37.

Nature of Negotiable Instruments

37.1. INTRODUCTION
In business dealings, all the transactions do not take place in terms of money. With expanding
commerce and trade, the growing demands for money could not be met merely with the exchange of
money. Under certain circumstances, the businessman may not have ready cash with him. Moreover, he
may not like to carry huge amount of money in his pocket. As such he needs certain facilities to enable
him to facilitate the business dealings. Due to these reasons, the businessmen adopted a new method of
exchanging documents (such as bills of exchange, cheques, bank drafts etc) in place of actual currency
for their day to day transactions. These documents which are used as substitute for money are
known as negotiable instruments.
These days, the negotiable instruments are the most common credit devices, and are freely used in
commercial transactions and monetary dealings. These instruments are legally employed by merchants
as an effective substitute for money. The legal provisions relating to the negotiable instruments are
contained in The Negotiable Instruments Act, 1881. The object and purpose of this Act is to legalise
the system under which claims upon certain mercantile instruments are treated like ordinary goods
passing from one hand to another.
The Negotiable Instruments Act came into force on first day of March, 1882. It deals with
promissory notes, bills of exchange and cheques.
Note. In our discussion, on Law of Negotiable Instruments, from chapters 37 to 48, unless otherwise
stated, the sections mentioned are those of the Negotiable Instruments Act, 1881.
37.2. DEFINITION OF A NEGOTIABLE INSTRUMENT
The term 'negotiable instrument' may be defined as a written promise or order to pay money which
may be transferred from one hand to another as a substitute for money. In simple words, it is a piece
of paper which entitles a person to a sum of money mentioned in it, and which is freely transferable
from person to person. It may be transferred by mere delivery or by endorsement and delivery.
The terms 'endorsement' and 'delivery' will be discussed in Chapter 41.
It may be noted that the term 'negotiable instrument' as such is not defined in the Negotiable
Instruments Act. However, section 13 defines it by specifying three kinds of negotiable instrument. This
section reads as under:
"A negotiable instrument means a promissory note, bill of exchange or cheque payable either
to order or to bearer"*
Thus, section 13 speaks of only three kinds of instruments (i.e. documents). However, it does not
mean that there cannot be any other kind of negotiable instrument than these three. In fact every
document which entitles a person to a sum of money and which is transferable by delivery or by
endorsement and delivery is entitled to be called a negotiable instrument. In Smith's leading cases, 535
(12th edn. 1915), it is said that whereby the custom of a trade, an instrument j s transferable like cash,
by delivery, and is capable of being sued upon by the person holding it for the time being, it is
entitled to the name negotiable instrument, and the property in it passes to a bona fide transferee for
value.
The person to whom the negotiable instrument is transferred becomes entitled to get the money
mentioned in it. He also has the right to further transfer it to any one he likes. As a matter of fact, a
person who gets a negotiable instrument in good faith and for consideration becomes its owner and has
an unconditional right to receive the money mentioned in it. This is emphasised in Willis' definition
of a negotiable instrument which reads as under:
"A negotiable instrument is one, the property in which is acquired by anyone who take it bona
fide and for value notwithstanding any defect of title in the person from whom he took it.".
 Thus, the free negotiability (i.e. transferability) is an important characteristic of a negotiable
instrument. Following are the two conditions for a negotiability:
1. The negotiable instrument should be freely transferable, and
2. The person, who obtains a negotiable instrument in good faith and for value, becomes
entitled to recover the money mentioned in it. And his title is not affected by any defect
in the title of the person from whom he obtained the instrument.
37.3. CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT
The characteristics of a negotiable instrument are as under:
1. A negotiable instrument must be in writing.
2. A negotiable instrument must be signed by its maker.
3. A negotiable instrument must contain an unconditional promise or order to pay some
money i.e. the amount should not be made payable on some condition.
4. A negotiable instrument must contain a certain (i.e. definite) amount of money only.
5. A negotiable instrument must be freely transferable from one person to another. The
conditions of free transferability have been explained in the last article.
6. On the transfer of a negotiable instrument from one person to another, the transferee who
receives it in good faith and for value, has the right to recover the amount mentioned
in the instrument in his own name. Such a person is known as a holder in due course.
His rights are not affected by any defect in the title of the transferee or any prior party.
This point will be discussed in detail in Art. 40.4.

37.4. PRESUMPTIONS ABOUT NEGOTIABLE INSTRUMENTS

Following are the important presumptions about all the negotiable instruments [Sections 118 and!19].
It may be noted that in case of any dispute about these presumptions, these need not be proved by
the person who holds the negotiable instrument until contrary is proved.
1. Consideration. It is presumed that every negotiable instrument has been made or drawn
for the consideration. Moreover, when a negotiable instrument is accepted, endorsed, negotiated
or transferred, it is also presumed that it was so accepted, endorsed etc. for a consideration.
But if the party liable for payment shows that the negotiable instrument was taken from him
without any consideration, then the holder has to prove that he took the negotiable instrument
for the consideration.
2. Date. In case of a dated negotiable instrument it is presumed that it has been made or drawn
on the date that appears on it.
3. Time of acceptance. In case of an accepted bill of exchange, it is presumed that it has been
accepted within a reasonable time after being made, and before its maturity (i.e. the due date
of payment).
4. Time of transfer. It is also presumed that every transfer of a negotiable instrument has been
made before its maturity.
5. Order of endorsements. It is also presumed that the endorsements appearing on the negotiable
instrument have been made in the same order in which they appear on the instrument.
6. Stamp. Sometimes, a negotiable instrument is lost or destroyed. In such cases it is presumed
that it was duly stamped.
1. Holder in due course. A 'holder in due course' is a person who has obtained a negotiable
instrument in good faith and for value. It is presumed that every holder of a negotiable instrument js
a 'holder in due course'. In case of dispute, it is the duty of a party liable for payment to prove
that the person holding the negotiable instrument is not the holder in due course. But if the party
liable for payment shows that the negotiable instrument was obtained from its lawful owner by
means of an offence or fraud, then it is the duty of the holder^ to prove that he is a holder in due
course i.e. to prove that he obtained the negotiable instrument in good faith and for value. In
law, the duty to prove certain facts is known as 'burden of poof.
8. Fact of dishonour. Sometimes, a negotiable instrument is dishonoured i.e. the party liable for
payment fails to make the payment. In such cases, the holder has the right to file a suit for recovery
of the amount, after giving a due notice of dishonour. However, before filing the suit, he may
obtain a certificate from a Notary Public about the fact of dishonour. Such a certificate is known
as 'protest'. On the proof of such a protest, the court shall presume the fact of dishonour. This point
will be discussed in detail in Arts 43.10 and 43.11.
Note. The above facts are presumed unless and until contrary is proved. In other words, these
presumptions are rebuttable by evidence i.e. the party liable for payment may prove by evidence that
these facts do not exist.
37.5. KINDS OF NEGOTIABLE INSTRUMENTS
There are many kinds of negotiable instruments. But the Negotiable Instruments Act mentions
only three kinds of negotiable instruments. These are specified in Section 13 of the Act which
reads as under:
"A negotiable instrument means a promissory note, bill of exchange or cheque payable either
to order or to bearer".
The analysis of this section reveals that, the Negotiable Instruments Act recognises the
following three kinds of negotiable instruments, namely:
1. Promissory note. It is a negotiable instrument, in writing which contains an unconditional
promise by one person to pay a certain sum of money to a specified person.
2. Bill of exchange. It is negotiable instrument, in writing, which contains an unconditional
order directing a certain person to pay a certain sum of money to the bearer of the instrument
or to a specified person.
3. Cheque. It is negotiable instrument, in writing which contains an unconditional order
directing a specified banker to pay a certain sum of money to the bearer of the instrument or to
a specified person.
4.
All these three kinds of negotiable instruments will be discussed in detail in the next chapter.
Though the Negotiable Instruments Act speaks of only above three kinds of negotiable
instruments, but it does not mean that there cannot be any other negotiable instruments than these
three. As a matter of fact, every other document which fulfils the requirements of a negotiable
instrument, is recognized by the usage or customs as the negotiable instrument e.g. hundis,
treasury bills, bankers drafts, share warrants, dividend warrants, bearer debentures etc. are
negotiable instruments recognized by the customs and other Acts (such as Companies Act). Thus,
every document which entitles a person to a sum of money, and law of which is freely transferable fro m
one hand to another, is entitled to be called a negotiable instrument.
Note. Money Orders, Postal Orders, Deposit Receipts, Bill of Lading, Railway Receipts, Dock Warrants etc.
are not negotiable instruments. Though these documents are transferable by delivery and endorsement yet they
cannot give a better title to the transferee than that of the transferor.

37.6. CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

The negotiable instruments may be broadly classified under the following six heads:
1. Inland instruments. The term 'inland instrument' is defined in Section 11 of the Negotiable
Instruments Act, which reads as under:
"A promissory note, bill of exchange or cheque drawn or made in India, and made payable in, or
drawn upon any person resident in India, shall be deemed to be an inland instrument." The
analysis of this section reveals, that, in any of the following cases an instrument is an inland
instrument:
(a) An instrument which is drawn in India and also payable in India.
(b) An instrument which is drawn in India on any person resident in India whether payable
in India or outside India.
Example 37.1. A, a resident of Chandigarh, drew (i.e. made) a bill of exchange in Chandigarh on B, a
merchant in London. And B accepted the bill of exchange as payable in Delhi. It is an inland bill of exchange.
In this case, the bill of exchange was drawn in India and also payable in India.
 Example 37.2. A, a resident of Bombay, drew a bill of exchange in Bombay on B, a merchant in Delhi. And B
accepted the bill of exchange as payable in New York. It is also an inland bill of exchange. In this case, the bill of
exchange was drawn in India on a person resident in India. It is immaterial that the amount is payable in New
York.
It will be interesting to know that the nature of an inland instrument is not changed by the fact of its
being circulation in a foreign country. Thus, an inland instrument remains inland even if it has been
endorsed in a foreign country e.g. if the bills of exchange mentioned in above two examples, are
endorsed in France, they will remain inland bills.
2. Foreign instruments. The term 'foreign instrument' is defined in Section 12 of the Negotiable
Instruments Act, which states that a foreign instrument is one which is not an inland instrument.
Example 37.3. A drew a bill of exchange in India on B, a merchant residing in London. It was also
made payable in London. It is a foreign bill of exchange..
Example 37.4. A drew a bill of exchange in London on B, a merchant residing in London. But
the bill of exchange was made payable in India it is also a foreign bill.
Similarly, a bill of exchange drawn in London and payable in London is a foreign bill. And a bill of
exchange drawn in London on a person residing in India, is also a foreign bill.
3. Bearer instruments. The term 'bearer' instrument' may be defined as negotiable instrument
the payment of which can be taken by a person who has the possession of the instrument. This
term is defined in Explanation II to Section 13 (1) of the Negotiable Instruments Act which
reads as under:
"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 indorsement in blank". The analysis of
this section reveals that, a negotiable instrument is payable to bearer in any of the following
cases:
(a) Where the instrument is expressed to be payable to bearer.
(b) Where the only endorsement or the last endorsement on the instrument is an endorsement
in blank (i.e. where the instrument is endorsed by the holder simply by signing his name
and without writing transfere's name). Thus, where an instrument is originally payable
to a particular person, but subsequently endorsed in blank, the instrument will become
payable to bearer.
It may be noted that a bearer instrument can be negotiated (i.e. transferred) by mere delivery e.g.
no formality is required for transferring a bearer instrument. Example 37.5. The negotiable
instrument made in the following words are the bearer instruments:
(a) pay to A or bearer
(b) pay the bearer
Example 37.6. A made a cheque payable to B and delivered the same to him. Afterwards, B put his
signatures on the back of the cheque and delivered it to C. In this case, the cheque becomes a bearer one in
the hands of C as B did not write the name of any person at the time of endorsement i.e. the only
endorsement on the cheque is an endorsement in blank.
Note. It may be noted that when an instrument is payable to bearer, any person who is in lawful
possession of the instrument as a holder, is entitled to receive payment due on the instrument. It is not
necessary that the instrument should contain his name. However, when he receives money, he may be
required to acknowledge receipt of money by signing on the instrument.
4. Order instruments. The term 'order instrument' may be defined as the instrument the
payment of which can be taken by a particular person to whom it is made payable or if it is
made payable to the order of that particular person. This term is defined in Explanation 1to Section
13(1) of the Negotiable Instruments Act, which reads as under:
"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". The analysis of
this section reveals that a negotiable instrument is payable to order in any of the following cases:
(a) Where the instrument is expressed to be payable to order.
(b) Where the instrument is expressed to be payable to a particular person and which does
not contain any words restricting its further transfer.
An order instrument is also negotiable (i.e. transferable). But it can be negotiated by an
endorsement on it, and then its delivery.
Example 37.7. The negotiable instruments, made in the following words, are order instruments:
(a) Pay to A or order.
(b) Pay to the order of A.
(c) Pay to A.
Example 37.8. A negotiable instrument made in the words as 'Pay to A only', is not an order instrument
because its transfer is restricted by using the word 'only'.
5. Instruments payable on demand. The 'instruments payable on demand' are defined in Section
19 of the Negotiable Instruments Act. In this connection first part of section 21 of the Act is also
relevant. Both these sections respectively read as under:
"A promissory note or bill of exchange in which no time for payment is specified, and a cheque,
are payable on demand".
"In a promissory note or bill of exchange the expression 'at sight' and 'on presentment' means
on demand".
The analysis of these sections reveal that, the following instruments are payable on demand:
(a) A promissory note or a bill of exchange in which no time for payment is specified.
(a) A promissory note or a bill of exchange which is expressed to be payable 'on demand',
or 'at sight', or 'on presentment'.
(b) A cheque. As a matter of fact, the cheques are always payable on demand.
Note. It may be noted that the instruments payable 'on demand' may be presented for payment at any time.
6.Time instruments. The term 'time instrument' may be defined as the instrument which is
payable some time in future. Thus, the following instruments are time instruments:
(a) A promissory note or a bill of exchange which is payable after a fixed period e.g. 60 days after
sight.
(b) A promissory note or a bill of exchange which is payable on a specified day e.g. On 31
March, 1999.
(c) A promissory note or a bill of exchange which is payable on the happening of an event
which is certain to happen e.g. on the death of a person.
(c) A promissory note or a bill of exchange which is payable 'after sight'.
Notes 1. The expression 'after sight' in a promissory note means that the payment cannot be demanded
on the promissory note till it has been shown to the maker. And in case of a bill of exchange the expression
'after sight' means after acceptance, or after noting for non-acceptance, or after protest for non-acceptan ce
[Section 21].
2. It may be noted that a cheque cannot be a time instrument because the cheque is always payable on
demand.

37.7. IMPORTANT TERMS

Following are the important terms in negotiable instruments:
1. Ambiguous instruments. The term 'ambiguous' instrument is defined in Section 17 of the
Negotiable Instruments Act. As per this section, an ambiguous instrument is one which in form is
such that it may either be treated as a promissory note or bill of exchange. In such cases, the holder
may either treat it as a promissory note or bill of exchange. Once he exercises his option, he is
bound by it i.e. he cannot fall back that it is the other kind of instrument.
Example 37.9. A firm was carrying on its business in Bombay and Delhi. Its Bombay branch drew a
bill of exchange on the Delhi branch. In this case, the holder of the bill of exchange, may also treat it
as a promissory note drawn by the Bombay branch payable in Delhi. The reason for the same is that the
drawer and the drawee of the bill of exchange are the same person.
Example 37.10. A drew a bill of exchange on B, a fictitious person not in existence. And A endorsed
the bill of exchange in favour of C and delivered the same to him. In this case also, C may treat the bill of
exchange as a promissory note made by A. The reason for the same is that where the drawee is a fictitious
parson the instrument is ambiguous.
As a matter of fact, in negotiable instruments, the amount undertaken or ordered to be paid is
stated in figures as well as in words. Sometimes, the amount stated in the instrument is different in
figures and words. In such cases the amount stated in words shall be taken as the amount of the
instrument [Section 18].
Example 37.11. A bill of exchange was drawn in words reading as "Pay to A the sum of rupees two
thousand". However, in figures the amount stated was Rs. 200. In this case, the bill of exchange is for
Rs. 2000.
2. Inchoate Instruments. The term 'inchoate instrument' means an incomplete instrument in
some respects e.g. an instrument not mentioning the amount payable, or the name of the payee.
Section 20 of the Negotiable Instruments Act contains the legal provision in this regard. As per this
section, an inchoate instrument is a blank or an incomplete instrument. When a person signs and
delivers to another a blank or incomplete stamped instrument, he authorises the other person to
make or complete a negotiable instrument for any amount not exceeding the amount covered by
the stamp. When the instrument is so filled up, the person signing the instrument becomes liable
in the capacity in which he has signed to any holder in due course for such amount. The liability of
the signer is restricted to the amount specified in the instrument which is covered by the stamp.
It may be noted here that no person other than a holder in due course can recover from the person
delivering the instrument anything in excess of the amount intended to be paid by him.
Example 37.12. A owed Rs. 500 to B. He gave a stamped and signed promissory note to B leaving
blank the space for amount. And B filled Rs. 700, in the space left for amount. In this case, B cannot recover
Rs. 700 from A as he B is not a holder in due course. He can recover Rs. 500 only which A intended to
pay under the instrument.
If after completing the promissory note for Rs. 700, B transfers it to C, a holder in due course,
then C will be entitled to recover the full amount of Rs. 700 if the stamp affixed is sufficient to
cover Rs. 700. And A. will be bound to pay the full amount to C.
Example 37.13. A drew a bill of exchange as 'pay to or order.' Thus leaving blank the space
for the name of the payee. In this case, the holder may write his own name and file a suit for the
recovery Of the amount due on the bill of exchange.
It may be noted that the person sign-ing and delivering the stamped incomplete instrument is liable
to both the 'holder' and the 'holder in due course'. However, the holder can recover only what the
signer intended to pay under the instrument. While a 'holder in due course' can recover the whole
amount made payable by the instrument provided that amount is covered by the stamp affixed on the
instrument. The following points are important in connection with an inchoate instrument:
(a)The liability of the person who signs and delivers an incomplete stamped instrument arises
only when the blanks are filled in and the instrument is completed.
(b)The signer becomes liable only when the instrument is delivered to the transferee. Thus,
where a person signs his name on a stamped promissory note, and keeps it in his table drawer,
and someone steals and completes the instrument, then he cannot recover the amount from the
signer. It may be noted that in such a case, even a holder in due course cannot recover the
amount from the signer.
(c) The instrument must be stamped one, and the stamp affixed must be sufficient to cover
the amount filled in the instruments.
(d) The person who completes an inchoate instrument cannot himself become a holder in due
course. Only the recipient from him become a holder in due course if he receives it in
good faith, and for value. [Kadarkarni v. Arumugam, AIR 1992 Madras 346].
37.8. LAW APPLICABLE TO NEGOTIABLE INSTRUMENTS
The law applicable to the negotiable instruments is contained in the Negotiable Instruments Act, 1881.
It may, however, be noted that this Act does not affect Section 31 of the Reserve Bank of India Act,
1934 which reads as under:
"(I) No person in India other than the Reserve 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, or
borrow, owe or take up any sum or sums of money on the bills, hundis, or notes payable to
bearer on demand of any such persons;
Provided that cheques or drafts, including hundis payable to bearer on demand or otherwise,
may be drawn on person's account with a banker, shroff or agent.
(2) Notwithstanding anything contained in the Negotiable Instruments Act, 1881, no person
in India other than the Bank, or as expressly authorised by this Act, the Central Government,
shall make or issue any promissory note expressed to be payable to the bearer of the
instrument".
The effect of this section may be stated as under:

(a) A bill of exchange, promissory note or hundi cannot be made payable to 'bearer on
"demand'. However, a cheque payable to bearer on demand can be drawn on person's
account with a banker.
(b) A promissory note cannot be made payable to the bearer. This makes the words "or to
bearer' in the definition of a promissory note given in Section 4 of the Negotiable
Instruments Act, as inoperative.
The object of the above provision of Reserve Bank of India Act is to protect the Government's power
of issuing paper currency i.e. the notes payable to bearer on demand. It may be noted that this
provision shall prevail over and above the provisions of the Negotiable Instruments Act.
Notes. 1. The expression' payable to bearer on demand' means that anybody without an
endorsement from the holder of the negotiable instrument, can get the payment of the amount mentioned
in the instrument Whereas, in case of a negotiable instrument payable to a particular person or to his
order, any body having its possession cannot get the payment. The person entitled to the payment
will be either the person in whose favour the instrument is drawn or the endorsee from him.

3. Earlier section 32 of the Reserve Bank of India Act provided that if anybody issues a bill of
exchange or promissory note payable to bearer on demand or a promissory note payable to
bearer, he shall be punishable with fine equal to the amount of such bill of exchange or
promissory note. But this section was omitted by the Reserve Bank of India (Amendment) Act
in 1974
TEST QUESTIONS
1.What do you understand by the term negotiable instrument? What are its special characteristics?
2.State the law applicable to negotiable instruments as modified by the Reserve Bank of India Act
1934.
3.How you will classify the negotiable instruments? What are the kinds of a negotiable instrument
as expressly dealt in the Negotiable Instruments Act, 1881?
4.What are the special presumptions as to negotiable instrument?
5.What are the special characteristics of negotiable instruments?
6.Write notes on the following
(a)Inland and Foreign Instrument.
(a)The provision of the Reserve Bank
of India Act, 1934 modifying the
Negotiable Instruments Act, 1881.Inchoate
Instruments.Bearer and Order Instruments
 38. PROMISSORY NOTES, BILLS OF EXCHANGE AND CHEQUES

38.1 INTRODUCTION
In the last chapter, we have discussed the 'negotiable instruments' in general. But the Negotiable
Instruments Act makes a specific mention of only three kinds of negotiable instruments namely,
promissory notes, bills of exchange and cheques. In this chapter, we shall discuss in details these three
negotiable instruments.
Note. The term 'negotiable instruments', 'promissory note' and 'bill of exchange' are frequently used in this
chapter as well as in subsequent chapters of Negotiable Instruments Act. At most of the places, we shall use the
words 'instrument', 'note' and 'bill' for the words 'negotiable instruments', 'promissory note' and 'bill of
exchange' respectively.
38.2. PROMISSORY NOTE
The term 'promissory note' may be defined as a promise in writing by a person to pay a certain sum of
money to a specified person. The legal definition of this term is contained in Section 4 of the
Negotiable Instruments Act, which reads as under:
"A promissory note is an instrument in writing 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".
The analysis of this section shows that, a promissory note is a written and signed promise to pay a
certain sum of money to a specified person or his order.
Example 38.1. The following negotiable instruments signed by A are valid promissory notes as they fulfill
the requirements of legal definition discussed above:
(a) I promise to-pay B or order Rs. 500.
(b) I acknowledge myself to be indebted to B in Rs. 1000, to be paid on demand for value received.
(c) Example 38.2. The following negotiable instruments signed by A are not valid promissory notes as they
do not fulfill the requirements of legal definition discussed above:
(a) B, I.O.U. (I owe you) Rs. 500.
(b) I promise to pay B Rs. 500, and all other sums which shall be due to him.
(e) I promise to pay B Rs. 500, first deducting thereout any money which he may owe me.
(d) I promise to pay B Rs. 500 seven days after my marriage with C.
I promise to pay B Rs. 500 on D's death, provided B leaves enough to pay that sum.
(/) I promise to pay B Rs. 500 and to deliver him my black horse on 1st January

It may be noted that the bank notes and currency notes are not to be treated as promissory notes.
They are expressly excluded from the category of promissory notes. It may also be noted that the
words "or to the bearer' in the last line of legal definition, are not operative. The reason for the same is
that Section 31 of the Reserve Bank of India Act, 1934, specifically provides that a promissory note
cannot be made payable to bearer. Thus, a valid promissory note is one which is payable to a
specified person or his order .

38.3. PARTIES TO A PROMISSORY NOTE

Following are the two main parties in a promissory note:

1. Maker. It is a person who makes the promissory note and promises to pay the money stated
therein.
 2. Payee. It is a person to whom the amount of promissory note is payable i.e. to whom
the promise to pay is made.

38.4. SPECIMEN OF A PROMISSORY NOTE

Following is the general specimen of a promissory note:

Rs. 500 Bombay, April 14, 1998

Three months after date, I promise to pay B or order the sum of rupees five to B
Bombay. Stamp
Sdl-A

In this specimen, A is the maker, and B is the payee as the amount of Rs. 500 is to be paid to him
or any other person to whom he orders. In this specimen, the promissory note is made at Bombay.
38.5. ESSENTIALS OF A VALID PROMISSORY NOTE
The legal definition of the term promissory note as discussed in the last article reveals certain essential
elements (i.e. requirements) of a promissory note. And a valid promissory note must have all the
essential elements of the legal definition. Following are the essential elements (requirements) of a
valid promissory note.
1. It must be in writing. The first requirement of a valid promissory note is that it must he
in writing. An oral promise to pay a sum pf money is not a promissory note. However, the writing may
be in ink or in pencil. It also includes printing and typewriting.
2. It must contain an express promise to pay. The second requirement of a valid promissory note
is that it must contain an express promise to pay money. A mere implied promise to pay is not
sufficient. It may be noted that a mere acknowledgment of a debt is not a promissory note. The reason
for the same is that by the mere acknowledgment of a debt, a person does not promise to pay the debt.
He simply acknowledges his liability to pay the same.
Example 38.3. The following negotiable instruments signed by A are valid promissory notes as
they contain an express promise to pay:
(a) I promise to pay B the sum of Rs. 1,000.
(b) I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received.
Example 38.4. The following negotiable instruments signed by A are not valid promissory notes as
they
contain a mere acknowledgment of debt:
(a) B, I.U.O. (I owe you) Rs. 1,000.
(b) B, 1 am liable to pay you Rs. 500.
It may also be noted that a mere receipt of money even if coupled with a promise to pay is
not a promissory note. As a matter of fact, generally the receipts are never intended to be
negotiable instruments. 1 Thus, a letter acknowledging receipt of money under revenue stamp is
not a promissory note. [Kundan Mai v. Nand Kishore, AIR 1994 Raj 1].
It may, however, be noted that a document which fulfils the legal requirements of a promissory
note, does not become a receipt simply because the receipt of money is written first instead of
mentioning it at the end of the document, e.g. "Received from A Rs. 1,001 which I promise to
pay on demand". An instrument containing such terms will be a valid promissory note.
[Halsbury's Law Vol. 4th Edn. Para 306].
Example 38.5. A executed an instrument in terms reading as "I have received the sum of Rs. 10,000
from B. This amount will be repaid on demand. I have received this amount in cash" This was held to
be a valid promissory note. [Surjit Singh v. Ram Rattan, AIR 1975 Guj 15].

3. The promise to pay must be unconditional. The third requirement is that, the promise to pay
must be unconditional. In other words, the promise to pay should not depend upon a condition or upon
the happening of an uncertain event. It may be noted that a conditional or an uncertain promissory
note is bad, and thus invalid.
Example 38.6. The following instruments signed by A are not valid promissory notes:
promise to pay B Rs. 500 seven days after my marriage with C. It is an uncertain promissory
note because A may never marry C.
(a) I promise to pay B Rs. 500 on C's death, provided C leaves me enough to pay that amount. In this
case, though the death of C is certain at one time or the other. But the payment is conditional because
the promise to pay depends upon the condition if C leaves the sufficient amount to pay. This is an
uncertain event because C may not leave sufficient amount at the time of death.
(b) I promise to pay B Rs. 500 as soon as possible. It is an uncertain promissory note because it is
difficult to ascertain A's possibility of making payment.
But sometimes, an instrument is made payable on the happening of a certain event which is
bound to happen. In such cases, the instrument is valid because there is no uncertainty regarding
its payment.
Example 38.7. A signed an instrument in the words readings as "I promise to pay B Rs. 500 seven
days after C's death. It is a valid promissory note because the death is a certain event and is bound to
happen.. Similarly, a promise to pay at a particular place or after a specified time, is not conditional. It is a
valid promissory note.
Example 38.8. A signed an instrument in the words reading as "I promise to pay B Rs. 1,000 thirty
days after date (i.e. after the date the promissory note was prepared)". It is a valid promissory note.
4. It must contain a promise to pay in terms of money only. The fourth requirement of a valid
promissory note is that it must be payable in terms of money and money only. If the instrument
contains a promise to pay something other than money or something in addition to money, it
will not be a valid promissory note.
Example 38.9. The following instruments signed by A are not valid promissory notes as they do not
contain a promise to pay in terms of money only:

(a) I promise to pay B Rs. 500 and also to deliver him my black horse on 1st January next.
(b) I promise to pay B in 30 shares and 20 bonds of a company.
(c) I promise to deliver to B 100 bags of rice.
5. It must contain promise to pay a definite (i.e. certain) amount of money. The fifth requirement
of a valid promissory note is that the amount of money payable must be definite. In other words, the
promise must be to pay a certain amount of money. If the amount payable is not definite, then
the promissory note will not be valid.
Example 38.10. The following instruments signed by A are not valid promissory notes as they do not
contain the promise to pay a definite amount of money:
(a) I promise to pay B Rs. 1,000 and all other sums which shall be due to him.
(b) I promise to pay fi Rs. 5000, first deducting thereout any money which he may owe to n,
(c) I promise to pay B Rs. 550 and the fine according to rules.
But sometimes, the language of a promissory note is such that the amount payable can h easily
ascertained. In such cases, the promissory note is valid.

Example 38.11. The following instruments signed by A are valid promissory notes as there j s uncertainty
regarding the amount payable:
(a) I promise to pay B Rs. 6,000 in 12 monthly installments of Rs. 500 each on the first of every mon(,
If I fail to pay any installment on the due date, then the whole balance unpaid shall become du
[Section 5, third para].
(b) I promise to pay B Rs. 2,000 along with simple interest at the rate of 15% per annum.
Notes. 1. The interest at the specified rate is calculated from the date of instrument until tender or
realisation of amount [Section 79]. Where no rate of interest is specified in the instrument, the appiic^
rate of interest would be 18%. [Section 80 as amended in 1988. Earlier this rate was 6%]
2. The Negotiable Instruments Act nowhere requires that the amount should be stated both in words and
figures. However, it has become usual practice to mention the amount in both. Moreover, Section !8 recognises it by
saying that in case of discrepancy, the amount stated in words will prevail.
6. It must contain certain parties. The sixth requirements is that the parties to a promissory
note must be certain. We know that there are two parties in a promissory note, namely, ( a) the
maker, i.e. who makes the note, and (b) the payee i.e. to whom the promise to pay is made. Both
these parties must be certain i.e. both must be indicated with certainty on the face of the
instrument. If from the face of the instrument, the maker and the payee cannot be identified with
certainty, the instrument is not a valid promissory note. Thus, the promissory note must show
who is liable to pay the money, and also who is entitled to receive the payment. However, the
parties may be described by name or designation e.g. manager of a bank, the principal of a college
etc. It may also be noted that it is not necessary that the payee should be specifically mentioned
in the instrument. It is sufficient if on reading the documents, as a whole there is no doubt as
to the person who is the payee, e.g. where a name is written in the address only, and not in the
instrument itself.
7. It must be signed by the maker. The last requirement of a valid promissory note is that it
must be signed by the maker. The instrument will be complete only when it is signed by the
maker. It may be noted that even if the instrument is written by the maker in his own hand and
his name appears in the body of the instrument, his signature must be there. If the maker is
illiterate, he may put his thumb mark. However, the signatures may be in any part of the
instrument.
8. Intention to make a promissory note and its delivery. In addition to the requirements of
Section 4 of the Negotiable Instruments Act (as discussed above), an instrument to be a promissory
note must be such as to show the intention to make a promissory note 2 , and must be delivered
[Section 48]. A promissory note is inchoate, and incomplete until it is delivered to the payee
[Section 46]. If a person signs a promissory note in his home and keeps it there, it is not a
promissory note, and he does not become liable to any one even if some body's name is written
on it. The making of a note is only a preparation. It is not an offer at all, and therefore, it does
not become any part of the contract. The contract arises only on the delivery of a properly signed
promissory note and not before that. Thus, the promissory note is complete, and the maker
becomes liable to pay only when the duly signed note is voluntarily delivered to the payee
[Bhagwan Das v. Girdharilal, 1966 SC 543].
9. Other formalities. As a matter of fact, the requirements mentioned above are essential for
the validity of a promissory note. Thus, the lack of any one or more of these requirements will
not make the document, a promissory note 3. There are certain other formalities, such as number, Me, place'
consideration, attestation etc. which are usually found in a promissory note. But they ae not essential in
law. The omission to mention date and place where it is made or where it •s payable, does not
invalidate the instrument. However, the date should be mentioned where the amount is payable at a
certain time after date. Similarly, the omission of words, 'for value received' does not invalidate the
promissory note. Because there is presumption as regards the consideration.
Thus, in general it is not essential for the validity of a promissory note that it should contain the
name of the place where it is made, or the place where it is payable 4. But it seems highly proper that
the place of execution and the place of payment should, in all cases, be stated in t(,e promissory note
at least in order to determine whether it is an inland instrument or a foreign instrument. In order to
determine the forum (court) in which action to recover the amount may be brought, the place of
making the note is an essential part of it. And the court of the place of execution has always
jurisdiction to try the suit on the note.
[Damji Hirji v. Mohd. AH Essabhoy, 1939 Bombay 461].
But a promissory note must be properly stamped as required by the Indian Stamp Act, 1899, and
stamp must also be properly cancelled.
Notes. 1. A promissory note may be payable on demand, or after a definite period of time. The expression 'on
demand' means payable immediately on presentation. The note in which no time of payment is specified, is
payable on demand.
2.A promissory note cannot be made payable to bearer, because, Section 31 of the Reserve Bank of
India Act prohibits the issue of such promissory notes.
3. Bank notes or currency notes are not promissory notes, because these are money itself.
38.6. BILL OF EXCHANGE
The term 'bill of exchange' may be defined as an order, in writing, requiring a certain person to pay
a certain sum of money to a specified person. The legal definition of the term is given in Section 5
of the Negotiable Instruments Act which, reads as under:
"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."
The analysis of this section shows that, a bill of exchange is a written and signed order directing a
person to pay a certain sum of money to the bearer of the instrument or to a specified person or his
order. Generally, a bill of exchange is drawn by a creditor, who directs his debtor to pay the money to
the person specified in the instrument.
Example 38.12. A wrote and signed an instrument ordering B to pay Rs. 500 to C. This is a bill of
exchange. In this instrument. B has been ordered to pay Rs. 500 to C.
It may be noted that a bill of exchange cannot be made payable to the bearer on demand. Section
31 of the Reserve Bank of India Act, 1934, specifically prohibits the issue of such bills of exchange.
Thus, a bill of exchange drawn as under is not a valid bill of exchange:
"On demand pay to the bearer the sum of rupees five hundred, for value received".
However, a bill of exchange payable on demand, in which name of the payee is mentioned, is
valid. Thus, a bill of exchange drawn as under is a valid bill of exchange:
"On demand pay to A or order the sum of rupees five hundred for value received".
In this case, though the bill of exchange is payable on demand but it is payable to a specified person
(i.e. A) or his order (i.e. to a person to whom A requires to be paid). And thus, it is a valid bill of
exchange.

38.7. PARTIES TO A BILL OF EXCHANGE

Following are the three main parties in a bill of exchange:
1. Drawer. It is a person who makes a bill of exchange. In other words, he is the
of bill of exchange.
2. Drawee. It is a person who is ordered (i.e. directed) to pay the amount of the bill
exchange i.e. on whom the bill of exchange is drawn. When the drawee accepts the K'I
of exchange (i.e. when he gives his consent to make the payment of the bill on due dat
he is called the 'acceptor'.
3. Payee. It is a person to whom the amount of bill of exchange is payable.
It will be interesting to know that in some cases, the drawer and the payee may be the sam persons e.g.
when a person signs a bill of exchange reading as "pay to me or my order'. Thu if A signs a bill of
exchange ordering B to pay the amount to himself A, then the drawer anH the payee will be the same
person (i.e. A). Sometimes, the drawer and the drawee may also b the same person e.g. a bill of exchange
drawn by one branch of a firm on its another branch In such cases the holder of the bill, at his option, may
treat it either a bill of exchange or a promissory note [Section 17].
Note. The acceptance of a bill of exchange is given by the drawee in writing only (either by writing the word
'accepted' and signing the bill of exchange or by simply putting his signature on the bill Of exchange). This point
will be discussed in detail in Art 42.2.
38.8.SPECIMEN OF A BILL OF EXCHANGE

Following is the general specimen of a bill of exchange:

Rs. 500 Delhi, April 14, 1998

Three months after date to pay C or order the sum of rupees five hundred, for value received .
To B
11, Model Town Stamp
Delhi. Sdl-A

In this specimen, A is the drawer. B is the drawee as the bill of exchange is addressed to him and he has been
ordered (i.e. directed) to pay the amount of Rs. 500. And C is the payee as the amount is to be paid to him or
any other person to whom he orders. In this specimen, the hill is drawn at Delhi.
38.9. ESSENTIALS OF A VALID BILL OF EXCHANGE

The legal definition of the term 'bill of exchange' as discussed in the last article, is almost similar to that of a
promissory note. Thus, the essential requirements are more or less the same. However, the bill of exchange
differs from a promissory note in some particular respects e.g. a bill of-exchange is an 'order to pay' money,
whereas a promissory note is a 'promise to pay' money. The requirements of a bill of exchange, in brief,
are as under.
1. It must be in writing. The first requirement of a valid bill of exchange is that it must be
in writing. Like promissory note, a bill of exchange also cannot be oral.
2. It must contain an express order to pay. The second requirement of a valid bill of exchange
is that it must contain an express order to pay money. This feature of a bill of exchange
distinguishes it from a promissory note. Because, a promissory note contains a promise to pay
and not an order to pay. It may be noted that a mere request to pay money, is not a bill of exchange.
However, the order to pay may be in the form of a request i.e. an order to pay may be in a polite
language. But, merely giving an authority to a person to pay money, is not an order.
Example 38.13.. The following instruments signed by A are valid bills of exchange as they contain
n order to pay, though the language used is very polite: (a) B, please pay Rs. 500 to C or order.
(I)) B will much oblige me by paying to C Rs. 500.
Example 38.14. The following instruments signed by A are not valid bills of exchange as they
contain only a request to pay and no order to pay:
(a) B, please let C have Rs. 500, and place it to my account and oblige.
(b) B, I shall be highly obliged if you make it convenient to pay Rs. 1,000 to C.

