Cases on Negotiable Instruments Act

FAMOUS CASES ON NEGOTIABLE INSTRUMENTS ACT* LIABILITY OF PAYING BANKER WHEN CUSTOMER’S SIGNATURE ON CHEQUE IS FORGED 1. When the client’s signature on the cheque is solid there isn’t any mandate to the financial institution to pay. As such a banker isn’t entitled to debit the client’s account on such solid cheque. In Canara Financial institution vs. Canara Gross sales Company and Others [(1987)2 Supreme Court Cases 666] the corporate has a present account with the financial institution which was operated by the Firm’s Managing Director.

The Firm’s account in whose custody the cheque e book was, solid the signature of the Managing Director in 42 Cheques totaling Rs. 326047. 92 over a time frame. This was detected by one other accountant. The corporate instantly on detected of the fraud demanded the quantity from the financial institution. The financial institution refused cost and subsequently the corporate file a swimsuit in opposition to the financial institution. The financial institution misplaced the swimsuit and took the matter as much as the Supreme Courtroom.

The Supreme Courtroom dismissed the enchantment of the financial institution and held that: For the reason that relationship between the client and the financial institution is that of a creditor and debtor, the financial institution had no authority to make cost of a cheque containing a solid signature. The financial institution could be acted in opposition to the legislation in debiting the client with the quantity of the cast cheque as there could be no mandate on the financial institution to pay. The Supreme Courtroom identified that the doc within the cheque type on which the client’s title as drawer was solid was a mere nullity. The financial institution would succeed solely when it will set up adoption or estoppel.

In dealing the case the Supreme Courtroom relied on its earlier judgment in Bihta Cooperative Growth and Cane Advertising and marketing Union Ltd vs. financial institution of Bihar (AIR 1967 Supreme Courtroom 389). 2. In a joint account if one of many signature is solid then there isn’t any mandate and banker can not make cost. In Bihta Cooperative Growth and Cane Advertising and marketing Union Ltd vs. financial institution of Bihar, the Cooperative Advertising and marketing Union had an account with the financial institution which was approved to be operated by Joint Secretary and Treasure of the Cooperative Advertising and marketing Union.

On 16, April 1948 the financial institution made cost of Rs. 11000 on a free leaf cheque and never on a cheque from in cheque e book to the Society. Although the 2 signature appeared on the cheque certainly one of them, the signature of the Joint Secretary was solid. The financial institution made cost, whereupon the Cooperative Advertising and marketing Union sued the financial institution for restoration of the cash. Although the financial institution admitted negligence on its half, it argued that the staff of the Cooperative Advertising and marketing Union have been dishonest within the discharge f their duties and as such it can not succeed. The matter went to the Supreme Courtroom and the Supreme Courtroom whereas permitting the case of the Cooperative Advertising and marketing Union held that “one of many signatures was solid in order that there by no means was any mandate by the client in any respect to the banker and the Question Assignment of negligence of the client in between the signature and the presentation of the cheque by no means arose”. PAYMENT TO BE IN DUE COURSE FOR BANK TO SEEK PROTECTION 1. The Supreme Courtroom in Financial institution of Bihar vs.

Mahabir Lal (AIR 1964 Supreme Courtroom 397) held that a banker can search safety below Part 85 solely the place cost has been made to the holder, his servant or agent i. e cost should be made sooner or later. On this case the Financial institution had agreed to grant to the agency money credit score facility in opposition to pledged of fabric bales on the agency fulfilling sure situations, certainly one of which was that the cash for buying the material wouldn’t be immediately given to the agency, however as a substitute the provider could be paid the quantity by the financial institution and the material bales could be stored by the financial institution as pledge for the mortgage.

