Banking Regulation Act

Banking Regulation Act.pdf

BRA was passed to consolidate and amend laws regarding banking companies.

Purpose was to provide safety to the interests of depositors and to prevent the misuse of power
by managers of banks.

Concept of Bank and Banker

Section 5 (b) - banking - accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft,
order or otherwise

R. Pillai v S. Ayyar - Treasury is not a bank

If a bank accepts deposits for any other reason other than lending or investment, it will not be a
banking company. Hence, institutions like Industrial Finance Corporation of India and State
Finance Corporations are not banks as they do not accept deposits in the prescribed manner.

Section 5 (c) - banking company - any company which transacts the business of banking in
India.

Explanation.—Any company which is engaged in the manufacture of goods or carries on any

trade and which accepts deposits of money from the public merely for the purpose of financing
its business as such manufacturer or trader shall not be deemed to transact the business of
banking within the meaning of this clause

Section 6 - Form of business in which banking companies may engage - Defines scope of
term of banking business. It includes:

 borrowing, lending of money with or without security, dealing in bills of exchanges,

buying or selling or dealing in bullions, buying and selling of foreign exchange,
providing safe deposit vaults
 acting as agents for any Government or local authority or any other person or persons,
 contracting for public and private loans and negotiating and issuing the same
 effecting, insuring, guaranteeing, underwriting, participating in managing and carrying
out of any issue, public or private, of State, municipal or other loans or of shares, stock,
debentures, or debenture stock of any company and the lending of money for the purpose
of any such issue
 carrying on and transacting every kind of guarantee and indemnity business
 managing, selling and realising and property which may come into the possession of the
company in satisfaction or part satisfaction of any of its claims
  dealing with any property which may form the security for any loans or advances
 undertaking and executing trusts
 undertaking the administration of estates as executor, trustee or otherwise
 establishing and supporting associations, institutions, funds, trusts and conveniences
calculated to benefit employees or ex-employees of the company or the dependents or
connections of such persons; granting pensions and allowances and making payments
towards insurance; subscribing to or guaranteeing moneys for charitable objects
 acquisition and maintenance of works necessary for the purposes of the company
 Selling or disposing or dealing with all or any of the property and rights of the company
 acquiring and undertaking the whole or any part of the business of any person or
company, when such business is of a nature enumerated or described in this sub-section
 doing all such other things as are incidental or conducive to the promotion or
advancement of the business of the company
 any other form of business which the Central Government may, by notification in the
Official Gazette, specify as a form of business in which it is lawful for a banking
company to engage.

Banking companies cannot engage in any activity which is not enumerated here.

Additional business of banking company includes that a banking company becomes competent to
carry on other businesses when it is ordered to be wound up and an official liquidator has been
appointed.

Section 22 - Licensing of Banks- A company can only carry on banking business unless it holds
a license issued in that behalf by RBI. Conditions to be fulfilled includes:

 the company must be in a position to pay its present and future depositors in full as their
claims accrue
 the affairs of the company are not being conducted in a manner or are not likely to be
conducted in a manner detrimental to the interests of its present or future depositors
 the general character of the proposed management of the company will not be prejudicial
to public interest or the interest of its depositors.
 company has adequate capital structure
 public interest will be served by grant of license
 grant of license is not prejudicial to the operation and consolidation of the banking
system consistent with monetary stability and economic growth.
 Any other condition which RBI thinks is necessary.

RBI can cancel license if these conditions are not fulfilled or if the company ceases to carry on
banking business in India.

Section 7- only banking companies can use the words “bank”, “banking company”, “banker” or
“banking” in the name of their company. Conversely, a company cannot carry on the business of
banking unless it uses one of these words in its name.
Section 8 - Prohibition on trading - A banking company cannot directly or indirectly deal in
buying or selling or bartering of goods. This may be done only to the extent to which it is
necessary for realisation of any security given to it or held by it. It cannot also engage in any
trade, or buy or sell or barter goods for others otherwise than in connection with bills of
exchange received for collection, or negotiation or for that class of its businesses as mentioned in
Section 6 (1) (i).

This prohibition does not apply to any such business allowed by the Central Government by
notification in Official Gazette.

Here, goods means every kind of immovable property but does not include actionable claims,
stocks, shares, money, bullion, specie (money in the form of coins rather than notes).

State Bank of Travancore v CTO - A bank had to sell pledged gold ornaments by bullion auction
but this was held to be not prohibited by Section 8. Even if it is an exercise of the right under the
pledge for realisation of security, it is in essence a sale of goods. It was considered to be a part of
the course of banking business.

Section 9 - Disposal of non-banking assets - A banking company is not allowed to hold any
immovable property howsoever acquired but can acquire it for its own use. In any other case, the
property cannot be held for longer than 7 years. RBI can extend this period for maximum 5 years
if it is satisfied that the extension is necessary in the interest of depositors of the banking
company.