3. The order to pay must be unconditional. The third requirement of a valid bill of exchange is that
the order to pay must be unconditional. In other words, the order to pay should not depend upon a
condition or upon the happening of an uncertain event. This point has already been discussed in
detail in case of a promissory note.
4. It must contain an order to pay in terms of money only. The fourth requirement of a valid bill of
exchange is that it must be payable in terms of money and money only. If the instrument contains an
order to pay something other than money or something in addition to money, it will not be valid bill of
exchange.
5. It must contain an order to pay a definite (i.e. certain) amount of money . The fifth
requirement of a valid bill of exchange is that the amount of money ordered to be paid must
be definite. In other words, an order must be to pay a certain amount of money. If the amount
ordered to be paid is not definite, then the bill of exchange will not be valid.
6. In must contain certain parities. The sixth requirement is that, the parties to a bill of
exchange must be certain. We know that there are three parties in a bill of exchange namely
(a) the drawer, (b) the drawee, and (c) the payee. All these three parties must be certain i.e.
indicated in a bill of exchange with reasonable certainty.
7. It must be signed by the drawer. The last requirement of a valid bill of exchange is that,
it must be signed by the drawer. The instrument will be complete only when it is signed by the
drawer.
8. Intention to make a bill of exchange and its delivery. In addition to the requirements of
Section 5 of the Negotiable Instruments Act (as discussed above), an instrument to be a bill of
exchange must be such as to show the intention to make a bill of exchange and must be delivered. A bill
of exchange is inchoate and incomplete until it is delivered to the payee. This point has already been
discussed in detail in case of a promissory note.
9. Other formalities. As a matter of fact, the requirements mentioned above are essential for
the validity of a bill of exchange. And the lack of any one or more of these requirements will
not make the document, a bill of exchange. There are certain other formalities, such as number,
date, place, consideration, attestation etc., which are usually found in a bill of exchange. But
they are not essential in law. Thus, the omission to mention number, date etc. does not invalidate the
instrument. But a bill of exchange must be properly stampted as required by the Indian Stamp Act,
1899, and the stamp must also be properly cancelled.
Notes. 1. A bill of exchange may be made payable on demand, or after a definite period of time.
2. A bill of exchange cannot to made payable to 'bearer on demand', because Section 31 of the
Reserve Bank of India Act prohibits the issue such bills of exchange.
3. The bill of exchange being an order upon the drawee to pay the money, is not binding on him
unless he accepts it i.e. gives his consent to pay the money due on the bill of exchange. However, the
acceptance of a bill of exchange is not necessary for its validity. If a bill of exchange is not
accepted, it does not become invalid. It only becomes dishonoured by non-acceptance. The usual
mode of acceptance is that the drawee will put his signature on the face of the bill of exchange, with
or without the word 'accepted'.
38.10. CHEQUE
The term 'cheque' may be defined as a bill of exchange which is drawn upon a banker and is
always payable on demand. The legal definition of the term is contained in Section 6 of the Negotiable
Instruments Act, which reads as under:
"A cheque is a bill of exchange drawn on a specified banker
otherwise than on demand".
The analysis of this section shows that, a cheque is a bill of exchange
two additional requirements:
1. A cheque is always drawn on a specified bank, and
2. A cheque is always payable on demand.
A cheque, being a bill of exchange, must have all its essential requirements. Thus
must contain an unconditional order on a specified banker to pay a certain sum of mone^ Therefore,
by a cheque, a banker is directed to pay a certain amount of money on demand

38.11. PARTIES TO A CHEQUE

Following are the three main parties in a cheque:
1 . Drawer. It is a person who makes the cheque. In other words, he is the maker of a cheque
2. Drawee. It is a banker who is directed to pay the amount of the cheque i.e.
the cheque is drawn. It may be noted that in case of a banker.
3. Payee. It is a person to whom the amount of cheque is payable.
However in some cases, the drawer and the payee may be the draws a cheque 'payable to self.
38.12. SPECIMEN OF A CHEQUE

Following is the general specimen of a cheque:

No……….. Date……….19……………
PUNJAB NATIONAL BANK
Sector 17, Chandigarh
Pay……………………Mr. B or bearer ………………………………
Rs. 500/-

In this specimen, A is the drawer. The Punjab National Bank, Sector 17, Chandigarh is the drawee bank
as the cheque is drawn on this bank. And B is the payee as the amount of Rs. 500 is to be paid to him.

38.13. ESSENTIALS OF A VALID CHEQUE

The legal definition of the term 'cheque', discussed in the last article, reveals that it is
a special kind of a bill of exchange drawn upon a banker. The essential elements
(i.e. requirements) of a cheque are as under:
2.
1. It must have all the essentials of a bill of exchange. The first requirement of a
valid cheque is that it must have all the essential elements of a bill of exchange.
The reason for the same is that the cheque is primarily a bill of exchange drawn
upon a banker. The essentials for a bill of exchange have already been discussed in
detail in Art. 38.9 which may be summed up as under:
(a) It must be in writing, (b) It must contain an unconditional order to pay. (c) It
must contain an order to pay in terms of money only, (d) It must contain an
order to pay a definite amount of money, (e) It must contain certain parties. (/)
It must be signed by the drawer.
In addition to these essentials of a bill of exchange, the cheque must also satisfy the
following two requirements :

2. It must be drawn on a specified banker. The second requirement of a valid cheque is that
jt must be drawn on a specified banker. A cheque drawn on any person other than a banker, is
not valid.
3. It must be payable on demand. The last requirement of a valid cheque is that it must be
payable on demand. As a matter of fact, a cheque is always payable on demand.
It will be interesting to know that all cheques are bills of exchange. But all bills of exchange are
not cheques. A bill of exchange becomes a cheque only when it satisfies the above two additional
requirements.
Notes 1. No acceptance of a cheque is required. Moreover, a cheque is also not required to be stamped.
2. A cheque is equivalent to cash payment. The payment is deemed to be made on the date of issue.
[K. Saraswathy v. Somasundram Chettiar, AIR 1989 SC 1553].
38.14. MARKING OF A CHEQUE
The term 'marking of a cheque' may be defined as the writing on a cheque by the drawee banker that it would be
honoured when duly presented for payment. A cheque may be marked with words 'approved' or 'good'. The marking
of a cheque may be made by the drawee banker at the instance of the drawer, or the holder or the collecting
banker. The effect of marking is that the payee is certain to get the payment. In some places, there is custom
among bankers to mark cheques as 'good for payment'. It may, however, be noted that the marking of a cheque
does not amount to an acceptance.
We know that a cheque is intended for immediate payment. As such, it does not require any acceptance. In fact,
the liability of the banker depends upon the contractual relationship between the banker and its customer (drawer).
If the customer has sufficient funds with the banker, the banker is bound either to pay the cheque or to dishonour
it at once. It may be noted that in Negotiable Instruments Act, there is no provision about the marking of
cheques such as 'approved.' 'good' or 'good for payment'. Moreover, in India, there is no such recognised practice
of marking of cheques.

38.15. COMPARISON BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHANGE

The following Table gives the comparison between a promissory note and a bill of exchange :
S. No Promissory Note Bill of Exchange

1. In this case there are two parties, namely In this case, there are three parties, namely, (a) the
(a) the maker, and (b) the payee. Drawer, (b) the drawee, and (c) the payee. However,

In some cases, the drawer and the payee may be

the same person. And sometimes, the drawer and
the drawee may also be the same

2. It contains unconditional promise by the maker It contains unconditional order, by the drawer to
To pay, i.e. the maker himself promises to pay another, to pay money i.e. the maker (drawer) orders
The amount someone else (i.e. drawee) to pay the amount

3. It does not require any acceptance of the It generally, requires the acceptance of the drawee,
Maker before it is presented for payment. Before it is presented for payment. The drawee
The reason for the same is that, it is becomes liable to pay only when he accepts the bill
By the person who is liable to pay. It is of exchange. A bill of exchange which is payable
Presented for payment without any prior ‘after acceptance or ‘after a certain period’ must be
Acceptance presented to drawee for his acceptance

4. In this case, the liability of the maker of In this case, the liability of the drawer (maker) of
A promissory note is primary and absolute. Because a bill is secondary and conditional . Because he
The maker himself promises to pay the money becomes liable to pay only when the acceptor fails
To pay the mone

5. In this case, the maker stands in an immediate In this case, on acceptance of the bill of exchange
Relationship with the pay and thus, the payee can drawers’ immediate relationship is with the acceptor
Demand payment from the maker. And not with the payee. And thus, the payee cannot
Demand payment from the drawer directly. He should
First demand the payment from acceptor

6. It can never be made payable to bearer It can be made payable to bearer. But it cannot be
Made payable to a ‘bearer on demand’

7. In this case, the maker and the payee In this case, the drawer and the drawee may be
Cannot be the same person, because a same person, because the drawee can be ordered
Promise to pay money itself is not a to pay the money to the drawer himself
Promissory note.

8. It is generally written by a debtor who himself It is generally written by a creditor who orders his
Promises to pay the money to his creditor. debtor (drawee) to pay the money.

9. In case of dishonor of a promissory note, there In case of a dishonor of a bill of exchange, the notice
Is no need to give a notice of dishonor to maker of dishonor must be given by the holder to all the prior
. He is liable to pay the amount due on the parties (including drawer and indorser) who are liable
Promissory note even if no notice of dishonor to pay the money. If no notice of dishonor is given,
Is given to him. Such parties shall not be liable to pay the amount due
 On the bill of exchange

10. It cannot be drawn in sets i.e. parts. It can be drawn in sets also.

11. In this case, no protest is required, The In this case a foreign bill of exchange must be

Term protest will be discussed in Art. 43.11 protested for dishonor when such protest is required
By the law of the place where the bills are drawn. In
this case , there can be a conditional acceptance of a
a bill of exchange.

12. In this case,there is no question of conditional

Acceptance, as promissory note s are not required

38.16 COMPARISON BETWEEN BILL OF EXCHANNGE AND A CHEQUE.

The following table gives the comparison between a bill of exchange and a cheque

S.No. Bill of Echchange Cheque

1. It is usually drawn on some person. It is always drawn on a banker. Thus the drawee
However, it may also be drawn on a banker. In the case of a cheque is always a banker

2. It may be payable on demand or after the It is always payable on demand. As a matter of

Expiry date of a fixed period fact, a cheque is meant for immediate payment.

3. It generally requires acceptance before the It does not require any acceptance. As the
Payment can be demanded from the drawee. Cheque is meant for immediate payment. It is
Thus, in the first instance, the bill of exchange presented for payment and not for acceptance.
Is presented for acceptance, the drawee becomes However, the banker is liable to pay the amount
Liable to pay the amount due on the bill of exchange of cheque only if there is sufficient amount in the
Only when he accepts the bill. Drawers account

4. In this case, there is no provision regarding In this case, there is a provision regarding
The crossing of the bill of exchange the crossing of cheques. And thus, a cheque
May be crossed.the payment of a crossed
Cheque can be obtained on through the bank
Account.

5. It cannot be madepayable to the bearer on It can be made payable to the beaer on demand.
Demand.

6. It must be stamped. It does not require any stamp.

7. In case of dishonor of a bill of exchange In case of dishonor of a cheque, the notice

The notice of dishonor must be given to of dishonor is not required.
The drawer. If notice is not given to the drawer
He will not be liable for payment.

8. In this case, the drawer of a bill of exchange In this case, the drawer of a cheque Is not
 Is discharged from liability if the bill is not presented discharged from liability if the cheque is not
To the acceptor for payment is not demanded from presented for payment. However, if due to delay
The acceptor, the drawer can be made liable to pay in presentation of a cheque for payment, the
Drawer suffers some damages the he is
Discharged to the extent of damages e.g. the
Drawer may suffer loss due insolvency of the
Drawee banker.

9. In this case, three days of grace are allowed In this case, there is no question of days
From the due date within which the payment can be of grace. The reason for the same is that a
Made. However, in case of a bill of exchange payable cheque is always payable on demad. i.e
On demand no days of grace are allowed. Immediately on presentation for payment.

10. In case of dishonor of a bill of exchange, it is In case of dishonor of a cheque, it is not

Generally ‘noted’ or ‘protested’ for dishonor required to be noted or protested for dishonor

11. In this case, the payment of a bill of exchange In this case, the payment of a cheque can be
Cannot be countermanded i.e. the drawer of countermanded i.e. on drawers’ request, the
A bill of exchange cannot stop the other parties banker can stop the payment of a cheque in
From making payment. Certain circumstances.

38.17. SOME IMPORTANT KINDS OF BILLS OF EXCHANGE.

Following are some important kinds of bills of exchange:
1. Accommodation bill.
2. Fictitious bill
3. Documentary bill and clean bill.
4. Bill in sets.

38.18. ACCOMMODATION BILL

It is a bill of exchange which is made only to provide financial help to some party. A accommodation
bill is drawn accepted or endorsed, without any consideration, by some persn with a view to lend the credit of
his name on the bill so that the person taking the bill can get the money for the same. The person who signs (i.e.
accepts) the bill without any consideration in order to accommodate some other person, is known as 'accommodating
party' (or accommodation party), and the person who has been accommodated, is known as 'accommodated
party'.
Note. In form and in all other respects, an accommodation bill is similar to other (i.e. ordinary)
bill of exchange. There is nothing on the face of it to distinguish it from an ordinary trade bill of
exchange
Example 38.15. A was in need of Rs. 1,500. He approached his friend B for this purpose. But B
was not in a position to lend money. However, he (B) suggested that A may draw a bill of exchange
on him (B) which he would accept. Accordingly, A drew a bill of exchange on B, and B accepted the
same. This is an accommodation bill. If the credit of A is good, he can get the bill discounted with
his banker and can get the amount. And thus, A will be in a position to raise the money. In this case, B is
the accommodating party, and A is the accommodated party.
Since an accommodation bill is drawn for the benefit of the 'accommodated party', there is an implied
agreement between the 'accommodating party' and 'accommodated party' that either
(a) The accommodated party will himself pay the bill on maturity. In the above example,
A may himself pay the amount on maturity, or
(b) The accommodated party will provide funds to the accommodating party to make the
payment of the bill on maturity. In the above example, just before maturity, A may remit
the money to B who will pay the bill on maturity, or
(c) The accommodated party will indemnify the accommodating party for any payment which
 the accommodating party might make in respect of the bill. In the above example, if B
pays the amount on maturity, then he can claim the amount from A.
There are certain rules regarding the liability of parties, and payment of accommodation bills.
These rules may be studied under the following heads:
1. In such cases, the accommodating party is liable to make payment of the bill to the 'holder
for value' (i.e. the person -who has obtained the bill for consideration). At the time of
recovery by the 'holder for value', the accommodating party cannot take the plea that
he had signed (accepted) the bill without any consideration, only with a view to help the
accommodated party. In the above example, if A endorses the bill to C a holder for value,
then C can recover the amount due on the bill from B.
2. Sometimes, the 'holder for value' of the accommodation bill further transfers it to some
other person for consideration. Such person, if he receives it in good faith, can recover
the amount due on the bill from the prior parties even if he acquires the bill after its
maturity [Section 59]. In the above example, as stated in point 1 above if C endorses bill
to D after its maturity. But D receives the bill for consideration and in good faith.
Then D can recover the amount due on the bill from the prior parties (i.e. C, B or A).
3. In case of payment of the amount due on the bill, by the accommodated party, he cannot
afterwards recover the amount from the accommodating party [Section 43, Explanation
f\. In the above example, if A pays the amount due on the bill on its maturity, he cannot
afterwards recover the amount from B.
4. The drawer of the accommodation bill is not discharged from liability on account of non-presentment
of the accommodation bill, to the acceptor, for payment. 5. In case of dishonour of the
accommodation bill, the failure to give notice of dishonour does not discharge the prior parties from
liability .
38.19. FICTITIOUS BILL
It is a bill of exchange in which the name of the drawer, or payee or both is fictitious. The term
'fictitious person' means (a) a person who is not in existence or (b) a pretended person i.e. a person who
is in existence but never intended by the parties to be the drawer or payee Of the bill of exchange. It may
be noted that when a fictitious bill is accepted by the drawee, then the holder in due course of the bill can
recover the amount due on it from such a drawee if he can prove that the signature of the supposed
drawer and that of the first endorser are in the same handwriting. This point will be discussed in detail in
Art. 40.4.
38.20. DOCUMENTARY BILL AND CLEAN BILL
Sometimes, a seller of goods draws a bill of exchange on the buyer for the price of the goods. And the
documents of title to the goods such as bill of lading, railways receipt, warehouse receipt etc., and some other
documents such as invoice, shipping papers, marine insurance policy etc. are attached to the bill. In such
cases, the bill of exchange is called a documentary bill. Such documents are delivered to the buyer only on
the acceptance or payment of the bill. On the other hand, when no documents of title etc. are attached to a
bill of exchange it is called a clean bill.
38.21. BILL IN SETS
A bill of exchange drawn in parts is known as a bill in sets. Sometimes, the drawer and the payee of a bill of
exchange are at distant places or in different countries. In such cases, the bill of exchange, which is sent
from one place to another may be lost or miscarried in transit. This causes a lot of inconvenience and delay
to the person to whom the bill is sent. In order to avoid such delay and inconvenience, and to ensure the safe
transmission of at least one part of the bill, it is drawn in parts (generally three). These parts together
constitute one set. And the whole set is considered only one bill. Generally, each part is sent by a separate
post. And if one or two parts are lost in transit, the payee can present the part which he has for acceptance
or payment as the case may be. It may be noted that generally foreign bills are drawn in sets. Inland bills
are rarely drawn in sets. Following are the rules regarding the bill in sets.
1. In case of a bill drawn in parts, all the parts together make a set, and the whole set
 constitutes one bill only.
2. Each part of a bill in set must be numbered and contain a reference to other parts. If any
one part of the set does not contain reference of other parts, then it shall become a separate
bill if it falls in the hands of a holder in due course.
3. Each part must contain a provision that it shall continue to be payable so long as the
other parts, remain unpaid. When payment is made on one of the parts, the entire bill
comes to an end i.e. it is considered to be paid.
4. The drawer must sign all the parts of a set and deliver them to the payee. However, the
stamp is affixed on one part only.
5. The drawee's acceptance is required only on one part [Section 7 (third para)], and may
be given on any part. If an acceptor gives his acceptance on more than one part and they
fall in the hands of different holders in due course, then the acceptor shall be liable on
every such part as if it were a separate bill [Section 132 (exception)].
6. When a person endorses different parts of the bill in favour of different persons, he will
be liable on each such part as if it was a separate bill. In such a case the subsequent
endorsers also become liable on each part [Section 132 (exception)].
7. Where different parts of a set are held by different holders in due course, he who first gets title to his part is entitled to
all the other parts and can claim the money represented by the bill (Section 133

Specimen of a Bill in Set

New Dehi, 1 st March, 1999

No…………..

Rs. 1, 000

Two months after sight of this first part of the bill of exchange (Second and Third of the same tenor
and date being unpaid), pay to C or order the sum of rupees one thousand only, for value received.

To M/s B & Co. Stamp

London Sd/- A

In this set of a bill of exchange, the second part should contain a reference to first and third parts, and the
third part should contain a reference to first and second parts.

38.22 SOME IMPORTANT TERMS

Following are some of the important terms relating to the kinds of negotiable instruments:
1. Bank draft or demand draft. A bank draft is a bill of exchange drawn by a banker upon
its branch. Thus, it is an order by one banker to its branch directing the latter to pay a specified
amount of money to a named payee or to his order on demand. It is also known as demand draft.
It may be noted that a bank draft is drawn either against cash which is deposited by a person
at the time of its purchase, or against debits to his current account with the banker. Following
are the essential features of a bank draft:
(a) It is drawn by a banker upon its branch. It cannot be drawn by a private person. This
distinguishes a draft from a cheque.
(b) It is always payable on demand.
(c) It cannot be made payable to a bearer.
(d) Its payment cannot be usually stopped or countermanded.
2. Traveller's cheque. It is a cheque drawn by a specified banker upon self and is payable
on demand. Thus, it is an order by a banker directing itself (i.e. branches) to pay a specified
amount of money to a specified person on demand. A traveller's cheque is drawn by the banker
either against the cash which is deposited by the person for the purpose or against debit to his
current account with the banker. It may be noted that the payee may get the money from any
branch of the banker. A traveller's cheque contains two spaces for payee's signature usually one
at the top and other at the bottom. At the top, he has to sign at the time of obtaining the cheque
from the banker. And at the bottom, he has to sign at the time of taking payment of the cheque.
The purpose of such cheques is to avoid the risk of loss, theft etc. while carrying huge amount
in pocket.
3. Gift Cheque. It is a cheque drawn by a specified banker upon self and is payable on demand.
Thus, it is also an order by a banker directing itself (i.e. branches) to pay a specified amount
of money to a specified person on demand. It is also drawn against cash deposit or debit of current
account. Sometimes, a person wants to send some money to another on some occasion, say
marriage. In such cases, he may obtain a gift cheque from a banker in the name of a person
to whom the money is to be sent. And such person may get the payment from the banker. A
gift cheque has a special form which is particularly meant for the purpose of sending money
by way of gift.
4. Escrow. Sometimes, a negotiable instrument is delivered conditionally, or for a special
purpose as a collateral security, or for a safe custody only, and not for the purpose of transferring
its ownership. In such cases, it is called an escrow. It may be noted that in case of such instruments, there is no liability of the
parties to pay the amount of the instrument unless the conditions agreed upon are satisfied, or the purpose for which the
instrument is delivered is fulfilled. However, the rights of 'holder in due course' are not affected. This point will be
discussed in Art. 41.7.
5. Letter of credit. The term 'letter of credit' may be defined as a letter of request by which one person requests some
other person (usually a merchant or a banker) to advance money or give credit to a third person named therein for a
certain amount, and promises that he will repay such amount of money to the person advancing the same, or accept the bill
of exchange drawn upon himself for the like amount. It may be of two kinds, namely (a) general or open letter of credit, or
(b) special letter of credit. A general letter of credit is one which is addressed to all merchants in general. And a special
letter of credit is one which is addressed to a particular person by name requesting him to make such advance to a third
person.
As a matter of fact, a letter of credit is a 'credit facility' given by a banker to its customer. Sometimes, a person wants to
purchase certain goods, but he does not have the required money to pay to the seller. In such cases, he may approach
his banker for this facility, and request it to make payment of the price of the goods to the seller. And in return, the buyer
promises to reimburse the banker the money along with interest on the same. On such request, the banker may agree to
give this credit facility to its customer. Sometimes, the banker giving this facility, has no branch at the place where
payment is to be made to the seller. In such cases, the banker may employ an intermediary banker for the purpose. It may
be noted that in such cases, there will be no contractual relationship between the intermediary banker and the customer
who has availed the letter of credit facility from his banker.
Note. A letter of credit is not a negotiable instrument.

TEST QUESTIONS
1. Define the term promissory note. What are the essentials of a valid promissory note? State the main
parties to a promissory note.
2. What is a promissory note? How does it differ from a bill of exchange?
3. What is a bill of exchange? State its essential characteristics. In what way does it differ from a
cheque?
4. "A cheque is a specie of a bill of exchange with two additional qualifications" —explain stating
these additional qualifications.
5. State the comparison between (a) promissory note and bill of exchange, (b) bill of exchange and
cheque.
6. What are the main parties to a promissory note, bill of exchange, and a cheque? Give the specimen
of these instruments.
7. What do you mean by an accommodation bill? What are the rules regarding the liability of parties,
and payment of an accommodation bill?
%. Write notes on the following:
(a) Marking of cheques, (b) Fictitious bill, (c) Bill in sets, (d) Escrow, (e) Gift cheque.
(/) Traveller's cheque, (g) Letter of credit- (h) Documentary bill and clean bill, (i) Liabilities of
 parties to an accommodation bill. (

OBJECTIVE TYPE QUESTIONS

1. A promissory note cannot be made payable to bearer.
(a) True, as the Reserve Bank of India Act, 1934 prohibits such promissory notes.
(b) False, as the Negotiable Instruments Act authorises issue of such promissory notes.
2. Which of the following is a valid promissory note?
(a) A I owe you some amount.
(b) A I owe you Rs. 1000
(c) I promise to pay A or order Rs. 1000
(d) I promise to pay the bearer Rs. 1000

39. PARTIES TO A NEGOCIATE INSTRUMENT & THEIR CAPACITY

39.1 INTRODUCTION
In the previous chapters, we havediscussed the main parties with reference to each negociable instrument
i.e promissory note, bill of exchange and cheque. However, there are certain other persons who also
become parties toa negociable instrument. In this chapter, we shall discuss all the parties who are involved
in each type of negociable instrument. The capacity of the parties i.e. competency of the parties to make ,
draw, accept etc. The negociable instruments shall also be discussed with reference to certain person such
as minor, agents, corporations, legal representatives etc.
39.2 PARTIES TO A PROMISSORY NOTE
Followin are the parties who are involved in a promissory note:
1. Maker. It is a person who makes the promissory note and promises to pay the amount stated
therein.
2. Payee. It is a person to whom the amount of promissory note is payable i.e. to whom the promise
to pay is made.
3. Holder. It is a person who is either the payee or the indorsee of the promissory note. This will be
discussed in detail in chapter 40 on ‘Holder and Holder in due course.
4. Indorser. It is a person who indorses (i.e transfers) the negociable instrument (promissory note in
this case) to another person. Sometimes the holder of a promissory note indorses the same to
another person. In such cases , the holder is known as an indorser. In simple words, he is the
transferor of the promissory note.
5. Indorsee. It is a person to whom the negociable instrument (promissory note in this case) is
indorsed (i.e. transferred). In simple words, he is the transferor of the promissory note.
39.3 PARTIES TO A BILL OF EXCHANGE
Following are the parties who are involved in a bill of exchange:
1. Drawer. It is a person who draws the bill of exchange i.e he is the maker of a bill of exchange.
2. Drawee. It is a person who is directed (i.e ordered) to pay the amount of the bill of exchange i.e. on
whom a bill of exchange is drawn.
3. Acceptor. It is a person who accepts the bill f exchange. Generally, the drawee accepts the bill of
exchange and on acceptance, he becomes the acceptor.
4. Acceptor for honour.Sometimes, the original drawee refuses to accept the bill of exchange, or
refuses to furnish better security when demanded by the notary. In such cases, any person may
accept the bill in order to safeguard the honour of the drawer or any indorser, andbind himself by
the acceptance. Such person is called the ‘acceptor for honor’. Thus any person may voluntarily
become a party to a boll of exchange as an acceptor for honour.
5. Fajee. It is a person to whom the amount of the bill of exchange is payable.
6. Holder. It is a person who is either the payee or the indorsee of the bill of exchange. This
will be discussed in detail in chapter 40 on 'Holder and Holder in Due Course'.
7. Indorser. It is a person who indorses (i.e. transfers) the bill of exchange to another person
8. Indorsee. It is a person to whom the bill of exchange is indorsed (i.e. transferred). In sirnp]e
words, he is the transferee of bill of exchange.
9. Drawee in case of need. Sometimes, in the bill of exchange, the name of another drawee
is mentioned in addition to the original drawee. The purpose of such a drawee is that he should
be approached for acceptance or payment of the bill of exchange when it is dishonoured, either
by non-acceptance or by non-payment, by the original drawee. Such additional drawee is known
as a 'drawee in case of need'. The name of 'drawee in case of need' is written either in the bill
of exchange or in any indorsement on it.
Sometimes, the original drawee refuses to accept the bill of exchange. In such cases, the holder must present
the bill to the 'drawee in case of need' for his acceptance or payment. And the 'drawee in case of need' may
either accept the bill of exchange or pay the amount mentioned in the same [Section 116]. The name of
drawee in case of need may be inserted either in the bill by the drawer or in any indorsement by the
indorser. Where a 'drawee in case of need' is named in the bill of exchange, the bill is not dishnonoured till
such drawee refuses to accept or pay the bill [Section 115], Thus, when the original drawee refuses to accept
the bill, it is not dishonoured, because there is still a chance of its being accepted by the 'drawee in case of
need'. The bill is dishonoured only when the 'drawee in case of need' also makes defaults, i.e. refuses to
accept the bill or pay the amount mentioned in it.

39.4. PARTIES TO A CHEQUE

Following are the parties who are involved in a cheque:
1. Drawer. It is a person who draws a cheque.
2. Drawee. It is the banker on whom the cheque is drawn.
In case of cheque, the drawee is always a banker.
Note. The parties such as payee, holder, indorser, indorsee, have the same meaning as in case of a promissory note
or bill of exchange.

39.5. CAPACITY OF PARTIES

We have already discussed, in chapter 5, that the 'capacity of the parties' means their competency (i.e.
capability) to enter into a valid contract, and every person who is capable of entering into a valid contract,
can also become a party to a negotiable instrument and be bound by the same. The competency of the parties
to enter into a valid contract is defined in section 11 of the Indian Contract Act, 1872. According to this section, a
person who is major, of sound mind, and is not disqualified from contracting by law, is competent to enter into a
valid contract. These persons can become a party to a negotiable instrument and become liable thereon. This
follows that the capacity of a person to draw, make, accept or indorse a negotiable .instrument, is co-extensive
with his capacity to enter into a contract. Thus, a person incapable of contracting, cannot bind himself by the
negotiable instrument. But in certain circumstances, he may make the other parties liable. Sometimes, some of
the parties to a negotiable instrument are competent to contract, but some are not. In such cases, only the
competent parties are liable under the instrument and the incompetent are not. The legal provisions regarding
the incapacity of certain person in connection with the negotiable instruments, are discussed in the following
pages.
1. Minors. We know that a minor is not competent to contract. Therefore, he cannot bind himself by becoming
a party to any negotiable instrument. However, a minor may draw, indorse, deliver and negotiate a negotiable
instrument so as to bind all other parties except himself [Section

26]. Thus, a minor whether he is drawer, maker, acceptor or indorser is not liable on the negotiable
instrument. It may, however, be noted that the negotiable instrument does not become void merely because a
minor is a party to it. The instrument remains binding on all other parties. But he may
operate as a channel to convey title and liability.
Example 39.1. A, B and C executed a promissory note in favour or D. C is the minor. In this case, C is not liable
under the note. But A and B shall remain liable to pay the money to D.
[Sulochna v. Pandiyan Bank Ltd., AIR 1975 Madras 70].
However, the minor's rights under the negotiable instrument are not affected e.g. if he is the payee, or
indorses, or holder, then he can enforce the payment
[Alagarsami v. Ramanathan, 56 MLJ 399].
Example 39.2. A drew a cheque in favour of B, a minor. In this case, B can recover the money due on the
cheque.
 2. Persons of unsound mind. Like minors, the persons of unsound mind are also not competent
to contract. And thus, they are not liable under the negotiable instruments. Lunatics, idiots and
drunken persons are included in this category. The bills of exchange and promissory notes drawn
or made by such persons are void as against them. But the other parties remain liable. However,
such persons shall be liable under the negotiable instrument, if the instrument is made or drawn
during lucid intervals i.e. during the period when they were of sound and sober mind.
Example 39.3. A, a lunatic, drew a promissory note in favour of B and promised to pay Rs. 1000 to him. This
promissory note was drawn by him when he was of sond mind. In this case, A is liable to pay the amount of the
promissory note.
3. Insolvents. An insolvent is not competent to enter into a valid contract unless he is discharged
by the court. Thus, an insolvent cannot draw, make, accept or indorse a negotiable instrument.
But if he indorses an instrument, of which he is the payee, to a holder in due course, then the
holder in due course can recover the amount from all prior parties except the insolvent. The
insolvent cannot sue on a negotiable instrument. The reason for the same is that the property
of the insolvent goes into the hands of Receiver or Official Assignee, appointed by the court of
insolvency for the purpose. But if an instrument is executed in his favour after adjudication (i.e.
after he is declared insolvent by the court), he can bring an action on it unless the Receiver or
Assignee intervenes i.e. unless the negotiable instrument is taken by Receiver or Assignee.
4. Corporations or companies. A corporation or a company is an artificial person created by
law. It has separate legal entity independent of its members. It exists in the eyes of law, though
it has no physical shape or form. Therefore, it can become a party to a negotiable instrument
through human agents. A corporation comes into existence by a special Act of Legislature. And
a company is formed by registration under the Companies Act, 1956. The contractual capacity
of the corporation is expressly defined by the Special Act under which it is formed. Whereas,
the contractual capacity of a company, registered under the Companies Act is regulated by the
terms of its Momorandum of Association, Articles of Association, and the provisions of the
Companies Act. Thus, whether a corporation or a company can draw, make or accept the
negotiable instruments depends upon the provisions of the Special Act or the Memorandum or
Article of Association, as the case may be. If the corporation or a company is expressly authorised
to do so, it can become a party to a negotiable instrument. If it exceeds the powers and executes
a negotiable instrument, the same is void. Even a holder in due course cannot make the corporation
or company liable on such instrument.
Note. A trading company has implied powers to draw or accept negotiable instrument. Bu a non-trading
company has no such powers unless it is expressly authorised by its Memorandum or Articles of Association.
5. Agents. An agent is a person who acts on behalf of his principal. The authority of an agent
depends upon the terms and conditions- of the agreement between an agent and his principal. It
may be noted that a person, who is capable of contracting, may make or accept or otherwise
become a party to a negotiable instrument either himself or through a duly authorised agent acting
in his name. Thus, the negotiable instruments can be drawn or accepted by duly authorised agents on behalf of their
principles. But the authority of an agent to draw accept or indorse negotiable instruments must be expressed in clear
terms. The general authority to transact business and to receive and discharge debts does not authorise an agent to
accept or indorse the bills of exchange so as to bind his principal. The authority only to draw a negotiable instrument
does not of itself empower the agent to indorse the same. Similarly, the authority only to indorse does not authorise the
agent to accept the bills. It, therefore, follows that the agent's authority to draw, accept or indorse the negotiable
instruments must be expressed in very clear terms. Thus, an agent can bind his principal by drawing, accepting or
indorsing a negotiable instrument if the following conditions are satisfied:
(i) The principal must be competent to contract.
(ii) The agent must be authorised to draw, accept or indorse the negotiable instruments.
(iii) The agent's authority must be expressed in clear terms.
(iv) The agent must not exceed his authority.
(v) The agent must act in the name of the principal i.e. he should make it clear on the face of the
instrument that he is signing as an agent i.g. by using the word 'for and on behalf.
An agent does not incur any personal liability for acts mentioned above if all these above conditions are
satisfied. However, in the following cases, the agent becomes personally liable for his acts, and the
principal will not incur any personal liability:
 (a) If the agent puts his signatures on the negotiable instrument without making it clear that
he is signing as an agent. However, an agent will not be personally liable to those who
induced him to sign the instrument on the belief that the principal only would be held
laible.
(b) If the agent executes the negotiable instrument without authority, or by exceeding his
authority.
Thus, to avoid personal liability an, agent should always execute the instruments within the authority.
Moreover, he should also disclose the name of his principal and make it clear that he is signing only as an
agent of his principal. Where the form of agent's signature does not show that there was an intention to
bind the principal, the agent will be personally liable.
[M. Mahadevan Pillai v. Vedavali, AIR 1992 Madras 183].
Note. The provisions relating to agent's capacity to execute negotiable instrumens are contained in
Sections 27 and 28.
6. Partners. We know that the principle of agency relationship is also applicable in case of
partnership. As a matter of fact, every partner is the agent of the firm, and the partners are agents
and principals of each other. The firm and other partners are liable under the instrument, if a
partner signs the instrument in the name of the firm and on behalf of the firm.
In a trading firm, each partner has the implied authority to bind the firm and his co-partners by drawing,
signing, making accepting, endorsing the negotiable instruments in the name of the firm. But the partner of
non-trading firm cannot do so unless he has an express authority for the same.
7. Legal heirs. After the death of the holder of a negotiable instrument, his legal heris (i.e.
representatives) become entitled to the instruments. And the legal heirs of a deceased holder, can
sue on the negotiable instruments for the recovery of the amount. The legal heirs are also liable
for any liability of the deceased. It may, however, be noted that a legal heir is liable on the
negotiable instrument only to the extent of the assets of the deceased received by him. But if
the legal heir signs his name on the negotiable instruments, he becomes personally liable unless
by clear words he limits his liability to the extent of the assets of the deceased received by him
as a legal heir [Section 29]. However, he may escape his personal liability i-y adding the words
to his signature such as "without recourse to me personally" or "without recourse". These terms
will be discussed in ;chapter 41..
8. Joint Hindu Family. We know that a 'Karta' (or manager) of a Joint Hindu Family represents
the family in all transactions of the family with the outside world. He can draw a promissory
note, a bill of exchange and cheque whenever necessary for carrying on the family business.
He can also borrow money on promissory note or a bill of exchange for the purpose of carrying
on the family business. Such a promissory note or a bill of exchange is binding on all the members
of the joint family and can be enforced against them. In other words, all the members of the
family are liable to pay the money. It may be noted that the minor members are equally liable
to the extent of their shares. However, they (minors) are not personally liable, where the 'karta'
has signed a promissory note or a bill of exchange in his individual capacity. In such cases only
the karta is liable while the others are not. [Moti Lai v. Punjaji (1933) Nagpur 160].

TEST QUESTIONS
1. Who can be a party to a negotiable instrument? State all the parties to a promissory note, bill of
exchange and a cheque.
2. What do you mean by the capacity of a party to a negotiable instrument? State the extent to which
a minor can be a party to a negotiable instrument.
3. Whether a minor can be a party to a negotiable instrument? If yes, to what extent? How the liability
of other parties is affected if minor is a party to a negotiable instrument?
4. Write notes on the capacity of following persons to become a party to a negotiable instrument:
(a) Persons of unsound mind, (b) Insolvents, (c) Corporation or companies, (d) Agents, (e) Partners.
(/) Joint Hindu Family.
 40. HOLDER AND HOLDER IN DUE COURSE
40.1. INTRODUCTION
We know that in commercial transactions, the negotiable instruments are used in substitution of
money, and are easily transferable from one person to another. As a matter of fact, the negotiable
instrument entitles its payee to receive the amount due on the instrument (i.e. amount mentioned
alongwith its interest, if mentioned). And the payee may validly transfer the negotiable instrument
to any person for the payment of his own debts. On such a transfer, the transferee becomes entitled
to receive the amount due on the negotiable instrument. There may also be cases where a person
finds or steals a negotiable instrument and transfers the same for payment of his own debts.
Whether such a transferee can recover the money due on the negotiable instrument, depends upon
the fact whether he is the 'holder' or 'holder in due course', The law requires that a person can
receive the money due on the negotiable instrument if he is a 'holder' or 'holder-in-due course'.
In this chapter, we shall discuss the meaning of these terms, and the legal provisions relating
thereto.
40.2 HOLDER
The term 'holder' is defined in Section 8 of the Negotiable Instruments Act, which reads as under:
"The 'holder' of a promissory note, bill of exchange or cheque means any person, entitled
in his own name, to the possession thereof and to receive cr recover the amount due thereon
from the the parties thereto".
Thus, a holder is the person, who is entitled to the possession of the negotiable instrument in
his own name and is also entitled to receive the money due on the same. The analysis of this
section reveals that a person becomes a holder of the negotiable instrument if the following
conditions are satisfied:
1. He must be entitled, in his own name, to the possession of the instrument; and
1. He must also be entitled, in his own name, to receive or recover the amount due on the
instrument.
It may be noted that the words, "entitled in his own name' as used in Section 8, are of great
significance. If the person is not entitled to the negotiable instrument in his own name, then he is
not the holder of the instrument. The 'payee', bearer' and the 'endorsee' of the negotiable
instrument are entitled to the instrument in their own name, and thus, are the holder of the same. As
a matter of fact, every negotiable instrument belongs to the payee, and he is entitled in his own
name to its possession and to receive the amount due on it. The payee of a negotiable . instrument
can transfer the same to any person in payment of his own debts. The transfer of negotiable
instruments is known as 'negotiation', and it takes place in two ways, namely:
(a) By mere delivery, and (b) By indorsement and delivery.
The negotiable instruments payable to bearer can be transferred by simple delivery, and the
transferree becomes the holder of the same. The order instruments can be transfered by
indorsement' and delivery, and the indorsee becomes the holder of the same. The reason for the
same is that the 'bearer' of the bearer instrument, and the 'indorsee' of the order instrument is entitled
to the same in his own name as he gets the possession of the instrument in a proper manner. Thus,
the holder means either the 'payee', or the 'bearer' or an 'indorsee' of the negotiable instrument. It,
therefore, follows that the holder must have acquired the possession of the negotiable instrument in
some proper manner, and he must have a right to recover the amount in his name.