The agency thereafter was required to attract a cheque on itself which was handed over to the financial institution. The financial institution as a substitute of handing over money to the companies accomplice, to be paid over to the wholesalers it with one of many financial institution’s workers (Potdar) who accompanied the accomplice to the wholesales. Nonetheless, earlier than the cash could possibly be paid to wholesalers the Potdar absconded. The financial institution sought compensation of the cash which was refused by the agency. The financial institution subsequently sued the agency for the cash relying on Part 85 and 118 of the Negotiable Instruments Act, 1881.

The matter reached the Supreme Courtroom and it was held that earlier than the provisions of Part 85 can help the financial institution it needed to be established that cost had actually been made to the agency or an individual on behalf of the agency. Fee of an individual who had nothing to do with the agency or a cost to an agent of the Financial institution wouldn’t be a cost to the agency. 2. The Calcutta Excessive Courtroom had event to think about as as to whether a financial institution had made cost sooner or later or not within the case of Bhutoria Buying and selling Firm (BTC) vs.

Allahabad Financial institution (AIR 1977 Cal 363) the info of that are as follows; BTC, a restricted firm, had offered some jute to WFD one other restricted firm, for cost of which WFD issued an uncrossed cheque payable to BTC or order which was delivered to one of many officers of BTC. The official utilizing the corporate’s seal endorsed the cheque as supervisor and encashed it over-the-counter. BTC later sued the financial institution for restoration of the cash on the grounds of damages or within the different on the grounds of cash had and acquired by the financial institution.

The courtroom held that: The expression “cost due course” has been outlined in Part 10 of the Negotiable Instruments Act to imply cost in accordance with the obvious tenor of the instrument in good religion and with out negligence to any particular person in possession thereof, below circumstances which don’t afford affordable floor for believing that he’s not entitled to obtain cost of the quantity therein talked about. It might hardly be questioned that the cost by the defendant financial institution of the cheque in Question Assignment has been made by the defendant financial institution in accordance with its obvious tenor.

The cheque is an uncrossed cheque payable to the plaintiff. The cheque was endorsed by the plaintiff via its Supervisor. The truth that Jethmall is the Supervisor is borne out by the seal of the Firm which is unquestionable an genuine seal. The seal of the Supervisor can also be equally genuine. That the cost was made in good religion has not been disputed for all sensible functions. There may be not a grain of proof earlier than the Courtroom from which it remotely seems that the cost was not made in good religion.

Now that your complete proof is earlier than the courtroom, the Question Assignment of onus to show good religion loses a lot of its significance. No negligence has been proved in opposition to the financial institution. The defendant financial institution insisted on identification of Jethmal and Jethmall was actually recognized by Krishanlal Maheswari, a constituent of the financial institution, the defendant No-Three. The defendant financial institution subsequently took all affordable precaution despite the fact that the circumstances through which the cheque was introduced for cost didn’t afford any affordable floor for believing that Jethmall was not entitled to obtain cost of the quantity talked about therein.

The plaintiff having did not show the commerce observe which he alleged and the financial institution having paid the cheque, in accordance with the obvious tenor of the instrument, in good religion, and with out negligence to Jethmall who was in possession thereof the defendant is entitled to succeed. There have been no circumstances which afforded any affordable floor for believing that he was not entitled to obtain cost of the cheque. It should be held that the financial institution made the cost sooner or later.

The discovered decide, in opinion has rightly identified that cost sooner or later is essentially cost within the bizarre course. Three. Whether or not cost made by a financial institution was cost sooner or later would rely on the info of a given case. In Madras Provincial Cooperative Financial institution Ltd vs. Official Liquidator, South Indian Match Manufacturing unit Ltd (AIR 1945 Mad 30) the courtroom held that cost to a liquidator in opposition to the cheque introduced throughout the counter was not a cost sooner or later and the financial institution was not entitled to hunt safety below Part 85 of the Negotiable Instrument Act.

