signed by you, duly stamped and handed over to Salim, becomes a negotiable instrument. Now Salim can personally present it before you for payment or give this document to some other person to collect money on his behalf. He can endorse it in somebody else’s name who in turn can endorse it further till the final payment is made by you to whosoever presents it before you. This type of a document is called a Promissory Note.
Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as ‘an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument’.
Illustration
A signs instrument in the following terms
a) I promise to pay B or order Rs. 500.
b) I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received.
c) I promise to pay B Rs. 500 and all other sums which shall be due to him.
d) I promise to pay B Rs. 500, first deducting there out any money which he may owe me."
The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes.
Specimen of a Promissory Note
Rs. 50,000/- Mumbai February 14, 2014 On demand, I promise to pay Robin, s/o Gerard of Kerala or order a sum of Rs 50,000/- (Rupees Fifty Thousand only), for value received. To , Robin Sd/ Makwana Address…….. Stamp

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

Features of a promissory note
Let us know the features of a promissory note.
i. A promissory note must be in writing, duly signed by its maker and properly stamped as per Indian Stamp Act. ii. It must contain an undertaking or promise to pay. Mere acknowledgement of indebtedness is not enough. For example, if someone writes ‘I owe Rs. 5000/- to Satya PrSneha’, it is not a promissory note. iii. The promise to pay must not be conditional. For example, if it is written ‘I promise to pay Suresh Rs 5,000/- after my sister’s marriage’, is not a promissory note. iv. It must contain a promise to pay money only. For example, if someone writes ‘I promise to give Suresh a Maruti car’ it is not a promissory note.
v. The parties to a promissory note, i.e. the maker and the payee must be certain. vi. A promissory note may be payable on demand or after a certain date. For example, if it is written ‘three months after date I promise to pay Satinder or order a sum of rupees Five Thousand only’ it is a promissory note. vii. The sum payable mentioned must be certain or capable of being made certain. It means that the sum payable may be in figures or may be such that it can be calculated.

2) Bill of Exchange
Suppose Ashutosh has given a loan of Rupees 5,000 to YashRaj, which YashRaj has to return. Now, Ashutosh also has to give some money to Shaunak. In this case, Rajiv can make a document directing YashRaj to make payment up to Rupees Ten Thousand to Shaunak on demand or after expiry of a specified period. This document is called a bill of exchange, which can be transferred to some other person’s name by Shaunak.

Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as ‘an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument’.
Specimen of a Bill of Exchange
Rs. 10,000/- New Delhi February, 2014 Five months after date pay Shaunak or (to his) order the sum of Rupees Ten Thousand only for value received. To Accepted Stamp YashRaj YashRaj S/d Address Ashutosh

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

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

3) Cheques
Cheque is a very common form of negotiable instrument. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favour of others, thereby directing the bank to pay the specified amount to the person named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque.
The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.

Specimen of a Cheque ………......20....... Pay…….............................................................................................................. ……....................................................................................................... or Bearer Rupees……………………………………………… …………………………………………………… UNION BANK OF INDIA Mazgaon, Mumbai – 110067 MSBL 6 5 3 0 0 3 1 1 0 0 0 2 0 5 6 1 0

Features of a cheque
Let us look into some important features of a cheque.
i. A cheque must be in writing and duly signed by the drawer. ii. It contains an unconditional order. iii. It is issued on a specified banker only. iv. The amount specified is always certain and must be clearly mentioned both in figures and words.
v. The payee is always certain. vi. It is always payable on demand. vii. The cheque must bear a date otherwise it is invalid and shall not be honoured by the bank.

Types of Cheque
Broadly speaking, cheques are of four types.
a) Open cheque
b) Crossed cheque.
c) Bearer cheque
d) Order cheque
Let us know details about these cheques.
a) Open cheque: A cheque is called ‘Open’ when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following:
a. Receive its payment over the counter at the bank,
b. Deposit the cheque in his own account
c. Pass it to someone else by signing on the back of a cheque.

b) Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing other types of cheque called ‘Crossed cheque’. The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without the writing ‘Account payee’ or ‘Not Negotiable’.

c) Bearer cheque: A cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’. A bearer cheque can be transferred by mere delivery and requires no endorsement.

d) Order cheque: An order cheque is one which is payable to a particular person. In such a cheque the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.

There is another categorization of cheques which is discussed below:
i. Ante-dated cheques:- Cheque in which the drawer mentions the date earlier to the date of presenting if for payment. For example, a cheque issued on 20th May 2003 may bear a date 5th May 2003. ii. Stale Cheque:- A cheque which is issued today must be presented before at bank for payment within a stipulated period. After expiry of that period, no payment will be made and it is then called ‘stale cheque’. Find out from your nearest bank about the validity period of a cheque. iii. Mutilated Cheque:- In case a cheque is torn into two or more pieces and presented for payment, such a cheque is called a mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer. But if a cheque is torn at the corners and no material fact is erased or cancelled, the bank may make payment against such a cheque. iv. Post-dated Cheque:- Cheque on which drawer mentions a date which is subsequent to the date on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th May 2003 bears a date of 25th May 2003, it is a post-dated cheque. The bank will make payment only on or after 25th May 2003.