Example 40.1. A advanced Rs. 500 to B. And B executed a promissory note for the payment of
the same. However, the promissory note was not executed in the name of, A but in the name of C, a
benamidar. On maturity (i.e. when the payment became due), B failed to pay the amount due on the
promissory note and A brought an action against B for recovery of the same. It was held that he could
not recover the amount as he was not the holder of the promissory note. In this case, A was not
entitled to the promissory note in his own name.
[Sarjoo Prasad v. Rampayari, AIR 1950 Patna 493].
It may also be noted that a person who has obtained the negotiable instrument by theft, is not a
holder of the same. The reason for the same is that he is not entitled to recover the amount due on the
instrument in his own name. For the same reason, an agent holding an instrument for his principal
will also not be a holder of it, although he may receive its payment. Only a holder can bring a legal
action to recover the amount due on the instrument. No other person can bring such an action.
Note. Sometimes, a negotiable instrument is lost or destroyed. In such cases its holder is the person who
was entitled to the instrument, in his own name, at the time of such loss or destruction [Section 8, second
para].
40.3. HOLDER IN DUE COURSE
The term 'holder in due course' is defined in Section 9 of the Negotiable Instruments Act, which reads
as under:
"Holder in due course means any person who for consideration become — the possessor of a
promissory note, bill of exchange or cheque, if payable to the bearer, or the payee or indorsee
thereof, if payable to order, before the amount mentioned in it became payable, and without
having sufficient cause to believe that any defect existed in the title of the person from whom
he derived his title".
Thus, a holder in due course is a person who takes the possession of negotiable instrument in
good faith and for value (i.e. consideration). Moreover, he must also get the instrument before its
maturity (i.e. before it is due for payment). As a matter of fact, the holder in due course is the true
owner of the instrument. The analysis of this section reveals that a person becomes a holder in due
course of the negotiable instrument if all the following conditions are satisfied:
1. He must be the holder of the negotiable instrument i.e. in case of a bearer instrument, he
must be the possessor of the same, and in case of an order instrument he must be the payee or
indorsee of the same.
2. He must have obtained the negotiable instrument before its maturity i.e. before the amount
mentioned in the instrument becomes payable. In other words, the instrument should not be
overdue. If the instrument is taken after it is due for payment, the person taking it is not a 'holder in due
course', and cannot enjoy the rights and privileges of a holder in due course. In such cases, he gets only
the rights of his immediate transferor.
3. He must have obtained the negotiable instrument for valuable consideration. A person who takes
the instrument without considerati'on, does not become a holder in due course of the same. However, in
case of negotiable instruments, the consideration is always presumed to have been given i.e. every
holder is presumed to be a holder for value. If someone wants to show that the instrument was taken
without consideration, then he must prove that the consideration was not Paid by the holder.
4. He must have obtained the negotiable instrument in good faith i.e. honestly. It may, however be
noted that section 9 of the Negotiable Instruments Act does not use the words 'good/a/?/,-' It
provides that the holder should have received the instrument "without having sufficient cause to
believe that any defect existed in the tittle of the person from whom he derived his title". ThjS means that
at the time of taking the instrument, the holder should not have any 'cause to believe' that there is
something wrong. The term 'cause to believe' means a suspicion in one's mind about some illegality
affecting the instrument. This follows that the holder should take the instrument in good faith i.e.
honestly. If certain facts come to his knowledge, which raise suspicion in his mind that there is some
defect in the title to the instrument, then before taking the instrument he must make reasonable
enquiries to satisfy himself that the instrument is free from defects If he fails to do so, it will
amount to bad faith on his part, and he will not become the holder in due course of the instrument.
As a matter of fact, two things are expected from the holder namely, (a) he must act honestly, and (b)
he must make reasonable enquiries in case of doubt in the title of the transferor.
5. He must take the negotiable instrument which is complete and regular on the face of it.I f a
negotiable instrument is incomplete e.g. blank, undated, not properly stamped, without drawer's
name, then the holder will not become the holder in due course of such instrument.Thus, the
instrument must be without any material defects on the face of it. It may be noted that the term
'face' for this purpose includes back of the instrument also.
If all the above requirements are satisfied, the holder of the negotiable instrument becomes its
'holder in due course'. As a matter of fact, he becomes the owner of the instrument irrespective of any
defects in the title of the person from whom he received the instrument. A holder in due course can
recover the amount of the instrument from all the' previous parties even if there were some defects in
earlier transfers. It will be interesting to know that once the instrument passes through the hands of a
holder in due course, it becomes free from all defects. And any person who takes the instrument
from a holder in due course, can recover the amount from any one of the parties prior to such
holder. It is thus, obvious that all such parties are liable to pay the money due on the instrument.
40.4. RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSE
The 'holder in due course' enjoys certain special rights and privileges. These may be discussed under the
following heads:
1. Right in case of inchoate stamped instrument. An 'inchoate instrument' means an incomplete instrument.
Sometimes, a person puts his signatures on a stamped paper and delivers it to another to fill it as a negotiable
instrument for a certain amount. In such cases, the person signing the blank stamped paper becomes liable
to pay the amount filled in the instrument, which is covered by the stamp on it. The person to whom such
signed paper is delivered may fill it up for a greater amount than authorised by the person signing the paper,
and transfer the same to a person who takes it without any notice of such fraud. Such a transferee can recover
the full amount of the instrument from the drawer or maker (i.e. who signs and delivers the instrument) only
if the following two conditions are satisfied namely [Section 20]:
(a) If he is the holder in due course of the instrument, and
(b) If the amount filled is sufficiently covered by the stamp on the instrument.
Example 40.2. A signed his name on a blank stamped paper and delivered the same to B with an authority
to fill it up as a promissory note for Rs. 2,000. But B fraudulently filled it as a promissory note for
Rs. 5,000. The stamp put on the paper was sufficient to cover the amount of Rs. 5,000. Subsequently, B
indorsed the promissory note in favour of C, a holder in due course, who took it without any
knowledge of the fraud. In this case, C is entitled to recover Rs. 5,000 from A, and he (A) cannot
escape his liability on the ground that in filling the amount, his authority has been exceeded by B.
It may, however, be noted that if the amount filled is not sufficiently covered by the stamp on the
instrument then the holder in due course can recover only that amount which is covered by the stamp.

Example 40.3. Suppose in the above example the stamp put on the paper is sufficient to cover the amount
O f Rs. 4,000 only. In such a case, C would be ent ; 1 to recover the amount of Rs. 4,000 and not RS.
5,000.
It may be noted that a person, other than a holder in due course, is not entitled to recover from
the person signing and delivering the instrument anything in excess of the amount intended to be
paid by him under the instrument. Thus, if a holder himself completes the instrument for a greater
amount, then he cannot recover the full amount, because he is not the holder in due course. The
amount due on an incomplete instrument can be recovered only if the following conditions are
satisfied:
(a) The signatures must be put on -a stamped paper.
(b) The blank stamped and signed paper must be delivered by the signer with the intention
that it be filled and used a negotiable instrument. Moreover, the delivery of the same must
be voluntary.
Example 40.4. A signed his name on a blank stamped paper and delivered the same to B with an
authority to fill it up as a promissory note for Rs. 7500. But B fraudulently filled it as a
promissory note for Rs. 10,000 and the stamp put on the paper was sufficient to cover the amount of
Rs. 10,000. In this case, B can recover only Rs. 7500 from A. The reason for the same is that he (B)
is a holder and not a holder in due course.
Note. It seems to follow from the requirements of Section 20 as to stamp that the provisions of this
section cannot apply to cheques which are not required to be stamped.
2. Rights on fictitious bill. A 'fictitious bill' is a kind of a bill of exchange which is payable to
a fictitious person i.e. a bill of exchange where payee is fictitious. The 'fictitious' payee means the
payee who is not in existence, or if in existence he is never intended by the drawer to have the
payment. Sometimes, a person draws a bill of exchange payable to a fictitious person, and the
drawee accepts the same. After acceptance of the bill of exchange, the same may be endorsed by the
drawer in the name of a ficititious person (i.e. the drawer himself endorses the same as a
fictitious payee). During the course of negotiation, such a bill of exchange may come in the hands
of a holder in due course. In such cases, the right of the holder in due course is that he can
recover the amount of the bill from the acceptor. And the acceptor cannot escape his liability on the
ground that the payee was a fictitious person [Section 42].
However, the holder in due course must prove that the signature of the drawer and that of the
first endorser (i.e. fictitious payee) are in the handwriting of the same person. It may be noted that
the holder in due course can recover the amount only if the payee is fictitious. Where the drawer
intends the payee to have the payment of the bill, then he is not a fictitious payee and the
endorsement in his name will amount to forgery of payee's signature and will affect the validity of the
bill.
Example 40.5. A drew a bill of exchange on B for Rs. 1,000 payble to C, a fictitious non-existent
person. B accepted the bill of exchange and returned the same to A. Subsequently, A endorsed the bill
of exchange to D by signing as the endorser (i.e. as C). During the course of neogitations, the bill
came in the hands of £ a holder in due course. In this case, E can recover the amount of the bill from
the acceptor (B) by showing that the signatures of the drawer (A) and the first endorsed (C) are in the
same handwriting. And B cannot escape liability on the ground that the bill of exchange is fictitious
and indorsees (C) signatures are forged by A. However, D cannot recover the amount from B, as he
(D) is not a holder in due course.
Example 40.6. A used to accept bills of exchange drawn on him by B'a foreign agent, and
payable to 'B & Co', a foreign fictitious firm. A's clerk obtained his (A's) acceptance on certain fake
bills of exchange all purporting to be drawn by B and payable to 'B & Co'. Thereafter, the clerk
endorsed these bills in the name of 'B & Co' (i.e. by signing as 'B &Co.') and obtained payment at the
bank where A's accounts were maintained. The bank debited A's account for the amount of these bills.
Later on, the fraud committed by the clerk was discovered, and A contended that the bills were fake
and the signature of 'B & Co. being forged, the banker could not get a good title to the bills. It was
held that the banker, being holder in due course, was protected against such defences. The court
observed that whether the bills were genuine or not, the acceptor should have considered it before signing on the
bills of exchange. Moreover, 'B & Co 1 was a fictitious payee, and the forgery of its signature did not affect the validity
of the bills
[Rank of England v. Vagliano Bros. (1891) AC 107]
3. Rights in case of prior defects in the instrument. A holder in due course can recover the
amount of the instrument irrespective of any defect in the title of the prior parties i.e. his rights
to receive the amount due on the instrument are not affected even if there were some prior defects
in the instrument [Section 58].
Thus, when any negotiable instrument is lost or obtained by means of an offence or fraud or for an
unlawful consideration, no other person except a holder in due course is entitled to receive the amount due on
it.
Example 40.7. A obtained, by fraud, a promissory note for Rs. 5,000 from B, and endorsed the same
to C who received it in good faith and for value. In this case, C is the holder in due course and he can
recover the amount from B. And B cannot avoid the liability on the ground that from him A obtained the
note by fraud.
4. Right against the prior parties. A holder in due course has a right to recover the amount due
on the instrument from any one of the parties prior to himself. As a matter of fact, every prior
party is liable to make payment to the holder in due course until the instrument is duly satisfied
i.e. the payment due on the instrument is duly made [Section 36]. The term 'prior parties' includes
the maker and acceptor of the instrument, and all the intervening endorsers.
5. Right in case of conditional delivery of instrument. Sometimes, a negotiable instrument is
delivered to a person, upon some condition i.e. it will be effective on the happening of a certain
event. In such cases, the negotiable instrument cannot be further negotiated unless such event
happens. And if transferred before the event, the transferee will not get a good title to the
instrument. However, if it is transferred to a holder in due course, his rights will not be affected by
such condition [Section 47]. He can recover the amount due on the instrument from the parties
liable to make payment, and the liable party cannot avoid liability on the ground that delivery of
instrument was conditional only.
Example 40.8. A made a promissory note for Rs. 4,500 payable to B, and delivered the same to B on
the condition that he (B) will demand payment only on the death of C. Before the death of C, B indorsed
and delivered the promissory note to D, a holder in due course. In this case, D can recover the amount
due on the promissory note from A. And A cannot avoid his liability on the ground that the payment was
to be made on the death of C.
Similarly, where a negotiable instrument is delivered for some special purpose e.g. for
discounting only. And the holder transfers the same !o a holder in due course, instead of
discounting. In such cases also, the holder in due course can recover the amount due on the
instrument, and the liable party cannot avoid his liability on the ground, that the delivery of the
instrument was for special purpose only and not for transferring it to someone else [Section 46,
para 3].
Note. Ordinarily, a negotiable instrument must contain an unconditional promise to pay. And if the
promise to pay is dependent upon some condition, the negotiable instrument will not be valid. But when
a negotiable instrument is dependent on such a condition, which is bound to take place (e.g. death), the
instrument will be valid. Thus, in the above example, the promissory note is not bad though the amount
is payable on the death of a person.
6. Title free from all defects. We know that a holder in due course gets the negotiable
instrument free from all defects in the title of the transferor or any of the previous holders of the
instrument. In other words, his title to the instrument is better than all the prior parties. Thus,
the general rule of transfer of property that "no one can transfer a better title that be himself
has" 2 (nemo dat quod non-habet), does not apply to negotiable instruments. Any holder who
receives the instrument from a holder in due course gets the same free from all defects even if he
had knowledge of some prior defects. But he must not be a party to such defects [Section 53].
Thus, once the instrument passes through the hands of a holder in due course, it is purged (i.e.
cured) of all prior defects. As a matter of fact, the holder in due course, serves as a channel to protect
all the subsequent holders.
Example 40.9 A had a bill of exchange for Rs. 1,800 drawn upon B, the drawee. An! he, (A)
obtained B's acceptance to the bill of exchange by fraud. Thereafter, A indorsed and delivered the
same to C who took it in good faith and for value. C further indorsed and delivered the bill of
exchange to D. In this case, when the bill of exchange came in the hands of C i.e. the holder in due
course, it became free from all defects. Now D also gets a good title to the bill of exchange, and can
claim the amount from the acceptor (B). Now suppose that D endorses the bill to A for value. In such a
case, A would not be entitled to recover the amount on the bill as he himself was a party to the
fraud.
1. Presumption as to title. Every holder of a negotiable instrument is presumed to be a holder in
due course. Thus, he is not required to prove that he is the holder in due course of the instrument i.e. he
has received the negotiable instrument in good faith and for value. This presumption is, however,
rebuttable Le. the party liable for payment can prove that the holder is not the holder in due course
[Section 118(g)].
8. Estoppel against denying the original validity of the instrument. Sometimes, the holder in due
course files a suit for the recovery of the amount due on the instrument, against the maker of a
promissory note, or the drawer of a bill of exchange or cheque, or an acceptor of a bill of exchange
for the honour of the drawer. In such cases, the maker or the drawer cannot escape their liability on
the ground that the instrument was invalid when it was made or drawn i.e. the maker or the drawer
is estopped (i.e. prevented) from denying the validity of the instrument [Section 120].
9. Estoppel against denying the capacity of the payee to endorse the instrument. Sometimes,
a holder in due course files a suit, for the recovery of the amount due on the instrument, against the
maker of a promissory note or the acceptor of an order bill of exchange. In such cases, the maker or
the acceptor cannot escape their liability on the ground that the payee had no capacity (i.e. not
competent) to indorse the promissory note or the bill of exchange at the time of making it, i.e. the
maker or the acceptor is estopped (Le. prevented) from denying payee's capacity to indorse the
instrument [Section 121].
10.Estoppel against denying the signatures or capacity of prior parties. Sometimes, the holder in
due course files a suit, for the recovery of the amount due on the instrument, against the indorsers.
In such cases, the indorser cannot escape their liability on the ground that the signatures of any prior
party were forged or that he (i.e. prior party) was not competent to contract i.e. the indorser is
estopped (Le. prevented) from denying the signatures or capacity to contract of any prior party to the
instrument [Section 122].
Note. It may be noted that this privilege is available to all the subsequent holders. The reason for
the same is that by an indorsement, the indorser of the instrument guarantees that all previous
indorsements are genuine, and that all prior parties had capacity to enter into valid contracts.

40.5. COMPARISON BETWEEN A HOLDER AND A HOLDER IN DUE COURSE

The following Table gives the comparison between a holder and a holder in due course:

S.No. Holder Holder in due course

1. A holder means any person entitled in his A holder in due course means a holder who has
Own name possession of the taken the instrument in good faith and for
Instrument and to recover or receive the value, and also before its maturity
Amount due from the parties

2. In this case, the consideration is not In this case, consideration is must i.e. the holder
Necessary e.g. an instrument may be gets the instrument for some consideration.
Given in gift. As the gift is without any
Consideration, the donee becomes the holder,
And not the holder in due course
3. A holder does not get a good title if the A holder in due course gets a title free from any
Title of any prior party is defective. In other defect. In other words, he gets a better title than that
Words, he cannot have a better title that of a person from whom he got instrument.
That of a person from when he got the
Instrument

4. A holder may acquire the instrument even A holder may in due course acquire the instrument
If it has become due for payment i.e. even before it has become due for payment i.e. before
After maturity. Maturity. If the instrument is acquired after maturity
The holder will not get the rights of a holder in due
Course.

5. A holder of an instrument can recover the A holder in due course can recover the amount from
Amount from a person who has signed it any of the prior parties until the instrument is duly
And also from the transferor from whom he discharged. In other words, he can enforce his rights
Obtained. In other words, the holder cannot against all prior parties.
Enforce his rights against all the prior parties.

6. A holder does not enjoy any special A holder in due course enjoys certain privileges
Privilege

TEST QUESTIONS
1. Define the term 'holder' and 'holder in due course' under the Negotiable Instruments Act. And
distinguish between a 'holder' and 'holder in due course'.
2. Define the term 'holder in due course'. What are the rights and special privileges of a holder in
due course?
3. When a person becomes a holder in due course?
4. "A holder in due course gets a title free from all equities"—comment.
5. "Every holder in due course must be a holder but every holder may not be a holder in due course"—
explain.
6. "A negotiable instrument once passes through the hands of a holder in due course it is purged of
all prior defects"—explain.
7. To what extent it is true to say that "a holder in due course serves as a channel to protect al!
subsequent parties."
8. Can the following defences be taken against a holder in due course in a suit filed by him? If not,
why:
 (a) That the instrument was invalid when made.
(b) That the payee was not competent to indorse the instrument.
That the signature of the indorser was forged.

41. NEGOTIATION AND LIABILITY OF PARTIES

41.1. INTRODUCTION
We know that negotiable instruments are used as substitute for money. One of the essential features of
negotiable instruments is that they are freely transferable from one person to another. Such a
transfer of a negotiable instrument is known as negotiation. A negotiable instrument may be
transferred in two ways, namely:
(1) By negotiation
(2) By assignment.

42.2. NEGOTIATION
The term 'negotiation' may be defined as the transfer of a negotiable instrument by one person to
another so as to constitute the transferee the holder of the instrument. This term is defined in
Section 14 of the Negotiable Instruments Act, which reads as under:
"When a promissory note, bill of exchange or cheque is transferred to any person so as tc
constitute that person the holder thereof, the instrument is said to be negotiated" . The analysis of
this section reveals that the negotiation takes place when the following two conditions are satisfied:
1. The negotiable instrument is transferred from one person to another; and
2. The transfer is made in such a manner so as to make the transferee the holder of the
negotiable instrument.
Thus, the essence of the negotiation is that it must be made with the intention of transferring a
title of the instrument to the transferee.
Example 41.1. A delivered a cheque for Rs. 7500 to B and requested him to keep it in safe
custody. This is not a negotiation of the cheque to B. In this case, the transfer of the cheque to B
makes him a bailee only, and not the holder of the cheque.

1. Negotiation by delivery.
2. Negotiation by indorsement and delivery.

41.4. NEGOTIATION BY DELIVERY

In case of bearer instruments, the negotiation can be made by simple delivery of the instrument This
provision is contained in Section 47 of the Negotiable Instruments Act, which reads as under'
"Subject to the provisions of Section 58, * a promissory note, bill of exchange or cheque payable
to bearer is negotiable by delivery thereof".
The analysis of this section reveals that a negotiable instrument payable to bearer can be transferred
mere delivery, and the person to whom the instrument is delivered becomes the holder of the same. It may,
however, be noted that the instrument must be actually delivered and the delivery must also be voluntary.
Thus, a person who finds or steals a bearer instrument is not the holder of the same. The reason for the
same is that the instrument has not been delivered to him voluntarily. However, if a finder or a thief
delivers the bearer instrument to another person for some consideration, the latter will become the holder in
due course of the instrument if he receives the same in good faith and before maturity.
Example 41.2. A was the holder of a cheque for Rs. 2000 payable to bearer. He delivered the cheque to fl's
agent to keep it on behalf of his principal (B). In this case, the cheque has been negotiated to B so as to make
him the holder. This amounts to the negotiation of the cheque by mere delivery.
Example 41.3. A was the holder of cheque for Rs. 1,200 payable to bearer. He kept the cheque in his table
drawer. B, a miscreant, stole the cheque from A's table drawer. In this case, there is no negotiation of the
cheque from A to B as it was not voluntarily delivered to B.
41.5. NEGOTIATION BY INDORSEMENT AND DELIVERY
In case of an order instrument, the negotiation can be made only by indorsement on the instrument
and its delivery. This provision is contained in Section 48 of the Negotiable Instruments Act,
which reads as under:
"Subject to the provisions of Section 58*, a promissory note, bill of exchange or cheque payable
to order is negotiable by the holder by indorsement and delivery thereof.
The analysis of this section reveals that a negotiable instrument payable to a particular person
or his order can be transferred by making an indorsement on it and then delivering the same.
It may be noted that this mode of negotiation requires the following two formalities to be complied
with:
1. The holder must indorse the negotiable instrument, i.e. he must sign his name on the
instrument, and
1. The duly signed instrument must be delivered to the transferee (indorsee).
In this case, the transferee becomes the holder of the negotiable instrument only when the duly
indorsed (i.e. signed by the transferor) instrument is delivered to him. Thus, a mere indorsement on the
instrument does not amount to negotiation, unless there is delivery of the same.
Example 41.4. A drew a cheque for Rs. 10,000 payable to B and delivered it to him. B indorsed the cheque in
favour of C but kept it in his table drawer. Subsequently, B died, and cheque was found by C in B's table
drawer. In this case, C does not become the holder of the cheque as the negotiation was not completed by
delivery of the cheque to him.
41.3. MODES OF NEGOTIATION
We know that the negotiable instruments are of two types, namely (a) bearer instruments, and
(b) order instruments. Keeping in view these types of the instruments, the Negotiable Instruments
Act provides for the following two modes of negotiation:
41.6. DELIVERY AND ITS IMPORTANCE IN NEGOTIATION
The term 'delivery' may be defined as the voluntary transfer of the possession of the instrument
from one person to another. The delivery should be with the intention of transferring the ownership
of the instrument to the person to whom it is delivered Le. the intention should be to make
the transferee the holder of the instrument. Thus, the delivery of the instrument is a very important
formality to complete the negotiation. The importance of delivery is emphasised in Section 46
of the Negotiable Instruments Act which states that, a negotiable instrument is said to be made
accepted or indorsed when it is completed by delivery. Thus, a mere writing and signing of the
instrument does not make it operative. [Thrappa v. Umedmalji, 1942, Bombay 205].
Example 41.5. A made a promissory note for Rs. 2,000 payable to B. A died and the promissory note
was found in A's papers. A's legal heirs delivered the promissory note to B. In this case, B cannot recover
the amount of promissory note because it was not delivered to him by A. And the legal heirs were not
authorised by A to deliver the promissory note. [Bromage v. Lloyd (1847) 1 Ex. 32].
Example 41.6. A drew a bill of exchange for Rs. 1,250 on B and transferred it to C. C sent the bill to B for
acceptance, and B wrote his acceptance on it, but did not return it to C. In the meantime, B heard that the drawer (A)
has become bankrupt (insolvent). And B cancelled his acceptance and returned the bill to C. In this case, the
acceptance of B is not complete because he did not return the accepted bill to C. And thus, B is not liable as
acceptor.
[Bank of Van Diemen's Land v. Bank of Victoria (1871) LR 3 PC 526].
Similarly, if a person finds or takes away an instrument duly indorsed to him without the knowledge of the
indorser, he does not get any right on the instrument because it was not delivered to him Thus, every contract
on a negotiable instrument is completed by the delivery of the instrument. And where the maker, acceptor or
the indorser of a negotiable instrument cancels or revokes his signatures before the instrument is delivered,
he may not be held liable on the same.

41.7. KINDS OF DELIVERY

The delivery of a negotiable instrument may be of the following kinds:
1. Actual delivery. It takes place when the instrument changes hands physically i.e. when the
instrument is physically delivered by the transferor to the transferee.
Example 41.7. A had a bearer cheque of State Bank of India for Rs. 1,000. He delivered it to B. In this case, there
is actual delivery of the cheque, and the cheque is negotiated to B.
2. Constructive delivery. It takes place when the instrument is delivered to an agent, clerk,
or servant of the transferee who holds the instrument on behalf of the transferee
Example 41.8. A was the holder of a negotiable instrument payable to bearer. He delivered it to B's agent to keep it
for B. In this case, there is constructive delivery of the negotiable instrument, and the instrument is negotiateed to B.
Example 41.9. A was the holder of negotiable instrument for Rs. 800 payable to bearer. The instrument is in the
hands of A's banker. The same banker is also the banker of B. A directed the banker to transfer the instrument to fl's
credit in his books. The banker acted accordingly, and possessed the instrument as B's agent. In this case, there is a
constructive delivery of the negotiable instrument, and the instrument is negotiated to B.
3. Conditional delivery. The conditional delivery is the delivery which is effective on the
fulfilment of certain condition. It may be noted that where an instrument is delivered conditionally,
the netgotiation is not complete till the condition is fulfilled, and the transferee does not become
the holder till that date. An instrument delivered conditionally is called an 'Escrow'. Similarly,
when an instrument is delivered for a special purpose, the transferee does not become the holder
of the instrument.
Example 41.10. A was the holder of a cheque for Rs. 500 payable to bearer. He delivered it to his banker for
collection. In this case, the cheque is delivered for special purpose and not to entitle the banker to further negotiate it.

Note. However the plea of conditional delivery or for special purpose is available only against parties
who take the instrument with notice of the condition or special purpose, and not against, the holder
jn due course. Thus, the holder in due course can hold all the prior parties liable on such
instrument.

41.8. INDORSEMENT
The term 'indorsement' may be defined as signing one's name on the negotiable instrument for the purpose of
transferring it to another person. In other words, it means the signing of a negotiable instrument for the purpose of
negotiation. Usually, the indorsement is made by signing one's name on the back of the instrument. However, it
may also be made on the face of the instrument Sometimes, the back is already full of indorsements. In such
cases, the further indorsements may be signed on a slip of paper attached to the instrument. Such a slip is calleld
"allong " and becomes part of the instrument. The following two parties are involved in an indorsement:
Indorser. The person who signs the instrument is called the 'indorser'.
1. Ndorsee. It may be noted that simply signing one’s name on the signed instrument is not sufficient to complete
the indorsement. The indorsement is complete by delivering the signed instrument to the ‘indorsee’.

41.9. PERSONS ENTITLED TO INDORSE THE NEGOTIABLE INSTRUMENT

The persons who may indorse and negotiate the negotiable instrument are specified in Section
51 of the Negotiable Instruments Act. According to this section, every sole maker, drawer, payee
or indorsee of a negoliable instrument may endorse the same. Thus, Section 51 enables all parties to an instrument to
entorse the same. The authority of these persons to indorse the negotiable instrument may be discussed as under:
1. Payee. As a matter of fact, the payee of an instrument is the rightful person to make the
first indorsement. However, he may indorse the same only if he is the holder of the instrument.
Thereafter, the instrument may be indorsed by any person who has become the holder of the
instrument.
2. Indorsee. Any person who has become the holder of the negotiable instrument, may indorse
the same. Thus, an indorsee may also indorses the instrument if he is the holder of the same.
3. Maker or drawer. Ordinarily, the maker of a promissory note and the drawer of a bill of
exchange cannot endorse the same. But if any of them has become the holder in his own right,
he may indorse the instrument. However, the maker of an instrument may indorse it if he signs
it in the capacity of a holder and not as a maker e.g. if a bill is drawn payable to the drawer's
order, the first signature of the drawer (as a drawer) is not an indorsement. Buf if he signs the
bill second time for the purpose of negotiating it, the second signature would be in indorsement. 4- Stranger. An
indorsement cannot be made by a stranger (i.e. a person other than those stated above or who is not a party to the instrument).
If any person other than those mentioned above, indorse it, the indorsement is void and he cannot be made liable as
indorser [Thakursey v. Kishandas, AIR 1925 Sind 9].
Example 41.11. A, the payee of a promissory note died leaving behind his widow B and a minor son C. B
indorsed the promissory note without purporting to act as guardian for her minor son C. It was held that the
indorsement was invalid and the indorsee could not sue on the promissory note [Suppai v. Kandaswami, 19 LW
560],
However, a stranger may be held liable as surety (i.e. guarantor) at least to the person who
is in immediate relationship with him. [Thakursey's case].
Note. Under English Law, stranger signing his name on the back of a promissory note is not liable as indorser.
But, stranger signing his name on the back of a bill of exchange is liable as an indorser to subsequent
indorsees. The stranger indorser is called the 'backer' in English Law.

41.10 KINDS OF INDORSEMENT

An indorsement may be of the following kinds.
1. Blank or general indorsement 2. Full or special indorsement. 3. Restrictive indorsement. 4 Partial
indorsement. 5. Conditional indorsement. 6. Sans recourse indorsement. 7. Facultative indorsement. 8.
Contingent indorsement.

41.11 BLANK OR GENERAL INDORSEMENT

Sometimes, the indorser signs his name on the instrument without mentioning the name of
indorsee. In such cases, it is known as blank or general indorsement [Section 16(1)]. In other
words, an indorsement, in blank means simply putting of indorser's signature on the instrument
(usually on the back of the instrument) without mentioning the name of the indorsee. The
effect Of a blank indorsement is that the instrument becomes a bearer, even if originally it was
payable to order [Section 54]. Thus, an instrument indorsed in blank can be further negotiated
by its simple delivery.
Example 41.12. A bill of exchange was-payable to A. A signed only his name on the back of the
bill. This is an indorsement in blank. And the bill becomes a bearer bill, and can be further
transferred by mere delivery.
41.12. FULL OR SPECIAL INDORSEMENT
Sometimes, the indorser signs his name on the instrument and also writes the name of the
indorsee (i.e. the person to whom the payment is to be made). In such cases, the
indorsement is known as full indorsement (or 'indorsement in full') [Section 16(1), second
para]. In other words, indorsement in full means putting of indorser's signature on the
instrument and also writing the name of a person to whom the amount is to be payable. In
this case, an order instrument remains an order instrument. It can be futher negotiated only by
an indorsement by the indorsee.
Example 41.13. A bill was payable to A. A wrote on its back "pay to B or order", and signed the
bill. This is an indorsement in full. A may also simply write "pay to B, and sign. i.e. the use of the
words "or orders" is not necessary. In this case also, the indorsement is full indorsement .
41.13. CONVERSION OF BLANK INDORSEMENT INTO FULL INDORSEMENT
A blank indorsement may be converted into a full indorsement. The holder of an instrument
indorsed in blank, may convert it into an indorsement in full by writing the name of some person
(indorsee) above the indorser's signatures. The holder may do so without signing his own
name. The advantage of such indorsement is that the holder does not become liable as an
indorser though he transfers the instrument [Section 49].
Example 41.14. A was the holder of a bill of exchange. He indorsed it in blank by simply signing
his name on the back of it, and delivered it to B. Above A's signature B wrote the words, "Pay to C
or order". In this case, the writing by B will make it the indorsement in full from A to C. Here, B is
not liable as an indorser of the bill because he has not signed it.
Note. The holder of a bill may convert a blank indorsement into a full one in his own favour. In
such a case, he will be held to have decided to take the bill or note as an indorsee, though the
Negotiable Instruments Act is silent on this point. [Clark v. Pisot (1699) 12
Madras 192].
41.14. BLANK INDORSEMENT FOLLOWED BY FULL INDORSEMENT
We know that an instrument indorsed in blank become a bearer instrument. If subsequently,
such instrument is indorsed in full, it remains payable to bearer and negotiable by mere
delivery with regard to all parties prior to the indorser in full. This means that the indorsee in
full may transfer the instrument by mere delivery, and the person receiving the same may
recover the amount from any party prior to the indorser in full. However, the indorser in full is
liable only to the person to whom he indorses the instrument in full or to such person who
derives a title through Su indorsee in full [Section 55].
Example 41.15. A was the payee and holder of a bill of exchange. He indorsed it in blank and
deljVe it to B. B also endorsed it in blank, and delivered it to C. C indorsed it in full to D or order.
D deliveZ the bill to E without any indorsement. In this case, E as the bearer of the bill is
entitled to recover th amount from the drawer, the acceptor, and A or B. But he cannot recover
the amount from C or D becau C is the indorser in full and D is the indorsee from C.
[Smith v. Clarke, (1974) Peake, 295]
However, if D instead of passing the bill without indorsement to E, had passed it by
indorsement j full, then E could claim against all prior parties.

41.15. RESTRICTIVE INDORSEMENT

Sometimes, the indorser signs his name on the back of the instrument and adds some
words by which the rights of the indorsee are restricted. In such cases, the indorsement is
known as restrictive indorsement. In other words, when by express words the right of
further negotiation is taken away or restricted, that is called a restrictive indorsement. An
indorser can make the restrictive indorsement in any one of the following way [Section
50]:
1. He may altogether exclude the right of further negotiation, or
2. He may restrict the right of further negotiation, or
3. He may merely constitute the indorsee as an agent to indorse the instrument or to
receive
its contents for the indorser or for some other specified person.
The effect of restrictive indorsement is that the indorsee gets the rights to receive the
payment when due, and he can sue the parties for it. But he cannot further negotiate the
instrument except as authorised by indorser. Thus, in case of restrictive indorsement the
indorsee does not become the owner of the instrument, as in case of other
indorsement.
Example 41.16. A signed the following indorsements on different negotiable instruments:
(a) "Pay the amount to B only".
(b) "Pay B for my use".
(c) "Pay B or order for the account of A.
In this case, the indorsements are restrictive as they exclude the right of further negotiation
by B. Example 41.17. A signed the following indorsements on different negotiable
instruments:
(a) "Pay B".
(b) "Pay B value in account with Oriental Bank".
In this case, these are not restrictive indorsements as they do not exclude the right of further
negotiation by B.
41.16. PARTIAL INDORSEMENT
A partial indorsement is invalid and does not operate as a negotiation of the instrument. The
partial indorsement is not allowed because it will cause inconvenience to prior parties! Moreover, it
will subject them to plurality of action and interfere with the free circulation of the instruments.
Example 41.18. A was the holder of a bill for Rs. 1,000. He indorsed it as "pay to B or order Rs. 500".
This is a partial indorsement and is invalid for the purpose of negotiation.
Example 41.19. A was the holder of a bill for Rs. 1,000. He indorsed it as "Pay Rs. 500 to B and
Rs. 500 to C". This is a partial indorsement and is invalid. In this case, neither B nor C can recover the
amount, or indorse it further.
But sometimes the amount due has already been partly paid. In such cases, a note to that effect
may be made on the instrument and then it may be negotiated for.the balance [Section 56).
 Example 41.20. A was the maker of a promissory note for Rs. 1,000. He paid Rs. 500 to the holder
and this fact was noted on the instrument. Now this promissory note can be indorsed for the balance of
Rs. 500.
41.17 CONDITIONAL INDORSEMENT
Sometimes, the indorser limits or excludes his own liability by putting some condition in the instrument. In such
cases, it is known as conditional or qualified indorsement. It differs from the restrictive indorsement. The
restrictive indorsement prohibits further negotiability of the instrument. But the conditional indorsement does not
prohibit the negotiability. It simply limits or excludes the liability of the indorser.

40.18. SANS RECOURSE INDORSEMENT

Sometimes, the indorsee does not want to incur any liability as indorser. In such cases, he may
exclude his liability by express words in the indorsement. He can do so by adding certain words
such as "sans recourse", 'without recourse' etc. Such an indorsement is called 'sans recourse'
indorsement. Example 41.21. A singed the following indorsements on different instruments:
(a) "Pay B or order sans recourse".
(b) "Pay B or order without recourse to me".
(c) "Pay B or order at his own risk".
These are 'sans recourse' indorsements as the indorser (A) has excluded his own liability.
In such cases, if the instrument is dishonoured, die indorsee or the subsequent holder cannot ask
the indorser for payment of the same.
Sometimes, an indorser who has excluded his own liability in this manner, afterwards becomes
the holder of the instrument in the normal process of negotiation. In such cases, all the
intermediate indorsers continue to be liable to him [Section 52].
Example 41.22. A was the payee and holder of a bill of exchange. He indorsed it 'sans recourse' to
B. B further indorsed it to C and then C to D. D indorsed it to A. In this case, A can recover the amount
of the bill from B, C or D.
41.19. FACULTATIVE INDORSEMENT
Sometimes, by express words the indorser abandons some right or increases his own liability. In
such case the indorsement is called facultative indorsement. He may do so by giving up some rights
to which he is entitled under the negotiable instrument.
Example 41.23. A was the holder of a bill of exchange for Rs. 1,900. He made an indorsement on
it reading as "Pay to B or order. Notice of dishonour waived". This is a facultative indorsement. In
this case, A has given up his right to receive the notice in case of dishonour of bill. This increases
his liability, because he is liable to pay the amount of the bill even though no notice of dishonour has
been given to him.
41.20 CONTINGENT INDORSEMENT
Sometimes, an indorser makes the indorsement in such a way that his liability depends upon the
happening of a specified event which may or may not happen. In such cases, the indorser will not
be liable until the happening of such an event. If the event becomes impossible or does not happen
in specified time (if the time is specified), then the liability of the indorser comes to ^ end i.e.
he is no more liable to pay the amount due on the instrument.
Example 41.24. A the holder of instruments signed the following indorsements on different negotiable
nstruments:
(a) "Pay B or order on the arrival of ship".
(b) "Pay B or order on his marriage with C'.
In these cases, A's liability will arise only on the arrival of the ship or on B's marriage with C as
the rase may be. If these events do not happen at all, then A's liability comes to an end.
The indorser may also make an indorsement in such a way that the indorsee's right to receive the
amount of the instrument depends upon the specified event which may or may not happen. In
such cases, the indorsee cannot recover the amount either from the indorser or from any prior party
until such event has happened. It will be interesting to know that such indorsement H not affect
the position of the party who has to pay for the instrument on its maturity. He may pay to the
indorsee and will be discharged from his liability whether the condition has has been fulfilled
or not1. But as between the indorser and indorsee the condition is operative. If the indor obtains the
payment without the condition being fulfilled, he will hold the same in trust f 0r H, indorser2.