On this case the Official Liquidator of the Firm has offered sure properties of the corporate for which cost was made by the purchaser by giving a cheque in favour of the liquidator introduced the cheque over-the-counter and obtained cost in money which he misappropriated. He was later prosecuted and convicted and faraway from workplace. His successor proceeded in opposition to the financial institution for restoration of the quantity on the bottom that the financial institution was negligent and the quantity was incorrect paid.

The courtroom held that below Part 244A of the Indian Corporations Act, 1913, an official liquidator was required to open an account with a financial institution and pay therein cash acquired by him in the middle of the liquidation. Rule 66 of the Guidelines framed by the Madras Excessive courtroom below the Act required that each one payments and different securities payable to the corporate or to the liquidator ought to, except the decide in any other case directs, shall as quickly as they got here into the fingers of the liquidator, be deposited by him within the financial institution.

From the cheque itself the financial institution had discover that it was payable to the liquidator in his official capability. That the financial institution realized this in full was proven by the truth that it known as for the order of his appointment. The discovered decide subsequently concluded. We now have little question that the officers of the financial institution didn’t notice, as they need to have completed, that the financial institution was doing one thing improper, however within the circumstances there was negligence.

They knew or should have deemed to have recognized that this cash might solely be collected by the payee via his personal financial institution and subsequently it was most improper on his half to ask for cost over the drawee’s counter. In our judgment there was a transparent breach of a statutory obligation positioned upon the financial institution and the discovered decide was proper in holding the financial institution liable. PAYMENT OF GOOD FAITH, WITHOUT NEGLIGENCE OF AN INSTRUMENT ON WHICH ALTERATION IS NOT APPARENT 1.

The impact of Part 10 and 89, and Part 31 was thought-about by the Supreme Courtroom in Financial institution of Maharastra vs. M/s Automotive Engineering Co. (1993) 2 SCC 97. The Question Assignment which arose for consideration on this enchantment was whether or not the paying financial institution was certain to maintain an ultraviolet ray lamp and to scrutinize the cheque below the mentioned lamp even when no infirmity on the face of the mentioned cheque on visible scrutiny was discovered. Briefly said, the respondent, a partnership agency, opened a present account with the Wagle Industrial Property department of the appellant financial institution.

The mentioned department was within the industrial space on the outskirts of Metropolis of Bombay, the place forgery of cheques have been rampant and though different branches of the appellant financial institution have been supplied with ultraviolet ray lamps, the mentioned department was not present with such lamp. On 26, Might 1967, one Sri Shah, as a proprietor of Messrs Imperial Tube and Hardware Mart, opened an account, within the title of his agency with a department of the Union Financial institution of India. Sri Shah introduced a cheque dated 29 Might 1967 for Rs. 6500 in favour of his agency to Union Financial institution of India.

On presentation of the cheque via clearing the appellant financial institution handed the cheque and debited the quantity to the account of the respondent. Later on, on receipt of the objection from the respondent defendant, the mentioned cheque was examined below the ultraviolet ray lamp when it transpired that the unique cheque was issued in favour of Sri GR Pardawala and the quantity of the mentioned cheque was Rs. 95. 98. The writing on the cheque was chemically altered with regard so far, the title of the payee and likewise the quantity. The respondent made calls for to the appellant financial institution to credit score the quantity to its account.

The appellant financial institution filed a swimsuit which the agent of the appellant financial institution was examined, who said that earlier than passing the mentioned cheque for cost he had checked that serial quantity and date of the cheque and had in contrast the signature of the respondent with the specimen signature and that from visible look of the cheque no conformity was famous by him and from the tenor of the cheque it seemed to be real one. The trial courtroom dismissed the swimsuit on the bottom that by not offering the power of ultraviolet ray lamp, the appellant financial institution had did not discharge correct care and, thereof, didn’t go the mentioned cheque with the due diligence.