4) Hundis
A Hundi is a negotiable instrument by usage. It is often in the form of a bill of exchange drawn in any local language in accordance with the custom of the place. Sometimes it can also be in the form of a promissory note. A hundi is the oldest known instrument used for the purpose of transfer of money without its actual physical movement. The provisions of the Negotiable Instruments Act shall apply to hundis only when there is no customary rule known to the people.

Types of Hundis
There are a variety of hundis used in our country. Let us discuss some of the most common ones.
i. Shah-jog Hundi: This is drawn by one merchant on another, asking the latter to pay the amount to a Shah. Shah is a respectable and responsible person, a man of worth and known in the bazaar. A shah-jog hundi passes from one hand to another till it reaches a Shah, who, after reasonable enquiries, presents it to the drawee for acceptance of the payment. ii. Darshani Hundi: This is a hundi payable at sight. It must be presented for payment within a reasonable time after its receipt by the holder. Thus, it is similar to a demand bill. iii. Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time. This is similar to a time bill.
There are few other varieties like Nam-jog hundi, Dhani-jog hundi, Jawabee hundi, Jokhami hundi, Firman-jog hundi, etc.

6) CHARACTERISTICS OF PROMISSORY NOTE, BILL OF EXCHANGE & CHEQUES
After discussing the various types of negotiable instruments let us sum up their characteristics as under:-
i. Witting and Signature according to the rules – A Negotiable Instrument must be in writing and signed by the parties according to the rules relating to (a) promissory notes, (b) Bills of Exchange and (c) Cheques.

ii. Payable by Money – Negotiable Instruments are payable by the legal tender money of India. The Liabilities of the parties are governed in terms of such money only.

iii. Unconditional Promise – If the instrument is a promissory note, it must contain an unconditional promise to pay. If the instrument is a bill or cheque, it must be an unconditional order to pay money.

iv. Freely transferable – A negotiable instrument is transferable from one person to another by delivery or by endorsement and delivery.

v. Acquisition of Property – Any person, who possesses a negotiable instrument, becomes its owner and entitled to the sum of money, mentioned on the face of the instrument. When it is payable to bearer, the property in its passes from one holder to another by mere delivery. If it is payable to order, the property passes by endorsement, i.e. by the signature of its holder on its back and its delivery.

vi. Acquisition of Good Title – The holder in due course, i.e. the transferee of a negotiable instrument in good faith and for value, acquires a good title to the instrument even if the title of the transferor is defective. Further his title will not be affected, by any defect in the title of the transferor. vii. No Need of Giving Notice – There is no need of giving a notice of transfer of a negotiable instrument to the party liable to pay the money.

viii. Right of the Holder in Due Course – The holder in the due course remains unaffected by certain defenses, which might be available against previous holders, as for example , fraud, to which he is not a party.

ix. Certain Presumptions – Unless contrary proved certain presumptions are in the made case of all negotiable instruments. Consideration, date, signature of holder in due course, for example, is presumed in the case of all instruments.

x. Stamping of Bills of Exchange and Promissory Notes is mandatory – This is required as per the Indian Stamp Act, 1899. The value of stamp depends upon the value of the Promissory note or bill of exchange and the time of their payment.

7) DIFFERENCES BETWEEN:
A. PROMISSORY NOTE & BILLS OF EXHANGE

Parties
There are three parties to a bill of exchange, namely, the drawer, the drawee and the payee; while in a promissory note there are only two parties – maker and payee.

Nature of payment
In a bill of exchange, there is an unconditional order to pay, while in a promissory note there is an unconditional promise to pay.

Acceptance
A bill of exchange requires an acceptance of the drawee before it is presented for payment, while a promissory note does not require any acceptance since it is signed by the persons who is liable to pay.

Liability
The liability of the maker of a promissory note is primary and absolute, while the liability of a drawer of bill of exchange is secondary and conditional. It is only when the drawee fails to pay that the drawer would be liable as a surety.

Notice of dishonor.
In case of dishonor of bill of exchange either due to non-payment or non-acceptance, notice must be given to all persons liable to pay. But in the case of a promissory note, notice of dishonor to the maker is not necessary.

Maker’s position
The drawer of a bill of exchange stands in immediate relationship with the acceptor and not the payee. While in the case of a promissory note, the maker stands in immediate relationship with the payee.

Nature of acceptance
A promissory note can never be conditional, while a bill of exchange can be accepted conditionally.

Copies
A bill of exchange can be drawn in sets, but a promissory note cannot be drawn in sets.

Payable to bearer
A promissory note cannot be made payable to a bearer, while a bill of exchange can be so drawn provided it is not payable to bearer on demand.

Payable to maker
In a promissory note, the maker cannot pay to himself. While in the case of a bill of exchange, the drawer and the payee may be one person.

B. CHEQUE & BILLS OF EXCHANGE
Drawee
A cheque is always drawn on a bank or a banker while a bill of exchange can be drawn on any person including a banker.