41.21. EFFECT OF INDORSEMENT

An unconditional indorsement completed by delivery of the instrument has the following effects
[Section 50]:
1. The ownership of the instrument is transferred from the indorser to the indorsee.
2 The indorsee gets the rights of further negotiation.
. The indorsee gets the rights to bring an action for recovery against all the parties whose
names appear on the instrument.

41.22.EFFECT OF CANCELLATION OF INDORSEMENT

The effect of cancellation of indorsement is that the indorser, whose remedy is impaired, is
discharged from liability to the holder who cancels the indorsement (Section 40). In other words if a
holder of the negotiable instrument cancels any indorsement on it, then he cannot recover the
amount from the indorser whose remedy is impaired against the prior party.
Example 41.25. A was the holder of a bill of exchange payable to B or order. It contained the
following indorsements, all in blank:
First indorsement by B.
Second indorsement by C.
Third indorsement by D.
Fourth indorsement by E.
A cancelled the indorsement by C and D without the consent to E, and filed a suit against E for the
recovery of the amount due on the bill of exchange. In this case, A cannot recover the amount from E
because E's remedy against C and D is destroyed by A by cancelling the indorsement.
41.23.NEGOTIATION BACK
Sometimes, during the course of negotiation, the negotiable instrument comes back to the original
indorser. This is called negotiation back. Thus, where an indorser negotiates an instrument and
again becomes its holder before its maturity, the instrument is said to be 'negotiated back' to that
holder. In such cases, the intermediate indosers are not laible to the holder to whom the instrument
is negotiated back.
Example 41.26. A, the holder of bill of exchange, indorsed it to B. B indorsed it to C. C to D, D
to E, and E indorsed it again to A. In this case, the indorsement by £ to A is a 'negotiation back'.
And B, C, D and E are not liable to A.
This rule is made to prevent of multiplicity of actions, and it is an exception to the general rule
that a holder in due course can sue all prior parties. This process of multiplicity of actions is
explained below on the basis of above example.
In the above example, A becomes the holder in due course by the second indorsement by E to
A. Now A being a holder in due course, has the right to recover the amount from B, C, D and E.
And he (A) being a prior party, is also liable to all of them. If A is allowed to sue £, then E
could sue D, D could sue C, and C could sue B, and B could sue A and this will lead to circuity
of legal actions without any purpose. The law prohibits such multiplicity of actions. Thus, A having
been pushed to his original position of holder, cannot suit B, C, D and E.

But sometimes, the original indorser expressly excludes his liability at the time of indorsement
nd the instrument is again negotiated back to him. In such cases, he can sue all the intermediate jndorsers e.g.
a
where the first indorsement was 'sans recourse'.
Note. Sometimes, the original indorser, to whom the instrument is negotiated back cancels all the indorsements on it,
and further indorser, the same. Such a transaction is known as 'taking up of a bill'.

41.24. ASSIGNMENT
The term 'assignment' may be defined as the transfer of one's right to recover the payment of a
debt. It may be noted that the promissory notes, bills of exchange and cheques represent the debts.
Thus, they are also assignable (transferable) without an indorsement. As a matter of fact, the
assignment is the sale of 'person's right to receive the payment of a debt'. The assignment takes
place by means of a written document signed by the person who transfers his rights, under the
negotiable instrument, to the other. The following two parties are involved in an assignment:
1. Assignor. The person who transfers his right under the negotiable instrument, is called an
assignor.
1. Assignee. The person to whom such rights are transferred, is called an assignee.
It may be noted that in both, 'negotiation' and 'assignment' there is the transfer of the right to
receive the payment of a debt. However, the rights of a transferee by negotiation are
substantially superior to those of an assignee. The assignee gets the right of the assignor only. He
does not get the rights of a holder in due course.
Note. The Negotiable Instruments Act deals with the transfer of instrument by negotiation only, and
not with the transfer by assignment.

41.25 COMPARISON BETWEEN NEGOTIATION & ASSIGNMENT

The following table gives the comparison between negotiation and assignment.
S.No. Negotiation Assignment
1. In this case, the mode of transfer is simple. In this case, the mode of transfer is not so simple
The negotiation can be made either by The assignment can be made only by a separate
mere delivery of the instrument, or by written document signed by the transferer

endorsement on the instrument itself

and its delivery.

2. In this case, the consideration is always In this case, the consideration is not
presumed. The indorse is not required to presumed. The transferee must prove
prove that he has obtained the instrument that he has obtained the instrument
for consideration. (by assignment) for consideration

3. In this case, the transferee gets a better title In this case, the transferee gets the
than that of the transferor if he is the holder same title as that of the transferor, whether
in due course. As a matter of fact, the holder it is good or bad. As a matter of fact, the
in due course takes the instrument free from transferee takes the instrument (by assignment)
all defects in the title of the transferor. subject to all defects in the title of the transferor

4. In this case, there is no need to give a notice of In this case, a notice of transfer must be
transfer to the debtor (i.e the person liable to given to the debtor by the transferee
pay the amount of the instrument). The parties Without such notice, the assignment
are liable to pay the amount even without such . is not complete and effective
notice

41.26. LIABILITY OF PARTIES

The liability of all the parties of a negotiable instrument may be discussed under the follow'
heads:
1. Liability of maker of a promissory note and acceptor of a bill of exchange. 2. Liabj|j, of
drawer of a bill of exchange or of a cheque. 3. Liability of drawee of a cheque 4. Liabjl't of
indorser. 5. Liability of prior parties.
41.27. LIABILITY OF MAKER OF A PROMISSORY NOTE AND ACCEPTOR OF A Bin
OF EXCHANGE
The liability of both, the maker of a promissory note and the acceptor of a bill of exchange is the
same. They are primarily liable to pay the amount due on the instrument. This means that they are
bound to pay the amount of the instrument (i.e. note or bill) on its maturity accordW to its apparent
tenor i.e. terms of the instrument [Section 32, para 1]. In default of such payment they become liable to
compensate any subsequent party for the loss caused to him by such default [Section 32, para 2].
Sometimes, an acceptor accepts an already indorsed bill with the knowledge or suspicion that the
indorsement was forged. In such cases also, he will be liable on the bill, and cannot escape his
liability on the ground that indorsements was forged [Section 41].

41.28. LIABILITY OF DRAWER OF A BILL OF EXCHANGE OR OF A CHEQUE

The liability of the drawer of a bill or of a cheque is contained in Section 30 of the Negotiable
Instruments Act, and may be discussed as under:
1. Drawer of a bill of exchange. On the dishonour of a bill of exchange by the drawee, either
by non-acceptance or by non-payment, the drawer becomes liable to compensate the holder or
any indorser who has been compelled to pay, for the loss suffered by him. But to make the drawer
liable, the notice of dishonour must be given to or received by him. Thus, the liability of drawer
of a bill is secondary because the primary liability is that of the acceptor., i.e. the drawer of a
bill becomes liable to pay the amount only on the default of the acceptor. But until the bill is
accepted, the drawer is primarily liable.
2. Drawer of a cheque. On the dishonour of a cheque, the drawer becomes liable to compensate
the holder. In this case also, to make the drawer liable the notice of dishonour must be given
to or received by him. There is also a criminal liability of the drawer. It will be discussed in
detail in Art. 41.33.
Note. The point of difference between the liability of the drawer of a bill and that of a cheque is
thai the liability of the drawer of a cheque is primary and not secondary. The reason for the same is
that the holder of a bill can recover the amount from the drawee (acceptor). But the holder of a
cheque has no remedy against the drawee i.e. banker. His remedy is only against the drawer.
[PNB v. Bank of Baroda, AIR 1944 PC 58).
41.29.LIABILITY OF DRAWEE OF A CHEQUE
We know that the drawer of a cheque is always a banker (bank). When the bank has sufficieni funds of
the drawer, then it must make the payment of the cheque when required to do so. When the bank
refuses to make payment without any sufficient cause, then it must compensate the drawer for any
loss or damage caused by such default (Section 31). Thus, the liability of the drawee of a cheque
arises when it is having sufficient amount in drawer's account properly applicable to the cheque, but
refuses, to pay the amount of the cheque. It may be noted that the banker is liable only to the drawer of
a cheque and not to the holder. The reason for the same is that the relationship between banker and
his customer (drawer) is contractual, and the holder is not a party to such contract. The holder's remedy
is only against the drawer and not the banker.

However, there are certain circumstances in which the banker is justified in refusing the payment of a cheque.
In such circumstance, the banker is not liable to the drawer in refusing payment, even if there is sufficient funds in
his account. Following are the circumstances, in which
jhe banker is justified in refusing payment:
(a)When the cheque is post-dated.
(b) When the cheque is out-dated. It is the custom of bankers in India not to pay a cheque
if it is presented after 6 months from the date of issue.
(c) When the customer has countermanded (i.e. stopped) payment of a particular cheque. In
this case, the customer has to do so by a notice in writing not to pay a particular cheque.
(d) When the cheque is mutilated i.e. torn. Etc
(e) When the cheque is of doubtful validity e.g. undated, amount differing in words and figures etc.
(f) When the customer has died
(g) When the customer has become insolvent
(h) When the customer has become insane (i.e. of unsound mind).
 (i) When the customer's signature does not agree with the specimen signature.
(/') When a garnishee order has been issued i.e. when the banker has received a court order
attaching the balance of the customer's account. (it) Where the balance in customer's account is not
sufficient to meet the cheque. In such
a case, drawer is also liable to be punished with imprisonment upto one year or with fine
upto twice the amount of cheque or with both [Section 138 added by amendment in 1988.
It will be discussed in detail in Art. 41.33]
All the above points will be discussed in detail in Arts. 47.7, 47.8 and 47.9. Following three points are also
important in connection with the liability of a banker:
1. Banker's liability where the amount of cheque is increased by fraud: Sometimes, a dishonest
person alters or increases the amount of a cheque by using some techniques, and the banker pays
the increased amount. In such cases, whether the banker should suffer the loss of excess payment
or it should be allowed to be recovered from the customer (i.e. the drawer of the cheque) depends
upon the following:
(a) Where the customer has drawn a cheque with reasonable precautions and the amount is
increased by some dishonest person and the banker pays the amount, then the banker must
bear the loss i.e. the banker cannot charge the customer with the increased amount.
[Hall v. Fuller (1825) 5 B & C 7501.
(b) Where the customer is negligent in drawing his cheque e.g. leaves unusual spaces on the
cheque and the amount is raised by adding some words or figures, then the banker is not
liable for the raised amount. Such loss falls on the customer.
[London Jt. Stock Bank v. Mctnillan (1918) AC 777].
2.. Banker's liability in case of forgery of customer's signature. As a matter of fact, it is the
duty of the banker to be acquainted with the customer's signature. If the payment is made against
a cheque on which the customer's signature is forged, then the banker must suffer the loss i.e.
the banker is liable to pay the amount again to his customer. The reason for the same is that
the earlier payment by the banker is without authority.
[Bhagwandas v. Greet (1904) ILR 3 Cal. 249].
However, the banker has his remedy against the forger (i.e. the person who has obtained the payment by forging
customer's signature). The banker's remedy is to recover the amount from the forger. Thus, when the customer
comes to know of the forgery of his signature, then it becomes his duty to inform the banker so that the banker may
take action against the forger. If the customer 'ails to inform the banker, and in consequence the banker loses his
remedy against the forger, then the banker will not be liable to the customer to pay the amount again.

3. Banker's liability in case of forgery in indorsement. We have already discussed that jt

•banker's duty to be acquainted with the customer's signature. However, it is not banker's dm to
acquaint himself with the handwriting of several persons who may indorse a cheque. Thi/ the
banker is not liable if he makes the payment of a cheque on which the indorsement was forgeri
(Section 85). As a matter of fact, the banker is discharged from liability by making the paym e in
due course 3 . And the banker cannot be held liable on the ground that the indorsement w a
forged one. However, the banker will not be protected if there is an apparent irregularity
•indorsement, [Slingby v. District Bank (1932) 1 KB 5*44, Q ^-,

41.30. LIABILITY OF INDORSER

The liability of an indorser is conditional and arises only in case of dishonour of the instrument i.e.
his liability arises only if there is default by the party who is primarily liable to pay the amount due on
the instrument on its maturity. It means that, in case of dishonour of the negotiable instrument,
every indorser is liable to all the parties who are subsequent to him [Section 351 As a matter of
fact, by indrsing the instrument, the indorser gives a guarantee to the subsequent parties that the
instrument shall be paid on its maturity, and that if it is dishonoured he shall be liable to any
subsequent party for the loss caused to him by such dishonour. However, an indorser will be liable
only if a notice of dishonour is given to him, or received by him i.e. he himself comes to know of
the dishonour.
 It will be interesting to know that an indorser can exclude his liability by express words in the
indorsement or can make his liability conditional e.g. by 'sans recourse' or conditional
indorsement.
Note. Sometimes, a holder destroys the remedy of an indorser against the prior parties. In such
cases, the indorser is discharged from his liability to such holder (Section 40).
41.31. LIABILITY OF PRIOR PARTIES
Any person who is a party to the negotiable instrument, prior to the holder in due course, is liable to
him (the holder in due course) until the amount due on the instrument is paid [Section 36]. Thus,
when an instrument is dishonoured, the holder in due course can hold all or any one of the prior
parties liable for the amount due on the instrument. It will be interesting to know that the liability
of the intervening (i.e. prior) parties is joint and several i.e. the holder in due course may recover
the amount from one party or from all of them jointly.
It may, however be noted that when a holder of an accepted bill of exchange enters into a
contract with the acceptor to release him from liability, then all other parties shall also
discharged from liability to the holder. However, in such cases, the holder may expressly reserve
his right against the other parties. [Section 39].
Example 41.27. A was a holder of a bill of exchange for Rs. 5,000. He took from B, the acceptor
of the bill of exchange, Rs. 4,000 in full satisfaction of his claim against him (B) for the bill. In this
case,, all other parties (i.e. the drawer and indorsers) are discharged from their liability. However,
the hold may expressly reserve his right to sue the other parties.
Example 41.28. A was the holder of a bill of exchange for Rs. 1,000. He agreed with B, acceptor
of the bill of exchange, not to sue him upon the bill. In this case also, the other parties (i.e. the
drawer; indorsers) are dischanrged from their liability. However, the holder may expressly reserve his
right i the other parties. liable as principal debtors, and certain are liable as sureties (guarantors).
This provision is contained in Section 37 of the Negotiable Instruments Act. According to this
section, the following parties are liable as principal debtors i.e. their liability is primary:
1. The maker of a promissory note.
2. The drawer of a cheque.
3. The drawer of a bill of exchange until acceptance.
4. The acceptor of a bill of exchange .
And all the other parties are liable as sureties (guarantors) i.e. their liability is secondary and arises only on
default by a party who is primarily liable. This is, however, subject to a contract to the contrary.
Examplle 41.29. A made a promissory note for Rs. 1,000 payable to B and delivered the same to him.
Afterwards, B indorsed the promissory note to C, C to D and D to E. In this case, the primary
liability is that of A as he is the maker of the promissory note. And the liability of other parties (B, C
and D) is secondary. Thus, B, C and D are liable to pay the amount due on the promissory note to E
only if A fails to pay on due date.
It will be interesting to know that among the parties who are liable as sureties, each prior party is
liable as principal debtor in respect of each subsequent party. It is also subject to a contract to the
contrary [Section 38].
Example 41.30. A drew a bill of exchange for Rs. 1,350 on fi payable to his (A's) own order. B
accepted this bill of exchange. Afterwards, A indorsed the bill to C, C to D, and D to £. In this case, B
being the acceptor is the principal debtor. In case B fails to pay the amount due for the bill of
exchange, then E being the holder can claim the amount from A. If A also fails to pay the amount, E
can claim the amount from C. If C also fails to pay the amount, then E can claim the amount from
D. This liability is based on the principle that between E and B, B is the principal debtor and A, C and
D are his sureties. As between E and C. C is the principal debtor and D is his surety.
41.33. CRIMINAL LIABILITY OF DRAWER FOR DISHONOUR OF CHEQUES
An amendment to this effect was made in 1988, when a New Chapter XVII comprising sections
138 to 142 was added to the Negotiable Instruments Act, 1881.
Sometimes, a cheque issued by a person (i.e. drawer) is dishonoured i.e. returned unpaid due to
insufficient funds in his bank account. In such cases, the drawer is deemed to have committed an
offence. For this offence, he is punishable with imprisonment for a term which may extend to
two* year, or with fine which may extend to double the amount of cheque or with both.
However, this criminal liability of the drawer of a dishonoured cheque arises where the cheque
was given by him for the payment of any legally enforceable debt or other liability [Section 138].
Moreover, to make the drawer criminally liable, the following conditions should also be satisfied:

1. The cheque has been presented to the bank for payment within a period of six months
from the date on which it is drawn or within period of its validity, whichever is earlier
[Section 138 (a)].
2. Within thirty** days of the receipt of information from the bank about dishonour, the payee
or the holder in due course, as the case may be, gives a written notice to the drawer
demanding payment of the said cheque [Section 138(£)].
3. The drawer of the cheque fails to make payment within the next fifteen days after receiving
such a demand notice [Section 138 (r)]. The cause of action starts from the 16th day onward.
On the fulfilment of these conditions, an offence against the drawer becomes complete, and the
criminal action can be started against him after the expiry of fifteen days period mentioned in
point (3) above. However, to make the drawer criminally liable, a written complaint must be filed
against him within one month from the date of cause of action i.e. within one month after the
expiry of fifteen days period as mentioned in Section 138 (c) above [Section 142].

41.32. BASIC PRINCIPLES OF LIABILITY OF PARTIES

We have already discussed the liability of all the parties to a negotiable instrument. It may w
noted that the liability of the parties is based on the principle of suretyship i.e. certain are liable
as principal debtors, and certain are liable as sureties (guarantors). This provision is contained in
Section 37 of the Negotiable Instruments Act. According to this section, the following parties are
liable as principal debtors i.e. their liability is primary:
5. The maker of a promissory note.
6. The drawer of a cheque.
7. The drawer of a bill of exchange until acceptance.
8. The acceptor of a bill of exchange.
And all the other parties are liable as sureties (guarantors) i.e. their liability is secondary and arises only on
default by a party who is primarily liable. This is, however, subject to a contract to the contrary.
Examplle 41.29. A made a promissory note for Rs. 1,000 payable to B and delivered the same to him.
Afterwards, B indorsed the promissory note to C, C to D and D to E. In this case, the primary
liability is that of A as he is the maker of the promissory note. And the liability of other parties (B, C
and D) is secondary. Thus, B, C and D are liable to pay the amount due on the promissory note to E
only if A fails to pay on due date.
It will be interesting to know that among the parties who are liable as sureties, each prior party is
liable as principal debtor in respect of each subsequent party. It is also subject to a contract to the
contrary [Section 38].
Example 41.30. A drew a bill of exchange for Rs. 1,350 on fi payable to his (A's) own order. B
accepted this bill of exchange. Afterwards, A indorsed the bill to C, C to D, and D to £. In this case, B
being the acceptor is the principal debtor. In case B fails to pay the amount due for the bill of
exchange, then E being the holder can claim the amount from A. If A also fails to pay the amount, E
can claim the amount from C. If C also fails to pay the amount, then E can claim the amount from
D. This liability is based on the principle that between E and B, B is the principal debtor and A, C and
D are his sureties. As between E and C. C is the principal debtor and D is his surety.
41.33. CRIMINAL LIABILITY OF DRAWER FOR DISHONOUR OF CHEQUES
An amendment to this effect was made in 1988, when a New Chapter XVII comprising sections
138 to 142 was added to the Negotiable Instruments Act, 1881.
Sometimes, a cheque issued by a person (i.e. drawer) is dishonoured i.e. returned unpaid due to
insufficient funds in his bank account. In such cases, the drawer is deemed to have committed an
offence. For this offence, he is punishable with imprisonment for a term which may extend to
two* year, or with fine which may extend to double the amount of cheque or with both.
However, this criminal liability of the drawer of a dishonoured cheque arises where the cheque
was given by him for the payment of any legally enforceable debt or other liability [Section 138].
Moreover, to make the drawer criminally liable, the following conditions should also be satisfied:

1. The cheque has been presented to the bank for payment within a period of six months
from the date on which it is drawn or within period of its validity, whichever is earlier
[Section 138 (a)].
2. Within thirty days of the receipt of information from the bank about dishonour, the payee or the
holder in due course, as the case may be, gives a written notice to the drawer demanding
payment of the said cheque [Section 138(£)].
3. The drawer of the cheque fails to make payment within the next fifteen days after receiving
such a demand notice [Section 138 (r)]. The cause of action starts from the 16th day onward.
On the fulfilment of these conditions, an offence against the drawer becomes complete, and the
criminal action can be started against him after the expiry of fifteen days period mentioned in
point (3) above. However, to make the drawer criminally liable, a written complaint must be filed
against him within one month from the date of cause of action i.e. within one month after the
expiry of fifteen days period as mentioned in Section 138 (c) above [Section 142].
It may be noted that, till the Cheque is returned by the bank as unpaid, no offence is mad out
against the drawer of the cheque under section 138 [Anil K. Sawhney v. Gulshan Rai, LW (Crl.) 641
(SC)]. Moreover, the dishonour of cheque by itself does not make the draw? criminally liable.
It is only the failure to pay the amount within fifteen days of the receipt Of demand notice that
gives a cause of action against the drawer. [MA Ancon Engg. Co. v. Amitava Goswami,
(1994) 3 Crimes 769 (Cahi The following points, in connection with drawer's criminal
liability, are important aa noted here:
1. In pursuant to the demand notice by the payee, it is necessary for the drawer to
make payment of the entire amount of the cheque. Any part payment is not
sufficient to evade prosecution under this provision. [MA Ancon Enggs.'s
case]
2. The complaint for this offence should be made in writing by the payee or the
holder in due course [Section 142 (a)].
3. The written complaint should be made before a Metropolitan Magistrate or a
JudicialMagistrate of first class [Section 142 (c)].
4. The payee cannot lodge a complaint after the completion of one month from
the dateon which the cause of action arose under Section 138(c).
[V.N.Samant v. A/A K.G.N. Traders (1994) 3 Crimes, 725 (Karnataka)].
In case, this offence is committed by a company, it is liable to be punished
accordingly. Moreover, every person who was incharge of conducting company's
business, shall also be liable to be punished under this provision [Section 141 (1)].
Further, the director, manager, secretary or other officer of the company will also be
liable for this offence, if it can be shown that the offence has been committed with
his consent or connvinance [Section 141 (2)].
Notes. 1. The word 'company' for the purpose of this section, means any body
corporate and includes a firm or other association of individuals [Section 141,
Explanation (a)]. And the word 'director' in relation to a firm means a partner in the firm
[Section 141, Explanation (b)].
1. Sometimes, a customer has an arrangement with a bank for the payment of his
cheques upto certain amount e.g. where he avails a loan facility upto specified amount. In
such a case also, the drawer is criminally liable if his cheque is dishonoured because of
the fact that the cheque exceeds the amount arranged to be paid as per agreement with
the bank [Section 138].
TEST QUESTIONS
1. Explain clearly the term 'negotiation'. What are the different modes of
negotiation? State the importance of delivery in negotiation.
 1. What is meant by negotiation? How is it effected? Distinguish between negotiation and
assignment.
2. What do you mean by indorsement? What are its various kinds? Can a negotiable
instrument be indorsed in parts? If yes, when?
2. Explain the meaning of 'special' and 'restrictive' indorsement. Who may indorse such an
instrument?
3. "A partial indorsement does not operate as a negotiation of the instrument"—comment.
3. What is the liability of a maker of a promissory note? What is its nature? Does it
differ from the liability of a drawer of a bill of exchange and cheque? If yes, in
what way?
4. State the basic principles of liability of parties to a negotiable instrument. What is
the liability of prior parties, and indorsers?
4. Write notes on the following:
(a) Sans recourse indorsement, (b) Facultative indorsement, (c) Contingent
indorsement. (d) Restrictive indorsement, (e) Negotiation back.
9. Is there any criminal liability of the drawer of a cheque? If yes, in. what circumstances?

42. PRESENTATION OF NEGOCIABLE INSTRUMENTS

42.1. INTRODUCTION
We have already discussed that negotiable instruments are used as substitute for money. However,
the money due on the instruments can be received only after presenting the same to the parties
liable for payment. The process of presenting or placing the instrument before the maker, acceptor or
drawee is known as a 'presentment of a negotiable instrument'. As a matter of fact, the
presentment of a negotiable instrument is required for any one of the following purposes:
1. Presentment for acceptance. 2. presentment for sight. 3. Presentment for payment.
Note. The presentment for acceptance is required in case of bills of exchange only, and the
presentment for sight only in case of promissory notes. However, the presentment for payment is
necessary in all kinds of negotiable instruments.
42.2. PRESENTMENT OF A BILL OF EXCHANGE FOR ACCEPTANCE
The presentment for acceptance is necessary only in case of bills of exchange [Section 61]. If the
bill is not presented for acceptance, no party is liable to the holder who makes default in its
presentment. The term 'acceptance of a bill' may be defined as the indication by the drawee of his
assent to the drawer that he will pay the amount of the bill of exchange on due date. In other
words, it is the consent of the drawer signed upon the bill of exchange. The bill is said to be
accepted when the drawee writes the word 'accepted' on the bill and signs his name below it. And
the drawee is then called the 'acceptor' of the bill of exchange. However, the writing of the word
'accepted' is not necessary. The acceptance may be given by the drawee by simply signing his name
on the bill. It may, however, be noted that the acceptance must be in writing. An oral acceptance
is not a valid acceptance. The liability of the drawee arises only when the bill of exchange has
been validy accepted by him. The following are the essentials of a valid accetpance of a bill of
exchange.:
1. The acceptance must appear on the bill of exchange itself.
2. The acceptance must be in writing.
3. The acceptance must be signed by the drawee or his duly authorised agent.
1. The acceptance must be completed either by delivering the accepted bill of exchange to the
holder, or by giving notice of acceptance to the holder or to some other person on holder's
behalf.

Sometimes, a drawee signs his acceptance on the bills of exchange. But before delivering i' to the
holder, he changes his mind and cancels the acceptance. In such cases, the drawee will not be
liable as an acceptor of the bill of exchange. Thus, the drawee is not liable unless the Lj|i of
exchange is presented to him for acceptance, and he actually accepts it and then delivers ihe same to
the holder, or gives notice of acceptance to him or to his authorised agent.
Example 42.1. A drew a bill of exchange on B ordering him to pay Rs. 500 to C 15 days after
acceptance. yl delivered the bill of exchange to C to enable him to receive the money from B. C
presented the bill (0 B for acceptance. B accepted the bill. But before delivering it to C, he cancelled
his acceptance. In this case, C cannot claim the amount due on the bill from B. However, he can
claim the amount due on bill from A.
Thus, the drawee of a bill of exchange is not liable unless he accepts the bill and delivers ihe
same to the holder. It may also be -noted that no other party will be liable to the holder, if he does
not present the bill for acceptance. However, it is not necessary that every bill of exchange should be
presented for acceptance. There are certain bills which are not required to be presented for acceptance,
and there are certain others which must be presented for acceptance. Following are the bills of
exchange which need not be presented for acceptance:
(a) A bill of exchange payable on demand.
(b) A bill of exchange payable on fixed date e.g. on 31st March, 1999
(c) A bill of exchange payable on fixed number of days after date e.g. 30 days after date.
Following are the bills of exchange which must be presented for acceptance in order to make
the parties liable [Section 61]:
(a) A bill of exchange payable at a given time after acceptance or after sight. Here the term 'after
sight' means that the bill is payable at a given time after it has been presented to the drawee
for his knowledge. In such cases, the presentment of a bill for acceptance is necessary in order
to fix the date of maturity.
(b) A bill of exchange in which there is an express term that it shall be presented for acceptance before
it is presented for payment. A bill of exchange which is payable at a place other than the place of
residence or business of the drawee.
Though in certain cases, it is optional to present the bill of exchange for acceptance, yet it is
always desirable to have the bill accepted due to the following reasons:
1.In order to obtain additional security of acceptor's name on the bill of exchange.
2.In order to have an immediate right of recourse against the drawer and other parties if
the bill is dishonoured by non-acceptance. Because in such a case, the holder can immediately
proceed against the drawer or other parties for the recovery of the amount due on the bill.
42.3. KINDS OF ACCEPTANCE
The acceptance of a bill of exchange may be of the following two kinds, namely:
1. General acceptance. 2. Conditional acceptance.

42.4 GENERAL ACCEPTANCE

A general acceptance is one which is given without any condition regarding the payment of the
amount due on the bill of exchange. It is also known as an 'absolute acceptance'. A general
acceptance is according to the apparent tenor of the bill of exchange i.e. the drawee accepts the bill
as originally drawn. In case of general acceptance, the drawee makes himself liable to pay the
amount due on the bill of exchange without any condition. As a matter of fact, the acceptance must be
general.

42.5. CONDITIONAL ACCEPTANCE

A conditional acceptance is one which is given upon some conditions regarding the payment of 'he
amount due on the bill of exchange. It is also known as a ''qualified aceptance'. In case of a
conditional acceptance, the drawee makes himself liable to pay the amount due on the bill of exchange
only if conditions of acceptance are fulfilled. It may be noted that the condition acceptance varies the effect of the
bill of exchange as originally drawn. The holder of a bill \ exchange may refuse to take back the bill which has been
accepted conditionally. And he mj treat such a bill as dishonoured by non-acceptance. However, he may also take such
a bill B in this case, all parties prior to himself shall not be liable on the bill of exchange unless the
give their consent to the conditional acceptance. Thus, the holder takes the conditionally accepted bill of
exchange at his own risk, and can recover the amount due on the bill from the accepto only as no
other party will be liable to pay the amount. Following are the instances of conditional acceptance:
 1. Acceptance on the happening of an event . It is the acceptance by which the drawee
undertakes to pay the amount due on the bill of exchange on the happening of an event, e.g.
an acceptance reading as "accepted, payable only when the ship arrives at Bombay", or "accepted
payable when sufficient funds are available".
2. Acceptance of partial amount . It is the acceptance by which the drawee undertakes to pay
only a part of the amount due on the bill of exchange e.g. a bill drawn for Rs. 1,000, and accepted
in words reading as "accepted for Rs. 600 only".
3. Acceptance for payment at a specified place. It is the acceptance by which the drawee
undertakes to pay the amount due on the bill of exchange only at a specified place and not
elsewhere, or to pay at a place different from the place mentioned in the bill itself e.g. an
acceptance reading as "accepted, payable at Punjab National Bank only", or "accepted, payable
at Punjab National Bank and not eslewhere". It may however, be noted that if a bill of exchange
is accepted reading as "accepted payable at Punjab National Bank", then it will be a general
acceptance and not a conditioinal one. The reason for the same is that it does not state expressly
that the bill is payable only at the Punjab National Bank and not elsewhere.
4. Acceptance for payment at a different time . It is the acceptance by which the drawee
undertakes to pay the amount due on the bill of exchange at a time different from that mentioned
in the bill itself, e.g. a bill drawn payable 30 days after date and accepted in words reading as
"accepted payable 60 days after date".
5. Acceptance by some of the drawees only. It is the acceptance by which only one of the
several drawees undertakes to pay the amount due on the bill of exchange. Thus, where a bill
of exchange is drawn on several drawees, it should be accepted by all of them. If only some
of the drawees accept the bill, the acceptance will be conditional. It may, however, be noted that
sometimes the drawees are the partners of a firm. In such cases, one or more partners (drawees)
can accept the bill on behalf of all the partners, and the acceptance will be a general acceptance.
6. Acceptance for payment in instalments. It is the acceptance by which the drawee undertakes
to pay the amount due on the bill of exchange in instalments. A bill drawn for Rs. 500 and accepted
in words reading as "accepted payable in monthly instalments of Rs. 100".
42.6. RULES REGARDING THE PRESENTMENT OF A BILL OF EXCHANGE FOR
ACCEPTANCE
The rules regarding the presentment of a bill of exchange for acceptance may be discussed under the
following heads:
1. Persons who should present the bill for acceptance . A bill of exchange should be presented
for acceptance by any person who is entitled to demand the acceptance of the same. The holder
of the bill or his duly authorsied agent is entitled to demand the acceptance of the bill. And thus,
he can present the bill for acceptance.
2. Persons to whom the bill should be presented for acceptance. A bill of exchange should
be presented for acceptance to the person who can accept the same. The provisions, relating to
the persons who can accept the bill, are contained in Sections 33 and 75 of the Negotiable
Instruments Act as per these sections, following are the persons who can accept the bill of
exchange:
(a) The drawee of a bill of exchange or his duly authorised agent . As a matter of fact, the drawee is the only
person to whom the bill of exchange should be presented for acceptance at the first instance
[Section 33 ].
(I)) The joint drawees of a bill of exchange. If there are several drawees who are not partners of a
firm, then the bill must be presented to all the drawees (Section 34) and must be accepted by
all of them. If any one fails to accept the bill, then the acceptance will be considered as
conditional.
Note. However, where the several drawees are partners of a firm, the acceptance by any one of them,
On behalf of the firm, will be a general acceptance. And the firm will be bound by the same if he accepts
within his authority and in the name of the firm and for its usual business.
(c) The legal representatives (i.e. heirs) of a drawee. If the drawee is. dead, his legal
representatives can accept the bill of exchange. And thus, after drawee's death, the bill of
exchange should be presented to his legal representatives for acceptance [Section 75].
 (d) The official receiver or assignee. If the drawee is declared as an insolvent, his receiver or
official assignee can accept the bill of exchange. And thus, after the insolvency of the
drawee, the bill should be presented to his receiver or official assignee for acceptance
[Section 75 ].
(e) The drawee in case of need. If the original drawee refuses to accept the bill of exchange, then
the bill should be presented for acceptance to a 'drawee in case of need,' if there is any. He
is the person whose name is mentioned in the bill (in addition to the name of the drawee)
to whom the payee should approach in case the original drawee refuses to accepts [Section
33].
(f) The acceptor for honour. If the bill of exchange is not accepted, and is noted or protested for
non-acceptance, then the bill may be accepted by the acceptor for honour i.e. the person who
accepts the bill for the honour of any party liable on the bill of exchange [Section 3.3].
This point will be discussed in detail in Arts. 42.9 and 46.5.
3. Time for presentment for acceptance. The rules regarding the time for presentment of a bill of
exchange for acceptance may be stated as under:
(a) Where the time for presentment is specified. Sometimes, the time for presentment of a bill
of exchange for acceptance is specified in the bill itself. In such cases, the bill must be
presented for acceptance within that time i.e. before the expiry of the specified time
[Section 62].
(b) Where the time for presentment is not specified. Sometimes, the time for presentment of a
bill of exchange for acceptance is not specified in the bill itself. In such cases, the bill
must be presented for acceptance within a reasonable time of its being drawn [Section 62]. The
term 'reasonable time' is a question of fact that depends upon the means of
communication available and the usage of a particular trade.
It may, however, be noted that all the bills of exchange must be presented for acceptance before
maturity. Moreover, the presentment must also be made on a business day and during the business
hours only. The term 'business hours' depends upon the custom and usage of particular trade.
Note. In all cases where the presentment of a bill for acceptence is not necessary, the bill may be
presented for acceptance at any time before payment.
4. Place for presentment for acceptance. The rules regarding the place for presentment of a bill
of exchange for acceptance may be stated as under:
(a) Where the place for presentment is specified . Sometimes, the place for presentment of a
bill of exchange, for acceptance, is specified in the bill itself. In such cases, the bill must be
presented for acceptance at that place only. If after reasonable search, the drawee cannot be
found at that place, then the bill is deemed (i.e. considered) to be dishonour, by non-
acceptance [Section 61].
(b ) Where the place for presentment is not specified. Sometimes, the place for presents of a bill
of exchange, for acceptance, is not specified in the bill itself. In such cases ti bill should be
presented for acceptance at drawee's place of business or residence. If reasonable search, the
drawee cannot be found there, then the bill is deemed considered) to be dishonoured by non-
acceptance [Section 61]. Note. Where presentment by post is authorised by agreement or custom, then
presentment for acceptan by registered letter is sufficient .
42.7.EFFECT OF NON-PRESENTMENT OF A BILL FOR ACCEPTANCE
We know that in certain cases, the presentment of a bill of exchange for acceptance is compulsory In
such cases, the holder must present the bill for its acceptance. If he fails to do so, then no party
on the bill shall be liable to such holder [Section 61 (first para last line)]. In other words if the
holder fails to present the bill for acceptance, the drawer, and all the indorsers, prior to the
defaulting holder, shall be discharged from their liability to such holder. It may be noted that when
the bill of exchange is presented to the drawee for his acceptance, he is entitled to 48 hours
(exclusive of public holidays) to consider whether he will accept the bill or not. If the bill is not
returned after acceptance, the proper approach for the holder is to treat the bill as dishonoured. It
may also be noted that if the holder allows more time than the said 48 hours then all the previous
parties who do not give consent to the extended time, are discharged from their liability to such
holder [Sections 63 and 83].

42.8. CASES IN WHICH PRESENTMENT OF A BILL OF EXCHANGE FOR

ACCEPTANCE IS EXCUSED
The holder of a bill of exchange becomes entitled to recover the amount only when the bill is
duly presented for acceptance, and the same is dishonoured due to non-acceptance (i.e. not
accepted). However, there are certain cases in which the presentment for acceptance is excused (i.e.
the holder is not required to present the bill for acceptance). And the holder may treat the bill as
dishonoured and proceed to recover the amount from the liable parties. Following are the cases, in
which presentment of a bill of exchange for acceptance is not essential:
1. When, after reasonable search, the drawee cannot be found [Section 61].
2. When the drawee is a fictitious person or one incapable of contracting [Section 91].
3. When although the presentment is irregular, but acceptance has been refused on some other
ground.
But in all other cases, where presentment is compulsory, the bill of exchange must be presented for
acceptance. Even if the drawee is dead or becomes insolvent, the bill should be presented to his
legal heirs or the Receiver or Official Assignee as the case may be [Section 75]. Moreover, the
presentment for acceptance is not excused even if the holder has the reasons to believe thai the bill
will be dishonoured on presentment.
Thus, where the presentment of a bill of exchange for acceptance, is compulsory, the bill must
be presented for acceptance except in three cases mentioned above.

42.9.ACCEPTANCE FOR HONOUR

As a general rule, a bill of exchange should be accepted only by the drawee i.e. the person on whom
it is drawn. But in certain cases, a person who is in no way liable on the bill of exchange may come
forward and accept it for the honour of the drawee or any other party liable on bill of exchange.
Such acceptance is known as 'acceptance for honour'. Sections 108 to 112" the Negotiable
Instruments Act contain the provisions relating to the "acceptance for honour These will be
discussed in detail in Art. 46.5.