On enchantment, the District Decide, whereas showing that no irregular options to suspect the genuineness of the cheque might discovered on visible inspection of the cheque, was of the view that the appellant financial institution was not entitled to safety for the lapse within the mentioned cheque for scrutiny below the ultraviolet ray lamp. On additional enchantment, the Excessive Courtroom of Bombay, whereas accepting the discovering that the cheque in Question Assignment apparently didn’t present any signal of alteration, held that the appellant financial institution didn’t act with correct care and warning in not offering mandatory gadget for detecting solid cheque.

For the reason that absence of such lamp amounted to negligence on the a part of the appellant financial institution, no safety was obtainable as a result of cost was not made sooner or later. The appellant financial institution most popular this enchantment to the Supreme Courtroom. The Supreme Courtroom allowed the enchantment of the Financial institution on the next grounds. (i) Part 89 of the Negotiable Instruments Act provides safety to the paying banker of a cheque which has been materially altered however doesn’t seem to have been so altered, if cost was made in keeping with the obvious tenor thereof on the time of cost and in any other case sooner or later. ii) Part 10 of the mentioned Act defines cost sooner or later to imply cost in accordance with the obvious tenor of the instrument in good religion and with out negligence to any particular person in possession thereof below circumstances which don’t a accountable floor for believing that he’s not entitled to obtain cost of the quantity therein talked about. (iii) Part 31 of the mentioned Act obliges the drawee financial institution having adequate funds of the drawer in its fingers correctly relevant to the cost of such cheque, to make cost of the cheque when duly required to take action. iv) On Assessment the proof, the courts beneath had held that on visible examination no signal of forgery or tampering with the writings on the cheque could possibly be detected. It was discovered that the agent of the appellant financial institution had verified the serial quantity and signature on the cheque and had in contrast the signature on the cheque with the specimen signature of the respondent and on scrutiny of the cheque visually no defects could possibly be detected by him. There was adequate funds of the drawer with the appellant financial institution, which had no event to doubt concerning the genuineness of the cheque from the obvious tenor of the nstrument. There was no proof to carry that the cost was not made in good religion. Just because the ultraviolet ray lamp was not stored within the department and the mentioned cheque was not subjected to such lamp, wouldn’t be adequate to carry the appellant financial institution responsible of negligence extra so when it has not been established on proof that the opposite branches of the appellant financial institution or different industrial banks had been following a observe of scrutinizing every cheque or cheques involving a specific quantity below such lamp by means of further precaution. v) In such circumstances, it’s not appropriate authorized proposition that the financial institution, to be able to get absolved from the legal responsibility of negligence, was below an obligation to confirm the cheque for additional scrutiny below superior know-how or for that matter below ultraviolet ray lamp other than visible scrutiny despite the fact that the price of which scrutiny was solely nominal and it is likely to be fascinating to maintain such lamp on the department to take help in acceptable case. vi) The Courts beneath weren’t justified in holding that the financial institution had did not take affordable care in passing the cheque for cost with out subjecting it for additional scrutiny below ultraviolet ray lamp as a result of the department was within the industrial space the place such forgery was rampant and different branches of the appellant financial institution have been supplied with such lamp. The enchantment was, subsequently, allowed and the swimsuit of the appellant financial institution was decreed just for the principal quantity with none curiosity on the identical. b) The safety granted to a banker below Part 89 had come up for consideration earlier than the Calcutta Excessive Courtroom in Brahma Shumshere Jung Bahadur vs. Chartered Financial institution of India, Australia and China (AIR 1956 Cal. 399). On this case B who was a member of the royal household of Nepal had an overdraft account with the financial institution for which sure securities have been deposited with the Financial institution. The overdraft restrict was not a set restrict and fluctuated relying on the securities deposited. In April 1946, B requested the financial institution to reinforce the overdraft restrict which nonetheless was not agreed to by the financial institution and the restrict was Rs. 70000.