Acceptance
A cheque does not require any acceptance while a bill must be accepted before the drawee can be made liable upon it.

Payment
A cheque is payable immediately on demand without any days of grace, but a bill of exchange is normally entitled to three days of grace unless it is payable on demand.

Crossing
A cheque may be crossed but there is no such provision in the case of a bill of exchange.

Notice of dishonor
When a cheque is not met, notice of dishonor is not necessary. Want of assets in the hands of the banker is sufficient notice. It is necessary to give a notice of dishonor in order to make the drawer of a bill liable.

Payable to bearer on demand
A cheque can be drawn payable to bearer on demand. But a bill of exchange cannot be so drawn.
Stamp
A bill of exchange must be stamped, whereas a cheque does not require any stamp.

Countermanding payment
A cheque may be revoked by countermand of payment. The payment of a bill, however cannot be countermanded.

Noting and protesting
A cheque is not noted or protested for dishonor and is generally inland.
Presentment
A bill of exchange must be duly presented for payment otherwise the drawer will be discharged. The drawer of a cheque is not discharged by failure of the holder to present it in due time unless the drawer has sustained damage by the delay.

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

9) SECTION 134 – 137 OF AN INTERNATIONAL LAW
(SECTION 134)
Law governing liability of maker, acceptor or endorser of foreign instrument.
In the absence of a contract to the contrary, the liability of the maker of drawer of a foreign promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and endorser by the law of the place where the instrument is made payable.
Illustration
A bill of exchange was drawn by A California where the rate of interest is 25 per cent and accepted by B, payable in Washington where the rate of interest is 6 per cent. The bill is endorsed in [India], and is dishonored. An action on the bill is brought against B in [India]. He is liable to pay interest at the rate of 6 per cent, only; but if A is charged as drawer, A is liable to pay interest at the rate of 25 per cent.

(SECTION 135)
Law of place of payment governs dishonors.
Where a promissory note, bill of exchange or cheque is made payable in a different place from that in which it is made or endorsed, the law of the place, where it is made payable determines what constitutes dishonor and what notice of dishonor is sufficient.
Illustration
A bill of exchange drawn and endorsed in [India], but accepted payable in France, is dishonored. The endorsee causes it to be protested for such dishonor and gives notice thereof in accordance with the law of France through not in accordance with the rules herein contained in respect of bills which are not foreign. The notice is sufficient.
(SECTION 136)
Instrument made out of India, but in accordance with the law of India
If a negotiable instrument is made, drawn accepted or endorsed [outside India], but in accordance with the [law of India], the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or endorsement made thereon [within India].

(SECTION 137)
Presumption as to Foreign Law.
The law of any foreign country regarding promissory note, bills of exchange and cheques shall be presumed to be the same as that of [India], unless and until the contrary is proved.

10) DISHONOR OF NEGOTIABLE INSTRUMENTS
When a negotiable instrument is dishonored, the holder must give a notice of dishonor to all the previous parties in order to make them liable. A negotiable instrument can be dishonored either by non-acceptance or by non-payment. A cheque and a promissory note can only be dishonored by non-payment but a bill of exchange can be dishonored either by non-acceptance or by non-payment.

Dishonor by non-acceptance (Section 91)
A bill of exchange can be dishonored by non-acceptance in the following ways:

i. If a bill is presented to the drawee for acceptance and he does not accept it within 48 hours from the time of presentment for acceptance. When there are several drawees even if one of them makes a default in acceptance, the bill is deemed to be dishonored unless these several drawees are partners. Ordinarily when there are a number of drawees all of them must accept the same, but when the drawees are partners’ acceptance by one of them means acceptance by all.

ii. When the drawee is a fictitious person or if he cannot be traced after reasonable search.

iii. When the drawee is incompetent to contract, the bill is treated as dishonored.

iv. When a bill is accepted with a qualified acceptance, the holder may treat the bill of exchange having been dishonored.

v. When the drawee has either become insolvent or is dead.

vi. When presentment for acceptance is excused and the bill is not accepted. Where a drawee in case of need is named in a bill or in any indorsement thereon, the bill is not dishonored until it has been dishonored by such drawee.

Dishonor by non-payment (Section 92)
A bill after being accepted has got to be presented for payment on the date of its maturity. If the acceptor fails to make payment when it is due, the bill is dishonored by non-payment. In the case of a promissory note if the maker fails to make payment on the due date the note is dishonored by non-payment. A cheque is dishonored by non-payment as soon as a banker refuses to pay.

An instrument is also dishonored by non-payment when presentment for payment is excused and the instrument when overdue remains unpaid (Sec 76).

Effect of dishonor: When a negotiable instrument is dishonored either by non acceptance or by non-payment, the other parties thereto can be charged with liability. For example if the acceptor of a bill dishonors the bill, the holder may bring an action against the drawer and the indorsers. There is a duty cast upon the holder towards those whom he wants to make liable to give notice of dishonor to them.