42. 10. PRESENTMENT OF A PROMISSORY NOTE FOR SIGHT

The term 'presentment for sight' may be defined as the showing of a negotiable instrument (generally
promissory note) to the maker for his knowledge. The presentment for sight is required only in case of a
note payable after sight.. In this case, there is no need of writing or signature Of the maker on the
promissory note to validate such presentment. It is, however, advisable for tlie holder to get an
acknowledgment of presentment by the maker by writing the word 'seen' On the promissory note, or
by initialling and dating the promissory note. It is not necessary that every promissory note should be
presented for sight. There are certain promissory notes which are not required to be presented for
sight, and there are certain others which must be presented for sight. Following are the promissory
notes which need not be presented for sight:
(a) A promissory note payable 'at sight'.
(b) A promissory note payable on demand.
(c) A promissory note payable on fixed date e.g. 15th June, 1998.
(d) A promissory note payable on the expiry of fixed period e.g. 30 days after date.
Following are the promissory notes which must be presented for sight:

(a) A promissory note payable at a given time 'after sight' [Section 62].
(b) A promissory note in which there is an express term that it shall be presented for sight
before it is presented for payment.
The above notes are required to be presented for sight in order to make the parties liable and fix the
maturity of the instrument. In default of such presentment, no party is laible to the holder who makes
such default [Section 62].
Note. A promissory note does not require acceptance. The reason for the same is that the maker of the
promissory note is primarily liable to pay the amount due on it and there is no other person (like acceptor as in
case of a bill of exchange) to be made primarily liable.

42.11. RULES REGARDING THE PRESENTMENT OF A PROMISSORY NOTE FOR

SIGHT
The rules regarding the presentment of a promissory note for sight may be summed up as under:
1. A promissory note should be presented for sight by its holder or his duly authorised agent.
2. A promissory note should be presented for sight to its maker.
3. The presentment for sight should be made within a reasonable time after the making of
a promissory note.
4. The presentment for sight should be made on a business day and during the business hours
only.
5. If, after a reasonable search, the maker cannot be found, then the presentment is excused
and the promissory note is treated as dishonoured.
42.12. EFFECT OF NON-PRESENTMENT OF A PROMISSORY NOTE FOR SIGHT
We know that in certain cases, the presentment of a promissory note for sight is compulsory. In
such cases, the holder must present the promissory note for sight. If he fails to do so, it has the same
effect as in case of non-presentment of a bill of exchange for acceptance. Thus, if the holder fails to
present a promissory note for sight, no party on the promissory note shall be liable to such holder
[Section 62]. As a matter of fact, there is no debt due and no cause of action arises until presentment
for sight has been made.
42.13. PRESENTMENT OF NEGOTIABLE INSTRUMENTS FOR PAYMENT
After a negotiable instrument is made (completed by acceptance or sight, where required), the next
stage is that it must be presented for payment to the parties who are primarily liable to pay the amount
due on the instrument. Thus, a promissory note, a bill of exchange and a chequ must be presented
for payment to the maker, acceptor on drawee thereof respectively [Section 64].

42.14. RULES REGARDING THE PRESENTMENT OF NEGOTIABLE INSTRUMENTS FOR

PAYMENT
The rules regarding the presentment of negotiable instruments for payment may be discussed under
the following heads:
1. Persons who should present an instrument for payment. A negotiable instrument should he
presented for payment by a person who can give a valid discharge to the debtor i.e. by payment to
whom the debtor's liability to pay comes to an end. A holder or his duly authorised agent can give a
valid discharge to the debtor. And thus, he can present the instrument for payment
2. Persons to whom the instrument should be presented for payment. A negotiable instrument
should be presented for payment to the party who is primarily liable. According to Sections 64
and 75, following are the persons to whom an instrument should be presented for payment :
(a) The maker. In case of promissory note, a maker is primarily liable to make the payment.
Thus, a promissory note should be presened to him for payment. It can also be presented
to his duly authorised agent.
(b) The acceptor. In case of bill of exchange, the acceptor is primarily liable to make the
payment. Thus, a bill of exchange should be presented to him for payment. It can also
be presented to his duly authorised agent.
(c) The drawee. In case of a cheque, the payment is to be made by the drawee banker. Thus,
a cheque should be presented to the banker for payment. It can also be presented to his
duly authorised agent.
(d) The legal representative of the maker, acceptor, drawee. If the maker, acceptor or drawee
is dead the negotiable instrument should be presened to his legal representative for
payment.
(e) The Official Receiver or Assignee. If the maker, acceptor or drawee becomes insolvent
 the negotiable instrument should be presented to his official receiver or assignee for
payment.
3. Time for presentment for payment. The rules regarding the time for presentment of payment
may be stated as under:
(a) Where an instrument is payable after a fixed period of time. Sometimes, a negotiable
instrument is payable after a fixed period of time (e.g. 30 days after date). In such eases,
the instrument must be presented for payment on its maturity [Section 66] i.e. on the date
when its payment becomes due. It may be noted that an earlier presentment is premature
and the party is not liable to pay the amount due on the instrument. It may also be noted
that the delay, even of a brief period (say a day) discharges all parties other than the maker
or acceptor of the instrument.
(b) Where an instrument is payable on demand. Sometimes, a negotiable instrument is payable
on demand. In such cases, instrument must be presented for payment within a reasonable
time after it is received by the holder [Section 74]. It may be noed that the cheques are
always payable on demand. Thus, the holder of a cheque must present it for payment
within reasonable time after it is received by him. If he fails to do so, all parties except
the drawer, will be discharged from liability to the holder [Section 73]. The drawer will
also be discharged, if the holder does not present the cheque within a reasonable time
and in the meanime the relation between the drawer and his banker has been altered to.
the prejudice of the drawer [Section 72] e.g. where the banker has failed and the cheque
remains unpaid. In such cases, the drawer is discharged to the extent of damages suffered
on account of delay [Section 84].

Note. Delay in presentment of a negotiable instrument for payment is excused if it is caused by the circumstances beyond the control
of the holder and not imputable to his default, misconduct or negligence. gut when the cause of delay ceases to operate, the
presentment for payment must be made within a reasonable time thereafter [Section 75-A].
Example 42.2. A drew a cheque for a sum of Rs. 1,000 in favour of B. B kept the cheque with
him for an unreasonable long time. In the meantime, the banker became insolvent, and was in a
position to pay only 60 paise for one rupee. In this case, A is discharged from his liability to the
extent of Rs. 400, is this loss is due to B's default in presenting the cheque in time.
(c) Where a promissory note is payable by instalments. Sometimes, a promissory note is payable
by instalments. In such cases, the note must be presened for payment on the third day after the
date fixed for payment of each instalment. If any instalment is not paid on such presentment, it
has the same effect as non-payment of a promissory note at maturity [Section 67] i.e. the
instrument is treated as dishonoured .
It may, however, be noted that all the instruments must be presented for payment during the 'usual
hourse of business'. In case of a cheque, it must be presented for payment during the usual 'banking
hours' [Section 65].
4. Place of presentment for payment. The rules regarding the place of presentment for payment may
be stated as under:
(a) Where place of presentment is specified. Sometimes, the place of presentment for payment
is specified in the instrument itself. In such cases, the presentment for payment must
be made at that place only. The place of payment may be specified by using certain phrases
in the instrument such as "payable at 128, World Trade Centre, Connaught Place, New
Delhi, and not elsewhere", or "payable at 213, Raheja Chambers, Nariman Point,
Bombay". It will be interesting to know that the use of these different phrases makes
difference in the liability of the parties. Where a promissory note, bill of exchange or
cheque is made payable "at a specified place and not elsewhere" as stated in first phrase
above, then it must be presented for payment at that place only. If it is not presented at
the specified place, no party will be liable to the holder [Section 68]. Thus in such a case,
all parties are discharged from their liability if the instrument is not presented for payment
at the specified place. On the other hand, where a bill of exchange or promissory note
is made payable "at a specified place" as stated in the second phrase above, then it must
also be presented for payment at that place only. But if it is not presented at the specified
 place, only the drawer or the maker will be discharged from their liability to holder
[Section 69]. Thus, in such case, the other parties will remain liable.
The words specified place means a definite address of the place where the instrument is
required to be presented, e.g. an instrument "payable at 113, Park Street, Calcutta". But where a
promissory note was made payable "at Madras", it was held that the mere mention of the name of a big
city like 'Madras' does not make the instrument payable at a specified place. Therefore, no question of
presentment at a specified place arises. Thus, a specified place means a precise, certain and definite
place. [Sivaram v. Jayaratn, AIR 1966 Madras 297].
(b) Where the place of presentment is not specified. Sometimes, the place of presentment
is not specified in the promissory note or bill of exchange. In such cases, it must be
presented for payment at the place of business, if any, or at the usual residence of the
maker, drawee, or the acceptor as the case may be [Section 70]. And if the maker, drawee,
or acceptor has no known place of business or of fixed residence, then the presentment
may be made to him in person {i.e. personally) wherever he can be found [Section 71].
As regards the presentment of a cheque, it must be presented for payment at the banker
upon which it is drawn [Section 72]. In case of an uncrossed cheque, the payee can get
the payment in cash by presenting the cheque to the same branch of the banker upon which
it is drawn. And in case of a crossed cheque, the payee can get the amount credited to
his account with any banker at any place or city.

Note. Where the presentment for payment by post is authorised by agreement or custom
presentment by a registered letter is sufficient [Section 64].

42.|l5. EFFECT OF NON-PRESENTMENT OF NEGOTIABLE INSTRUMENTS

PAYMENT
Sometimes, an instrument is not presented for payment as per the rules discussed above. In such cases,
the parties, other than those primarily liable, are discharged from their liability to th holder
[Section 64].
Thus, following are the parties who are discharged from their liability to the holder in cas of non-
presentment of various negotiable instruments for payment: •
1. In case of a promissory note, all the parties other than the maker (such as indorsers)
2. In case of a bill of exchange, all the parties other than the acceptor (such as drawer and
indorsers)
3: In case of a cheque, all the parties other than the drawer (such as indorsers).
The reason for the same is that the liability of these parties is conditional upon the presentment of the
negotiable instruments for payment. And if this condition is not fulfilled, they are dicharged from making
the payment. However, in case of a promissory note which is payable on demand and is not payable at a
specified place, no presentment is necessary to hold the maker liable for payment [Section 64
(Exception)].

42.16 CASES IN WHICH THE PRESENTMENT OF NEGOTIABLE INSTRUMENTS FOR

PAYMENT IS EXCUSED
Section 76 of the Negotiable Instruments Act specifies certain cases, in which the presentment of a
negotiable instrument for payment is excused (i.e. the holder is not required to present the instrument for
payment). And at the due date for presentment, the holder may treat the instrument as dischonoured and
proceed to recover the amount from the other liable parties. Following are the cases, in which
presentment of the instrument to the parties primarily liable is not essential.
1. When the maker, drawee or acceptor of a negotiable instrument intentionallly prevents
its presentment for payment.
2. When the negotiable instrument is payable a the place of business of the- maker, drawer
or acceptor, and he closes, such place on business day during the usual business hours.
3. When the negotiable instrument is payable at some other specified place, and the maker,
 drawer or acceptor or any other person athorised to pay the amount does not attend al
such place during the usual business hours.
4. When the negotiable instrument is not payable at any specified place, and the maker,
drawee or acceptor cannot be found after due search.
5. When the liable party undertakes to pay the amount due on the instrument in spite of
its presement for payment.
6. When, after the maturity of the instrument, the liable party makes the part payment against
the total amount due on the instrument.
7. When the liable party promises to pay the amount, due on the instrument, in whole or
in part.
8. When the liable party waives off his right to take advantage of any default in presentment
for payment.
9. When the drawer does not suffer any damage for want of presentment for payment e.g.
when the drawer draws a bill of exchange on himself, or when the drawee is a fictitious
person.
10. When the presentment of the negotiable instrument for payment becomes impossible e.g.
declaration of war.
11. When the bill of exchange is dishonoured by the drawee for non-acceptance, then further
presentment to him for payment is not necessary.
12. When the maker refuses to pay the money or puts foward certain defences.
[Sevaram v. Jayaram, AIR 1966 Madras 297].
But in all other cases, a negotiable instrument must be presented for payment to make the other
parties liable on the instrument. Even if the party to whom the presentment has to be made js dead or
becomes insolvent, the negotiable instrument must be presented for payment to his legal
representatives (i.e. heirs) or the Receiver or Official Assignee, as the case may be. It will be
interesting to know, that the presentment for payment is not excused only because of the reason that the
party to whom the presentment has to be made, has gone abroad
[Phillips v. Astling (1809 2 Taunt 206].
42.17 PAYMENT FOR HONOUR
As a general rule, the payment due on the negotiable instrument can be made by the party who is
liable to pay the same. But in case of a bill of exchange, any person, under certain circumstances, may pay
the amount due on the bill of exchange for the honour of any party who is liable to pay the same.
Such payment is known as 'payment for honour'. Sections 113 and 114 of the Negotiable Instruments
Act contain the legal provisions relating to 'payment for honour'. These will be discussed in detail in
Art 46.7
TEST QUESTIONS
1. What is meant by 'presentment of negotiable instruments? State the instruments which are required
to be presented for acceptance, for sight and for payment.
2. What is meant by acceptance of a bill of exchange? What are the essentials of a valid acceptance?
State the rules relating to the presentment of a bill of exchange for acceptance.
3. What are the different kinds of acceptance? State the legal effect of a conditional (qualified)
acceptance . Is the holder bound to take the conditional acceptance?
4. Is presentment of a negotiable instrument for acceptance necessary in all cases? State the cases in
which presentment for acceptance is excused.
5. State by whom and to whom the bill should be presented for acceptance. What is the effect of non-
presentmentt of a bill of exchange for acceptance?
6. What steps should be taken by the holder on drawee's refusal to accept the bill?
7. Explain 'presentment for payment' of negotiable instruments. Under what circumstances the
presentment for payment is not necessary?
8. State by whom and to whom a negotiable instrument should be presented for payment. State the
cases in which the presentment for payment is excused.
9. Write notes on the following:
(a) Acceptance for honour, (b) Payment for honour, (c) Presentment for sight, (d) Conditional or qualified acceptance, and (e)
 Time and place for presentment of negotiable instruments for acceptance and payment.

43. DISHONOUR OF NEGOTIABLE INSTRUMENTS

43.1 INTRODUCTION
In the preceding chapter, we have noted that the liability of the parties arises, when the instrument is
duly presented for acceptance or for payment, as the case may be. There may be cases when the party,
who is liable to accept or to pay, refuses to accept or pay the instrument when duly presented for the
acceptance or payment, as the case may be. When the acceptance or payment is refused, the instrument
is said to be dishonoured. Thus, a negotiable instrument may be dishonoured in either of the following
ways:
1. Due to non-acceptance. 2. Due to non-payment.
The instruments which are required to be presented for acceptance may be dishonoured either due to
non-acceptance or due to non-payment after its acceptance. But the instruments, which are not required
to be presented for acceptance, can only be dishonoured due to non-payment. Thus, a bill of exchange
may be dishonoured due to non-acceptance or non-payment because acceptance is required only in case
of a bill of exchange. And a cheque or a promissory note can only be dishonoured due to non-payment
as these do not require any acceptance.
43.2. DISHONOUR OF NEGOTIABLE INSTRUMENTS DUE TO NON-ACCEPTANCF
We know that only a bill of exchange can be dishonoured due to its non-acceptance. According to
Section 91, a bill of exchange is treated as dishonoured due to its non-acceptance in any of the following
cases:
1. Where a bill is properly presented to the drawee for acceptance and he refuses to accept it, or he
does not accept it within 48* hours from the time of presentment for acceptance.
2. Where presentment for acceptance is excused and the bill remains unaccepted.
3. Where there are more than one drawes who are not partners, and any one of them defaults in
accepting the bill of exchange.
4. Where the drawee is incompetent to contract.
5. Where the drawee gives a conditional i.e. qualified acceptance.
6. Where the drawee cannot be found after a reasonable search.
7. Where the drawee is a fictitious person.
It may, however be noted that sometimes, a 'drawee in case of need,' is mentioned in the bill of
exchange. In such cases, the bill is not dishonoured until it is dishonoured by such a drawee [Section
115].

43.3. DISHONOUR OF NEGOTIABLE INSTRUMENTS DUE TO NON-PAYMENT

As a matter of fact, every negotiable instrument is required to be presented for payment. If the payment
is not made on such presentment, the instrument is said to be dishonoured due to nonpayment.
According to Section 92, a promissory note, a bill of exchange or a cheque js dishonoured due to its non-
payment in the following ways:
1. Where a promissory note is properly presented to its maker for payment, and he fails to make the
payment, the promissory note is dishonoured due to non-payment.
2. When a bill of exchange, after its acceptance, is properly presented to the acceptor for payment, and
he fails to make the payment, the bill of exchange is dishonoured due to non-payment.
3. Where a cheque is presented to the banker for payment and he fails to make payment, the cheque is
dishonoured due to non-payment.
It will be interesting to know that a negotiable instrument is also taken as dishonoured due to non-
payment, where its presentment.for payment is excused (i.e. not required), and the instrument when
overdue, remains unpaid [Section 76, already discussed in Art. 42.16.]
Note. A cheque is always payable on demand, and, therefore, technically it can never become overdue
[Federal Bank v.P.S. Carves Ltd., AIR 1976 Kerala 5]. A cheque is equivalent to cash payment, and the
payment is deemed to be made on the date of issue. [K. Saraswathy v. Somasundaram Chettiar, AIR
1989 SC 1553].

43.4. DISHONOUR OF CHEQUES DUE TO INSUFFICIENT FUNDS

Sometimes, a cheque is dishonoured due to insufficient funds in drawer's bank account. In such cases the
drawer is also criminallly liable for this offence. The punishment may extend upto imprisonment of
two* year, or fine upto double the amount of cheque or both [Section 138, added by amendment in
1988]. This point has already been discussed in detail in Art. 41.33.

43.5. NOTICE OF DISHONOUR

We have already discussed that a negotiable instrument may be dishonoured either due to its non-
acceptance or non-payment. In both the cases of dishonour, a notice of dishonour must be given by the
holder to all such parties to whom he wants to make liable on the instrument i.e. from whom he wants to
recover the amount due on the instrument. The object of giving such a notice of dishonour is to inform
the party liable on the instrument about their liability which accrues as a result of the dishonour of the
instrument.

43.6. RULES REGARDING NOTICE OF DISHONOUR

The rules regarding the notice of dishonour may be discussed under the following heads:
1. Persons by whom the notice of dishonour should be given. A notice of dishonour must be given by
the holder of the negotiable instrument or by some other party who is liable on the instrument [Section
63]. It may be noted that a party who receives the notice of dishonour must also give the notice of
dishonour to the prior parties to whom he wants to make liable [Section 95]. The authorised agent of any
of the above parties may also give the notice of dishonour. It may be noted that it is not necessary that
the notice of dishonour should always emanate from (he holder of the negotiable instrument. When the
holder has given such a notice to any party liable on the instrument and that party, in turn, has given due
notice to all the parties, the holder can treat the notice by the other party as a notice given by himself.
Sometimes, the negotiable instrument is deposited with the agent for presentation, and the same is
dishonoured on presentment. In such cases, the agent should give a notice of dishonour to his principal
within a reasonable time. Thereafter, the principal should give a notice of dishonour within a reasonable
time to the parties to whom he wants to make liable [Section 96].
2. Persons to whom the notice of dishonour should be given. A notice of dishonour must be given to
all such parties to whom the holder wants to make liable. It may, however be noted that by giving notice
of dishonour, the holder cannot make a person liable who is not otherwise liable under the law e.g. the
drawee banker in the case of dishonour of a cheque [Union Bank v. Dina Nath (1935) Allahabad 637].
The drawee of a cheque i.e. the banker is not liable to the holder of a cheque. In case of dishonour of a
cheque, the holder's remedy is against the drawer and not the drawee banker.
The notice of dishonour may also be given to the duly authorised agent of the liable party. Sometimes,
the liable party is dead. In such cases, the notice should be given to his legal representatives (i.e. legal
heirs). But if the party to whom the holder wants to make liable is dead, and the notice of dishonour is
given to him in ignorance of his death, then the notice already given is sufficient and the holder is not
required to give a fresh notice to his legal representatives [Section 97]. Sometimes the liable party has
been declared insolvent. In such cases, the notice of dishonour should be given to his Receiver or
Official Assignee.
The notice of dishonour is not necessary to the parties who are primarily liable, because it is their duty to
pay the instrument on due date. In fact, it is they who dishonour the instrument by non-acceptance or
non-payment, and to give them notice is to tell them something which they already know. Thus, notice
of dishonour is not necessary to the maker of a dishonoured promissory note, and to the drawee or
acceptor of a dishonoured bill of exchange or cheque. However, the drawee banker is liable only to his
customer (i.e. the maker of a cheque).
3. Form and mode of giving notice of dishonour. A notice of dishonour may be in any form. But it
must expressly inform the party to whom it is given that the instrument has been dishonoured, and that
he will be held liable on it. Moreover, the party liable for payment must also be informed the way in
which the instrument was dishonoured. The notice of dishonour may be oral or in writing. If it is in
writing, it may be sent by post. It should be directed to the party's place of business, and where he has no
such place, to his residence [Section 94]. If the notice is duly directed and sent by post, it will be a good
notice even if it is miscarried or lost.
4. Time of giving notice of dishonour. A notice of dishonour must be given within a 'reasonable time'
of dishonour. The term 'reasonable time,' will depend upon the nature of the negotiable instrument and
the usual course of dealing between the parties with respect to similar instruments. In calculating the
reasonable time, public holidays must be excluded [Section 105]. Following are the rules for
determining the reasonable time for giving a notice of dishonour [Section 106]:
(a) Sometimes, the holder and the party to whom the notice of dishonour is to be given, carry on their
respective business in different places or live in different places. In such cases, the notice of dishonour
must be despatched by the next post or on the next day after the day of dishonour.
(b) Sometimes, these parties carry on the respective business or live in the same place. In such cases,
the notice of dishonour must be despatched in time so as to reach its destination on the next day after the
day of dishonour.
Thus, each party is entitled to one clear day for giving notice of dishonour. It may be noted that one
clear day is also allowed for each step in the communication of notice between parties who are liable on
the instrument. But a holder or indorser, who wants to give notice to all parties, cannot claim as many
days as there are indorsers. He must give notice to all within such time as is allowed to give notice to his
immediate indorser.

43.7. EFFECT OF DEFAULT IN GIVING NOTICE OF DISHONOUR

The consequence of not giving due notice of dishonour is that all parties who are entitled to require such
notice are discharged from their liability. In fact, the liability of the drawer1, and that of the indorser
arises2 only on notice of dishonour being given to them unless the notice is excused under Section 98.
Thus, the holder cannot sue the party to whom the notice of dishonour has not been given. However, the
maker of a note, and the acceptor of a bill remain liable without notice because they are primarily liable
on the instrument [Section 93].

43.8. CASES IN WHICH NOTICE OF DISHONOUR IS EXCUSED

As per Section 98, following are the cases in which the notice of dishonour is excused i.e. in these cases,
the holder is not required to give a notice of dishonour:
1. When the notice of dishonour is dispensed with by the party entitled to the same.
2. When the drawer has countermanded payment, no notice of dishonour is necessary to charge the
drawer. This is so because the drawer has made it impossible for the holder to obtain payment.
3. When the party charged could not suffer damages if no notice of dishonour is given to him e.g. if
at the time when the cheque is drawn, the drawer did not have any funds in his account with the drawee
banker.
4. When the the party entitled to the notice of dishonour cannot be found after due search.
5. When the party who has to give notice is unable to do so without any fault of his own e.g. serious
illness or any unavoidable accident.
6. When the acceptor is also the drawer no notice of dishonour is necessary to charge the drawer e.g.
when a firm draws a bill of exchange on its branch.
7. When the promissory note is not negotiable, no notice of dishonour is necessary in case of its
dishonour.
8. When the party entitled to notice of dishonour, unconditionally promises to pay the amount due on
the instrument.

43.9. DUTIES OF A HOLDER ON DISHONOUR OF A NEGOTIABLE INSTRUMENT

The following are the duties of a holder on the dishonour of a negotiable instrument:
1. Notice of dishonour. On the dishonour of a negotiable instrument, the holder must give notice of
dishonour to such parties to whom he wants to make liable. After giving due notice of dishonour, the
holder may bring an action against the liable parties for recovery of the amount due on the instrument.
2. Noting and jjn'iesi. On the cjisiionoui of a negotiable instiuniem, the iioidu ikiu> ui:.;, tj, the
instrument noted and protested for dishonour. However, noting and protesting is done only in case of
promissory note and bill of exchange. This point will be discussed in detail in Arts. 43.11 and 43.12

43.10. NEGOTIABLE INSTRUMENTS ACQUIRED AFTER THEIR DISHONOUR

Sometimes, a person acquires a netotiable instrument after its dishon jur. In such cases, he gets the rights
of his immediate transferor, if he takes it with the notice (i.e. knowledge) of dishonour. Same is the case
whent the instrument is acquired after maturity [Section 59]. Thus, such a transferee cannot become a
holder in due course of the instrument. It may be noted that this is an exception to the general rule that
the holder in due course gets better title than that of his transferor.

43.11. NOTING OF A DISHONOURED NEGOTIABLE INSTRUMENT

The term 'noting' may be defined as the recording of the fact of dishonour by a Notary Public' upon the
negotiable instrument. Where a promissory note or bill of exchange is dishonoured, the holder can, after
giving due notice of dishonour, sue the liable parties for the recovery of amount due on the instrument.
However, before suing, the holder may also get the fact of dishonour, authenticated by 'noting' by a
Notary Public. In such cases, the Notary Public makes a formal demand for acceptance or payment upon
the maker, drawee or acceptor. And on their refusal to accept or pay, the Notary Public records the fact
of dishonour and makes noting on the instrument. The recording of such a fact, on the instrument, is
called 'noting'. It may be noted that the noting is done in case of promissory notes and bills of exchange
only [Section 99]. The noting should specify the following particulars [Section 99, para 2]: (a) The fact
of dishonour, (b) The date of dishonour, (c) The reason, if any, for dishonour. (d) If the instrument has
not been expressly dishonoured, the notice should state why the holder treats it dishonoured, (e) The
charges of Notary Public.
The noting must be made within a reasonable time4 after the dishonour of the negotiable instrument. It
will be interesting to know that the noting is not compulsory under law. If the dishonoured instrument is
not 'noted' it does not affect the rights of the holder of the instrument in any way. But it has certain
advantage e.g. it provides an authentic evidence of dishonour.

43.12. PROTEST OF A DISHONOURED NEGOTIABLE INSTRUMENT

The term 'protest' may be defined as the formal certificate of dishonour issued by the Notary Public to
the holder of a promissory note or bill of exchange. It may be noted that the protest is issued after noting
the fact of dishonour. According to Section 100, if a promissory note or bill of exchange is dishonoured
due to non-acceptance or non-payment, the holder may get the fact of dishonour noted and certified by a
Notary Public. Such certificate of Notary Public is called the 'protest'. The protest must contain the
following particulars (Section 101):
(a) The instrument itself or an exact copy of it. (b) The name of the person for whom and against whom
the instrument has been protested, (c) The facts of and reasons for dishonour. (d) The place and time of
dishonour, (e) The signature of the notary public, (f) In the event of an acceptance for honour or of a
payment for honour, the name of the person for whose honour it is accepted or paid. Also the manner in
which such acceptance or payment was offered and effected.
The holder must get the instrument protested within a reasonable time. It may be noted that protest is not
compulsory in case of inland promissory note and bill of exchange. However, foreign bill of exchange
must be protested for dishonour when such protest is required by the law of the place where they are
drawn [Section 104].
Note. The difference between 'noting' and 'protest' is that the noting is merely a records of fact of
dishonour on the instrument itself by a Notary Public. And a protest is a formal certificate of dishonour
issued by the Notary Public to the holder of the instrument i.e. in this case the Notary Public certifies the
fact of dishonour and issue a separate certificate to that effect.

43.13. PROTEST FOR BETTER SECURITY

Sometimes, before .the maturity of a bill of exchange, its acceptor becomes insolvent or his credit is
publicly impeached. In such cases, the holder of the bill of exchange may demand a better security from
the acceptor through a Notary Public. If the acceptor refuses to give a better security, this fact may be
noted and certified by the Notary Public. Such a certificate is called a protest for better security [Section
100 (second para)]. The demand for better security should be made within a reasonable time after the
acceptor has lost his credibility. And the protest should also be certified within a reasonable time after
the acceptor refuses to give better security.
It may be noted that the acceptor is not bound to give better security. And on refusal by the acceptor to
give a better security, the holder has no immediate right of action against the drawer and indorsers. He
will have to wait till the date of maturity. The main advantage of protest for better security is that the bill
of exchange may be accepted for honour after such protest has been made.

43.14. ADVANTAGES OF PROTEST OF A DISHONOURED NEGOTIABLE INSTRUMENT

Following are the main advantages of protest of a dishonoured negotiable instrument:
1. It provides an authentic and satisfactory evidence of dishonour.
2. If a suit is filed on the basis of a dishonoured negotiable instrument, the court shall, on the proof of
the protest, presume the fact of dishonour unless and until such fact is disproved.

43.15. NOTICE OF PROTEST OF DISHONOURED NEGOTIABLE INSTRUMENT

Sometimes, a promissory note or a bill of exchange is required by law to be protested. In such cases, the
notice of protest should be given instead of notice of dishonour. It may be noted that a notice of protest
is to be given in the same manner and subject to the same conditions as in case of a notice of dishonour.
The notice of protest may be given by the Notary Public who makes the protest [Section 102].

43.16. COMPENSATION FOR DISHONOUR

In case of dishonour of a negotiable instrument, the party, who is liable to pay the amount due on it, is
also bound to pay the compensation to the holder or indorser of the instrument. The rules for
determining the amount of compensation may be stated as under:
1. Compensation to the holder. The holder of a negotiable instrument is entitled to recover the amount
due on the instrument alongwith the expenses properly incurred in presenting, noting and protesting the
instrument [Section 117(a)].
2. Compensation to indorser. Sometimes the indorser, who is liable on the instrument, pays the amount
due on it. In such cases, he is entitled to recover the amount so paid with interest at the rate of 18 per
cent per annum from the date of payment until the tender or realisation of the amount. He is also entitled
to recover all expenses incurred for dishonour and payment [Section 117(c)]. Priod to the amendment in
1988, this interest rate of 18 per cent was 6 per cent only.
3. Re-exchange. Sometimes, the holder or indorser entitled to claim the amount, resides in a country
different from that in which the person sought to be made Ijable resides. In such cases, the holder or the
indorser is entitled to receive the amount at the current rate of exchange between the two countries on
the date of dishonour [Section 1 ¥l(b)(d)].
4. Re-draft. The party entitled to compensation may draw a bill of exchange payable at sight or on
demand on the party liable to compensate him, for the amount due to him together with all expenses
properly incurred by him. Such a bill of exchange is known as 're-draft'. The redraft must be
accompanied by the original instrument dishonoured and the protest, if any. If the re-draft is
dishonoured, the party dishonouring the same is liable to make compensation in the same manner as in
the case of the original bill of exchange [Section 117 (e)].
Note. In the Negotiable Instruments Act, there is no provision for determining compensation payable by
a banker who wrongfully dishonours his customer's cheque. However, in English Law, the courts award
exemplary damages which also include the damages to the credit and reputation of the drawer. The same
rule may be considered by the Indian Courts.

TEST QUESTIONS
1. A negotiable instrument may be dishonoured either due to 'non-acceptance' or due to 'non-payment'. explain
both kinds of dishonour. State the instruments which are dishonoured due to non-acceptance, and those due to
non-payment.
2. When does dishonor of a bill of exchange by non-acceptance take place? What are the circumstances under
which presentment for acceptance, is excused?
3. What is meant by dishonour by non-acceptance, and dishonour by non-payment? What steps should
be taken by the holder on the dishnour of a negotiable instrument?
4. What is a notice of dishonour? Why it is required to be given? State by whom and to whom the
notice of dishonour should be given.
5. What are the rules regarding the notice of dishonour? What is the effect of default in giving a notice
of dishonour? State the cases in which the notice of dishonour is excused.
6. What is meant by 'noting' and 'protest' of a dishonoured negotiable instrument? Is the 'noting' and
'protest' obligatory under the Negotiable Instruments Act? What are the advantages of protest?
7. What are the rules for determining the amount of compensation payable in case of dishonour of a
negotiable instrument?

44. DISCHARGE FROM LIABILITY

44.1. INTRODUCTION
In Chapter 41 on 'Negotiation and Liability of Parties' we have discussed that when a valid negotiable
instrument is made, the parties become liable to pay the amount due on the instrument. The liability of
some parties is primary and of some others it is secondary. In this chapter we shall discuss, how the
parties are discharged from their respective liability to pay the amount. The 'discharge from liability'
means that the party's liability, on instrument comes to an end. The term 'discharge' in relation to
negotiable instrument has two meanings, namely:
1. Discharge of the negotiable instrument.
2. Discharge of one or more parties from their liability on the negotiable instrument.

44.2. DISCHARGE OF THE NEGOTIABLE INSTRUMENT

The negotiable instrument is said to be discharged when all the rights of the persons involved in it are
over i.e. no person related with the instrument has any further claim over others. This happens when the
party who is primarily and ultimately liable on the instrument, is discharged from his liability. In other
words, when the liability of primary party comes to an end, the instrument is said to be discharged. A
negotiable instrument may be discharged in any one of the following ways:
1. By payment in due course. 2. By the primarily liable party becoming the holder of the instrument. 3.
By renunciation of the rights by the holder. 4. By cancellation of the negotiable instrument. 5. By
discharge as a simple contract.

44.3. BY PAYMENT IN DUE COURSE

The payment in due course discharges a negotiable instrument and all the parties who are primarily
liable to pay the amount due on the instrument. The term 'payment in due course' is defined in Section
10 of the Negotiable Instruments Act, which states that, payment in due course is the payment which is
made in good faith and in accordance with the apparent tenor of the instrument i.e. according to what
appears on the face of the instrument to be the intention of the parties. Thus, it is the payment made on
maturity of the instrument and of the entire amount due on it. It may be noted that a payment before
maturity does not discharge the instrument unless the instrument is cancelled or the fact of payment is
recorded on the instrument. Such cancellation or recording of the fact of payment is necessary to prevent
its further negotiation. Similarly, when an instrument is payable on demand, its payment will not be an
effective discharge of the instrument unless the instrument is cancelled. As a rule, person making the
payment should get hack the instrument. As a matter of fact, he is entitled to have the instrument
delivered to him on making the payment of the amount due on it [Section 81].

Example 44.1. A, the maker of a demand promissory note, paid the amount due on it to the payee. gut A
failed to obtain back and cancel the promissory note. Subsequently, the payee transferred the same
promissory note to B, a holder in due course. And B claimed from A the amount due on the promissory
note. On his refusal to pay, B filed a suit against A for the recovery of the amount due on the promissory
note. It was held that A was liable to pay the amount to B. In this case the instrument was not discharged
as it was not cancelled. [Srinivasa v. Gounder, AIR 1966 Madras 176].
It may be noted that the following conditions must also be satisfied in order to discharge a negotiable
instrument by payment in due course:
1. The payment should be made by the party who is primarily liable. We know that the acceptor is
primarily liable in case of a bill of exchange, the maker in case of promissory note, and the drawer in
case of a cheque. It may be noted that the payment by a party who is not primarily liable, does not
discharge the instrument.
2. The payment must be made to the rightful holder'. In case of a bearer instrument, the rightful holder
is the person who is in possession of the instrument. Thus, payment to a finder or thief of a bearer
instrument will discharge the parties liable to pay, if there is nothing to excite the suspicions of a prudent
man i.e. there is nothing to show that he is not entitled to receive it.
In case, where the instrument is payable to order, it is necessary that the payment be made to the genuine
indorsee. If payment is made to a person whose title is made through a forged indorsement, it will not
discharge the payer, and he will remain liable to the true owner of the instrument. Thus, in case of order
instruments, the payment to a finder or thief of the instrument is not valid discharge. However, a banker
is discharged if the payment is made in due course even if the indorsement was forged [Section 85 (1)].
3. The payment should be made in good faith and without negligence [Section 10]. This means that
the circumstances should not afford reasonable ground for believing that the person to whom the
payment is made is not entitled to receive the amount. If there is some suspicion, and the person making
the payment does not make necessary inquiry, then the payment will not be a payment in due course.

44.4. BY THE PRIMARILY LIABLE PARTY BECOMING THE HOLDER OF THE

INSTRUMENT
Sometimes, the acceptor of a bill of exchange becomes its holder in his own right at or after its maturity.
In such cases, the bill of exchange is discharged (Section 90). This happens by 'negotiation back'. A bill
of exchange when comes back to the acceptor after a number of negotiations and he becomes its holder,
then the process is known as 'negotiation back'. If this happens at or after maturity, the bill of exchange
is discharged, and no party is liable on such a bill of exchange. However, the following two conditions
must be satisfied:
1. The acceptor must have taken the bill of exchange at or after maturity. If he takes it before maturity,
then the bill is not discharged because he may again endorse the same; and
2. The acceptor must take the bill of exchange in his own rights and not in any other capacity such as
agent, administrator etc.
The above rule is based upon the general principle that if present right and liability are united in the
same person, they cancel each other. (Chalmer’s Bill of Exchange Act, 1882 (13th edn. 1964), 213)

44.5. BY RENUNCIATION OF THE RIGHTS BY THE HOLDER

Sometimes, the holder of a negotiable instrument renounces or gives up his rights against a|i the parties.
In such cases, the instrument is discharged. The renunciation may be made bv delivering the instrument
to the party who is primarily liable. It may be noted that unless the instrument is so delivered to the
primarily liable party, the renunciation must be made in writing

44.6. BY CANCELLATION OF THE NEGOTIABLE INSTRUMENT

Sometimes, the holder of a negotiable instrument intentionally cancels it. In such cases, the instrument is
discharged. It may be noted that the cancellation should be made with the intention of discharging all the
parties. Moreover, the cancellation must be apparent i.e. clear from the instrument itself. The
cancellation of the instrument may take place by the physical destruction of the instrument or by
crossing out signatures on the instrument.

44.7. BY DISCHARGE AS A SIMPLE CONTRACT

A negotiable instrument may also be discharged in the same way as a simple contract for payment of
money. Thus, like a simple contract, a negotiable instrument may be discharged by an agreement of the
parties in the form of a novation, or by rescission or by substitution of another negotiable instrument for
the original instrument. However, it must be provided in a contract that all the parties shall be
discharged from their liability under the negotiable instrument.

44.8. DISCHARGE OF ONE OR MORE PARTIES FROM THEIR LIABILITY ON THE

NEGOTIABLE INSTRUMENT
We have discussed above that when all the parties to a negotiable instrument are discharged from
liability, the instrument is said to be discharged. But sometimes, only some of the parties to a negotiable
instrument are discharged from their liability, whereas other parties continue to be liable thereon. In
such cases, it is only a discharge of some of the parties. The instrument in itself is not discharged, and it
continues to be negotiable. It may be noted that where only some of the parties are discharged from their
liability, the amount due on the instrument can be recovered from the undischarged parties e.g. on the
discharge of the drawer or an indorser of a bill of exchange from their liability, the acceptor remains
liable to pay the amount due on the bill of exchange. A party may be discharged in any one of the
following ways:
1. By cancellation of the name of a party. 2. By release of a party. 3. By payment. 4. By allowing the
drawee more than forty-eight hours to accept the bill of exchange. 5. By non-presentment of a bill of
exchange for acceptance. 6. By delay in presenting a cheque for payment. 7. By conditional acceptance.
8. By operation of law. 9. By the drawee banker making the payment in due course. 10. By material
alteration.