In July 1946, B despatched a cheque by publish drawn on the overdraft account which was intercepted within the mail and the quantity was raised from Rs. 256 to Rs. 234081. The cheque was put for assortment in one other financial institution which was paid by B’s financial institution. B oncoming to know concerning the forgery, sued each the paying and amassing financial institution contending that although the cheque was signed by him it was written out by the identical particular person and as such it ought to have aroused the suspicion of the financial institution. The courtroom, nonetheless, held that since no alternation or obliteration was seen on the time of cost, the cost was made in keeping with the obvious tenor on the cheque.

Additional since B had on different events additionally issued cheque signed by him and written by others, the financial institution suspicion couldn’t have aroused. The courtroom was held that the phrases “liable to pay” showing within the third paragraph of Part 89 included a legal responsibility to pay showing within the third paragraph of Part 89 included a legal responsibility to pay below the overdraft agreements as a lot because it utilized to an bizarre deposit account. As regards exceeding the overdraft restrict, the Courtroom held that no particular restrict was fastened at any time and it fluctuated in keeping with the securities deposited by B.

On this case amassing financial institution was accountable for different causes for which we will see within the subsequent unit. 2. Within the case of Tanjore Everlasting Financial institution vs. S. R Rangachari (AIR 1959 Madras 119) the Excessive Courtroom was known as upon to determine a case through which cheque was materially altered and the financial institution sought safety below Part 89. On this case R had an overdraft account with the financial institution and requested the Supervisor to advance him Rs. 16000 to debit of his account. The Supervisor asks R to ship him three clean cheque signed. R accordingly did the identical.

Nonetheless,, of the three cheques just one was utilized for the cost of Rs. 16000. The opposite two cheques have been alleged to have been filed by the accountant of the Financial institution for Rs. 7600 and Rs. 4200 and the names of two clerks have been written because the payees. In each the cheques the alteration have been obvious and visual however the financial institution paid these cheques. On R not clearing the debit due to his overdraft account, the financial institution sued him. R contended that the debit entries for Rs. 7600 and 4200 have been made by the Financial institution wrongly and as such he can’t be held liable.

The courtroom held that for the reason that materials alteration on each the cheques have been seen and since they weren’t authenticated by the drawers, initials, the cost made by the financial institution was not in keeping with the obvious tenor of the instrument and as such the financial institution can not declare safety below Part 89 of the Negotiable Instruments Act. The Courtroom in coming to the above conclusion relied on the next paragraph of Bhashyam and Adiga’s Negotiable Instrument Act; The financial institution has additionally to see whether or not there are nay alterations within the cheque and whether or not they have been correctly authenticated.

Subsequently, the place an alteration in a cheque is initialed not by all of the drawers however solely a few of them, the financial institution shall be paying the quantity on the mentioned cheque at its personal danger. On this connection it’s mandatory to note that below Part 89 safety is afforded to the financial institution paying a cheque the place the alternation isn’t obvious. It’s to be famous as per Part 89 of the financial institution can search safety provided that there may be materials alteration within the cheque and doesn’t seem to have been altered.

This, nonetheless, doesn’t shield a banker in case the signature of the client is solid. As said earlier a solid cheque is not any mandate of the client and as such the financial institution can not make cost on a cheque the place the signature of the client is solid. The Question Assignment whether or not signatures is solid or not relies upon on the proof and the courtroom in coming to a conclusion that the signature is solid would look into the info and circumstances that led to the cost of the cheque. Three. In Bareilly Financial institution Ltd vs.

Naval Kishore (AIR 1964 All 78) N opened an account with the financial institution by making a money deposit of Rs. 19900. N was issued a cheque e book containing 25 cheques. 17 months after the opening of the account N drew a cheque for the primary time for Rs. 5900 which was dishonored by the financial institution. On enquiries N was knowledgeable that 11 months again three cheque aggregating Rs. 19500 have been paid by the financial institution and the current stability within the account was a mere Rs. 437. N denied issuing of the cheque and sued the financial institution.