Conduct of a Banker

Case laws:

Case Name Ruling

Union of India v.
Conduct of Bankers to be that of devotion, diligence, integrity & honesty
Vishwa Mohan 1998.
SBI v. R Periysamy
Shortage of cash doesn’t amount to misappropriation. What
2015
is essential is utmost
devotion
A cheque issued by a bank employee was dishonoured. Court said that the
M Lakshnamann v
conduct of an employee in entering into a partnership while in service and
ICICI Bank
issuing cheques in a transaction arising out of business which were
Employee Union
dishonoured and his conviction for the offense amounted to moral
2011
turpitude.
PNB v. Jagdish Singh Bank can suspend employees with criminal prosecution.
Misconduct includes act of negligence, act prejudicial to interest of Bank
SBI v TJ Paul
and acts of serious loss to Bank
Srinivasa Desai v
Employee who played fraud on Bank will be treated as debtor
Canara Bank
Section 11 - Requirement as to minimum paid-up capital and reserves. - A banking company
must maintain these statutory minimum capital and reserves

 Foreign banking company - Aggregate value of the paid-up capital and reserves must be
atleast 15 lakh rupees. If place of business is in Bombay or Calcutta - 20L. This amount
must be deposited with RBI in the form of cash or unencumbered securities. Also has to
deposit 20% of its profits every year
 Other banking companies -
o if places of business in more than one state - 5L and if any such place of business
is situated in Bombay or Calcutta both then 10L
o If all places of business in one state but none in Bombay / Calcutta - 1L (principal
place of business) + 10K (each other place of business situated in the same district
as principal place of business) + 25K (each place of business situated elsewhere in
the State otherwise than in the same district) [Overall not more than 5L]
o if all places of business

Section 12 - Regulation of shareholding and voting rights -

 Subscribed capital > 50% of authorised capital

 Paid-up capital > 50% of subscribed capital

[if requirements are not complied, RBI will give 2 years to comply]

Preference shares can be issued as per how RBI specifies in its guidelines

A person holding shares in a banking company is not to exercise voting rights in respect of his
shareholding on a poll in excess of 10% of the total voting rights of all the shareholders of the
banking company.

Section 17 - Reserve Fund - out of balance of profit of each year as disclosed in P/L Account,
transfer to the reserve fund a sum equivalent to atleast 20% of such profit.

Section 18- Cash Reserve

Every bank except for scheduled bank has to maintain in India on daily basis by way of cash
reserve at least such percent of the total of its demand and time liabilities in India as on the last
Friday of the second preceding fortnight as the RBI may specify by notification in the Official
Gazette from time to time. It may maintain the CR with itself or by way of balance in a current
account with RBI or by net balance in current account in one the above ways. The report of this
position has to be submitted to RBI by a return before 20th day of every month showing the
amount so held on alternative Fridays with particulars of its demand and time liabilities on such
Fridays (if it is a holiday under the NI Act) then at the close of the business on the preceding
working day.
Section 24 - Maintenance of Percentage of assets - Banks have to maintain in addition to cash
reserve, a value of atleast 40% of its demand and time liabilities as on the last Friday of the
second preceding fortnight, every day.

Section 20 - Restrictions on loans and advances -

A banking company is not to grant any loan or advances on the security of its own shares. It also
cannot enter into any commitment for granting any loan or advance to any of its own director / to
anyone on his behalf / partnership firm in which any of its directors is interested as partner,
manager, employee or guarantor.

Section 25 - Assets in India - atleast 75% of demand and time liabilities must be in India on the
close of business on the last Friday of every quarter. Company has to also submit return to RBI
within 1 month from the end of every quarter

Section 46 - Penalties

 submission of false statements

 failure to produce documents
 acceptance of deposits in contravention of orders
 contravention of provisions or defaults
 contravention or default by company
 persons involved with consent or connivance
 chairman, directors etc to be public servants

Functions of Bank
Functions of a Banker.pdf

Primary functions :

1. Accepting of deposits
2. Granting of loans and advances

Secondary Functions :

1. Issuing of letter of credit, travellers cheque, circular notes etc

2. Undertaking safe custody of the valuables
3. Providing facilities of foreign exchange
4. Standing as a guarantee on behalf of its customers
5. Issuing demand draft and pay orders
6. Collecting and supplying business information
7. Providing report on credit worthiness of the customer.
Classification of Banks
Types of Banks.pdf

RBI

Scheduled Banks - listed in the second schedule of the RBI Act of 1934; have corporate status
and minimum paid-up share capital of INR 500

Commercial Banks - require license from RBI to commence banking operations, open new bank
branch, close existing bank branch, change in location of existing branch. Main object is profit.

Public Sector Banks - Govt owns atleast 51% of the bank either at the central or state level

SBI and Associates

Nationalised Banks - corporations and their premises are public premises and entire capital is
with the Central Govt.

Other Public Sector Banks

Private Sector Banks

Foreign Banks - Banks that are established in India but are owned by a foreign firm or entities,
like Citi Bank. These are essentially private banks with foreign ownership.

Regional Rural Banks - Under the provisions of the Regional Rural Banks Act of 1976, Regional
Rural Banks were created in 1975 with the goal of boosting the rural economy by offering loans
and other facilities, particularly to small and marginal farmers, agricultural laborers, artisans, and
small businesses owners, for the growth of agriculture, trade, commerce, industry, and other
productive activities in rural areas.

Co-operative Banks - These banks are organised under the state government’s act. They give
short-term loans to the agriculture sector and other allied activities. The main goal of
Cooperative Banks is to promote social welfare by providing concessional loans.