44.9. BY CANCELLATION OF THE NAME OF A PARTY

Sometimes, the holder of a negotiable instrument intentionally cancels one or more names of the parties
to a negotiable instrument. In such cases, the party whose name has been so cancelled, is discharged
from his liability to such a holder i.e. the holder cannot recover the amount due on the instrument from
that party whose name has been cancelled. According to Section 82(a) , the maker, an acceptor and an
indorser of a negotiable instrument is discharged from his liability to the holder, if his name is cancelled
by the holder with the intention of discharging him from his liability. It may be noted that the parties
subsequent to the party whose name has been cancelled are also discharged from their liability to the
holder and to any person who gets the instrument from such a holder. However, the following two
conditions must be satisfied to discharge a party from liability:
1. The cancellation of party's name must be with the intention of'discharging that party from his
liability.
2. The cancellation must be apparent (i.e. clear) on the face of the instrument.
It will be interesting to know that in case of a bill of exchange, when acceptor's name is cancelled, the
effect is the same as that of cancellation of the instrument. The reason for the same: that all the parties
are also discharged by cancellation of acceptor's name. This is based upon the principle of the law of
guarantee that when a principal debtor is discharged, the sureties (i.e. guarantors) are also discharged
from their liability. Similarly, the cancellation of maker's name also operates as the discharge of the
instrument. But the cancellation of indorser's name discharges only that indorser and the indorsers
subsequent to him, the parties prior to such indorsers remain liable. Thus, the discharge of an acceptor's
or maker's name is the discharge of all the parties. And the discharge of a middle party's name
discharges only that party and the parties subsequent to him. But the prior parties remain liable.

44.10. BY RELEASE OF A PARTY

Sometimes, the holder of a negotiable instrument himself releases (discharges) a party from his liability.
In such cases, that party is not liable to pay the amount due on the instrument. According to Section
82(£), the maker acceptor and indorser of a negotiable instrument is discharged from his liability to the
holder, if the holder himself discharges him by any method other than cancellation. The holder may
discharge the parties by any method such as by agreement, by waiving his right etc. It may be noted that
a person who gets the instrument from such a holder with the knowledge that a party is discharged, can
also not recover the amount from the party who was discharged by the holder.

44.11. BY PAYMENT
We know that the payment is the most common mode of discharging a party from his liability. Since a
negotiable instrument is meant for payment of money, a payment in due course discharges both the
instrument and the parties to it. According to section 82(c), the maker, acceptor and indorser of a bearer
instrument is discharged from his liability to all the parties by making a payment in due course. The
term 'payment in due course' has already been discussed in detail in Art. 44.3.

44.12. BY ALLOWING THE DRAWEE MORE THAN FORTY-EIGHT HOURS TO ACCEPT

THE BILL OF EXCHANGE
This rule is applicable to bills of exchange only. We know that when the holder presents the bill of
exchange to the drawee for his acceptance, the drawee whould be allowed only forty-eight hours to
consider whether he will accept it or not [Section 63]. If the holder allows the drawee more than forty-
eight hours (exclusive of public holidays), then all the previous parties who do not give their consent to
such extended time are discharged from their liability to such holder [Section 83].

44.13. BY NON-PRESENTMENT OF A BILL OF EXCHANGE FOR ACCEPTANCE

We know that a bill of exchange payable after sight must be presented to the drawee for his acceptance,
within a reasonable time after it is drawn (i.e. made). If the holder makes default in presentment, then no
party to the instrument is liable to such a holder i.e. all the parties are discharged from their liability to
the holder who makes a default in presentment [Section 61].

44.14. BY DELAY IN PRESENTING A CHEQUE FOR PAYMENT

A cheque must be presented for payment within a reasonable time of its issue. As a matter of fact, it is
the duty of the holder of a cheque to present it for payment within a reasonable time of its issue. If the
holder makes a delay .in presenting the cheque, and in the meantime something happens (e.g. the banker
fails) which prevents the banker from making payment, then the drawer of the cheque is discharged
from his liability to the holder [Section 84]. It may be noted that though the drawer is discharged from
his liability, but the holder of the cheque becomes credit0 of the drawee banker and can recover the
amount from the insolvent banker [Section 84 (3\j i.e. the holder can prove his claim, in the insolvency
proceedings, to the extent of damages suffered by the drawer.

Example 44.2. A drew a cheque for Rs. 1,000 in favour of B and delivered the same to him. And when
the cheque was ought to be presented for payment, A had sufficient funds in his bank account to nieet
the cheque. The banker failed before the cheque was presented for payment. In this case, the drawer u\ is
discharged from his liability to the holder (B). However, B can prove his claim in the insolvency
proceedings of the banker.
It may also be noted that the drawer of a cheque is discharged to the extent of actual damages suffered
by him due to delay in presenting the cheque.

Example 44.3. A drew a cheque for Rs. 2,000 in favour of B and delivered the same to him. When the
cheque was ought to be presented, A had only Rs. 500 in his bank account. B did not present the cheque
for unreasonable long time. And in the meantime, the banker failed. In this case, the drawer (A) is
discharged from his liability up to Rs. 500 only. And thus, the holder (B) -can recover Rs. 1500 from A,
and for the balance Rs. 500 he can prove his claim in the insolvency proceedings of the banker.

44.15. BY CONDITIONAL ACCEPTANCE

Generally, a bill of exchange should be accepted without any condition or qualification. Thus, when the
holder of a bill of exchange presents the bill to the drawee for his acceptance, then he should insist that it
should be accepted without any condition. If the acceptance is conditional, then the holder has the right
to treat the bill as dishonoured. But if the holder approves the conditional acceptance, the all the
previous parties, who do not consent to the conditional acceptance, are discharged from their liability to
such a holder who takes the conditional acceptance. However, if the prior parties also approve the
conditional acceptance, then they will remain liable [Section 86].

44.16. BY OPERATION OF LAW

In certain cases, the parties are also discharged from their liability by operation of law e.g. when a
debtor is declared an insolvent, he is discharged from his liability, or by the expiry of limitation period1
(the time prescribed by law for the recovery of debts). Thus, if the amount due on a negotiable
instrument is not recovered within the time prescribed by law, then the party liable for payment is
discharged from his liability to make the payment.

44.17. BY THE DRAWEE BANKER MAKING THE PAYMENT IN DUE COURSE

The drawee banker is discharged from his liability by making the payment of a cheque in due course. It
will be interesting to know that the banker will be discharged from liability even if the payment was
made to the wrong person. According to Section 85, in the following two cases, the banker is discharged
by making payment in due course even if it is made to a wrong person:
1. When in an order cheque the payee's indorsement is forged. Sometimes, a cheque payable to order
purports to be indorsed by or on behalf of the payee. In such cases, the banker's liability will be over if
the payment is made in due course (i.e. in accordance with the indorsement) even though subsequently it
may turn out that such indorsement was forged. The reason for the same is that the banker is not
supposed to know the signatures of the indorsers.

Example 44.4. A drew a cheque for Rs. 2,000 payable to B or order. C stole the cheque and forged S's
indorsement upon it and received the payment from the banker, who made the payment in due course.
In this case, the banker is discharged from his liability to pay the cheque again.
It may, however be noted that where the drawer's signatures are forged, and the banker makes the
payment on forged signature, the banker will not be discharged from his liability. The reason for the
same is that the banker is supposed to know the signature of his customer (drawer).
2. When the payment of a bearer cheque is made ignoring the indorsement at the back of the cheque.
Sometimes, a cheque is originally payable to bearer. And the banker makes the payment, in due course,
to the bearer ignoring the indorsement at the back of the cheque. In such cases, the banker is discharged
from his liability to pay the cheque again. This is because of the rule that "once a bearer cheque always
a bearer cheque". The object of this rule is to provide protection to the banker who, per chance, may
overlook the indorsements and makes the payment of the bearer cheque to the bearer thereof. Thus, for
the purpose of discharge of liability of the drawee banker, once a bearer cheque always remains a bearer
cheque.
Note. The above rule of payment in due course is also applicable to bank drafts [Section 85-A]

44.18. BY MATERIAL ALTERATION

The term 'material alteration' may be defined as the alteration in the material parts of the instrument. It is
the alteration which destroys the identity of the original instruments, and affects the rights and liabilities
of the parties to the instrument. As a matter of fact, any change in an instrument which causes it to speak
a different language in legal effect from that which it originally spoke, or which changes the legal
identity of the instrument either in its terms or in the relation of the parties to it, is a material alteration2.
Thus, in order to know whether an alteration is material or not, the nature of the alteration must be
examined. If it affects the very purpose of the original instrument i.e. if it goes to the root of the
instrument, it is a material alteration.
Sometimes, a negotiable instrument is materially altered. In such cases, it becomes void as against those
parties who were liable prior to the alteration, and have not given consent to the alteration [Section 87].
In other words, material alteration of a negotiable instrument discharges those parties, who were liable
prior to the alteration. But if such parties give their consent to the alteration, then their liability on the
instrument is not affected by such alteration. Following are some of the instances of material
alteration:
1. Alteration of the date 2. Alteration of the amount payable. 3. Alteration of the time of
payment. 4. Alteration of the place of payment. 5. Alteration of the rate of interest. 6.
Tearing an instrument in a material part. 7. Where a bill of exchange is accepted generally,
the addition of a place of payment.
It may, however, be noted that the above list is not exhaustive. There may be other material alterations
depending upon the nature and facts of each particular case. Following are the instances of alterations
which are not material. In these cases, the instrument remains valid and the parties are not discharged
from their liability.
1. An alteration which is made for the purpose of correcting a clerical error or mistake in an instrument
e.g. correcting of mistake in -a bill of exchange dated 1985 instead of 1958.
2. An alteration which is made to carry out the common intention of the parties [Section 87] e.g. where
the drawer of the instrument forgets to write the words 'or order' after the name of the payee, the
subsequent insertion of these words will not affect the validity of the instrument.
3. An alteration which is made with the consent of the parties [Section 87].
4. An alteration which is made before the completion or issue of the negotiable instrument.
5. An alteration which is made to convert an incomplete name of a person into the complete name of
the same person.
6. An alteration which has resulted from an unintentional act e.g. mutilation of the instrument by
washing in a garment etc.

44.19. AUTHORISED ALTERATIONS

The authorised alterations are those which are permitted by the Negotiable Instruments Act. Even
though these are material but they do not invalidate the negotiable instrument. Following alterations are
permitted by Section 87 of the Negotiable Instruments Act:
1. Filling blanks in an incomplete stamped negotiable instrument [Section 20].
2. Conversion of an 'indorsement in blank' into an 'indorsement in full' [Section 49].
3. Making qualified (conditional) acceptance [Section 86).
4. Crossing of an uncrossed cheque [Section 125].

44.20. EFFECT OF MATERIAL ALTERATION

The effect of material alteration is stated in first part of Section 87 of the Negotiable Instruments Act.
According to this section, any material alteration renders the negotiable instrument void, and discharges
all those persons from their liability who have become parties at the time of making the alteration.
However, the following conditions must be satisfied for the applicability of this section:
1. The alteration must be material. 2. The alteration must be intentional. 3. The alteration must be
without the consent of the parties. 4. The alteration must not be to carry out the common intention of the
parties. 5. The alteration must be apparent on the face of the negotiable instrument. If the alteration is
not apparent, then the instrument will remain a valid security in the hands of a holder in due course.
In, may however, be noted that a material alteration does not affect the liability of those parties who
have become liable after the alteration is made. Thus, an acceptor or indorser of a negotiable instrument
is bound by his acceptance and indorsement even if there was any previous alteration of the instrument
[Section 88] i.e. the acceptor or indorser is not discharged from liability even if some alteration in the
negotiable instrument was made before its acceptance or indorsement.
Note. Sometimes, a negotiable instrument has been materially altered but it does not appear to have been
so altered. In such cases, if the liable party makes the payment in due course, then he will be discharged
from his liability in spite of the fact that the instrument was materially altered [Section 89].

TEST QUESTIONS
1. What do you understand by the discharge of an instrument? State the different modes of discharge
of an instrument.
2. State under what circumstances the liability in promissorry note, bill of exchange and cheque is
discharged.
3. What are the various modes of discharge from liability of parties to a negotiable instrument?
4. What is the difference between discharge of a negotiable instrument, and discharge of a party to a
negotiable instrument? When a negotiable instrument is said to be discharged?
5. What do you mean by material alteration of a negotiable instrument? State the effect of material
alteration. What alterations are authorised by the Negotiable Instruments Act?

45.CROSSING OF CHEQUES
45.1. INTRODUCTION
 The cheques are of two types, namely, open (or uncrossed) cheques, and crossed cheques. The payment of the
open cheque is made at the counter of the banker on its presentation. The open cheque is liable to a great
risk in the course of its circulation. When an open cheque is stolen or lost, the wrong person (thief or
finder) may go to the banker and take away the payment, unless it is stopped by the drawer. In such a case,
it becomes difficult to trace the wrong person. In order to avoid such risks and to protect the interest of
the original genuine holder, the system of crossing the cheque was introduced.
A cheque is said to be crossed when two parallel transverse lines are drawn across the face of a cheque.
Usually, the parallel lines are drawn on the left hand top corner of the cheque as shown in the specimen
given below.

Specimen of Crossing

Punjab National
Bank Parliament
Street, New Delhi
No..... Dated......
Pay to..........................................................................................or
Bearer
The Sum of Rupees..............................................................................
. Rs. Sd/-
S

However, these parallel lines may also be drawn anywhere on the face of a cheque.

45.2. EFFECT OF CROSSING OF THE CHEQUE

The crossing of a cheque affects the mode of payment of the cheque. The holder of a crossed cheque
cannot have the payment at the counter of the banker. The payment of such a cheque can be obtained
only by opening an account with a banker. Thus, first the holder of a crossed cheque has to open an
account with some banker, and then deposit the cheque into his account to enable the banker to collect its
payment on his behalf and credit the same into his account. The holder can then withdraw the money from
his account. Thus, in case of a crossed cheque generally, the following two bankers are involved for its
payment.:
1. Paying Banker. It is the banker which makes the payment of a crossed cheque. In other words, the
paying banker is the drawee of the crossed cheque i.e. the banker on whom the cheque is drawn.
Collecting banker. It is the banker which collects the amount of the cheque, on behalf of its
customer from the paying banker. for example, A drew a cheque for Rs. 1,000 on Punjab
National Bank in favour of B. And after crossing the cheque, A delivered the same to B. B had
his account in Canara Bank and Deposited the cheque in his account. The Canara Bank collected
the amount of the cheque from Punjab National Bank on behalf of B. In this case, Punjab
National Bank is the paying banker, all(| Canara Bank, the collecting banker.

45.3. OBJECTS OF CROSSING OF THE CHEQUE

fhe main object of crossing of cheque is to assure that only the rightful holder gets the payment of
the cheque. It provide:! protection and security to the true owner of the cheque as it is payable only
through a banker. Sometimes, a wrongful person obtains the payment of a crossed cheque. He can
be traced because he has to operate through a banker by opening an account.

45.4 TYPS OF CROSSING OF THE CHEQUE

The crossing of a cheque is of the following four kinds:
1. General crossing. 2. Special crossing. 3. Not negotiable crossing. 4. Restrictive crossing.
Note. The first two types are the basic types of crossing. The remaining two types of crossing are made
by adding certain specified words to either of the basic type of crossing. It may be noted that the reference
of first three types of crossing is made in the Negotiable Instruments Act, whereas, the last type of crossing
has been developed out of business usages.
45.5. GENERAL CROSSING
A cheque is said to contain a general crossing when two parallel lines are drawn across the face of
the cheque [Section 123]. The lines may be without any word between them as shown below in
specimen 1, or may contain some words such as & Co. or 'not negotiable' or 'not negotiable'
alongwith '& Co.' as shown below in specimen 2, 3 and 4 respectively. It may, however, be noted
that there should not be the name of any banker between the parallel lines drawn shall not pay it
in any other way except to a collecting banker (i.e. the banker which coll ecl the amount of the cheque
on behalf of the holder, from the drawee banker) [Section 126]. It rnea n thaj the drawee banker is not
to make the payment of the cheque at the counter. But the paym ent is to be made only to the
collecting banker, which collects the cheque on behalf of the holder Thus, the payee or holder of
the cheque can get it collected only by opening an account with some banker (i.e. the collecting
banker). However, the collecting banker may be any banker of the choice of the holder. The effect
of using different words in general crossing as shown in aboy e specimens, is as below:
Specimen 1 Specimen 2

& Co.

(body of the cheque) (body of the cheque)

Specimen 3 Specimen 4

(body of the cheque) (body of the cheque)

1. General crossing with two parallel lines. It is a simple crossing which prohibits the banker to
make cash payment at the counter. The payee in order to get the payment of the cheque, may
deposit it with his banker. The payee also has the right to indorse the cheque. In this case the
indorsee will get a better title, than that of the indorser if he (indorsee) is the holder in due
course.
2. General crossing containing word '& Co.' within two parallel lines. The effect of such a
crossing is same as stated above.
3. General crossing containing words 'not negotiable' within two parallel lines. The effects of
such a crossing is also the same as stated above. The only difference in this case is that the
indorsee.cannot get a better title than that of the indorser. Thus, if the title of the indorser is
defective, the title of indorsee will also be defective. This point will be discussed in detail in
Art. 45.7.
 4. General crossing containing the word 'not negotiable & Co.' within two parallel lines. The
effect of such a crossing is the same as stated above in case of general crossing containing the
words 'Not negotiable' within the two parallel lines.
5. It may be noted that when a cheque contains a special crossing, the banker on whom it is
drawn shall not pay it in any other way except to the banker to whom it is crossed, i.e. whose name
appears across the cheque [Section 126]. Thus, the payee or holder of the cheque can get it collected
only by opening an account with the specified banker whose name appears across the cheque. The
effect of using different words in special crossing as shown in above specimens, wjll be the same as
discussed in Art. 45.5. The only difference in this case is that the payment Of such a cheque can be
obtained by depositing it only with the banker whose name appears across the cheque i.e. to whom it
is crossed.
45.6. SPECIAL CROSSING
A cheque is said to contain a special crossing when the name of some banker is written across
the face of the cheque [Section 124]. For example, if a cheque is drawn on Punjab National Bank
and across its face the holder writes the name of some other bank e.g. Canara Bank. This type
of crossing is called a special crossing to Canara Bank. In this case, the name of the banker to
whom the cheque is crossed, may be written without any parallel lines as shown below in specimen
1. However, generally the name of the banker is written within the two parallel lines as shown
below in specimen 2. The name of the banker may also be written alongwith certain words such
as '& Co' or 'not negotiable as shown below in specimens 3 and 4 respectively
Specimen 1 Specimen 2

(body of the cheque) (body of the cheque)

Specimen 3 Specimen 4

(body of the cheque) (body of the cheque)

45.7. NOT NEGOTIABLE CROSSING

A cheque is said to contain a 'not negotiable crossing' when the words 'not negotiable' are added
to the crossing. It may be done in case of general crossing or special crossing. It may be done
in case of general crossing or special crossing as shown below in specimen 1 and 2 respectively.
The effect of the addition of the words not negotiable is that when such a cheque is indorsed
Specimen 1

(body of the cheque) (body of the cheque)

crossed
the indorsee cannot get a better title than that of the indorser. In other, words, a person who takes a
cheque containing the words 'not negotiable', cannot get a better title than that of his transferor
(indorser) i.e. if the title of indorser is defective then the title of indorsee will also be defective.
Moreover, the indorsee from such an indorsee can also not get a better title to the cheque [Section
130]. Thus, the important feature of the negotiable instrument is taken away by such crossing. In
other words, 'not negotiable crossing' materially diminishes the negotiable value of the cheque, in the
sense, that the person taking it shall get only the rights of the transferor, but no better rights. And thus,
he cannot become the holder in due course. However, if there is nothing wrong with the title of the
prior parties, the holder may recover the amount of the cheque. But if something is wrong anywhere,
he will be affected by the same, and may not recover the amount of the cheque. Thus, the cheque
containing a 'not negotiable crossing' remains transferable. But any person who takes such a
cheque, he takes it at his own risk.
Example 45.1. A obtained a cheque from its holder by false pretences. The cheque contained the words
"& CQ and not negotiable". He also obtained the payment of the cheque from the banker. It was held that
the banker's title was affected by the fraud, and he was accountable to the true owner for the amount of the
cheque. [Great Western Rly. Co. v. London & County Banking Co. (1901) AC 414].
The object of 'not negotiable crossing' is to protect the rights of the holder of a cheque, because,
even if such a cheque goes to wrong hands and from there it is transferred to a holder in due course,
the original holder will not lose his claim.

45.8. RESTRICTIVE CROSSING

A cheque is said to contain a 'restrictive crossing', when the words 'a/c payee' i.e. account payee or 'a/c
payee only' are added to the crossing. It may be done in case of general crossing or special crossing as
shown below in specimen 1 and 2 respectively. The words not negotiable' may also be added to
restrictive crossing as shown below in specimen 3.

on behalf of the payee and credit the amount to his account only. It the collecting banker collects it
on behalf of some other person, it can be held responsible for the same. The object of adding these
words in a crossing is to give protection to the payee. Even if such a cheque is lost, no person
other than the payee can get the payment of the same. It may be noted that merely by such
crossing there is no prohibition on the indorsement of the cheque [National Bank \. Silks (1891) 1
QB 435]. However, in actual practice the restrictive crossing hinders negotiability of the cheque
because no banker would like to collect it on behalf of any other person except the payee. The
effect of using the words 'a/c payee' in the general or special crossing, or alongwith the words 'not
negotiable' as shown in above specimens is the same as discussed in Arts. 45.5, 45.6. and 45.7.
respectively. The only difference in this case is that the collecting banker generally collects the
cheque on behalf of the payee only, and refuses to collect it on behalf of any other person.

45.9. PERSONS AUTHORISED TO CROSS THE CHEQUE

The following persons are authorised to cross the cheque.
1. The drawer. Te drawer is entitled to cross the cheque in any way he likes. He may make
a general, special, not negotiable or restrictive crossing on the cheque before issuing it.
2. The holder. The holder is entitled to cross the cheque after receiving it. He may cross ik
cheque in any one of the following ways [Section 125]:

(a) Where the cheque is uncrossed, the holder, may make a general, special or not-negotiable
crossing.
(b) Where the cheque contains a general crossing, the holder may convert it into a special
crossing by adding the name of some banker.
Where the cheque contains a general or special crossing (without the words
collection of payment from the drawee banker (i.e. paying banker). Thus a banker, whose name appears across the
cheque, can again make a special crossing on it to another banker to act as in agent of the former for collection
[Section 125].
The important point in connection with the crossing of cheques is that a general crossing can 1,6
converted into special crossing. But the special crossing cannot be converted into general crossing.
If the holder converts the special crossing into general crossing by striking out the name of the
banker, it will amount to material alteration which make the cheque void. It may a|So be noted that
a special crossing can be made only once except where the second special crossing is made by a
banker to another banker to act as an agent of the former, for collection of payment. Where a
cheque contains special crossing to more than one banker, then the paying banker shall refuse to
make the payment of the same [Section 127].
Note. Only the cheques can be crossed. -The promissory notes or bills of exchange cannot be
crossed. gut if the words 'not negotiable' are added to a bill of exchange, it may take away the
characteristic of free negotiability of the instrument specially when it is payable to the payee only
[Hibernain Bank Ltd. v Gysin & Hanson (1939) 1 K. B. 483 (CA); See also Paget's 8th Edn. p.
255].
45.10PAYMENT OF THE CROSSED CHEQUES
We know that the payment of a crossed cheque is not made in cash at the counter by the paying
banker. The procedure for collection of payment of crossed cheques is different for the different types
of basic crossings (i.e. general crossing, and special crossing) which may be discussed under the
following heads:
1. Payment of a cheque containing general crossing. The payment of a cheque containing
general crossing is always collected by the payee through some banker. In such cases, it is the
duty of the paying banker (i.e. drawee banker) to pay such a cheque to any banker in which the
holder opens the account for the purpose. Section 126 (first para), specifically states that, in case
of a cheque containing general crossing the paying banker shall not pay the cheque in any other
way except to some other banker (i.e. collecting banker).
Note. The payment of a cheque containing general crossing may also be collected by any other
person to whom the payee has indorsed the cheque. However, in case of general crossing
containing the words 'a/c payee' or 'a/c payee only', the payment of the cheque is generally
collected by the payee himself as no banker would like to collect it on behalf of any other person
except payee.
2. Payment of a cheque containing special crossing. The payment of a cheque containing
special crossing is always collected by the payee through the banker to whom it is crossed (I e.
the banker whose name is mentioned between the parallel lines by which the cheque is crossed).
In such cases, it is also the duty of the. paying banker to pay such a cheque only to the banker
to whom it is crossed. Section 126 (second para), specifically states that, in case of a cheque
containing special crossing the paying banker shall not pay the cheque in any other way except
to the specified banker to whom the cheque is crossed i.e. whose name is mentioned, between
the two parallel line. If a cheque contains special crossings in favour of more than one banker,
then the paying banker should refuse to make its payment except when the second special crossing
is made by the banker to whom it is crossed, to another banker to act as the agent of the former
tor the purpose of collection.
Note. The payment of a cheque containing special crossing may also be collected by any other
person to whom the payee has indorsed the cheque. However in case of special crossing
containing the words 'a/c payee' or 'a/c payee only,' the payment of the cheque is generally
collected by the payee himself as no banker would like to collected it on behalf of any other
person except the payee.
45.11 PROTECTION OF A PAYING BANKER
We know that a paying banker is one which makes the payment of a crossed cheque. It is the bank
on which the crossed cheque is drawn. It may be noted that when the payment is made "i due
course, i.e., as per the principles stated above, the paying banker is discharged from his liability to
the same extent as if the payment has been made to the true owner of the cheq u This will be so
even if the amount of cheque does not reach the true owner. This special protect^ of the paying
banker is contained in Section 128, which states that if the paying banker make" the payment in the
due course, it has the same effect as if the payment has been made to and received by the true
owner of the cheque. And thus, the paying banker is protected (i.e. not held liable) even if the
payment is received by some wrong person from the collecting banker to whom the paying banker
had made the payment.
However, in the following two circumstances, the payment by the paying banker is considered to be
irregular , and the paying banker becomes liable to the true owner of cheque for any I 0ss suffered by him
due to such irregular payment [Section 129].
1. If, in case of cheque containing general crossing, the paying banker makes its payment
at the counter;
2. If, in case of a cheque containing special crossing, the paying banker makes its payment
to a banker other than the banker to whom the cheque is crossed.
Another protection of the paying banker is that where at the time of presentment for payment a
cheque does not appear to be crossed or where the crossing is obliterated (i.e. destroyed or erased), the
banker making the payment in good faith and without negligence will be discharged from his liability
on the cheque [Section 89].

45.12. PROTECTION OF A COLLECTING BANKER

We know that a collecting banker is one which collects the payment of a crossed cheque on behalf of its
customer. In the collection of payment of a crossed cheque, there is also some risk as the customer on
whose behalf the payment of a cheque is collected may not be its true owner. In such cases, the
collecting banker may become liable to the true owner of the cheque for helping a wrong person to
receive money to which he was not entitled. But it is very difficult task for the collecting banker to
examine the validity of title of its customers specially when the banker has to collect a large number of
cheques daily. Therefore, the collecting banker deserves to be protected against such liability. The
protection to the collecting banker is provided by Section 131 which states that the collecting banker is
not liable if it collects payment of a crossed cheque for its customer, in good faith and without
negligence. The analysis of this section reveals that the following condition must be fulfilled to afford
protection to a collecting banker. These requirements have also been recounted by the Supreme Court
in Indian Overseas Bank v. Industrial Chain Concern (1990) 1 SCC 484:
1. The cheque must be crossed. The first requirement is that the collecting banker must collect
the payment of already crossed cheques only. If the cheque is uncrossed, the banker, is not
protected if the customer's title turns out to be defective. Banker cannot avail protection by
subsequently crossing the cheque.
2. The payment must be collected for a customer. The second requirement is that the collecting
banker must collect the payment of a crossed cheque on behalf of its customer. A customer means
a person who keeps an account with the banker.
3. The banker must act as an agent of its customer. The third requirement is that the collecting
banker must collect the payment of a crossed cheque as an agent of its customer. In other words,
the banker should not collect the cheque for himself as a holder in due course. It is, however,
immaterial that the banker credits the customer's account before the amount is actually collected
from the paying banker [Section 131 (Explanation)]. In such cases also, the collecting banker
is protected provided that the customer is not allowed to withdraw the amount until it is actually
collected.
4. The banker must act in good faith and without negligence. The last requirement is that
in collecting the payment of crossed cheque, the collecting banker must have acted in good faith
without negligence. If there are circumstances which arouse a suspicion in the mind of a collecting
banker regarding the title of a person who wants to get the cheque collected, then the banker is
supposed to make proper inquiries before collecting the cheque. If the banker fails to make any such
inquiry, he will not be acting in good faith. It may be noted that the inquiry Of such kind becomes
necessary in all cases where an agent or a servant is dealing with the cheques of his principal or
master in an unusual manner. The extent of inquiry to be made by the collecting banker depends
upon the circumstances of each case.
In case the bank acts negligently, it cannot avail protection under this section [Syndicate Bank v .
VCO Bank, (1991) 70 Comp. Gas. 748 Kar].
If the above conditions are not satisfied, the collecting banker can be held liable to the true
owner of the cheque if customer's title turns out to be defective. In Indian Overseas Bank's case
(1990) 1 SCC 484, the Supreme Court has further pointed out that the burden of proof is on the
collecting banker to show that the requirements of section 131 were duly satisfied .
TEST QUESTIONS
1. What do you mean by crossing of a cheque? State the effect and object of crossing of a
cheque.How the payment of a crossed cheque is made?
1. What are the different kinds of crossing? State the difference between a general and special crossing.
2. Define 'not negotiable' and 'restrictive crossing'. What is the difference between the two? State the
legal effect of the words not negotiable written in the crossing of a cheque.
3. Discuss the legal implications of crossing of a cheque, with special reference to a cheque crossed (a)
Generally, (b) Punjab National Bank, (c) Not negotiable, and (a) ale payee.
4. Discuss the protection available to a paying banker and a collecting banker in the matter of payment
and collection of cheques. "

46. MISCELLLANEOUS PROVISIONS

46.1 INTRODUCTION
The previous chapters we have discussed, topic-wise, all the relevant provisions of the Negotiable
Instruments Act. But there are certain provisions which are referred to in various chapters, but were not
discussed in detail in these chapters as their reference was sufficient at those places. Now in this chapter, we
shall discuss all those miscellaneous provisions in detail. For the sake of convenience all such provisions
are combined separately.
46.2.MATURITY OF NEGOTIABLE INSTRUMENTS
We know that the payment of a negotiable instrument can be demanded only when its payment is due.
When the payment becomes due, the instrument is said to be at maturity. Thus, maturity is the date on which
the payment of an instrument falls due. For the purpose of knowing maturity, the negotiable instruments can
be classified into the following three categories.
1. Negotiable instruments payable on demand. A negotiable instrument payable on demand
is due for payment immediately after issue. It is payable when the demand is made i.e. when
its payment is demanded. As a matter of fact, such instruments are meant for immediate payment.
And thus, no question of their maturity arises. They are due for payment from the date of their
issue.
Note. The expressions 'at sight' and 'on presentment' also mean 'on demand' [Section 211.
2. Negotiable instruments payable on a specified date. A negotiable instrument payable on
a specified date (e.g. 31st March, 1998) is due for payment on the third day after the specified
date. Thus, such an instrument is at maturity on the third day after the specified date. The
procedure for calculating the date of maturity will be discussed in Art. 46.4.
3. Negotiable instruments payable after certain period after its date. A negotiable instrument
payable after certain period after its date (e.g. two months after the date of instrument) is due
for payment on the third day after the specified period. Thus, such an instrument is at maturity
on the third day after the specified period. The procedure for calculating the date of maturity
will be discussed in Art. 46.4.
46.3.DAYS OF GRACE
The term 'days of grace' may be defined as the days which are added for calculating the date of maturity.
Every promissory note or a bill of exchange, payable otherwise than on demand, is at maturity on the
third day after the day on which it is payable. Thus, where a promissory note or a bill of exchange is
payable on a specified date or after a specified date, the date of maturity is not the date on which the
instrument is expressed to be so payable. But it is the third day after that date. These three days are called
the days of grace.
The following negotiable instruments are entitled to the days of grace:
1. A bill of exchange or a promissory note payable on a specified date.
2. A bill of exchange or a promissory note payable 'after sight'.
3. A bill of exchange or a promissory note payable at a certain period after date.
4. A bill of exchange or a promissory note payable at a certain period after the happening of a
certain event.
The following negotiable instruments are not entitled to the days of grace:
1. A bill of exchange or a promissory note in which no time for payment is specified i.e.
a bill or a cheque payable on demand [Section 19].
2. A bill of exchange or a promissory note payable 'at sight' or 'on presentment'. As a matter
of fact, such bills and notes are payable on demand [Section 21].
3. A cheque, as it is always payable on demand.
It may be noted that when the days of grace are allowed, the ascertainment of the date of maturity
becomes important. The reason for the same is that such instruments are to be presented for payment on
the last day of grace. And their payment cannot be demanded before that date. As a matter of fact,
the presentment of the instrument for payment before that date is invalid and does not entitle a
person to file a suit if the payment is refused by the party to whom the instrument was presented for
payment.
Note. The difference between the terms 'after sight' and 'at sight' is that the term 'after sight', in a
promissory note means 'after presentment for sight', and in a bill of exchange it means 'after acceptance' or
'after noting or protest for non-acceptance'. Whereas the term 'at sight' means 'on demand' in case of
promissory note as well as bill of exchange.
46.4. CALCULATION OF DATE OF MATURITY
We know that the date of maturity is calculated in case of bills of exchange and promissory notes where
the days of grace are allowed. The date of maturity is calculated in accordance with the following
principles:
1. Where a bill of exchange or a promissory note is payable after a stated number of months [Section
23]. Sometimes, a bill of exchange or a promissory note is made payable after a stated number of
months after date, or after sight, or after a certain event. In such cases, it is at maturity on the third day
after the stated number of months i.e. it becomes payable three days after the stated number of
months.
Example 46.1. A bill of exchange dt. 15th February, 1998 was made payable two months after date.
The bill of exchange is at maturity on 3rd day after 15th April 1998 i.e. on 18th April, 1998.
Example 46.2. A promissory note dt. 31st December, 1998 was made payable one month after sight.
The promissory note was presented for sight on 25th January, 1999. In this case, the promissory note is
at maturity on 3rd day after 25th February, 1999 i.e. on 28th February, 1988. Here, one month is to be
counted from 25th January, 1999 i.e. from the date of presentment for sight.
Example 46.3. A bill of exchange dt. 1st January, 1998 was made payable one month after the death
of A. And A died on 20th November, 1998. In this case, the bill of exchange is at maturity on 3rd day
after 20th December, 1998 i.e. on 23rd December, 1998. Here, one rnonth is to be counted from 20th
November, 1998 i.e. from the death of A.
Sometimes, the months in which the stated period would terminate has no corresponding day. In
such cases, the period shall terminate on the last day of such month.
Example 46.4. A promissory noted. 29th January, 1997 was made payable one month after date. The
promissory note is at maturity on 3rd day after 28th February, 1997 i.e. on 3rd March 1997. As the month
of February in this year has only 28 days. Similarly, the bill of exchange dt. 28th, 29th, 30th, 31st January,
1997 made payable one month after date will be at maturity on 3rd March, 1997.
Note. A bill of exchange or promissory noted. 30th or 31st August, 1998 made payable three
months after date will be at maturity on 3rd December, 1998.
 2. VWzere a bill of exchange or a promissory note is payable after a slated number of day s
[Section 24]. Sometimes, a bill of exchange or a promissory note is made payable after a stated
number of days after date, or after sight, or after a certain event. In such cases, it is at maturity
on the third day after the stated number of days i.e. it becomes payable three days after the stated
number of days. It may be noted that while counting the stated number of days, the day on which
the instrument is drawn, or presented for sight, or the day on which the event happens shall be
excluded.
Example 46.5. A bill of exchange dt. 10th January, 1998 was made payable 15 days after date. In
this case, the 15 days will be counted from llth January, 1998. The 15th day from llth January, 1998 is
25th January, 1998. Thus, the bill of exchange is at maturity on the 3rd day after 25th January, 1998
i.e. on 28th January, 1998.
Example 46.6. A promissory noted dt. 28th January, 1997 was made payable 60 days after sight. The
promissory note was presented for sight on 15th February, 1997. In this case 60 days will be counted
from 16th February, 1997. The 60th day from 16th February, 1997 is 16th April, 1997. Thus, the
promissory note is at maturity on 3rd day after 16th April, 1997 i.e. on 19th April, 1997.
3. When the day of maturity is holiday [Section 25]. Sometimes the day of maturity happens
to be a public holiday. In such cases, instrument shall be at maturity on the previous business
day. It may be noted that the expression 'public holiday' includes Sunday and any other day
declared by the Central Government by notification in the Official Gazette, to be a holiday. Thus,
if the maturity of a bill of exchange or a promissory note falls on Sunday, it shall be due for
payment on Saturday and not on Monday.
Example 46.7. A bill of exchange dt. 9th June, 1998 was made payable one month after date. It
falls due on 12th July, 1998 which happens to be a Sunday. In this case, the bill of exchange will be at
maturity on llth July, 1998 i.e. the previous working day.
Note. In case of a cheque, there is no question of calculation of date of maturity as it is always
payable on demand.
46.5. ACCEPTANCE FOR HONOUR
We know that a bill exchange is generally accepted only by the drawee i.e. a person on whom it is drawn.
But in certain cases, a person who is in no way liable on the bill of exchange, may come forward and
accept it for the honour of the drawer or any other party liable on the bill. Such acceptance is known.as
"acceptance for honour". This is a peculiar kind of acceptance which is allowed when the original drawee of
a bill of exchange refuses to accept it or refuses to give better security when demanded. When a bill of
exchange is dishonoured by non-acceptance, the credit and honour of the parties, particularly of the drawee,
is adversely affected. Similarly, when the acceptor of a bill of exchange has become insolvent, the holder
would feel insecure. In order to save the honour of such parties, the bill of exchange can also be accepted
for honour by any person with the consent of the holder of the bill. In this connection Sections 108 and 109,
provide that when a bill of exchange has been noted or protested for non-acceptance or for better security, any
persons may accept the bill for the honour of any one party liable on the bill of exchange. The analysis of
these sections reveals that the following conditions must be satisfied for a valid acceptance for honour:
1. The acceptance for honour can be made only in case of a bill of exchange which have
been noted or protested for non-acceptance or for better security. Thus, before the
acceptance for honour, the bill must have been noted or protested for non-acceptance, or
for better security.
2. The acceptance for honour must be made with the consent of the holder.
3. The acceptance for honour can be made by any person who is not a party already liable
on the bill of exchange.
4. The acceptance for honour should be made in writing on the bill of exchange itself.

5. The acceptance for honour must be made for the honour of any one party liable on the
bill of exchange. A person desiring to accept for honour must declare in writing that he
accepts the bill for the honour of the drawer or of a particular person named therein. And
when the acceptance does not express for whose honour it is made, it shall be deemed
to be made for the honour of the drawer [Section 110].
5. The acceptance for honour must be signed by the 'acceptor for honour'.
 6. The acceptance for honour must be made before the bill of exchange is over due. And
it should be for the full amount of the bill.