Notice of dishonor: Notice of dishonor means the actual notification of the dishonor of the instrument by non-acceptance or by non-payment. When a negotiable instrument is refused acceptance or payment notice of such refusal must immediately be given to parties to whom the holder wishes to make liable. Failure to give notice of the dishonor by the holder would discharge all parties other than the maker or the acceptor (Sec. 93).

Notice by whom: Where a negotiable instrument is dishonored either by non- acceptance or by non-payment, the holder of the instrument or some party to it who is liable thereon must give a notice of dishonor to all the prior parties whom he wants to make liable on the instrument (Section 93). The agent of any such party may also be given notice of dishonor. A notice given by a stranger is not valid. Each party receiving notice of dishonor must, in order to render any prior party liable give notice of dishonor to such party within a reasonable time after he has received it. (Sec. 95)

When an instrument is deposited with an agent for presentment and is dishonored, he may either himself give notice to the parties liable on the instrument or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder. The principal, too, in his turn has the same time for giving notice as if the agent is an independent holder. (Sec. 96)

Notice to whom?: Notice of dishonor must be given to all parties to whom the holder seeks to make liable. No notice need be given to a maker, acceptor or drawee, who is the principal debtors (Section 93).

Notice of dishonor may be given to an endorser. Notice of dishonor may be given to a duly authorized agent of the person to whom it is required to be given. In case of the death of such a person, it may be given to his legal representative. Where he has been declared insolvent the notice may be given to him or to his official assignee (Section 94). Where a party entitled to a notice of dishonor is dead, and notice is given to him in ignorance of his death, it is sufficient (Section 97).

Mode of notice: The notice of dishonor may be oral or written or partly oral and partly written. It may be sent by post. It may be in any form but it must inform the party to whom it is given either in express terms or by reasonable intendment that the instrument has been dishonored and in what way it has been dishonored and that the person served with the notice will be held liable thereon.

What is reasonable time? It is not possible to lay down any hard and fast rule for determining what reasonable time is. In determining what reasonable time is, regard shall be had to the nature of the instrument, the usual course the dealings with respect to similar instrument, the distance between the parties and the nature of communication between them. In calculating reasonable time, public holidays shall be excluded (Section 105).

Section 106 lays down two different rules for determining reasonable time in connection with the notice of dishonor (a) when the holder and the party to whom notice is due carry on business or live in different places, (b) when the parties live or carry on business in the same place.

In the first case the notice of dishonor must be dispatched by the next post or on the day next after the day of dishonor. In the second case the notice of dishonor should reach its destination on the day next after dishonor.

Place of notice: The place of business or (in case such party has no place of business) at the residence of the party for whom it is intended, is the place where the notice is to given. If the person who is to give the notice does not know the address of the person to whom the notice is to be given, he must make reasonable efforts to find the latter’s address. But if the party entitled to the notice cannot after due search be found, notice of dishonor is dispensed with.

Duties of the holder upon dishonor

i. Notice of dishonor. When a promissory note, bill of exchange or cheque is dishonored by non-acceptance or non-payment the holder must give notice of dishonor to all the parties to the instrument whom he seeks to make liable thereon. (Sec. 93)

ii. Noting and protesting. When a promissory note or bill of exchange has been dishonored by non-acceptance or non-payment, the holder may cause such dishonor to be noted by a notary public upon the instrument or upon a paper attached thereto or partly upon each (Sec. 99). The holder may also within a reasonable time of the dishonor of the note or bill, get the instrument protested by notary public (Sec. 100).

iii. Suit for money. After the formality of noting and protesting is gone through, the holder may bring a suit against the parties liable for the recovery of the amount due on the instrument.

iv. Instrument acquired after dishonor: The holder for value of a negotiable instrument as a rule is not affected by the defect of title in his transferor. But this rule is subject to two important exceptions:

a. When the holder acquires it after maturity and
b. When he acquires it with notice of dishonor.

The holder of a negotiable instrument who acquired it after dishonor, whether by non-acceptance or non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights thereon of his transfer (Sec. 59).

11) CURRENT SCENARIO
Today’s scenario of negotiable act is being transforming, not from his basic sense but in transactions of trade & commerce due to development of technology.
Negotiable Instruments by statue still remain the same but there is a change in way it is perceived. There is a reform in banking due to introduction of electronics and internet, the face of banking is changing which in turn is bringing changes in negotiation.
Bounce of cheque offence likely to go

It is estimated that more than 30% of all the pending cases in courts across the country are either related to cheque bounce or traffic challans. The proposed amendment has been recently suggested by an inter-ministerial group (IMG), which was set up last year to make suggestions for necessary policy and legislative changes to deal with a large number of cases pending in various courts.