State Co-operative Banks - Funded by RBI, the government and NABARD. Money is then
distributed to the public. Concessional CRR and SLR apply

District Co-operative Banks

Other Co-operative Banks

Non-Scheduled Banks - have limited operations, for eg: cannot transact in foreign exchange,
must maintain reserve requirements but not necessarily with RBI
Control by Government and its agencies
Section 21 - Power of RBI to control advances - RBI may lay down a policy whenever it is
satisfied that it has become necessary or expedient in public interest or in the interest of
depositors or banking policy. The policy may be laid down to be followed by banking companies
generally or by any banking company in particular and all banks are bound to follow the policy.
RBI can issue directions for:

 the purposes for which advance may or may not be made,

 the margins to be maintained in respect of secured advances,
 the maximum amount of advances or other financial accommodation which, having
regard to the paid-up capital, reserves and deposits of a banking company and other
relevant considerations, may be made by that banking company to any one company,
firm, association of persons or individual,
 the maximum amount up to which, having regard to the considerations referred to in
clause (c), guarantees may be given by a banking company on behalf of any one
company, firm, association of persons or individual, and
 the rate of interest and other terms and conditions on which advances or other financial
accommodation may be made or guarantees may be given

Section 31 - Submission of Returns - 3 copies of the balance sheet, accounts and auditor’s
report have to be filed with RBI within 3 months from the end of the period to which they relate

Section 35 - Power of RBI to give directions - Directions can be issued when RBI is satisfied
that it is in public interest or in the interest of banking policy or to prevent the affairs of any
banking company from being conducted in a manner prejudicial to the interests of depositors or
in a manner prejudicial to the interests of the bank or to secure the proper management of any
bank

Management of Banking companies

Section 10 -Prohibition of employment of managing agents and restrictions on certain
forms of employment -

A banking company cannot employ a person who has been adjudicated insolvent or who has
suspended payment or compounded with his creditors or who is or has been convicted by a
criminal court of an offence involving moral turpitude.

Cannot employ a person whose remuneration or commission or share in the profits of the
banking company. Does not include payment of any bonus in pursuance of a settlement or award
arrived at or made under any law relating to industrial disputes.

Person who is a director of any other company which is not a subsidiary of the banking company
Person who is engaged in any other business or vocation

Section 10B -Banking company to be managed by whole-time chairman

one director is appointed as a chairman on whole-time or part-time basis. If whole-time then he

gets control over all affairs of the company and if part-time then RBI approval required.

Section 36-AA. Power of Reserve Bank to remove managerial and other persons from
office. - if RBI is satisfied that in the public interest or for preventing the affairs of any bank
being conducted in a manner prejudicial to the interests of depositors or in a manner prejudicial
to the interests of the banking company or to secure the proper management of any bank, it may
remove employees from the company

36-AB. Power of Reserve Bank to appoint additional directors

On account and audit

Section 29 - Accounts and balance sheets - Every bank shall prepare P&L account and balance
sheet at the expiration of each calendar year or period of 12 months with such date as the Central
Government prescribes. Accounts should show all business transacted by the bank. Accounts
have to be signed by the manager or principal officer of the company.

Section 30 - Audit - B/S and P&L accounts have to be audited by a person who is duly qualified
under the law for the time being in force to be an auditor of companies. Prior approval of RBI is
necessary for appointed, reappointing or removing any auditor or auditors. RBI can order a
special audit of the banking company’s accounts if necessary in public interest or interest of the
bank or its depositors.

Section 35 - Inspection - RBI on its own motion and when directed by Central Govt may cause
an inspection to be made by one or more of its officers of any banking company and its books
and accounts and has to supply to the bank a copy of its inspection report.

 RBI can cause scrutiny to be made by one or more of its officers of the affairs of any
bank and its books and account and a copy of the report has to be furnished to the bank if
it asks for it.
 It is the duty of every director or other officer or employee of the bank to produce to the
inquiry or scrutiny officer all such books, accounts and other documents in his custody or
power and furnish all statements and information relating to the affairs of the company
with him. x
 If Central Govt has ordered the inspection then RBI has to report to Central Govt.
o If Central Govt formulates the opinion that the affairs of the company are being
conducted to the detriment of the interests of depositors, it may give an
opportunity to the company to make a representation in connection with the
report.
 o Central Govt can form an opinion and then order in writing: prohibiting the
company from accepting fresh deposits and direct the RBI to apply Section 58 for
winding up of company.

Reconstruction and reorganisation of

banking companies
Section 44A - Procedure for amalgamation of banking companies - Similar to normal
amalgamation of companies

Section 45 - Power of RBI to apply to Central Govt for reconstitution or amalgamation -

RBI can apply to Central Govt if scheme of amalgamation is necessary in public interest or in the
interest of the company’s depositors or for securing proper management of banking company or
in the interests of the banking system of the country.

Suspension and winding up of business of

banking companies
Section 37 - Suspension of business

 Power exercised by HC on application of bank that is unable to meet its obligations. HC

will order staying commencement or continuation of all actions and proceedings against
the company for a fixed period of time.
 if RBI is satisfied that the affairs of the bank to whom moratorium is granted are being
conducted in a manner detrimental to the interests of depositors, it may make an
application to the HC for an order of winding up of the bank. HC is not supposed to
further extend moratorium.

Section 38 - Winding up

HC can order winding up:

 if banking company is unable to pay its debts

 application for winding up is made by RBI under S37 or S38

Social control over banking

Earlier there were complaints that bulk of bank advances were granted to large and medium scale
industries and big businesses and the directors of banks who were mostly industrialists,
influenced many banks in granting indiscriminate advances to such companies.
There was a lot of mismanagement of banks.