46.6. LIABILITIES AND RIGHTS OF AN ACCEPTOR FOR HONOUR

An acceptor for honour takes the place of the person for whose honour he has accepted the bill of
exchange. Thus, his liabilities and rights are the same as those of a person, for whose honour the
acceptance was given. These may be discussed as under:
1. Liabilities. On a valid acceptance for honour, the aceptor for honour binds himself to all
parties, subsequent to the party for whose honour he accepts to pay the amount of the bill of
exchange [Section 111]. Thus, he is liable to pay the amount of the bill to the party who is
subsequent to the party for whose honour the bill was accepted. It may be noted that he is not
liable to any party who is prior to the party for whose honour he accepts the bill.
Example 46.8. A bill of exchange was negotiated through A, B, C and D, and was accepted by E for the
honour of B. In this case, E is liable 19 C and D only and not to A as he (A) is a prior party to B.
It may also be noted that the liability of an acceptor for honour is conditional and arises only if the
original drawee, after being approached again on the date of maturity does not pay the amount due on
the bill. In this way, the position of an acceptor for honour is slightly better than that of the ordinary
acceptor, because an ordinary acceptor is primarily liable. It will be interesting to know that an acceptor
for honour is liable only if the following conditions are satisfied:
(a) The bill of exchange must be presented again to the original drawee for payment on the
date of maturity,
(b) The bill of exchange must be noted or protested for non-payment if the original drawee
still refuses to pay the amount due on the bill [Section 112], and
(c) The bill of exchange must be presented to its 'acceptor for honour' for payment on the
next date after the day of its maturity [Section 111].
2. Rights. After making the payment of the bill of exchange, an acceptor for honour is entitled
to recover the amount from the party for whose honour he had accepted the bill of exchange,
and also from all parties prior to such a party. And such party including the prior parties is liable to
compensate the 'acceptor for honour' for all loss or damage sustained by him in consequence
of such acceptance [Section 111].
46.7 PAYMENT FOR HONOUR
As a general rule of law, one cannot make any payment voluntarily on behalf of somebody else and
then claim the amount from the person on whose behalf the payment had been made. But in certain
cases of a bill of exchange, any person may pay the amount due on the bill for the honour of any
party liable to pay the same. Such payment is known as 'payment for honour'. The payment for
honour may be made by any person whether or not he is liable as a party to the bill. A payment for
honour can be made in case of a bill of exchange which has been accepted by the drawee, and later on it
is dishonoured by non-payment. It may be noted that the payment for honour can be made only in case
of a bill of exchange. In this connection Section 113 provides that where a bill of exchange has been
noted or protested for non-payment, any person may pay the same for the honour of any party. The
analysis of this section reveals that the following conditions must be satisfied for a valid payment
for honour:
1. The bill of exchange must have been dishonoured by non-payment.
2.The bill of exchange must have been noted or protested for non-payment after its dishono
by non-payment.
3.Before making the payment, the person, who desires to pay, must have previously declared
before a Notary Public, the party for whose honour he makes the payment. And such
declaration must have been recorded by the Notary Public.
4.The payment for honour must be made for the honour of any party liable to pay the amount
due on the bill of exchange.
46.8. RIGHTS OF PAYER FOR HONOUR
After making the payment of a bill of exchange, the 'payer for honour' is entitled to the same rights as
the holder of a bill of exchange to whom the payment has been made, has against all the parties. It
may be noted that he can also recover all sums so paid, with interest thereon, and all expenses
properly incurred in making such payment, from the party for whose honour he has paid the amount
[Section 114].
Thus, the payer for honour can recover from the party for whose honour he has paid, and from all
parties prior to such a party. However, the parties subsequent to the party for whose honour the
payment has been made, are discharged from their liability.
46.9. SPECIAL RULES OF EVIDENCE
Following are the special rules of evidence which are applicable to all the negotiable instruments:
1. Presumptions. There are certain facts which are presumed in case of every negotiable
instrument. These have already been discussed in Art. 37.4.
2. Estoppel. We know the estoppel means a prevention of claim or assertion of law. The
following estoppels are considered to be there against the parties to the negotiable instruments.
In other words, the parties are prevented from denying the following facts:

(a) Estoppel against denying the original validity of the instrument.

(b) Estoppel against denying the capacity of payee to indorse the instrument.
(c) Estoppel against denying the signature or capacity of prior parties.
Note. The above estoppels have already been discussed in detail in Art. 40.4.

46.10.CONSIDERATION
We know that the general rule of contract is that an agreement without consideration is void, In
other words, the consideration is must for the validity of every contract. A negotiable instrument also
contains a contract for the payment of a certain sum of money. Thus, the consideration is also
required for the validity of the same. It will be interesting to know that in case of negotiable instruments,
the consideration is presumed to be there. It is presumed that every negotiable instrument is made,
drawn, accepted, indorsed or transferred for some consideration [Section 118(a)]. This presumption is,
however, valid till contrary is proved. On the other hand, there is no such presumption in case of an
ordinary contract. And the person enforcing the ordinary contract has to prove that it was made for
some consideration.
46.11.EFFECT OF ABSENCE OR FAILURE OF CONSIDERATION
We have discussed, in the last article, that consideration is presumed to be there in every negotiable
instrument. However, it does not mean that the consideration is always there. Because the party liable
for payment may prove that there is no consideration at all, or that there is only a partial
consideration. When total or partial absence of consideration is proved, the liability of the parties is
affected. Sections 43 to 45 of the Negotiable Instruments Act, contain the provisions which state the
effect of such absence or failure of the consideration, which may be discussed under the following
two heads:

1. Effect of total absence or failure of consideration.

2. Effect of partial absence or failure of consideration.

46.12. EFFECT OF TOTAL ABSENCE OR FAILURE OF CONSIDERATION

The effect of total absence or failure of consideration may be discussed under the following
two heads:
1. Effect between immediate parties. Sometimes, a negotiable instrument is made, drawn,
accepted, indorsed or transferred without any consideration or sometimes the consideration
fails subsequently. In such cases, the instrument is void as between the immediate parties
 and they are not liable to pay the amount of the instrument [Section 43 (first part)]. Thus, when
it is proved that there is no consideration at all, the negotiable instrument does not create any
obligation of payment as between the parties to the transaction i.e. the immediate parties are
discharged from their liability to make payment. The following are the parties who are in
immediate relation with one another:
(a) The drawer of a bill stands in immediate relation with acceptor.
(b) The maker of a promissory note, bill of exchange or cheque stands in immediate
relations
with the payee.
(c) The indorser stands in immediate relation with his indorsee.
(d) Other parties who sign the instrument may also by agreement, stand in immediate
relations
with a holder [Section 44 (Explanation)].
Thus, if a promissory note or a bill of exchange is drawn without any consideration, the
maker of note or bill is not liable to pay. Similarly where the instrument is indorsed without
any consideration, the indorsee who receives it without consideration cannot recover the
amount from his indorser.
Example 46.9. A made a promissory note in favour of B, and delivered the same to B
without any consideration. Thereafter, B transferred the same to C without consideration.
And C transferred it to D without consideration. In this case, the immediate parties are A and
B, B and C, C and D. Thus, B cannot recover anything from A, as there was no consideration
between A and B. Similarly, C cannot recover from B, and D from C as they also got the
promissory note without consideration.
2. Effect between remote parties. Sometimes, a person receives a negotiable instrument
without any consideration but transfers the instrument to a holder for some consideration. In
such cases, the holder for consideration and every subsequent holder deriving title from him,
with or without consideration, may recover the amount due on such instrument from the
transferor for consideration or from any prior party to such transferor [Section 43 (second
part)]. Thus, a holder for consideration is not affected by the prior absence of consideration,
and he can recover the amount from the transferor for consideration, and also from all the
parties prior to such transferor. Moreover, any subsequent holder who got the instrument from
a holder for value can also recover the amount from the transferor for consideration and from
all the prior parties. Thus, once the instrument gets into the hands of a 'holder in due course',
he or any subsequent holder deriving title from him, can recover the amount from transferor
for consideration or from any prior party to such transferor.
Example 46.10. A made a promissory note in favour of B and delivered it to B without any
consideration. Thereafter, B transferred the same to C without consideration. And C
transferred it to D for consideration D further transferred it to E without any consideration. In
this case D is the holder for value. He can recover, the amount from C who transferred it to D
for consideration Moreover, D can also recover the amount
from B and A because a person who takes a negotiable instrument for consideration can
claim the amount from transferor for consideration or from any prior party thereto. Here, E
can also recover the amount from A B and C because any person who derives a title from
holder for value can also recover the amount from prior parties. Here E derived his title from D
who was a holder for value. However, E cannot recover anything from D because E and D are
immediate parties to the transaction and there was no consideration.

46.13. EFFECT OF PARTIAL ABSENCE OR FAILURE OF CONSIDERATION

The effect of partial absence or failure of consideration may be discussed under the
following two heads.
1. Patial absence of money consideration. Sometimes, there is a partial absence or
failure of money consideration. In such cases, parties standing in immediate relations to each
other cannot recover more than the actual consideration (i.e. only reduced consideration can
be recovered) In other words, the partial absence or failure of money consideration in a
negotiable instrument affects the rights of the holder against the immediate parties who signed
the instrument. Such holder is entitled to recover only the amount of reduced consideration
[Section 44].
Example 46.11. A drew a bill of exchange on B for Rs. 5,000 payable to the order of A. B
accepted this bill of exchange, but refused to make the payment on the due date. And A filed a suit
against B for recovery of the amount due on the bill of exchange. B proved that the bill was
accepted for value as to Rs. 4,000, and the balance of Rs. 1,000 as an accommodation to A. In
this'case, A can recover only Rs 4,000 from B.
It may be noted that the above rule applies only where the holder stands in immediate
relation with the signer of the instrument. The right of a transferee from such holder who may
be a holder for value or a holder in due course is not affected by such partial absence of money
consideration.
Example 46.12. A drew a bill of exchange on B for Rs. 4,000 payable to the order of A.
And this bill of exchange was duly accepted by B. Thereafter, A indorsed and delivered the
bill of exchange to C for Rs. 4,000. In this case, C becomes the holder for value and can
recover the full amount (i.e. Rs. 4,000) either from A or from B even if B proves that the bill
was accepted for value as to Rs. 2,000, and the balance of Rs, 2,000 as an
accommodation to A.
2.Partial absence of consideration not consisting of money. Sometimes, there is a partial
failure or absence of consideration other than the money. In such cases also, the rights of
the holder against the immediate parties who signed the negotiable instruments, are
affected in the same way as there is a failure of money consideration. Thus, such holder is
entitled to recover only the amount of reduced consideration. It may, however, be noted
that this rule is applicable if the consideration which has failed can be ascertained in terms
of money without any collateral enquiry [Section 45].
Example 46.13. A promised to supply 100 tins of ghee to B at the rate of Rs. 350 per tin.
And B signed a promissory note for Rs. 35,000 in favour of A for the price of ghee. A
supplied only 60 tins of ghee. In this case, there is a failure of consideration to the extent
of 40 tins of ghee. The price of these tins of ghee comes out to be Rs. 14,000 which can be
determined without any collateral enquiry. Here, although B signed a promissory note for Rs.
35,000, but he is liable to pay only Rs. 21,000 as the part consideration has failed due to
short supply of 40 tins of ghee.
It may be noted that the above rule applies only where the holder stands in immediate
relation with the signer of the instrument. The right of a transferee from such holder, who may
be holder for value or holder in due course is not affected by such partial failure of
consideration even if it could be ascertained without any collateral enquiry.
Example 46.14. A promised to supply 100 pieces of ceiling fans to B at the rate of Rs. 400
per piece. And B signed a promissory note for Rs. 40,000 in favour of A for the price of fans. A
indorsed and delivered the promissory note to C for Rs. 40,000. However, A supplied only
50 fans to B. In this case, C is the holder for value, and thus he can recover the full amount
of promissory note (i.e. Rs. 40,000) from B, the signer of the promissory note, even
though there is a part failure of the consideration.
Sometimes the partial failure of consideration cannot be determined without a collateral
enquiry. In such cases the person signing the negotiable instrument is liable to the full
extent of the value of the instrument inspite of the fact that the consideration has failed in
part.
Example 46.15. A promised to supply 100 bags of first quality dry fruit to B at the rate of
Rs. 300 per bag, and B signed a promissory note for Rs. 30,000 in favour A for the price.
A supplied 100 bags of second quality dry fruit to B. In this case, there is a failure of part
consideration. But the extent of the failure cannot be known without a collateral enquiry about the
diffrence between the rates of first and second quality dry fruits. And thus, B is liable to pay the full
amount of the promissory note (i.e. Rs. 30,000). However, B may file a separate suit against A for the
recovery of damages for the supply of inferior quality dry furits.
46.14. NEGOTIABLE INSTRUMENTS OBTAINED BY UNLAWFUL MEANS
Sometimes, a person obtains a negotiable instrument by some unlawful means. In such cases, he
cannot recover the amount due on the instrument. In this connection, Section 58 provides that any
person who obtains a negotiable instrument by unlawful means (such as offence, by fraud or for
 unlawful consideration), cannot recover the amount due on the instrument. However, if such
instrument comes into the hands of a holder in due course, he gets a good title to it, and can
recover the amount due on the instrument. Moreover, any person who gets the instrument through
the holder in due course, can also recover the amount due on the instrument. Following are the
instruments which are referred to in Section 58 of the Negotiable Instruments Act. And no
person except a holder in due course gets a good title to such instruments.
1. Stolen instruments. A stolen instrument is one which has been lost and found by a person,or
which has been stolen from the custody of its rightful holder. It may be noted that a finder or a
person, who obtains a negotiable instrument by theft, does not acquire a good title to it. And
thus, he cannot recover the amount due on the instrument. But if the found or stolen
instrument is payable to bearer and the finder or the thief transfers it to any person, who receives it
in good faith and for value, such a transferee, being a holder in due course will get a good title
to the instrument and can recover the amount due on it from the parties liable for payment. It may,
however, be noted that where a found or stolen negotiable instrument is payable to order, and the
finder or the thief forges the indorsement of the rightful owner and transfers it to a bona fide
transferee for value, then such a transferee acquires no legal title to the instrument. The reason for
the same is that a forgery does not confer any title.
Example 46.16. A drew a bill of exchange for Rs. 1,000 payable to B or order". It was stolen from
B's custody, and the thief forged B's signature and indorsed it to C who took it in good faith and for value.
In this case, C does not get any title to the bill of exchange.
2. Forged instruments. A forged instrument is one on which the signature of a drawer, maker or
acceptor is forged. It may be noted that a forged instrument is totally ineffective and its holder
cannot recover the amount due on it. As a matter of fact, the forgery is not a case of defective
title. But there is a complete absence of title from the very beginning. Thus, a forged signature is
altogether inoperative, and a forged instrument is without any title. Even if a forged instrument
comes into the hands of a holder in due course, he also cannot recover the amount due on it,
because there was no title to the instrument.
Example 46.17. A drew a bill of exchange for Rs. 1,500 on B payable 60 days after acceptance and
indorsed the same to C. C forged B's acceptatance and negotiated it to D, a bona fide holder for value.
In this case, D does not get any title to the bill of exchange.
It may, however, be noted that any person who has paid money by mistake on a forged
instrument may recover it from the person to whom he has paid it [Section 72 of Indian Contract
Act].
Note. Forgery is the fraudulent making or alteration of a writing to the prejudice of another person's
right. It includes (a) fraudulently signing the name of an existing person; (b) signing the name of a fictitous
or non-existing person with the intention that it may pass for as that of a real person; (c) signing one's
own name with the intention that the signature should pass for the signature of another person of the same
name.

3. Instrument obtained by fraud. A negotiable instrument must be made, accepted, indorsed

or transferred with the free consent of all the parties. If any person obtains the negotiable
instrument by fraud or coercion he does not get a good title to the instrument and cannot enforce
its payment. Any possessor or indorsee who gels the instrument from the person, who acquired it by
fraud or coercion, can also not claim its payment from any party to the instrument.
However, if such instrument is transferred to a person who becomes a holder in due course then he
gets a good title and can recover the amount due on the instrument. Moreover, any person who derives
his title through the holder in due course can also recover the amount due on the instrument.
4. Instruments obtained for an unlawful consideration. A negotiable instrument must be made
accepted, indorsed or transferred for a lawful consideration. If the consideration for a negotiable
instrument is unlawful, then the instrument is void and creates no obligation between the parties to the
instrument. But it may be noted that if such instrument comes into the hands of a holder in due
course, he gets good title to it and can recover the amount due on it. Moreover, any person, who derivers
his title through the holder in due course, can also recover the amount due on the instrument.
46.15.FORGED INDORSEMENT
Sometimes, a negotiable instrument is negotiated by means of forged indorsement. In such cases, the
indorsee does not a get a good title to the instrument even if he is a bona fide holder for value. It
may be noted that when a party primarily liable on a negotiable instrument pays the amount due on it
to a wrong person (i.e. the person who holds the instrument under a forged indorsement), he remains
liable to the true owner of the instrument. However, in case of cheques the paying banker is given
statutory protection agains the payment of cheques having forged indorsement. And the banker cannot
be held liable if it makes payment in good faith and without any negligence [Section 85]. But the
banker will not be protected where the payment of a cheque is made on which the drawer's signature
was forged. The reason for the same is that the banker is protected only in case of forgery of indorser's
signature and not in -case of forgery of drawer's signature.
46.16.PAYMENT OF INTEREST
The provisions relating to the payment of interest on the amound due on promissory note and bill of
exchange are contained in Sections 79 and 80 of the Negotiable Instruments Act which may be
discussed under the following heads:
1. Where the rate of interest is specified in the instrument. Sometimes, the rate of interest
is specified in the promissory note or bill of exchange itself. In such cases, the interest is calculated at
such specified rate on the principal amount due on the instrument. The interest shall be calculated
from the date of the instrument to the date of realisation or tender of such amount. And where a suit
is filed for the recovery of the amount due on the instrument, the interest is payable upto the date
decided by the court [Section 79]. The court can also give relief against the exhorbitant (i.e.
excessively high) rate of interest, and reduce the specified rate of interest, Following are the cases in
which the court may not allow the specified of interest:
(a) Where the specified rate of interest is excessive and the transaction between the parties
is substantially unfair.'
(b) Where the provision tor the payment of interest is in the nature of a penalty. 2
(c) Where the negotiable instrument has been obtained by coercion, undue influence, fraud
or misrepresentation.3
2. Where the rate of interest is not specified in the instrument. Sometimes, the rate of interest
is not specified in the instrument itself. In such cases, the interest is calculated at the rate of
eighteen per cent per annum on the principal amount due on the instrument. The interest shall be
calculated from the date when the principal amount becomes payable to the date of realisation or tender
of such amount. And where a suit is filed for the recovery of the amount due on the instrument, the
interest is payable upto the date decided by the court [Section 80]. In this section the rate of interest
has been increased from six per cent to eighteen per cent by an amendment in 1988.
Note. Sometimes, a promissory note or a bill of exchange is dishonoured by non-payment. In such cases, the
indorser is liable to pay interest only from the time when he receives the notice of dishonour [Section 80
(Explanation)].
46.17. REASONABLE TIME
We know that in the Negotiable Instruments Act, a number of duties are required to be performed by
different parties within a reasonable time. The general rule for determination of reasonable time is
contained in Section 105 of the Negotiable Instruments Act. According to this section, the term
'reasonable time' for the four purposes, namely (a) for the presentment of instrument for acceptance,
(b) for the presentment of instrument for payment (c) for giving notice of dishonour, and (d) for
giving notice of protest, depends upon the nature of the negotiable instrument and the usual course
of dealing between the parties.
Though the 'reasonable time' depends upon the above principles (i.e. the nature of the negotiable
instrument and the usual course of dealing between the parties), but for the purpose of giving notice
of dishonour, a special provision is contained in Section 106 which provides that, the notice of
dishonour, a special provision is contained in Section 106 which provides that, the notice of
dishonour is said to be given within the reasonable time if it is given according to the following rules:
(a) Where the parties giving notice and receiving notice are at different places, if the notice is
despatched by the next post or on the next day after the day of dishonour.
 (b) Where the parties giving notice and receiving notice are at the same place, if the notice is
despatched in time so as to reach its destination on the next day after the day of dishonour.
Note. Where the party has to transmit the notice of dishonour, he must also do so within a
reasonable time. The reasonable time for this purpose is the same as that for giving notice of
dishonour.
46.18.RULES OF INTERNATIONAL LAW
We have already discussed that a negotiable instrument may be drawn in one country and payable in
another. In such cases, as the parties will be in different countries, the different laws will determine
the liability of the parties. Sections 134 to 137 of the Negotiable Instruments Act provide the legal
rules in case of such instruments which may be discussed under the following heads:
1. Law governing the liability of parties. In case of foreign instruments, the law which govern the
liability of the parties is contained in section 134 which provides that the liability of different parties of a
foreign instrument is determined as per the following rules:
(a) The liability of the maker or drawer. The liability of the maker or drawer of a foreign promissory
note, bill of exchange or cheque is governed in all essential respects by the law of the place
where he made the instrument. The rule is subject to a contrary contract between the parties i.e.
the parties may provide by an agreement the law of which country shall govern their liability.
(b) The liability of the acceptor and indorser. The respective liability of an acceptor and
indorser of a foreign promissory note, bill of exchange or cheque is governed by the law
of the place where the instrument is made payable. This rule is also subject to a contrary
contract between the parties
Example 46.18 A bill of exchange was drawn by A in California, where the rate of interest was
25 per cent. This bill of exchange was accepted by B, payable in Washington, where the rate of interest
was 6 per cent. The bill was indorsed in India and was dishonoured on the date of maturity. An action
for th recovery of amount due on the bill of exchange was brought against B in India. In this case, B is
liable to pay interest at the rate of 6 per cent only, because the acceptor is liable as per the law of the
country where the negotiable instrument is payable.
Note. If an action is brought against A as a drawer of the bill, he will be liable to pay interest at the
rate of 25 per cent, because the drawer is liable as per the law of the country where the negotiable
instrument is made.
2. Law governing the dishonour of foreign negotiable instruments. In case of dishonour of
a foreign negotiable instrument, the law which governs the dishonour is contained in Section
135 which provides that where a promissory note, bill of exchange or cheque is made or indorsed in
one country but made payable in another country, the dishonour is governed by the law of the
country where the instrument is made payable. In other words, the question whether a negotiable
instrument has been dishonoured or not shall be governed by the law of the country where the
instrument is made payable.
Example 46.19. A bill of exchange was drawn and indorsed in India. This bill of exchange was accepted
payable in France, and was dishonoured on the date of maturity. The indorsee of the bill of exchange
caused it to be protested for such dishonour and gave a notice of the protest in accordance with the law of
France, though not in accordance with the rules contained in the Negotiable Instruments Act. In this case,
the notice of protest is sufficient, because this was to be done according to the Law of France where the bill
of exchange was made payable.
3. Negotiable instrument made out of India but according to the Indian Law. Sometimes, a
negotiable instrument is made, drawn, accepted or indorsed out of India, but according to
the Indian Law i.e. the Negotiable Instruments Act. In such cases, the fact that the instrument is
invalid according to the law of the country where it is made, does not invalidate any
subsequent acceptance or indorsement of the instrument made thereon within India [Section
136]. Thus, where the first contract of making or drawing of a negotiable instrument in a
foreign country is invalidated for want of stamp or some other similar circumstances, the
subsequent contract created by acceptance and indorsement of the negotiable instrument within
India, being an independent contract, will be valid even though the prior contract was
invalid according to the law of the country where it was made, provided that it was valid
according to the Indian Law.
4. Presumption as the foreign law. The law of any foreign country regarding promissory
notes,
 bills of exchange and cheques, shall be presumed to be the same as that of India unless and
until the contrary is proved [Section 137].
TEST QUESTIONS
1. What do you understand by maturity of negotiable instrument? State the rules relating to the
calculation of date of maturity.
2.- What do you understand by 'acceptance for honour'? State the liabilities and rights of an acceptor
for honour.
3. What are the provisions of the Negotiable Instruments Act dealing with the effect of partial absence
or partial failure of consideration on a negotiable instrument on the rights of the parties thereto?
(a) Where the consideration consists of money.
(b) Where the consideration does not consist of money.
4. "The defence of absence of consideration in case of a negotiable instrument is available only between
parties in immediate relationship"—comment.
5. What is the presumption as to consideration for a negotiable instrument? State the effect of total
absence or failure of consideration.
6. Discuss the instruments obtained by unlawful means giving reference of the appropriate Sections
of the Negotiable Instruments Act.
7. What are the rules relating to the payment of interest on a negotiable instrument? At what rate the
interest is awarded when no rate of interest is specified in the instrument?

47. BANKER AND CUSTOMER

47.1 INTRODUCTION
The banker and customer relations are governed by a contract between them. Certain obligations and
rights of a banker arise out of the relationship between the banker and his customer. In this chapter we
shall discuss the legal relationship between a banker and a customer alongwith the obligations and
rights of a banker, and other legal provisions relating thereto.
47.2 BANKER
The term 'banker' is defined in Section 3 of the Negotiable Instruments Act, which reads as under:
"Banker includes any person acting as a banker and any post office saving bank".
The analysis of this section reveals that, a banker means any person who acts as a banker, and it
also includes a post office saving bank. It may be noted that this section does not clearly define the
term banker. It simply states who is included in the term 'banker'. As a matter of fact, there is no
statutory definition of the term 'banker' in any Act. However, Sections 5 (b) and 5 (c) of the
Banking Regulation Act, 1949, which respectively define the term 'banking' and 'banking
company' help us in knowing who is a banker. These sections respectively read as under:
"Banking means the accepting, for the purpose of lending or investment, of deposits of money
from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or
otherwise".
"Banking company means any company which transacts the business of banking in India".
The analysis of these two provisions reveals that a banker is one who accepts money from the
public for the purpose of lending or investment, and repays the same by cheque or otherwise. The
accepted definition of the term 'banker' is given by Dr. Herbert L. Hart, the author of the well-known
treatise, Law of Banking in the following words:
"A banker is one, who in the ordinary course of his business, honours cheques drawn upon
him by persons from and for whom he receives money on current account".
The definition given by Dr. Hart is further supported by Sir John Page!, another great author who
states that "no person or body corporate or otherwise can be a banker who does not (1) take deposit
accounts, (2) take current accounts, (3) issue and pay cheques, and (4) collect cheques crossed and
uncrossed for his customers'". It may, however, be noted that every person who receives the money
of another, and pays it according to his orders cannot be regarded as a banker, unless he establishes
that business for profit. 2 Sir John Paget has also stressed that a banker's main business must be that
of banking from which, generally, he should be able to earn his living.

47.3. CUSTOMER
There is no statutory definition of the term 'customer' also. But it is defined in judicial decisions which
is commonly accepted in England as well as in India. A customer means a person who keeps an
account with a banker. It may be a current account or a deposit account. It is, however, not necessary
that the account should be of long standing. So far as the banking dealings are concerned, the term
'customer' signifies a relationship in which duration is not material. Thus, a customer is a person
whose money has been accepted by the banker on the footing that the hanker will honour cheques
upto the amount standing to his credit irrespective of the fact whether his connection is of short or long
standing3. Dr. Hart, an author of Law of Banking defines the term customer in the following words:
"A customer is one who has an account with a banker or for whom a banker habitually
undertakes to act as such".
Thus, a person is a customer who has some sort of bank account in his name and for whom the
banker undertakes to provide the facilities as a banker.
It may, however, be noted that mere casual acts of service do not create the relationship of banker
and customer. The dealing must be of a banking nature. Thus, if a person occasionally goes to the
bank to buy a draft or to get the cheque encashed without opening the account or to deposit
valuables in a locker, he does not become a customer of the banker, because such transactions are
not regarded in the nature of real banking business.
47.4. LEGAL RELATIONSHIP BETWEEN A BANKER AND A CUSTOMER
The legal relationship between a banker and his customer is based on the contract between them.
Primarily, their relationship is that of a debtor and creditor. When a customer deposits money with a
banker, the banker becomes the debtor and the customer becomes the creditor. And when the banker
lends money to his customer, the banker becomes the creditor and the customer, the debtor.
It will be interesting to know that the money deposited with the banker is at his disposal, and he
can deal with it as he wants. The banker is, however, under an obligation to honour the cheques of his
customer i.e. the banker is under obligation to repay the money when the customer demands payment.
47.5. OBLIGATIONS OF A BANKER
The obligations of a banker, arising out of his relationship with the customer, may be discussed under
the following heads:
1. Obligation to honour cheques of his customer. The banker is under statutory obligations to
honour the cheques of his customer. This provision is contained in Section 31 of the Negotiable
Instruments Act, which reads as under:
"The drawee of a cheque having sufficient funds of the drawer in his hands, properly applicable to the
payment of such cheques, must pay the cheque when duly required so to do, and in default of such
payment, must compensate the drawer for any loss or damage caused by such default".

The analysis of this section reveals that, the banker is legally bound to honour the cheques of his
customer so long as there are .sufficient funds to the credit of his customer properly applicable to the
payment of the cheque. If the banker wrongfully refuses to honour these cheques, he is liable to the
customer for damages. The damages which the customer can recover for unjustified dishonour of
cheque is not limited to actual pecuniary loss, but also extends to loss of credit or injury to his
reputation. Thus, the customer can recover very substantial damages. It may, however, be noted that the
banker is liable to the customer (drawer of a cheque) only The payee or the holder of a cheque has no cause
of action against the banker as there is no privity of contract between the banker and the payee or the holder. In
certain circumstances, the banker is justified in refusing the payment of a cheque. In such cases, he is not liable
for damages These circumstances will be discussed in Arts. 41.7, 47.8 and 47.9.
2. Obligation not to disclose information concerning his customer's account or affair . As a
matter of fact, the relationship between the banker and his customer is confidential. And thus the
banker should not disclose the information concerning the account and affair of his customer. This is
to protect the credit and reputation of the customer. If the banker fails in this duty, he may be held
liable for damages for loss of credit or reputation.
3. Obligation to maintain proper and accurate account. The banker is also under obligation to
maintain proper and accurate account of all credits and debits of his customer. If the banker makes
some wrong credit in his customer's account and relying upon the accuracy of the entry, the customer
acts in good faith and alters his position to his prejudice, then the banker may not recover the amount
from the customer which was wrongly credited to his customer's account. The customer's position is
altered to his prejudice when on the basis of the amount to his credit, he issues cheques which are duly
paid by the banker. It may, however, be noted here that customer should also act in good faith and
without negligence.
Moreover, if the banker wishes to close the account of his customer, he must give a reasonable notice
to his customer. This enables the customer to make other arrangements, and the customer may not
issue any more cheques.
4. Obligation to abide by the directions given by the customer. We know that the relationship of
banker and customer is governed by terms of the contract between them. Thus, the banker must
abide by the specific and clear instructions which are expressly given by the customer. However,
the banker is under obligation to abide by the instructions only if they are within the scope of their
relationship.
5. Obligation to collect cheques and drafts on behalf of the customer. A banker is also under
obligation to collect the cheques and drafts on behalf of his customer. In such a case, the banker needs
special protection because it is difficult to verify the title of each and every holder of a cheque. The
protection of a 'paying' and 'collecting' banker has already been discussed in Arts. 45.11 and 45.12
respectively.
47.6. RIGHTS OF A BANKER
We have discussed, in the last article, the obligations of a banker which arise out of the legal
relationship between a banker and his customer. The banker also has certain rights against his
customer which may be discussed under the following heads .
1. Right of general Hen. This right of banker is contained in Section 171 of the Indian Contract
Act, which reads as under:
"Bankers may, in the absence of a contract to the contrary, retain as a security for a general
balance of account, any goods bailed to him".
The analysis of this section reveals that, a banker can exercise his right of lien on all goods and
securities deposited with the banker. It is, however, necessary that the goods should have been given
to the banker only as a bailee because the lien extends only to the goods which have been bailed to the
banker. This point has already been discussed in Art. 19.11.
2. Right to interest and incidental charges. The banker is entitled to charge jnterest on- ihs
money lent to his customer, and also to claim incidental charges e.g. commission for collection
etc. However, the banker can claim the interest and incidental charges as per the rules
communicated to the customer .
3.Right of set off. Sometimes the customer has two accounts with the same bank. And there customer can
recover very substantial damages is credit balance in one and debit balance in the other. In
such cases the banker has the right to combine the two accounts, and set off the debit balance of
one against the other showing the credit balance.

47.7. BANKER JUSTIFIED IN REFUSING THE PAYMENT OF CHEQUES

We have discussed in Art 47.5 that the banker is under legal obligation to pay the cheques of his
customers. However, in certain circumstances the banker is justified in refusing payment. In such cases,
the customer cannot claim damages from the banker for refusing payment of his cheques. These
circumstances may be discussed under the following two heads:
1. Circumstances when the banker may refuse the payment.
2. Circumstances when the banker must refuse the payment.
47.8. CIRCUMSTANCES WHEN THE BANKER MAY REFUSE THE PAYMENT
Following are the circumstances in which the banker may refuse to make the payment of his customer's
cheque:
1. When the cheque is post-dated. As a matter of fact, the banker is required to pay a cheque
on the date it bears, and not before that date e.g. where a cheque is dated 15th March, 1999
and it is presented for payment on 10th March 1999 the banker may refuse the payment, and
it will not amount to dishonour of a cheque. It may be noted that if the banker pays a post-dated
cheque, he .can be held liable for damages if by reason of the premature payment of the post
dated cheque, the banker is not able to meet the customer's other cheques presented within time.
2. When the cheque is out-dated i.e. stale. Sometimes, a cheque is out-dated. In such cases,
the banker may refuse the payment. In India, it is a custom of the banker not to pay a cheque
if it is presented after six months from the date of its issue. After six months the cheque is known
as a stale cheque.
When the cheque is ambiguous or of doubtful validity. Sometimes, the validity of a cheque
is doubtful. In such cases, the banker may refuse the payment. The validity of a cheque may
be in doubt where it is not properly drawn e.g. the amount in words and in figures differs, or
not dated, or its indorsements are not proper and regular. Thus, when some confusion about the
validity of a cheque arises, the banker may refuse the payment. Irregular and materially altered
cheques create such confusion.
3. When the cheque is mutilated. Sometimes the cheque is mutilated e.g. torn into two pieces.
In such cases, the banker may refuse the payment. As a matter of fact, a mutilated cheque creates
suspicion about the validity of a cheque.
4. When a cheque is not duly presented for payment. Sometimes, the cheque is not duly
presented for payment e.g. where a cheque is presented after banking hours. In such cases, the
banker may refuse the payment. Moreover, when a cheque is presented at a branch where the
customer has no account, the banker may also refuse to honour the cheque.
5. When the funds in customer's account are insufficient. Sometimes, the balance in customer's
account is not sufficient to meet the payment of the cheque. In such cases, the banker may refuse the
payment. It may be noted that the banker is under no obligation to make the part payment of a
cheque.
Example 47.1. A, a customer has Rs. 4,000 to his credit in a bank account. He drew a cheque for
Rs. 4,500, which was presented for payment. In this case, the banker is not bound to pay Rs. 4,000. The
hanker may dishonour the cheque.
In case of bank's refusal to honour customer's cheque due to insufficient funds in his account, the drawer of the
cheque may be held criminally liable for this offence. The provisions relating to criminal liability are contained in
Sections 138 to 142 which were added to the Negotiable Instruments Act by an amendment in 1988. These
have already been discussed in Art. 41.33
7. When the customer's signature does not agree. Sometimes the customer's signature on the
cheque does not agree with his signature in the bank record. In such cases, the banker may refu se
the payment of his cheque.
8. When the funds in customer's account are not applicable to the payment of the cheque
Sometimes, a customer has money in the bank in the form of fixed deposit, recurring deposit
or any other funds over which the bank has marked or signed lien. If such a customer issues
a cheque against these deposits, the banker may refuse the payment of such a cheque as these
funds are. not applicable to the payment of the cheques.
9. When the account is in joint names. Sometimes the bank account is in the joint name of
two or more persons, and the cheque is required to be signed by all the joint account holders
In such cases, if the cheque is not signed by all of them, the banker may refuse the payment
of such a cheque.
Note. In case of a joint account in the nature of 'either or survivor' the banker is not justified in refusing the
payment of a cheque if it is signed by any one of the account holders.
10. When the banker has a claim for set-off. Sometimes, a banker has certain claims against
his customer (e.g. claim for loan given to the customer). And at the same time, the customer
has some funds in his account with the same banker. In certain circumstances, the banker can
set off the amount of his claim against his customer's funds. In such cases, the banker may refuse
the payment of a cheque issued against such funds.
47.9. CIRCUMSTANCES WHEN THE BANKER MUST REFUSE THE PAYMENT
Following are the circumstances in which the banker is bound to refuse the payment of a cheque:
1. When the customer has countermanded payment. The term 'countermand' means the issue of instruction to the
banker not to pay a particular cheque. Thus, where a customer issues instructions to the banker not to make the payment
of a particular cheque, the banker must not make the payment. A cheque, the payment of which is stopped by the customer
is known as a 'stopped cheque'. And a stopped cheque is a piece of waste paper in the hands of payee. It is, however,
necessary that a countermand to be effective must reach the banker before he has paid the cheque in the ordinary course. It
may also be noted that the countermand notice must be duly signed by the customer and give correct particulars of the
cheque.
. 2. When the customer has died. Sometimes, the banker receives notice of customer's death. In such cases, he must
refuse the payment of the cheque presented after the notice of death. However, if the payment is made before the banker
receives the notice of death, the paymenl is valid and banker is justified in making such payment.
3. When the customer has become insolvent. Sometimes, the banker receives the notice of
customer's insolvency. In such cases also, he must refuse the payment of the cheques presented
after the notice.
4. When the customer has become a person of unsound mind (i.e. insane). Sometimes, the
banker receives the notice that his customer has become insane. In such cases also, he must refuse
payment of the cheque presented after the notice. This is so because a person of unsound mind
is not competent to contract. And a cheque, being a contract of payment, is suspended during
the period of customer's insanity.
5. When a garnishee order has been received by the banker. The term 'garnishee order' may
be defined as a court order attaching the balance in customer's account. When the banker receives
such order, then he is bound to refuse the payment of the customer's cheque.
6. When the cheque is lost. Sometimes, the drawer informs the banker that a particular cheque
is lotst. In such cases, banker must refuse the payment of that cheque.
7. When the account is closed. Sometimes, the customer closes his account and gives notice to the banker. In such
cases, the banker must not payany cheque of the customer after closure of the account.
8. When holder’s title defective. Sometimes, the banker comes to know of any defect in the title of the person
present the cheque. In such cases, he must refuse payment of the cheque.

Note: Other provisions relating to the banker and Customer relationship such as liability of the drawer (i.e
customer) of a cheque, liability of the drawee (i.e. banker) of a cheque, discharge of banker from liability,
protection of a paying banker and protection of a collecting banker have already been discussed in Arts, 41.28,
41.29,44.14, 44.17, .45.11 and 45.12 respectively.

TEST QUESTIONS
1. Define the term “banker” and “customer’. State the special features of legal relationship
between a banker and a customer.
2. “A banker is bound to honour his customer’s cheque”. Discuss fully and state to what extent
this statement is true.
3. Are there any circumstances in which the banker is justified in refusing the payment of his
customer’s cheque? If yes discuss separately the circumstances in the banker must refuse the
payment.
4. State the circumstances under which a banker would be justified in dishonouring a cheque.
5. Write notes on the following:
(a) Bankers obligation to honour cheques of his customer. (b) Bankers right of alien. (c) Bankers
liability to the payee of a cheque if the banker refuses payment.