The law ministry is working closely with the finance and surface transport ministries to make suitable changes in the law and cases falling under both categories (cheque bounce and traffic challans) will be ineligible to be taken to courts unless some other criminal intent is alleged. The changes in the NI Act will make it compulsory for the disputing parties to resolve the matter through alternative dispute resolution mechanism. Amendments in the Motor Vehicles Act are suggested for cases related to traffic challans.
"The use of alternative dispute resolution mechanism on the lines of Section 89 of the Code of Civil Procedure , through arbitration; conciliation; judicial settlement including settlement through Lok Adalat of mediation may be made compulsory in cheque bounce cases by making suitable amendments in the negotiable instruments act," the IMG recommendation said.
The IMG report, being implemented by the finance ministry, said a summary procedure for dealing with cheque bounce cases as a schedule of procedure may be codified, and developed by the department of financial services. The same may suitably be incorporated in the Negotiable Instruments Act, it added. The existing rules for court fees do not take into account the amount involved in the cheque or volume of complaint cases. "The court fee may be made Ad-valorem to act as a deterrent for indiscreet and vexatious complaints ," the IMG has said. Provision may also be made for defaulting party to bear the cost of litigation in cheque bounce cases.

Cheque Truncation System

Legal issues relating to electronic transaction processing at banks are too many and the need to address them by amending some of the existing acts and promoting the legislation in a few unexpected areas has assumed critical urgency. Necessary legislative support is essential to protect the interests of the banks as well as the costumers in several areas relating to electronic banking and payment systems. Since the Reserve bank is embarking on large electronic schemes like the nationwide RTGS, its time that efforts are made to bring about the necessary legislative framework that is in line with the initiatives taken by the Government of India.
Cheques are a type of negotiable instrument. There are certain changes in the laws regarding cheques implemented in the year 2013. The changes are:
Cheque Truncation System (CTS) or Image-based Clearing System (ICS), in India, is a project undertaken by the Reserve Bank of India – RBI, for faster clearing of cheques. CTS is basically an online image-based cheque clearing system where cheque images and Magnetic Ink Character Recognition (MICR) data are captured at the collecting bank branch and transmitted electronically.
Truncation means, stopping the flow of the physical cheques issued by a drawer to the drawee branch. The physical instrument is truncated at some point en route to the drawee branch and an electronic image of the cheque is sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting banks etc.
Cheque truncation, would eliminate the need to move the physical instruments across branches, except in exceptional circumstances. This would result in effective reduction in the time required for payment of cheques, the associated cost of transit and delays in processing, etc., thus speeding up the process of collection or realization of cheques.
Normally, when you issue a cheque to someone, he presents the cheque in his bank to get the credit.
The cheque then moves physically from his bank to your bank which involves a lot of time and risk. RBI recognized the disadvantages of this old system and brought about CTS, where instead of the physical movement of the cheque, an electronic image of the cheque is transmitted to the drawee branch.
The presenting bank (which is the bank of the person to whom you had issued the cheque to) retains the physical cheque. Along with the electronic image, certain key relevant information is also transmitted, such as date of presentation, presenting bank details, data on the MICR band.
The Reserve Bank of India first implemented CTS in National Capital Region, New Delhi from December 27, 2007 with 10 pilot banks and the dead line was set as April 30, 2008 for all the banks. This was followed by launch of CTS in Chennai on September 24, 2011. After migration from MICR to CTS the traditional MICR based cheque processing was discontinued in NCR and Chennai.
Based on the experience gained and the benefits that would accrue to the customers and banks, it was decided to operationalise CTS across the country. Starting August 1st, 2013 only CTS-2010 compliant cheques would be accepted for clearing. On 17th July 2013 the RBI extended the deadline to 31st December 2013.
FEATURES
The CTS-2010 is not just a change in the process of cheque clearing. The change in the system is apparent even on the cheque leaf you use. A CTS compliant cheque leaf is different from a normal cheque leaf you currently use, and has certain distinct features.
Cheque printer details: This is printed on the extreme left hand side of the cheque. The printer details along with the words ‘CTS-2010’ is mentioned along the area where you tear off the leaf from the cheque book.
Rupee symbol: The new symbol of the Indian rupee is printed beside the area where the amount in figures needs to be written.
Details of the bank and its logo: The bank details and its logo are printed on the face of the cheque. However, it is printed in invisible ink.
Signature space indicator: The words ‘please sign above’ are mentioned indicating the space where you will need to sign the cheque.
VOID pantograph: This is a wavelike design, which is visible to the naked eye and seen below the area where the account number is printed. CTS-compliant cheques are safer than old cheques.
BENEFITS

For Banks: Banks can expect multiple benefits through the implementation of CTS, like faster clearing cycle means realization of proceeds of cheque possible within the same day. It offers better reconciliation/verification process, better customer service and enhanced customer window. Operational efficiency will provide a direct boost to bottom lines of banks as clearing of local cheques is a high cost low revenue activity. Besides, it reduces operational risk by securing the transmission route. Centralized image archival system ensures data storage and retrieval is easy. Reduction of manual tasks leads to reduction of errors. Customer satisfaction will be enhanced, due to the reduced turnaround time (TAT). Real-time tracking and visibility of the cheques, less fraudulent cases with secured transfer of images to the RBI are other possible benefits that banks may derive from this solution.

For Customers: CTS / ICS substantially reduces the time taken to clear the cheques as well enables banks to offer better customer services and increases operational efficiency by cutting down on overheads involved in the physical cheque clearing process. In addition, it also offers better reconciliation and fraud prevention. CTS / ICS use cheque images, instead of the physical cheque itself, for cheque clearance thus reducing the turnaround time drastically.