Hence, nationalisation took place and amendments were made to the Banking Regulation Act to
further regulate both public sector and private sector banks.

Banking ombudsman
Appointment under Scheme of 1995

Banker- Customer Relationship

Meaning of Customer
Law of banking is the law of the relationship between the banker and the customer. Includes
persons who are using the services provided by authorised persons in carrying on regulated
activities or persons acting as appointed representatives.

A customer is generally someone who has an account with the bank but that is not always the
case. Services are rendered to non-customers as well, such as issue of a draft or bankers’ cheque.
Hence the duration of the relationship is not important.

The nature of the service or transaction must be such that it distinctly related to banking business
and is within the range of permitted banking business. Otherwise the person would not be
considered a customer.

Canara Bank v Canara Sales Corp - The relationship between the customer of a bank and the
bank is that of a creditor and debtor.

Consumer under Consumer Protection Act

Section 2 (27) - CPA

Sec. 2(7) "consumer" means any person who— (i) buys any goods for a consideration which has
been paid or promised or partly paid and partly promised, or under any system of deferred
payment and includes any user of such goods other than the person who buys such goods for
consideration paid or promised or partly paid or partly promised, or under any system of deferred
payment, when such use is made with the approval of such person , but does not include a person
who obtains such goods for resale or for any commercial purpose; or (ii) hires or avails of any
service for a consideration which has been paid or promised or partly paid and partly promised,
or under any system of deferred payment and includes any beneficiary of such service other than
the person who hires or avails of the services for 6 consideration paid or promised, or partly paid
and partly promised, or under any system of deferred payment, when such services are availed of
with the approval of the first mentioned person, but does not include a person who avails of such
service for any commercial purpose.

Explanation. —For the purposes of this clause, — (a) the expression "commercial purpose" does
not include use by a person of goods bought and used by him exclusively for the purpose of
earning his livelihood, by means of self-employment;

Customer and Consumer

Creditor-debtor relationship
Terms of the contract do not exist in any written form but is based on mutual consent and is
regulated by NI Act and Contract Act.

Bank is the debtor of a customer as he undertakes to repay on demand a sum, equivalent to the
amount deposited with him.

Contractual relationship
At the time of opening an account, certain rules are followed, yet the procedure does not mention
comprehensively the rights and duties of the banker or the customer. This is a complex
relationship depending on the customs and usages of bankers and thus, the implied terms of the
contract are important.

Principal –agent relationship

A service offered by the bankers to the customers is to collect the customer’s cheques and credit
other instruments such as dividend, warrant, interest warrants, pension bills etc. In these cases,
banker is agent of the customer.

Bailor -Bailee and trustee relationship

The legal relationship that arises in the case of safe deposit or safe custody is that of bailment.
The customer who deposits with the bank for safe custody is the bailor and the bank is the bailee.
In cases where the bank does not charge any fees for such safe custody, the bank can be termed
as a gratuitous bailee.

Trustee and Beneficiary

When a banker has suspended his business before receipt of such amount, he holds the money as
trustee for his customer, irrespective of whether or not the latter has an account with him. on the
date of receipt of the money and whether or not the money has been credited in that account.

Mortagor and Mortgagee

In the context of banking, a mortgagor-mortgagee relationship typically arises when a bank
provides a loan secured by property. The customer (borrower) becomes the mortgagor, while the
bank acts as the mortgagee. This relationship is governed by various laws and regulations in
India, including the Transfer of Property Act, 1882, and the SARFAESI Act, 2002.

Key aspects of this relationship include:

 The bank (mortgagee) has a legal claim on the property until the loan is fully repaid.
 The customer (mortgagor) retains possession and use of the property but cannot sell or
transfer it without the bank's permission.
 If the customer defaults on the loan, the bank has the right to initiate foreclosure
proceedings and recover the debt by selling the mortgaged property.

This relationship is distinct from the other banker-customer relationships such as creditor-debtor,
principal-agent, or bailor-bailee.

Lessor and Lessee

In a lessor-lessee relationship within banking, the bank typically acts as the lessor, providing
equipment or property to the customer (lessee) for a specified period in exchange for regular
payments. This arrangement is common in equipment financing or commercial real estate
transactions. The bank retains ownership of the asset while the customer has the right to use it,
subject to the terms of the lease agreement.

Rights of Banker
Rights and Duties of Bankers.pdf

1. Bankers Right of lien

1. The bankers’ general lien confers on him the right to retain securities in respect of
the general balance due by their owner to the banker. It extends to all securities
placed in his hands as a banker by his customer, which are not specifically
appropriated. Indian law, besides permitting the banker to exercise his lien in case
of all those securities which come into his possession in the course of his dealings
as a banker with his customers, also extends the right even to goods unless there is
a contract, express or implied, inconsistent with the lien.
2. Right of appropriation of payment
3. Right of set off and combine accounts
 4. Right to close an account
5. Right to charge for service
6. Right to revise charge