In proof it got here out that Three cheques used to withdraw the quantities weren’t from the cheque e book issued to N and have been from a special cheque e book. Although financial institution was not able to clarify this lapse, they made an try to counter the contentions of N by producing his specimen signature, which seemed to be much like those on the cheques. N nonetheless denied that the specimen signature was his and the courtroom concluded that the specimen signature have been completely completely different from N’s common signature.

Proof additionally was led to point out that the financial institution’s personal workers have been concerned within the forgery for the reason that ledger web page of N’s account confirmed that sure erasures and scorings have been made and the signature of N lacking within the cheque e book situation register. Subsequently, the courtroom refused to simply accept the financial institution’s competition. PAYMENT BY BANK UNDER MISTAKE WHETHER RECOVERABLE The Question Assignment whether or not a financial institution paying a solid cheque can get well the sale from the payee was thought-about by the Calcutta Excessive Courtroom in United Financial institution of India vs. Ali Hussan & Co. AIR 1978 Calcutta 169) On this case a cheque for Rs. 5000 presupposed to have been drawn by an organization was introduced by the amassing financial institution to the paying financial institution, and was paid. The signature, in addition to different writings on the cheque, have been solid. The forgery was good that it was not attainable even for a skilled eye to detect it. The paying financial institution, having subsequently come to know of the forgery, filed a swimsuit in opposition to the amassing financial institution and the payee of the cheque, for restoration of the quantity paid, on the bottom of cost below mistake.

Defending the swimsuit, the amassing financial institution contended that it acquired the cheque within the bizarre course of its enterprise, and introduced the identical for encashment in good religion. The payee thought-about that he acquired the cheque from some individuals claiming to be representatives of an organization, within the bizarre course of enterprise, in direction of cost of the value of the products to be provided by him, that he acted in good religion having no motive to suspect that the cheque was solid, and that he parted with the products solely on receipt of intimation from the amassing financial institution that the cheque had been encashed.

The Trial Courtroom having dismissed the swimsuit on the bottom that the paying financial institution had no reason for motion, an enchantment was most popular to the Excessive Courtroom. Choice: The Excessive Courtroom dismissed the enchantment and held that each from the perspective if equitable ideas and the doctrine of estopple, the paying financial institution was disentitled to get well the cash both from the amassing financial institution or the payee. In the midst of his judgment, MM Dutt. J mentioned; The proof on document helps the findings of the discovered Decide that the forgery was so correct that it was not attainable to a skilled eye to deduct the identical.

In these circumstances, it’s tough to carry that the plaintiff financial institution had acted carelessly or negligently. The encashment was made by the plaintiff financial institution on the mistaken perception that the cheque was a real one. The defendant United Financial institution had nothing to do with the Question Assignment as as to whether the cheque was real or solid. Sooner or later of enterprise it introduced the cheque to the plaintiff financial institution for assortment and after the cheque was encashed, intimation was given by it to its constituent, specifically the defendant No. 1 and the latter, in its flip, offered items to the individuals who ame with the cast cheque because the representatives of the Steel Alloy Co. Thus it seems that the events within the swimsuit acted in good religion sooner or later of enterprise. It was resulting from mistake that was dedicated by the plaintiff Financial institution that it needed to endure the lack of the mentioned sum of Rs. 5200. Upon the consideration of the ideas of legislation as seen above, it appears to us that as long as the established order is maintained and the payee has not modified his place to his detriment, he should reply the cash again to the payer.

If, nonetheless, there was a change within the place of the payee who, appearing s good religion, components with cash to a different with none profit to himself earlier than the error is detected, he can’t be held liable. Fairness disfavours unjust enrichment. When there us Question Assignment of unjust enrichment of the payee by reaping the good thing about an unintentional windfall the must be made to endure, for he could be as harmless because the payer who paid the cash appearing below a mistake. ——————————————– [ 2 ]. * compiled by Dr. S. C Bihari