12) REVOLUTION OF PAYMENT SYSTEM
Digital Cash
A ‘Digital Coin’ or digital cash consists of a message issued by a bank or other entity and encrypted by its Private Key. The message contains the serial number of the cash, the identity of the user and its Internet address, the amount of cash and an expiry date. This serial number is unique to bank and can be decrypted by bank only. This serial number cannot be altered unless message is tweaked i.e. it is permanent in nature and once set cannot be changed.
The main feature of digital cash is that:
1. It is not traceable i.e. one cannot track the initial user or whom the money is been transferred.
2. It is transnational and can be sent anywhere in the world.
Example: - When Suchita bought a book from the online retailer and wanted to make payment in digital cash for the given price, a digital cash code is associated with the requested digital cash value i.e. the book price generated from Suchita’s bank which provides her the digital cash service. So the code is then communicated to the online retailer, the retailer will confirm the code from the bank whether it is the correct code and that there is no multiple transactions. Then the code is encrypted with the retailer’s bank account code for the transfer of money.

Smart Card
A ‘Smart Card’ is like a “electronic wallet.” It is a standard credit card-sized plastic intelligent token within which a microchip has been embedded within its body which makes it smart. Amongst other things, the card can be used to store money, or a value of money, including digital coins.
Example: - Raj had gone of station for his cousin’s marriage for 5 days to Delhi. He went for shopping to a mall. He purchased clothes, shoes and perfume. During payment he realised that the cash he was carrying in his wallet was not enough to pay the bill. So he thought rather than withdrawing cash from an ATM, he would pay directly by using his credit card. This will save his time and it is easy to do the transaction.

Electronic Fund Transfer (EFT)
Electronic Fund Transfer (EFT) is the electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer based systems. The primary modes of funds transfer at present are demand draft, mail transfer and telegraphic transfer. The time taken by these modes of transfer for transferring the money from sender to beneficiary is around 8 to 10 days. In the case of Electronic fund transfer, fund reaches the beneficiary either on the same day or the next day.
Example: - Suppose there are 2 parties A and B entered into a contract. If party A wants to make payment to party B through Electronic fund transfer then party A will approach his bank to make to party B. Party A will give all the details of party A and party B required for making a Electronic fund transfer to his bank and then the bank of part A will make the payment to bank of party B. The bank of party B then will make the payment to party B.

Digital Cheque
Digital Cheque is a form of payment used in E-commerce. A digital cheque functions in the same way as paper cheque. It acts as a message to a bank to transfer funds to a third party; however, it has a number of security advantages over conventional cheques since the account number can be encrypted, a digital signature can be employed, and digital certificates can be used to validate the payer, the payer’s bank, and the account.

\

There are two types of digital cheques: -
1. Electronic cheques

Electronic cheques are issued electronically and no paper is involved. The electronic cheques are issued in electronic form with digital signatures / biometric signatures / encrypted data.

2. Truncated cheques

In cheque truncation, at some point in the flow of the cheque, the physical cheque is replaced with an electronic image of the cheque and that image moves further. The processing is done on the basis of this truncated cheque and physical cheque is stored.
Example: - a company that is depending on the received cheque clearing in time to use the funds to manage an employee payroll will appreciate the speed that the electronic cheque deposit method provides in comparison to waiting several days for paper cheque to clear

RTGS

The acronym 'RTGS ' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time ' means the processing of instructions at the time they are received rather than at some later time; 'Gross Settlement ' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.
Electronic Fund Transfer is different from RTGS as EFT works on the basis of batch transactions. Transactions in NEFT are netted i.e. batched and in RTGS it settles all transactions individually. For example, currently, NEFT operates in hourly batches. [There are twelve settlements from 8 am to 7 pm on week days and six settlements from 8 am to 1 pm on Saturdays.] Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours.
The RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is 2 lakh. There is no upper ceiling for RTGS transactions.
Under normal circumstances the beneficiary branches are expected to receive the funds in real time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit the beneficiary 's account within two hours of receiving the funds transfer message. The remitting bank receives a message from the Reserve Bank that money has been credited to the receiving bank. Based on this the remitting bank can advise the remitting customer through SMS that money has been credited to the receiving bank.

With a view to rationalize the service charges levied by banks for offering funds transfer through RTGS system, a broad framework has been mandated as under:
a) Inward transactions – Free, no charge to be levied.
b) Outward transactions – ` 2 lakh to ` 5 lakh - not exceeding ` 30 per transaction;
Above ` 5 lakh – not exceeding ` 55 per transaction.

Mobile commerce
Mobile users are increasing day by day and hence concentrating on mobile internet is important. New android apps help you book tickets, recharge you phone, pay bills etc. These apps are revolutionary and hold a future scope of expansion.
Transactions are done by just sending a message this makes it easier and saves a lot of time. Banking details like credit/debit of monetary value are sent to you by a SMS an you can rely on it as a proof. Thus revolution has been bought by M commerce and is still expanding day by day.