Duties of Bankers
1. Duty to open an account to accept deposits
2. Duty to give notice before closing an account
3. Duty to honour cheques
1. S 31 of NI Act
2. Contractual obligation to honour cheque as long as he has sufficient balance to
credit applicable to the payment of the cheque.
4. Duty to maintain secrecy (Confidentiality)
1. Secrecy is required in the mater of banker customer relationship and account
details cannot be disclosed to a third party and nobody can inquire into the
commercial transactions between a bank and a customer.
5. Duty to supply periodic account statement
1. Banker may be held liable for untimely dispatch of account statement and
incorrect statement
6. Obligation of Banker to maintain proper records
7. Duty of banker to follow customer’s instruction
8. Duty to follow rules and instruction
9. Duty in promptness in collection of cheques
10. Duty to explain debits into customers account
1. Indian Overseas Bank v Bismilla Trading Co - Duty of the bank to show why the
account was debited and if not explained, bank is liable to restore the amount to
the customer’s account.
11. Duty to pay profit to customer if he deposit in profit bearing account
12. Duty to issue cheque book, ATM card etc
13. Duty in collection of cheque and other instruments
1. Payment should be received on behalf of and for a customer
2. Banker should receive payment of the crossed cheque as agent for the customer
3. The cheque must be already crossed when handed over to the bank for collection
4. Lastly, in collecting a crossed cheque the banker should act in good faith and
without negligence.
Negotiable Instruments Act
Definition and characteristics of Negotiable
instruments
A NI is a piece of paper which entitles a person to a sum of money and which is transferable
from person to person by mere delivery or by endorsement and delivery. The person to whom it
is so transferred becomes entitled to the money and also to the right to further transfer it.

Nemo dat quod non-habet - no one can transfer a better title than he himself has. General
principle relating to transfer of property is that no one can become the owner of any property
unless he purchases it from the true owner or with his authority.

Negotiable instruments are an exception to this because a person who takes a negotiable
instrument in good faith and for value becomes the true owner even if he takes it from a thief or
finder.

Willis - A negotiable instrument is one, the property in which is acquired by anyone who takes it
bona fide and for value notwithstanding any defect of title in the person from whom he took it.

Raephal v. Bank of England - if you obtain a negotiable instrument bona fide and for value, no
one can deprive you of it. Only applies when the instrument is negotiable which means that the
instrument should be in such a state that it can be transferred like cash by simple delivery. If it
requires something other than delivery then it is not negotiable.

Whistler v. Forster - The title of a negotiable instrument (payable to order) passes by

endorsement and delivery. A title so acquired is good against all the world, provided the
instrument is taken for value, and without notice of any fraud. The plaintiff’s title here, therefore,
was to be rendered valid by endorsement but at the time he obtained the endorsement, he had
notice that the bill had been fraudulently obtained.

Section 13 - Negotiable Instrument - A “negotiable instrument” means a promissory note, bill

of exchange or cheque payable either to order or to bearer.

Types of Negotiable instruments

Section 13 speaks of only 3 kinds of instrument, it does not mean that there cannot be any other
kind of negotiable instrument than these three. Instruments payable to order are also negotiable
but the order instrument should be negotiated by endorsement and the endorsement must be
genuine.
Promissory Note (Section 4)
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.

Characteristics

 All negotiable instruments must be in writing. [Bahadurrisa Begum v. Vasudev; Dokha Joganna
v. Upadrashta Chayadevi]
 Must contain a promise to pay [Gay v Rooke]
o Mere receipt of money does not amount to a promissory note even though it might
contain terms of repayment. Receipts are generally non-negotiable. [Akbar Khan v Attar
Singh]
 The promise to pay the money should be unconditional or subject only to a condition which
according to the ordinary experience of mankind is bound to happen. Bills of exchange which
are only payable on a contingency are not negotiable because it does not appear on the face of
them whether or not they will ever be paid.
o Beardsley v Baldwin - A written undertaking to pay a sum of money within so many days
after the defendant’s marriage was not recognised as a promissory note because
possibly the defendant may never marry and the sum may never become payable.
o Roberts v Peake - Promissory note issues promising to pay on the death of an individual
and if the promisors were left behind sufficient funds by such person. this was not
considered a good promissory note because the note would be payable on an uncertain
contingency.
 Must be payable in money only and the sum of money must be certain.
o Smith v Nightingale - Promissory note containing a promise to pay interest for a sum not
specified and not otherwise ascertained than by reference to the defendant’s books,
and therefore was considered too indefinite to be considered a promissory note.
o Batton v Dugdale - Promissory note declared void because its exact value was not
apparent on its face.
 The Parties to the instrument must be designated with reasonable certainty.
o Person who makes the note - maker
o To whom the promise is made - Payee
o Brij Raj Sharan v Shah Raghunandan Sharan - the person to whom the amount was to
be paid was not indicated in the promissory note.
o Chadwick v Allen - Held to be a good promissory note as it was clear from the whole
tenor of the document that the person could be nobody other than Sir Andrew.
 Promissory note must be signed by the maker
o P. Aswathamma v. Hotel Sathyaprakash - The initial burden of proving the genuineness
of the signature is on the plaintiff and on his doing so, the defendant has to disprove the
fact of his signature.
 Intent of Maker
o Bal Mukund v Munna Lal Ranji Lal
 There must be an Express Undertaking to pay the amount mentioned in the note
o Bacchan Singh v Ram Avadh - Mere implied undertaking is not sufficient to constitute
promissory note.
Bill of Exchange (Section 5)
A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or to the order of a
certain person or to the bearer of the instrument.

Characteristics

 Writing
 Must contain an order to pay - can be in the form of request but should be imperative. If the
language of the draft does not show an order to pay, it is not a BOE.
o Ruff v Webb - The language of the instrument was very polite but the introduction of the
terms of gratitude does not destroy the promise to pay.
o Little v Slackford - The order must be such as to require the other to pay the money at
all events. Merely giving him authority to pay the money is not sufficient.
o Hamilton v Spottiswood - The letter did not import an absolute intention that the money
should at all events be paid, but merely authorised the defendant to pay. Accordingly, it
was not a BOE.
 Unconditional
 Money - amount to pay must be certain
 Three parties
o Person who makes the bill of exchange - drawer
o person to whom it is addressed - drawee
o Payee (sometimes the payee and the drawer are the same if “pay to me or my order” is
written but without this a minimum of two there cannot be a bill of exchange).
o Cruchley v Clarance - payee name missing, so made in the name of drawer i.e. bonafide
holder; same thing as defendant made the bill payable to the bearer
 Indication of drawer with reasonable certainty - the drawee must be designated with reasonable
certainty.
o Grey v Milnar - No drawee was at all indicated in the bill yet it was held to be valid but
the place of payment was specified. It was not addressed to any person but the place of
payment was specified.
o Peto v Reynolds - BOE was not addressed to anybody. Was not recognised as a valid bill
of exchange because every bill should have a drawer and drawee.
o Mason v Lack - to make a valid bill of exchange, the drawer must address it to a
particular person and only that person or somebody for him can accept it.
 Must be signed by the drawer.

Section 7 requires that the drawee should sign his assent and return it to the holder or give notice
to him that he has done it and then he becomes the acceptor. The acceptor will be estopped from
denying his signature.

BOE is an order to pay, which if not accepted by Drawee becomes DISHONOURED and NOT
BINDING.

BOE is not invalid on non acceptance.

Section 33 - Only drawee can be acceptor except in need or for honour.—No person except
the drawee of a bill of exchange, or all or some of several drawees, or a person named therein as
a drawee in case of need, or an acceptor for honour, can bind himself by an acceptance.

Section 34 - Acceptance by several drawees not partners.—Where there are several drawees
of a bill of exchange who are not partners, each of them can accept it for himself, but none of
them can accept it for another without his authority.

Cheque - Section 6
Definition: BOE drawn on a specified banker and not expressed to be payable otherwise than on
demand and it includes the electronic image of a truncated cheque and a cheque in the electronic
form.

Cole v Milson - Document was drawn in the form of ‘cheque’ and was made payable to “cash or
order”. It was not payable to any person or to bearer and hence, was not a bill of exchange and
therefore, not a cheque either.

Michael Kuruvilla v Joseph - a cheque carried the words “to pay cash” in the place of payee and
the word bearer was struck off. Even so the court held that it was a valid negotiable instrument.

Bavins Junr and Sims v. London & South Western Bank - Cheque was held to be invalid because
its payment was made conditional upon signature of receipt. Similar to BOE, a cheque has to be
an unconditional order.

A cheque must be drawn on a banker.

R. Pillai v. S Ayyer - treasury is not a bank and hence, an order to withdraw money was not a
cheque but a BOE. Every person who receives money of another and pays it according to his
orders cannot be regarded as a banker unless he establishes that business for profit.

Definition of banker under NI Act is wider than that under Banking Regulation Act Hence,
society is also considered a banker.

Cheque must be payable on demand.

Ashok Yeshwant Badeve v Surendra Madhavrao Nighojaker - A post dated cheque is a bill of
exchange

BOE v Cheque
BOE Cheque

Section 5 Section 6
BOE Cheque

Drawn upon any person, including banker Drawn upon only banker

Order to pay Cheque is payable

Payable on expiry certain date Payable on demand only

Acceptance must be given by drawee or it will be Does not need accetance as there is immediate
dishonoured payment

Presented for acceptance (prior) Presented for payment

Banker liable as he shares contractual

Drawee has no liability until he accepts
relationship

Payable after a fix period Cheque is always payable on demand

NIA Comparison.pdf

Holder and Holder in Due course

Holder and Holder in Due Course.pdf

Every instrument initially belongs to the payee and he is entitled to its possession and the payee
can transfer it to any person in payment of his own debt. This transfer is known as negotiation.

Negotiation takes place in 2 ways - bearer instrument passes by simple delivery and the person to
whom it is delivered becomes the holder. The second way is that an order instrument can be
negotiated only by endorsement and delivery and the endorsee becomes the holder. Holder
means either the bearer or endorsee of an instrument.

Bearer= any person holding it | Endorsee = payee

Section 14 - Negotiation - 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.

Section 8 - Holder - means any person entitled in his own name to the possession of an
instrument and to receive and recover the amount.

No one can be entitled to the possession of a bill or not unless he becomes either the bearer or
indorsee thereof.
Entitled in his own name is important because of the institution of benami.

Sarjoo Prasad v Rampayari Debi - Note was not executed in the name of the plaintiff but in the
name of a third party. Plaintiff brought an action to recover amount but was rejected as he was
not entitled to the possession of the note “in his own name” and therefore, was not a holder.

Suraj Bali v Ram Chandra - Son could not recover amount as he was not entitled “in his own
name”

Section 9 - Holder in due course - any person who for consideration became the possessor of a
promissory note, BOE or cheque if payable to bearer or the payee or indorsee thereof, is 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.