Advantages
a) Saves time
b) Easy to use and handle
c) Latest details regarding your account are available.
Disadvantage
a) Security reasons if mobile changes a lot of hands.
b) Easy to use only if familiar
c) People still don’t feel it’s a reliable source.

13) FUTURE PROSPECTS
The current scenario talks about saving time and increasing security by any means possible and also comfort and simplicity of use. It is noticed that as security regarding a certain issue increases, complexity too increases. To overcome these factors our body Biometrics will be used and also Banks will be automated and won’t have people working on the interface of customers, these will be Universal Banks.
Biometrics

It consists of methods for uniquely recognizing humans based upon one or more intrinsic physical or behavioral traits. The traits that are considered include fingerprints, retina and iris patterns, facial characteristics and many more. Biometrics is used as a form of identity access management and access control”
The meaning of Biometrics is “life measurement" which measure a particular set of a person 's vital statistics in order to determine identity. E.g. Identify individuals in groups are means of identity access management & A PIN on an ATM system at a bank is means of access control.
Biometric characteristics can be divided in two main classes
1. Behavioural Biometrics: It basically measures the characteristics which are required naturally over a time. It is generally used for verification.
Eg: -
Speaker Recognition – analyzing vocal behaviour
Signature – analyzing signature dynamics
Keystroke – measuring the time spacing of typed keywords

2. Physical Biometric definition: It measures the inherent physical characteristics on an individual. It can be used for either identification or verification.
Eg: -
Fingerprint – analyzing fingertip patterns
Facial recognition – measuring facial characteristics
Hand Geometry – measuring the shape of the hand
Iris Scan – analyzing features of coloured ring of the eye
Retinal Scan – analyzing blood vessels in the eye
DNA – analyzing genetic makeup

Advantages of Biometrics in negotiable instruments:
Increase Security – Provide a convenient and low-cost additional tier of security.
Reduce fraud by employing hard-to-forge technologies and materials.
Eliminate problems caused by lost Ids or forgotten passwords by using physiological attributes. Eg: - Prevent unauthorised use of lost, stolen or “borrowed” ID cards.
Reduce password administration cost.
Replace hard-to-remember passwords which may be shared or observed.
Integrate a wide range of biometric solutions and technologies, customer applications and data bases into a robust and scalable control solution for facility and network access.
Make it possible, automatically, to know WHO did WHAT, WHERE and WHEN!
Offer significant cost savings or increasing ROI in areas such as Loss Prevention or Time and Attendance Universal Banks

These will be automated banks interfaced like ATM’s and would be able to access any bank account of the user by using the above biometric or any such relevant technique of that time. This will help the customer to simplify banking and its terms.
It will make available access to bank anywhere from any place. Tracking of transactions will become electronic and not mechanical and hence manipulation will be of less order.

Advantages
Easier access to any account of different banks and hence reducing time wastage.
All transactions which include different banks will be done by one machine.
Simplicity on the part of customer increases to a really high level.
Disadvantages
Complexity on the part of bank increases
Initial acceptance may be complicated for customers
Machine goes down and thus the interface between bank and customer is gone.
Banks and Universal ATM Banks will prevail hand to hand.

14) CASE STUDY
Case study one: The Morvi Mercantile Bank v/s The Union of India
FACTS:

A firm doing business in Bombay entrusted goods worth Rs.35500 with the Railway for delivery in Delhi. The goods were consigned to “self” and the firm endorsed the railway receipts to a Bank against an advance of Rs. 20,000 made by the Bank to the firm. The firm also executed a promissory note in favor of the Bank for that amount. When the goods reached the destination, the Bank refused to take delivery, on the ground that they were not the goods consigned by the firm. The Bank, thereafter filed a suit for the recovery of the value of the goods against the Railway.

ISSUE:

Can an owner of goods make a valid pledge of them by transferring the railway receipt representing the said goods? What value such documents carry for this purpose?

HELD:

Trial Court: Dismissed the suit of bank.

High Court: Allowed the appeal and decreed the claim for Rs. 20,000 on the ground that as pledgee of the goods, the Bank suffered loss only to the extent of the loss of its security. Both the Bank and the Railway appealed to SC.

SUPREME COURT

Contention (Railway): The endorsement of the railway receipt in favor of the Bank did not constitute a pledge of the goods covered by the receipt and the Bank had no right to sue for compensation.

Held

Subba Rao, Raghubar Dayal and Bachawat, J J
1. An owner of goods can make a valid pledge of them by transferring the railway receipt representing the said goods. The firm by endorsing the railway receipts in favour of the Bank, for consideration, pledged the goods covered by the said receipts, to the Bank, and the Bank being the pledgee could maintain the suit for the recovery of the full value of consignment amounting to Rs. 35,500.
2. A pledge being a bailment of goods under s. 172 of the Contract Act the pledgee, as a bailee will have the same remedies as the owner of the goods would have against a third person for deprivation of the said goods or injury to them under s. 180 of the Act.

Mudholkar & Ramaswami JJ. (Dissenting)

1. There was no valid pledge of the consignments of goods represented by the railway receipt in favour of the Bank and the Bank was not entitled to sue the Railway for compensation for the loss of goods, relying upon the endorsements of the railway receipts in its favour.