A person who takes the instrument “in good faith and for value” becomes the true owner of the
instrument and is known as a “holder in due course”. This phrase is split up in 4 elements:

1. The holder must have taken the instrument for value

1. person who takes a bill or note without consideration cannot enforce it.
2. Every NI contains a contract- A contract cannot be enforced w/o consideration
3. can sue only if paid consideration; A donee can be holder in value not holder in due
course
4. consideration paid in past is sufficient in NI
5. consideration must be lawful
6. Consideration may not be adequate
7. cant plead any defect/ want of consideration
2. He must have obtained the instrument before its maturity
1. Section 59 - Instrument acquired after dishonour or when overdue - holder of an NI who
has acquired it after maturity has only as against the other parties, the right thereof his
transferor.
2. Down v Halling - if a bill or note or cheque is taken after it is due, the person takes it at
his own peril
3. Demand note is not overdue unless a demand for payment has been made
3. The instrument must be complete and regular on its face
1. duty of every person who takes a negotiable instrument to examine its form, for, if it
contains any material defect, he will not become a holder in due course.
2. Hogarth v Latham and Co - Plaintiff took two BOE (without drawers name) and
completed them himself. Court held that he cannot recover the money from the bills.
3. NI is incomplete if there is no stamp, no date, blank, or other defects like marks of
dishonour, restrictive or conditional indorsement.
4. He must have taken the instrument in good faith and without notice of any defect either in the
instrument or in the title of the person negotiating it to him.
1. subjective test - honesty
2. objective test - due care and caution
3. Duty of reciever to check the title of transferor
4. the holder must have sufficient cause to believe that no defect existed in the title of the
person from whom he derived his title
Rights and Privileges of holder in due course
1. Presumption (Section 118)
1. every holder is deemed prima facie to be holder in due course
2. This is to facilitate the negotiability of negotiable instruments
2. Privilege against inchoate stamped instruments (Section 20)
1. gives authority to a person to fill up the blanks in a negotiable instrument. It does not
apply to cheques as they are not required to be stamped. The person so signing shall be
liable upon such instrument, in the capacity in which he signed the same, to any holder
in due course for such amount:
2. Person who completes an inchoate instrument cannot become holder in due course
3. Fictitious drawer/ Payee (Section 4)
1. acceptor of a BOE cannot as against the holder in due course say that the other parties
to the bill were fictitious.
2. “fictitious payee” means a person who is not in existence or being in existence is never
intended by the drawer to have the payment.
4. Prior defects (Section 58)
1. Party liable to pay an instrument cannot as against a holder in due course contend that
he lost the instrument or that it was obtained from him by means of an offence or fraud
or for an unlawful consideration.
5. Indorsee from holder in due course (Section 53)
1. A holder who receives an instrument from a holder in due course gets the right of the
holder in due course even if he had knowledge of the prior defects, provided that he
was not a party to them. This applies to the drawer who has received back his bill from a
holder in due course.
6. Liability of prior parties (Section 36)
1. Every prior party to a negotiable instrument is liable thereon to a holder in due course
until the instrument is duly satisfied.
7. Estoppel against denying original validity of instrument (Section 120)
1. 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.
8. Estoppel against denying capacity of payee to endorse (Section 121)
1. 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, to indorse the same.
9. Estoppel against endorder to deny capacity of prior parties (Section 122)
1. No indorser of a negotiable instrument shall, in a suit thereon by a subsequent holder,
be permitted to deny the signature or capacity to contract of any prior party to the
instrument.

Liabilities of the parties

Liability of Acceptor
 1. Section 32 - Liability of maker of note and acceptor of bill.
1. Liable to pay on maturity of NI
2. Liable to compensate for loss by dishonour if they default on payment on maturity
3. Estoppels that bind the acceptor
1. Cannot deny existence of the drawer
2. Cannot deny genuineness of his signature (Cooper v Meyer)
3. Cannot deny drawers capacity to indorse (Hallifax v Lyle)
4. Acceptor does not warrant the validity or genuine of endorsement
5. Only warrants the payee is in existence and has capactiy to indorse the bill
2. Section 41 - Acceptor is liable if accepts forged indorsement with knowledge
1. Acceptor of a bill of exchange which is already indorsed is not relieved of his liability by
reason that such indorsement was forged. If he knew or had suspicion that the
indorsement was forged and even then accepted the bill, he would be liable but not
otherwise.

Liability of Drawer
Drawer of BOE

 Drawer of BOE is primarily liable untill BOE has been accepted. After acceptance, the acceptor is
primarily liable.
 By drawing and issuing the bill, the drawer engages that it shall be accepted and paid by the
drawee according to its apparent tenor.
 If the cheque is dishonoured either by non-acceptance or by non-payment, he is liable to
compensate the holder or indorser who has been compelled to pay for the loss suffered by him
provided that a notice of dishonour has been given to or received by him.
 Holder of BOE can sue acceptor (drawee)

Drawer of Cheque

 Drawer of cheque gives guarantee to holder that it shall be paid by banker when duly presented
for payment
 Liable to compensate the holder if banker dishonours or does not accept the cheque
 Holder has no remedy against the banker, remedy against the drawer only.

Liability of Drawee / Banker

 Banker owe duty to customer and not to Holder. Holder has no remedy against banker if banker
refuses to pay the cheque (Bank of Baroda v. PNB)
 Contractual obligation of Banker to honour his customers cheque (sufficient fund/balance )
 Superadded obligation of banker to honour the customers cheque. (London joint stock Bank ltd.
V. Macmillan & Arthur)
 An unjustified dishonour is not merely a breach of contract but also a tort damaging customers
reputation (Marzetti v Williams)
 Banker has to be careful in choice of words that he uses in returning cutomer’s cheque--words
“not sufficient” is defamatory. (Davidson v Barclays Bank Ltd)
  Words “reason assigned, not stated” is not defamatory. (Frost v London Joint Stock Bank)
 Words “refer to drawer” is not defamatory. (London joint stock Bank ltd. V. Macmillan & Arthur)

Banker / Drawee can dishonour cheque

1. When cheques are post dated
2. When cheques are outdated
3. When fund is insufficient
4. When customer countermand payment (ie., customer sends written notice to bank requesting
not to pay a particular cheque)
5. When cheque is mutilated
6. When cheque is of doubtful validity
7. When customer’s signature do no agree
8. When customer has died
9. When customer has become insolvent
10. When customer has become a person of unsound mind
11. Garnishee order- banker’s authority ceases when he has received a court order attaching the
customer’s balance.

Discharge from liabilities of parties

Discharge means release from obligation / duty / liabilities

NI is meant to carry a liability to pay a certain sum to the Holder/ HDC

Discharge of instrument means:

1. When all the rights of action come to an end.

2. Instruments ceases to be negotiable.
3. In simple words instruments cease to be negotiable and all primary liabililties of party come to
an end.

Discharge of Parties
Discharge of one or more parties from liabilities on an instrument may not affect the liability of
other

NI continues to be negotiable with the undischarged parties

Modes of discharge

1. By cancellation (Section 82)

1. all parties are discharged
2. By release (Section 82)
 1. Holder may agree to discharge liability by a separate agreement or may do so by
conduct
3. By payment (Section 82)
1. All parties are discharged from liability when the amount due on the instrument is paid
4. By allowing more than 48hours to accept (Section 83)
1. The holder of a bill has to present it to the drawee for his acceptance and the drawee is
allowed only 48 hour to consider whether he will accept it or not.
2. If the holder allows the drawee more than 48 hours (exclusive of public holidays) all
previous parties who do not consent to such allowance are discharged from liability to
the holder.
5. By qualified Acceptance (Section 86)
1. If the holder acquiesces in a qualified acceptance or one limited to part of the sum
mentioned in the bill or which substitutes a different time or place of payment or which
where the drawees are not partners, is not signed by all the drawees, all previous
parties are discharged as against the holder unless on notice given by the holder they
assent to such acceptance.
6. By delay in presenting cheques (Section 84)
1. Drawer is discharged from liability if he does not present in reasonable time
7. By material alteration (Section 87)
1. Material alterations renders it void as against anyone who is a party thereto at the time
of making such alteration unless alteration was made in the common intention of all
parties.
8. By negotiation back (Section 90)
1. When bill of exchange comes back to the acceptor by process of negotiation and he
becomes its holder that is known as negotiation back. If this happens at or after
maturity, all liability on the instrument comes to end.

Dishonour of cheques
Cheque can be dishonoured by:

1. Non-acceptance - Section 91
2. Non-payment - Section 92

Section 138 - Dishonour of cheque for insufficiency, etc., of funds in the account. 2 year
maximum jail sentence or fine equal to twice the amount

Section 139 - the drawer is deemed to have known about insufficient funds at the time of
drawing the check if the check is presented within six months of the date of issue and is returned
unpaid because there are not enough funds or the drawer does not have an account.

Section 141 - the payee may bring a criminal action under Section 138 against the drawer if a
check is dishonoured and the drawer does not make good the payment within fifteen days of
receiving notice of dishonour

Section 142- outlines the format in which a check must be delivered to the bank.
Reasons for Dishonour
1. Insufficient Funds
2. Drawer's Signature Mismatch
3. Post-Dated Check: will be returned unpaid if it is presented before the designated date.
4. Modifications or Erasures: give rise to suspicions of fraud and result in dishonour.
5. Stop Payment Order: The check will be dishonoured if the drawer has placed a stop payment
order on it.
6. Legal limits:

Mode of recovery
Under the Negotiable Instruments Act (NI Act), the primary mode of recovery for a dishonored
cheque is through legal action under Section 138, which allows the payee to file a criminal
complaint against the drawer to recover the cheque amount, with the recovery typically
happening through the attachment and sale of the drawer's movable property as per Section 421
of the Criminal Procedure Code (CrPC) if the drawer fails to pay within the stipulated time
frame; this includes the option to issue a warrant to the District Collector to recover the amount
as arrears of land revenue

Duty of Banker to honour cheque

 payment to a wrong person by banker, bounds him to repay payee again (Lal Chand v Agra
Bank)
 amount of compensation for dishonour depends upon each case. A trader can claim substantial
compensation (Wilson v united counties bank ltd)
 Whereas others have to prove their loss of reputation/ sp loss/ injury by dishonour (Jogendra
Nath v. New Bengal Bank)
 dishonour of cheques does not amount to misapproriation. Banker not liable under s 409 of IPC
(Gopesh chandra Pal v Nirmal Kumar Das Gupta)