2. After the passing of the Indian Contract (Amendment) Act, 1930, the legal position with regard to the pledge of railway receipts, is exactly the same in Indian Law as it is in English Law, and consequently, the owner of the goods cannot pledge the goods represented by a railway receipt, by endorsing the railway receipt, unless the railway Authorities were notified of the transfer, and they agreed to hold the goods as bailee of the pledgee. Under the amended law a valid pledge can no longer be made by every person “in possession” of goods. It can only be made by a mercantile agent as provided in s. 178 of the Contract Act (after amendment) or by a person who has obtained possession of goods under a contract voidable under s. 19[4] or s. 19A of the Contract Act, as provided by s. 178 of the Act or by a seller or buyer in possession of goods, after sale as provided in s. 30[5] of the Indian Sale of Goods Act.

3. Negotiability of such receipt is a creature of a statute or mercantile usage, not of Judicial decisions apart from either. So, in the absence of any usage of trade or any statutory provision to that effect, a railway receipt cannot be accorded the benefits which flow from negotiability under the Negotiable Instruments Act, so as to entitle the endorsee, as the holder for the time being of the document of title, to sue the carrier-the railway authority-in his own name. In view of cl. (3) of the notice printed at the back of the receipt that an endorsement made on the face of the receipt by the consignee was only meant to indicate the person to whom the consignee wished delivery of goods to be made if he himself did not attend to take delivery, the Bank had no right to sue the Railway.

Since the language of s. 178[6]of the Contract Act is clear and explicit, if any hardship and inconvenience is felt because of, such practice of treating the receipt as a symbol of goods as not recognized, it is for Parliament to take appropriate steps to amend the law and it is not for courts to legislate under the guise of interpretation.

I. Wanted full recovery of Rs.35500
II. Main Judge
III. On a reasonable construction of s. 178 of the Contract Act, 1872, ss. 4 and 137 of the Transfer of Property Act, 1882, and ss. 30 and 53 of the Indian Sale of Goods Act, 1930.
IV. When consent to an agreement is caused by coercion {The words “undue influence” were rep.by Act 6 of 1899, s 3} fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
V. Where a person, having sold goods, continues or is in possession of the goods or of the documents of title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him, of the goods or documents of title under any sale, pledge or other disposition thereof to any person receiving the same in good faith and without notice of the previous sale shall have the same effect as if the person making the delivery or transfer were expressly authorized by the owner of the goods to make the same. (2) Where a person, having bought or agreed to buy goods, obtains, with the consent of the seller, possession of the goods or the documents of title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him, of the goods or documents of title under any sale, pledge or other disposition thereof to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of the goods shall have effect as if such lien or right did not exist.
VI. Where a mercantile agent is, with the consent of the owner, in possession of goods or the document of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorized by the owner of the goods to make the same; provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge.

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

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

On a complaint filed by the RBI, the Delhi High Court ordered the winding up of the company. The court also appointed an official liquidator and said that the RBI did not consider the revival scheme filed by the company viable. The RBI also filed criminal prosecution petitions in the Metropolitan Magistrates ' Courts in New Delhi.

RBI alleged that the company had accepted deposits worth Rs 88.82 crore which was 756.68% of its net owned fund. This was much higher than the permissible limit of 25% [1]. Similarly, JVG Leasing had received deposits worth Rs 19.28 crore which was 147.58% of its net owned fund. The RBI complaint also said that the deposit forms issued by the JVG Group did not contain any information regarding premature withdrawals, which was necessary as per RBI provisions. The companies had not provided any information about the rate of interest to the investors on the receipts issued to them. Further, the companies failed to submit their audited balance sheets for the period ending March 31, 1994 and 1995 15 days after their annual general meeting (AGM) and did not inform the RBI about the changes in the composition of the board of directors.

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

15) CONCLUSION

16) REFERNCES
Book – Mercantile Law by N.D. Kapoor
Web – http://en.wikipedia.org/wiki/Negotiable_instrument http://www.ddegjust.ac.in/studymaterial/mcom/mc-207-f.pdf http://indiankanoon.org/doc/1132672/ http://www.lawteacher.net/tort-law/essays/principle-of-negotiability-of-negotiable-instruments.php http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/4452.pdf http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=28 http://indiancaselaws.wordpress.com/2012/01/21/the-morvi-mercantile-bank-ltd-and-anr-v-union-of-india/ http://www.icmrindia.org/free%20resources/casestudies/jvg-scandal-3.htm http://www.icmrindia.org/free%20resources/casestudies/jvg-scandal-4.htm

References: According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means “promissory note, bill of exchange, or cheque, payable either to order or to bearer”. 4) NEGOTIABLE INSTRUMENTS ACT, 1881 The Negotiable Instruments Act was enacted, in India, in 1881 Explain capacity and liability parties to a negotiable instruments; and Understand various provisions of negotiable instrument Act, 1881 regarding negotiation, assignment, endorsement, acceptance, etc