49. NATURE OF ARBITRATION PROCEEDINGS

49.1. INTRODUCTION
In every sphere some disputes do arise between the persons. Whenever a dispute arises, the concerned
parties may go to the court for the redressal of their grievances. It may be noted that the procedure of the
courts is not so simple. Moreover, it is also expensive and time consuming. Instead of going to courts,
the people may like to solve their differences by mutual agreements or by referring their disputes to an
independent and impartial third person called an arbitrator. The reference of a dispute to a third person
for settlement is known as arbitration. Thus, arbitration is one of the methods of settling disputes
between two or more persons by referring their dispute to an arbitrator. The arbitrator hears all the
parties to the dispute and gives his award i.e. decision which is binding on all the parties. The arbitration
is, therefore, a domestic tribunal, and the disputes are decided in a quasi-judicial manner.
Arbitration is the striking feature of ordinary Indian life, and it prevails in all ranks of life. The method
of settlement of disputes, through arbitration, was prevalent in India even in earlier times. In ancient
times, the decisions of 'Panchayats' or bodies consisting of wealthy, influential and elderly men of the
community were recognised by the people. Now-a-days also, the Panchayats have come to denote an
arbitration tribunal selected by the consent of the parties, and a 'Panch' denotes an arbitrator. And many
disputes in rural areas, are settled by referring them to the Panchayats or Panch.
The law relating to .arbitration is contained in the Arbitration and Conciliation Act, 1996. Before the
passing of this Act. She law relating to arbitration was contained in the Arbitration Act, 1940, the Indian
Arbitration Act 1899, and in the Second Schedule to the Code of Civil Procedure 1908. The operation of
the Indian Arbitration Act, 1899 was limited to the Presidency Towns only, and its code was confined to
"arbitration agreement without the intervention of the court". And the Code of Civil Procedure 1908,
dealt mainly with the "arbitration in suits". The arbitration without the intervention of the court" was
only briefly provided for.
The present Arbitration and Conciliation Act of 1996 consolidates and standardise the law of arbitration
in the country, and is a complete code on the subject. It,has repealed the old provisions relating to the
arbitration. Salient features of the new Act will be discussed in Art. 49.10.
Note. In our discussion on the law relating to arbitration from chapters 49 to 52, unless otherwise stated
the Sections mentioned are those of Arbitration and Conciliation Act, 1996.

49.2 ARBITRATION AGREEMENT

The term 'arbitration agreement', is defined in Section 7 of the Arbitration and Conciliation Act,
which reads as under:
"Arbitration agreement means an agreement by the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them in respect of a defined legal relationship,
whether contractual or not."
The analysis of this section reveals that arbitration agreement is an agreement between t or more persons
to refer their dispute to a third person for settlement. It may be noted that th° agreement may be made to
refer the existing disputes or future disputes. However, the arbitrati agreement must be in writing
[Section 7(3)].
The person to whom the dispute is referred for settlement is called an 'arbitrator' Th proceedings before
an arbitrator are called arbitration, and his decision is known as an arbit award.
The arbitration agreement is also sometimes termed as 'submission* or 'reference'. In th Arbitration Act,
1899, the term 'submission' was used for 'arbitration agreement'.
Note: Salient Features of the Arbitration and Conciliation Act, 1996 will be discussed in Art. 49 ]Q

49.3 ESSENTIALS OF A VALID ARBITRATION AGREEMENT

The legal definition of the term arbitration agreement as discussed in the last article, reveals certain
essential elements of an arbitration agreement which may be stated as under:
1. It must be based on an agreement. It is an essential and important element of a valid arbitration
agreement that there must be an agreement between the concerned parties.
2. It must be in writing. It is another important essential element of Arbitration Agreement that it must
be in writing. An oral agreement to refer a dispute to arbitration will not be valid. It is, however, not
necessary that the agreement should be signed by both the parties. It would be sufficient if the terms of
the agreement are in writing and it is shown that the parties agreed to the settlement of disputes by
arbitration1 i.e. the parties have accepted the terms of the written Arbitration Agreement. It is, however,
not necessary that all the terms of the agreement should be contained in one document. It may be found
in correspondence consisting of a number of letters2. Thus an arbitration agreement may be in any form
but it must be in writing. It may be in the form of an arbitration clause in a contract or in the form of a
separate agreement [Section 7(2). The circumstances in which in arbitration agreement is considered to
be in writing will be discussed in Art. 49.4.
3. It must have all the essential elements of a valid contract. An arbitration Agreement is like any other
agreement. Therefore, a valid arbitration agreement must have all the essential elements of a valid
contract. Thus the parties to an arbitration agreement must be competent to contract, the consent of the
parties must be free, its consideration and object must be lawful, its terms must be certain, its
performance must not be impossible etc. If an arbitration agreement does not fulfil the requirements of a
valid contract, then it will not be a valid agreement.
It may be noted that where an arbitration clause is contained in a contract and the contract comes to an
end due to frustration (i.e. impossibility of performance) or is avoided (rescinded) on the ground of fraud
misrepresentation, undue influence or coercion, the arbitration clause continues to be valid and binding3.
The reason for the same is that in the beginning, there was a valid contract between the parties. But if the
parties are not ad idem in the contract, then the arbitration clause is also not binding because in such a
case there is no contract at all4. Similarly when an agreement is illegal, the arbitration clause which
forms a part of the agreement, is also illegal and void. This is so because an illegal agreement is void
ab-initio.
[Jaikissen Mull v. Lachminarayan Kanoria & Co. Air 1974 SC 1579].
4. It must be made to refer a dispute to arbitration. It is also an essential element of an arbitration
agreement that it must be made to refer a certain i.e. specific dispute between the parties to arbitration.
The disputes may be present or future i.e. a dispute which has arisen or IT! jj niay arise. If there is no
dispute, there can be no right to demand arbitration. It may be ted that the dispute must be of a civil
nature, because criminal matters cannot be referred to
arbitration-5 It must be binding on all the panics. An arbitration agreement must contain a clause that
. aWard (i.e. decision) of the arbitrator shall be binding on all the parties to the agreement. if the award is
binding on one party only, the clause does not amount to an arbitration agreement.5 It may a'so ^e notecl tnat
al' the persons interested in the subject matter of dispute should animously agree to refer the dispute to
arbitration. When an agreement is not consented to KV all interested persons, such an agreement is
invalid and the award given on the strength of ucri invalid reference is not valid and will not bind even the
consenting parties.
[Deep N. Singh v. Dhaneshwari, AIR 1960 Pat 201].
6. It must give bilateral right of reference. It is also an essential element of an arbitration agreement. It
means that either party may refer the dispute in the prescribed manner to arbitration. If there is not
mutuality in reference i.e. if only one party is given the right to refer the dispute to the arbitration, then it
is no valid arbitration agreement.
[M.7. Steamship Co. v. B.F. Joshi ILR 54 Bombay, 278].
7. It may or may not contain the name of an arbitrator. The 'arbitrator' is a person to whom the dispute is
to be referred by the parties, for settlement. But it is not necessary that the name of the arbitration should
be mentioned in the arbitration agreement.
[Union of India v. Janki Pd. Agarwal, AIR 1986 All 15].

49.4. FORM OF AN ARBITRATION AGREEMENT

No specific form of arbitration agreement has been prescribed by the Arbitration and Conciliation Act
1996. Section 7(2) of this Act, simply states that an arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a separate agreement. Thus, an arbitration agreement is
not required to be in any particular form. All that is required is that there should be an agreement to refer
a dispute to arbitration, and the same should be in writing. Thus, what is required to.be ascertained is
whether the parties have agreed that if disputes arise between them in respect of the subject-matter of the
agreement, such disputes shall be referred to arbitration? If such an agreement is there, then it would
spell out to be an arbitration agreement [Rukmani Bai Gupta v. Collector, AIR 1981 SC 479]. As a
matter of fact, the requirement is that there should be an arbitration agreement the terms of which are (a)
expressed in writing, and (6) accepted by the concerned parties. An arbitration agreement may be in any
one of the following form as pointed out by the Allahabad High Court in J. Chit Fund (P) Ltd. v.
Dawraka D. Dayal, AIR 1981 All 251:
1. A document, signed by both the parties consisting of the terms of reference to arbitration.
2. A document signed by one party, consisting of terms of reference to arbitration, and plain
acceptance by the other party.
3. An unsigned document, consisting of terms of reference to arbitration, and agreed to orally by both
the parties.
Section 7(4) of the new Arbitration and Conciliation Act, 1996 specifically states that in the following
cases an arbitration agreement shall be considered to be in writing:
(a) If it is contained in a document signed by the parties.
(b) If it is contained in an exchange of letters, telex, telegrams etc. which provide a record of the
agreement
(c) If it is contained in an exchange of statements of claim and defence in which the exi of the
S Cnce
agreement is alleged by the party and not denied by the other party.

49.5. ADVANTAGES OF ARBITRATION

Following are the advantages of settlement of disputes through arbitration:
1. The arbitration is simple as regards procedure.
2. The arbitration is less costly than a suit in a court of law.
3. The arbitration proceedings are quicker. Thus, it saves the time of the parties.
4. The parties may appoint a competent arbitrator according to the nature of their disnm
5. There are chances of early settlement of disputes because when the arbitrator is app0jnte J with the
consent of the parties they may not prolong the matter by going to the cou of law against the award.
6. The publicity of the suit is avoided because the proceedings are not openly held. On th other hand,
the publicity cannot be avoided in a court of law.

49.6. DISADVANTAGES OF ARBITRATION

Following are the disadvantages of settlement of disputes through arbitration:
1. The arbitrator may not act impartially. He may be biased and give his decision in favour of the
party who has approached him.
2. The arbitrator may not be competent i.e. he may not be knowing the legal and technical aspects of
the dispute.
3. The parties may feel unsatisfied with the decision.

49.7. EFFECTS OF AN ARBITRATION AGREEMENT

The effect of an arbitration agreement is that if any party files a suit in a judicial authority, then on an
application of a party, the judicial authority shall refer the matter pending before it, to arbitration. Thus,
where the parties have entered into an arbitration agreement for settlement of their disputes through
arbitration, then they may not be allowed to proceed with the suit in a court of law relating to those
disputes. If they are allowed, the very purpose of the arbitration is defeated. Therefore, if any party
commences any legal proceedings in a court of law, in respect of any matter covered by the agreement,
then any party to such legal proceedings may apply to the court for reference of the matter to arbitration.
On such application, the court shall refer the matter to arbitration. [Section 8(1)]. However, such
application by the party must be accompained by the original arbitration agreement or by its certified
copy [Section 8(2)]. Pending of such an application is no bar to the commencement and continuance of
the arbitration proceedings [Section 8(3)].
The court may also keep the matter pending till the arbitration award is received.
[Rajinder K. Khanna v. U.O.I. 1998(5) SCALE 589J
Prior to the New Act of 1996, the court had the power to stay the legal proceedings under Section 34 of
Arbitration Act, 1940, on the fulfilment of the following conditions:
1. The proceedings before a court of law must have been commenced by one of the parties to an
arbitration agreement. Moreover, the proceedings must also be against some other party to the
agreement.
2. The proceedings which are sought to be stayed must be in respect of a matter which is agreed to be
referred to the arbitration. This means that the subject-matter of legal proceedings and that of reference
to arbitration must be the same.
[Kunta M. Reddy v. Soma Srinivas, AIR 1978 A.P. 289].
3. The person who applies for the stay of legal proceedings, must be a party to the legal proceedings.
4 The person who applies for the stay of legal proceedings must also satisfy the court that
the time when proceedings were commenced he was ready and willing to do everything as
r the arbitration agreement, and is still ready and willing to proceed with the arbitration agreement.
5. The person who applies for the stay of legal proceedings must not have taken any step . the legal
proceedings after appearance in the court. Thus, the application for stay must be made I the earliest stage
of the proceedings i.e. before filing a written statement or taking any other steps in the matter.
[State of U.P. v. J. Saran K. Chandra, AIR 1973 SC 2071].
In Rachappa v. Guru Sidappa, AIR 1989 SC 635, the Supreme Court has held that where a party had
sought adjournments and obtained time for more than one occasions for the purpose Of filing written
statements, subsequent application for story of suit would not be maintainable.
5. The application for stay must be made to the court where the legal proceedings were pending.
7. The court must also be satisfied that there is no sufficient reason why the matter should n0t be referred
to arbitration in accordance with the arbitration agreement. If the court is satisfied it may stay the legal
proceedings. The party opposing the stay shall have to satisfy the court that there are sufficient reasons
for not granting the stay.
8.There must be a valid and subsisting arbitration agreement at the time of commencement of legal
proceedings. The court cannot stay the legal proceedings unless there is a valid and existing arbitration
agreement [Waverby Jute Mills v. Raymon & Co., AIR 1963 SC 90]. Thus, the issue as to the existence
or validity of an arbitration agreement must be decided first before granting the stay.
[R.S. Sehgal v. Wishav Bajaj, AIR 1972 P & H 259].
It may, however, be noted that it is largely in the discretion of the court whether the stay should be
granted or not. As regards court's discretionary power to stay proceedings the following points are
important to note here:
(a) The discretion must be judicially exercised.
[State of Punjab v. Geeta Iron & Brass Works, AIR 1978 SC 1608].
(b) In case the court finds that an arbitration contract is void ab initio illegal or non-existent, it will be
without jurisdiction to grant stay in such a case.
[ITC Ltd. v. J.J. Fernades, AIR 1989 SC 839].
(c) The mere existence of an arbitration agreement does not impose any obligation on the court to stay
the suit. To enable the party to obtain the stay of the suit, he is required to apply for the stay, before
filing his written statement or taking any other steps in the suit. [State
of U.P. v. Janaki Saran, AIR 1973 SC 2071].

49.8. CAPACITY TO REFER A DISPUTE TO ARBITRATION

We know that an arbitration agreement must have all the essential elements of a valid contract. Thus, the
parties to an arbitration agreement must be competent to enter into a valid contract. As the dispute can
be referred to the arbitration by a party to an arbitration agreement, it therefore, follows that a person
who is competent to contract, may refer a dispute to the arbitration. And a person who is incompetent to
contract cannot refer a dispute to arbitration. Thus, the capacity to make reference to arbitration is co-
extensive with the capacity to contract. The capacity of certain persons to refer a dispute to arbitration is
discussed in the following pages:
1. Minor. A minor is not competent to enter into a valid contract, and thus he cannot make a valid
reference of dispute to the arbitration. However, a natural guardian (i.e. father or mother) of a minor can
refer a dispute to arbitration if it is for the benefit and protection of the minor.
It may, however, be noted that if a minor is also a party to the arbitration agreement, it is not void. And
if the minor joins a reference to the arbitration and the award is made on a reference. Then award is
voidable at the option of the minor. But the parties who are major will be bound by the award.
J0r

2. Karta (i.-e. manager) of a Joint Hindu Family. A karta of a Joint Hindu Family is competent to refer
a dispute td arbitration i.e. he can make a valid reference. It is, however, necessary then the karta should
act bonafide and for the benefit of the family. If the reference is made in good faith, the award shall be
binding on all the members of the joint family.
3. Agent. An agent who is duly authorised by his principal, is competent to refer a dispute to arbitration
i.e. he can make a valid reference. The award made on such reference is bind! on the principal. The
authority of an agent to refer the dispute to arbitration may be express or implied.
4. Partner of a firm. A partner of a firm is not competent to refer a dispute to arbitration so as to bind
the firm. But if express authority is given to a partner by the partnership agreement then he can make a
valid reference to the arbitration so as to bind the firm. Moreover, if custom or trade usage so provides,
then also a partner can refer a dispute to arbitration. Thus, a partner has no implied authority to refer a
dispute, relating to the business of the firm, to arbitration
[Section 19(2) of the Indian Partnership Act, (1932)]
5. Trustee. A trustee is competent to refer a dispute to arbitration i.e. he can make a valid reference.
But a reference made by a trustee should be bona fide and reasonable and subject to the instrument (i.e.
document) of trust [Section 43(c) of the Indian Trusts Act].
6. Receiver or Official Assignee. A receiver or official assignee is competent to refer a dispute to
arbitration i.e. he can make a valid reference. However, he can make a valid reference only with the
leave (permission) of the court. As a matter of fact, the Receiver or Official Assignee has the power to
refer any dispute to arbitration and compromise all debts, claims and liabilities of an insolvent [Section
59(h) of the Provincial Insolvency Act, and section 68( 1) of the Presidency Towns Insolvency Act].
7. Insolvent. An insolvent is not competent to refer a dispute to arbitration so as to bind his estate or
Receiver or Official Assignee.
8. Company. A company is competent to refer a dispute to arbitration subject to the provisions of its
memorandum of association" and 'articles of association'.
[Section 389 of the Companies Act, 1956].
9. Attorneys and counsels. The attorneys and counsels are competent to refer a dispute to arbitration
i.e. they can make a valid reference. They have the implied authority to make a reference to arbitration
on behalf of their clients provided it is in the best interest of the clients, and there is no express direction
not to make the reference.

49.9. SUBJECT-MATTER OF REFERENCE

As a matter of fact, the jurisdiction of arbitration is civil in nature. Thus, all disputes of civil nature and
quasi-civil nature which can be decided by the civil court can be referred to and decided by arbitration.
Following are some of the matters which may be referred to arbitration:
1. The matters affecting the private right of the parties e.g. a right to hold the office of a priest in a
temple as it is a private right and can be decided by civil courts.
2. The matters which relate to personal rights of the parties e.g. question of validity of marriage, or
maintenance payable to wife or terms of separation between husband and wife.
3. The questions of determination of damages in case of breach of contract.
4. The questions of law or fact.
5. The question as to whether a judgment has been properly obtained or it is erroneous or void.
6. The disputes regarding compliment and dignity.
7. The disputes between an insolvent and his creditors. However, the insolvency proceedings itself
cannot be referred as these can be decided by a court only.
8. The time barred claims.
Thus, only the matters of civil nature can be referred to the arbitration. There are certain matters which
are the subject-matter of the courts (civil or criminal) only, and cannot be referred to and decided by
arbitration. Following are some of the matters which cannot be referred to arbitration:
1. The matters which are purely of criminal nature, as such matters can be decided by the criminal
courts only.
2. The insolvency proceedings (i.e. whether or not a debtor should be declared insolvent), as they are
the subjects of courts of law only.
3. The execution proceedings, as they are the subjects of courts of law only.
4. The lunacy proceedings (i.e. whether or not a person can be declared insane), as they are also the
subjects of court of law only.
5. The probate proceedings (i.e. whether or not a will is valid, and whether or not a probate should be
granted), as they are the subjects of courts of law only.
6. The proceedings relating to the appointment of a guardian of the minor.
7. The suits for divorce or for restitution of conjugal rights.
8. The matters relating to public charities and charitable trusts.
9. The matters relating to an order of injunction (i.e. whether or not a stay should be granted), as they
are the subjects of courts of law only.
10. The disputes arising from and founded on illegal transactions.

49.10. SALIENT FEATURES OF THE ARBITRATION AND CONCILIATION ACT, 1996

We know that the law relating to arbitration is contained in the new statute named the Arbitration and
Conciliation Act, 1996 which has repealed the old Arbitration Act, 1940. It is, therefore, necessary to
mention the salient features of the new Act of 1996, which may be stakkted as under:
1. Object of the Act: The object of the new Act is to consolidate and amend the law relating to domestic
arbitration, international commercial arbitration and enforcement of foreign arbitral awards, also to
define the law relating to conciliation.
2. A complete code in itself: The new Act is a complete i.e. exhaustive code (law) in itself. This Act
has given, for the first time, a procedure for Arbitral Tribunals. The 'arbitral tribunal' means a sole
arbitrator or a panel of arbitrators [Section 2(d)]. Thus, this Act has given the 'arbitrator', or 'board of
arbitrator' or 'statutory arbitrator', the status of Tribunals, and finality to their awards. The arbitration
award is termed as 'arbitral award' [Section 2 (c)].
This Act has provided for the law and procedure relating to foreign or international arbitration. And for
the first time, it has introduced the conciliation proceedings.
The Arbitration and Conciliation Act, 1996 is divided into four parts. Part I contains provisions relating
to Arbitration, Part II. relating to Enforcement of Certain Foreign Awards, Part HI relating to
conciliation and Part IV contains the provision relating to Supplementary Provisions. In total, this Act
contains 86 Sections and three Schedules.
3. Limits on court's powers and finality of award: The new Act has curtailed court's powers and
confined them to the limits of the Act itself. Section 5 of the Act provides that notwithstanding anything
contained in any oter law for the time being in force, in matters governed by Part I relating to arbitration,
no judicial authority shall intervene except where so provided in this part. Section 35 further provides
that the arbitral award shall be final and binding on the parties and persons claiming under them
respectively.
4. Precision about court's powers: The powers of the court are provided with precision under the new
Act. Section 42 provides that where, with respect to an arbitration agreement, any application has been
made to the court under Part I relating to arbitration, that court also shall have jurisdiction over arbitral
proceedings. The section further provides that all subsequent applications which arise out of arbitration
agreement and the arbitral proceedings, shall be mad in that court alone and in no other court.
5. Detailed procedure for conduct of arbitrations and arbitral awards: The new Act gives detailed
procedure for the conduct of the arbitral proceedings. For the first time, the A specifically provides that
the parties shall be treated with equality, and each party shall be give a full opportunity to present his case
[Section 18]. Thus, the principles of natural justice have been incorporated in the Act itself.
As regards the procedure to be followed, the adoption of the procedure provided in the Code of Civil
Procedure, 1908 has been made optional. The parties may agree to adopt even their own procedure
instead of that provided in the Code of Civil procedure. The arbitral tribunals have been given freedom
to conduct the proceedings in the manner which they may consider appropriate [Section 19].
6. More powers to arbitrators: The new Act has given more powers to arbitral tribunals (i.e arbitrators)
than they had uner the old Arbitration Act, 1940. Under Section 16,an 'arbitral tribunal' has been
conferred with absolute jurisdiction over the matters before him. Further, at the request of a party, an
arbitral tribunal may order the party to take any interim measure of protection as the tribunal may
consider necessary regarding the subject-matter of the dispute.
The powers to make corrections in the arbitral award and to make an additional arbitral award have also
been given to the arbitral tribunal (arbitrators) under Section 33 of the new Act.
7. New process of conciliation: .The new Act has introduced a new process of conciliation. The
detailed procedure for conciliation of would be or pending disputes have been provided in Part III of the
Act, and will be discussed in Chapter 52.

TEST QUESTIONS
1. Define arbitration agreement. State the essentials of a valid arbitration agreement.
2. State the advantages and effects of an arbitration agreement. Is any form is prescribed for an
arbitration agreement?
3. What matters may be referred to arbitration? State the disadvantages of arbitration?
4. What matters cannot be referred to arbitration? Can a reference to arbitration be made by a minor,
insolvent and a company?
5. Write a note on the capacity of different persons to refer a matter to arbitration with special
reference to Karta of Joint Hindu Family, and partner of a firm.

50. ARBITRAL TRIBUNAL & PROCEDURE IN ARBITRATION

50.1. INTRODUCTION
We have already discussed in the last chapter that the parties are free to enter into an arbitration
agreement. They may appoint an arbitrator with their mutual consent, and refer their dispute to him. The
Arbitration and Conciliation Act, 1996 has given the status of arbitral tribunal to the arbitrators)
deciding the matters referred to him. While deciding the matters, the arbitral tribunal shall follow the
procedure prescribed in the Act. In this chapter we shall discuss the concept of arbitral tribunal, number
of arbitrators, their powers, duties and other provisions relating thereto. The legal provisions relating to
the procedure to be followed by the arbitral tribunal shall also be discussed in this chapter.

50.2. ARBITRAL TRIBUNAL

The concept of 'Arbitral Tribunal' has been introduced for the first time by the new Arbitration
and Conciliation Act, 1996. This Act has given the 'arbitrators' or the 'panel of arbitrators'
the status of a Tribunal i.e. quasi judicial authority, and the finality to their awards. Section
2(d) of the new Act defines the arbitral tribunal as under:
"Arbitral tribunal means means a sole arbitrator or a panel of arbitrators."
Thus, whether the matter is to be decided by a single arbitrator or a number of arbitrators,
they shall have the status of a tribunal in dealing and deciding the matter referred to them.
The composition of the arbitral tribunal i.e. the number of arbitrators, and the manners of
their appointment will be discussed in the following pages.

50.3. NUMBER OF ARBITRATORS

The Arbitration and Conciliation Act, 1996 puts no limit on the numbers of arbitrators. The parties are
free to provide for any number of arbitrators in the arbitration agreement. Section 10(1) of the Act
specifically provides that the parties are free to determine the number of arbitrators. The only restriction
imposed by this section is that the number of arbitrators determined by the parties should not be an even
number, that is to say two, four, six etc. Thus, so long as the number of arbitrators is odd that is to say
three, five, seven etc., there is no limit on the number of arbitrators in the arbitral tribunal.
It will be interesting to know that the parties may not even determine any number of abitrators in the
arbitration agreement. In such a case, the rule contained in Section 10(2) f the Act shall apply which
states that where number of arbitrator is not determined by the parties, the arbitral tribunal shall consist
of a sole arbitrator. The provisions relating to the appointment of arbitrator(s) are contained in Section
11, and will be "discussed in detail in the next article.

50.4. APPOINTMENT OF ARBITRATOR

An arbitrator is a person who is appointed to settle disputes between the parties to an arbitration
agreement. The provisions relating to the appointment of arbitrator(s) are contained in Section 11 of the
Arbitration and Conciliation Act, 1996, and may be discussed under the following
heads:
1. Appointment of arbitrator by the parties to an arbitration agreement.
2. Appointment of arbitrator by the Chief Justice of the High Court.
3. Appointment of arbitrator by any person or institution designated by the Chief Justice.

50.5. APPOINTMENT OF ARBITRATOR BY THE PARTIES

The parties to an arbitration agreement are free to appoint any person as their arbitrator. A person of any
nationality may be appointed as an arbitrator if the parties so agree. It means that even a foreigner can be
appointed as an arbitrator by the parties [Section 11(1)]. As regards the procedure to be followed by the
parties for appointment of arbitrators, Section 11(2) has incorporated a new concept in this regard. This
section provides that the parties are free to agree on the procedure for the appointment of arbitrators.
Thus, with mutual consent, the parties are free to choose or adopt any procedure to appoint arbitrators.
Sometimes, the parties fail to appoint the arbitrators with mutual consent, and the arbitration is to be
done with three arbitrators. In such cases, each party shall appoint one arbitrator, and the two such
appointed arbitrators shall appoint a third arbitrator who shall act as the 'presiding arbitrator' [Section
11(3)]. Under the old Arbitration Act, 1940, such a presiding arbitrator was called an 'umpire'.
Note. When a person is approached in connection with his possible appointment as an arbitrator, then
such a person must disclose, in writing, any circumstances which are likely to give rise to the doubts
about his independence or impartiality [Section 12(1)].

50.6. APPOINTMENT OF ARBITRATOR BY THE CHIEF JUSTICE OF HIGH COURT

We know that the parties to an arbitration agreement are free to appoint any person as their arbitrator.
Moreover, with the mutual consent, the parties are also free to adopt any procedure for the appointment
of the arbitrators. But there may be certain circumstances in which the parties may not agree on the
appointment of the arbitrators. In such circumstances, Section 11 of the new Arbitration and
Conciliation Act, 1996 empowers the Chief Justice of the High Court to make appointment of the
arbitrators. The object of this provision is to provide machinery for making the arbitration agreement
effective and enforceable in certain cases, where the arbitration is not otherwise appointed. This power
of the Chief Justice is limited to the cases expressly specified in the Arbitration and Conciliation Act.
The Chief Justice should not be considered to have general or inherent power to appoint an arbitrator in
those cases which do not fall within the purview of this section. The case of Sunil Mukherjee . Union of
India, AIR 1978 Calcutta 37, decided under the old Act, may also be relevant here. In MMTC Ltd.
Sterlite Industries (/) Ltd. (1996) 10 SCL 402 (SC), the Supreme Court has held that where there is a
valid arbitration agreement, and the arbitrator is not appointed by the parties as per the provisions of
Section 11, then further procedure provided in this section should be followed whereby the appointment
of arbitrator can be made by the Chief Justice. It may, however, be noted that while making
appointment of the arbitrator, the Chief Justice or any person or instrument designated by him, shall
have due regard to the following (section 11 (8)):
(a) The qualification of the arbitrator is required by the agreement of the parties, and
(b) The independence and impartiality of the arbitrator.
The circumstances in which an arbitrator may be appointed by the Chief Justice, may be discussed under
the following heads:
1.Where the parties fail to appoint their respective arbitrator (section 11 (4)): Sometimes, the
arbitration agreement provides that the matter shall be referred to three arbitrators, but there is
no agreement between the parties regarding the procedure of appointment. In such cases, each
party shall appoint one arbitrator, and the two appointed arbitrator shall appoint the third
arbitrator who shall act as the ‘presiding arbitrator’. Under this clause, the Chief Justice of the
High Court, upon the request of a party, shall make the appointment of the arbitrators in the
following circumstances:
(a) Where a party fails to appoint his arbitrator within 30 days from the receipt of a request to do
so from the other party, or
(b) Where the arbitrators appointed by the parties fail to agree on the third arbitrator within 30
days from the date of their appointments.
It is important to note that under this clause, the arbitrators can also be appointed by any person or
institution designated by the Chief Justice for this purpose. Where any person or institution is so
designated, a request by a party for the appointment of the arbitrators may be made to such person or
institution.
2.Where the parties fail to appoint a sole arbitrator (Section 11(5)): Sometimes, the arbitration
agreement provides that the matter shall be refered to a sole arbitrator, but there is no agreement
between the parties regarding the procedure of appointment. In such cases, the appointment of
the arbitrator shall be made by the Chief Justice of the High Court, if the parties fail to concur
(ie. Agree) on the appointment. The Chief Justice, upon the request of a party, shall make the
appointment if the arbitrator is not mutually appointed by the parties within 30 days from the
receipt of a request by one party from the other party about the appointment.
It is important to noted that under this clause, the arbitrator can also be appointed by person or
institution designated by the Chief Justice for this purpose. Where any person or institution is so
designated, a request by a party for the appointment of the arbitrator may be made to such person
or institution.
3.Where the parties fails to act as per the agreed procedure of appointment [Section 11 (6)].
Sometimes, there is an agreement between the parties regarding the procedure of appointment,
but a party fails to act as required under that procedure. In such cases, a party may request the
Chief Justice to take necessary measures for securing the appointment of the arbitrators in the
following circumstances.
(a) Where the parties or the two appointed arbitrators fail to reach an agreement expected of
them under the agreed procedure of appointment, or
(b) Where a person or institution fails to perform any function entrusted to them under the
agreed procedure of appointment.
It is important to note here that, a request by the party for securing the appointment the arbitrators, may
also be made to any person or institution designated by the Chief Justice of the High Court.
Notes 1. Under Section 8 of the old Arbitration Act, 1940, instead of Chief Justice, the original court
having the jurisdiction had the power to appoint arbitrator in following circumstances.
The arbitral award shall be considered to be opposed to public policy of India, if the making of the
award was induced or affected by fraud or corruption [Section 34(2)], Explanatory]. In case of
misconduct by the arbitrator, the award may also be set aside on the ground of public policy.
[A. Irani v State of M.P., AIR 1974 MP 199].
The ‘misconduct’ by the arbitrator will be discussed in detail in Art 51.12.
Notes 1. Under Section 30 of the Old Arbitration Act, 1940, the court had the power to set aside an
award in three circumstances, namely:
 (a) Where the arbitrator had misconduct himself or the arbitration proceedings [ Section 30 (a)].
(b) Where the award had been made after the issue of an order by the court superseding the
arbitration or after the arbitration proceedings have become invalid [Section 30(b)].
(c) Where the award has been improperly procured or is otherwise invalid [Section 30(c)].
1.The court usually declines to set aside the award at the instance of a party who has not suffered
any injury. Union of India v. Narain Misra, AIR 1970 sc 753]

(a)Where all the parties did not concur in appointment.

(b) Where the appointed arbitrator refused or neglected to act.
(c) Where the appointed arbitrator died or became incapable of acting.
2. In K. Singh D. Kapadia v. Indian Engg., AIR 1972 SC 1538, the Supreme Court has observed that
an arbitrator appointed by the court, has the like powers to act in the reference and to make an award as
if he was appointed by the consent of the parties. This observation is also relevant in appointment made
by the Chief Justice under the new Act.
3. In Prabhat General Agencies v. Union of India, AIR 1971 SC 2298, the Supreme Court has stated
that the following conditions must be fulfilled for making an application to the court enabling it to
appoint in arbitrator. These may also be considered relevant for making an application to Chief Justice
under Section 1 1 of the new Act.
(a) There must be a valid arbitration agreement.
(b) The dispute must have arisen between the parties as regards the subject-matter of arbitration.
(c) The parties do not concur in the appointment of arbitrator.
(d) On written request being made by one party to the other for appointment of the arbitrator, such
other party do not give his consent within the time prescribed in the Act.
(e) The other party should be given an opportunity of being heard.

50.7. APPOINTMENT OF ARBITRATOR BY ANY PERSON OR INSTITUTION

DESIGNATED BY THE CHIEF JUSTICE
Any person, even if not a party to the arbitration agreement, or an institution have also been empowered
by the new Act to make appointment of the arbitrator. However, such a person or institution can appoint
the arbitrator only if they are designated by the Chief Justice for this purpose.
The circumstances, in which such designated person or institution can appoint the arbitrator, are the
same in which the Chief Justice himself is empowered to make the appointment [Section 11(4), 11(5)
and 11(6)]. As in case of appointment by the Chief Justice, the designated person or institution shall also
have regard to the following while making the appointment of the arbitrator [Section 11(8)]:
1 . The qualifications of the arbitrator as required by the agreement of the parties, and
2. The independence and impartiality of the arbitrator.

50.8. QUALIFICATIONS OF AN ARBITRATOR

The law does not prescribe any qualifications for an arbitrator. Any person, even a foreigner, who enjoys
the confidence of the parties may be appointed as an arbitrator [Section 11(1)]. An infant or lunatic or
even an unincorporated or fluctuating body can validly be appointed as an arbitrator'.
If the parties chose incompetent or unfit person, that is their own affair. The only requirement is that an
arbitrator should be impartial, disinterested and honest. However an arbitration agreement may prescribe
certain qualifications of an arbitrator. In such a case, the appointment of the arbitrator is not valid unless
he possess the qualifications prescribed by the arbitration agreement. [Rohcassi
Shipping Co. v. Blue Star Lines Ltd. (1969) 1 QB 173].
Thus, the qualifications of an arbitrator may, therefore, be stated as under [Section 11(8)]:
1. He must possess those qualifications which are prescribed by the parties in their mutual agreement,
and
2. He must be independent and impartial person. This means that he should be disinterested and an
honest person.

50.9. DISQUALIFICATIONS OF AN ARBITRATOR

Following are the disqualifications of an arbitrator:
1. A person is disqualified from acting as an arbitrator if he is interested in the subject-mat of
litigation. The test of interested person is Whether he is likely to be biased (unfair? If reasonable
likelyhood of bias is there, the person is disqualified. A person is also disqualified if he has some
pecuniary interest.
A person is disqualified from acting as an arbitrator if he has some relationship ^-.r any party to the
arbitration agreement. But the relationship will not be a disqualiflcati if it is not likely to bias him. If the
appointment is made with the full knowledge of th> relationship, it cannot be challenged.
A person is disqualified from acting as an arbitrator in a dispute in relation to which he is a judge and
also a witness.
The indebtedness to a party is usually a disqualification of the arbitrator. Thus, a person who is heavily
indebted to any party to the dispute, cannot be appointed as an arbitrator It may be noted that an
arbitrator may also be removed if he becomes indebted to a party after the reference. But if the
arbitrator's indebtedness is known to the parties, his appointment cannot be questioned.

50.10. COMPLETION OF APPOINTMENT OF AN ARBITRATOR

The appointment of an arbitrator is complete as soon as it is made. The acceptance of the office by the
arbitrator is not necessary to complete his appointment [A". Singh D. Kapadia v. Indian Engg. Co. AIR
1972 SC 1528]. Thus, when both the parties to the arbitration agreement have nominated the arbitrator,
the nominee is the arbitrator even before he accepts the office. However, the authority of the arbitrator
commences from the moment he begins with the business of reference and not from the time of his
appointment [M.S. Hussain v. Mt. Kaniz Fatinia 15 CWN 1005 (PC)].
There is also a contrary view on the point of completion of arbitrator's appointment. According to the
judicial decisions supporting this contrary view, the appointment of the arbitrator is not complete before
the appointee has been told that it is desired to appoint him in a particular matter and he has indicated his
willingness to act in the matter2. And a mere nomination of an arbitrator unknown to the appointee is not
an e effective appointment of him [Chaturbhuj Bhawanidas v. Deokaran Nanaji, AIR 1924 Bom. 370].

50.11. MODE OF APPOINTMENT OF AN ARBITRATOR

The Arbitration and Conciliation Act does not prescribe any mode of appointment of the arbitrator. The
very foundation of arbitration agreement is the consent of the parties. Thus, the parties may by mutual
consent, prescribe any mode of appointment. The appointment of an arbitrator may be made orally
unless the arbitration agreement requires a special mode of appointment. The parties may appoint an
arbitrator by lot or by any other method.
As regards the mode or procedure of appointment, Section 11 (2) of the Arbitration and Conciliation
Act, 1996 specifically states that the parties are free to agree on any procedure for the appointment of
arbitrators.

50.12. EFFECT OF DEATH OF A PARTY

Sometimes, a party to an arbitration agreement dies during the arbitration proceedings. In such cases, the
arbitration agreement is not discharged i.e. does not come to an end. It remains enforceable by or against
the legal representatives of the deceased party [Section 40(1)]. It may also be noted that the authority of
an arbitrator is not revoked by the death of the party who had appointed the arbitrator [Section 40(2)].
However, where right of action is extinguished by the death of a party, the arbitration agreement comes
to an end. The reason for the same is that when the right itself is extinguished, it cannot be enforced by
any person. Thus, when the right Of action to be enforced in the arbitration agreement is merely personal,
(i.e. can be enforced only against the person concerned) e.g. right for damages for defamation, the legal
representatives Of the deceased party are not bound by the agreement.

50.13. EFFECT OF INSOLVENCY OF A PARTY

Sometimes, an insolvent is a party to a contract, and the contract contains a clause that any difference
arising in connection with the contract shall be referred to arbitration. In such cases, the said clause can
be enforced by or against a Receiver (or Official Assignee) if he adopts (i.e. accepts) the contract
[Section 41(1)].
If the Receiver disclaims (i.e. does not adopt) the contract, then he is neither bound by the contract, nor
he can enforce the same.
Sometimes, a person enters into an arbitration agreement, and thereafter, he is declared insolvent. In
such cases if any matter, to which the agreement relates, is required to be determined for the purpose of
insolvency proceedings, the same may be referred to the arbitration in accordance with the arbitration
agreement, if the Insolvency Court makes an order to that effect. The application for such an order may
be made to the court by any party to the agreement other than the insolvent, or by the Receiver. [Section
41(2)]. It may, however, be noted that the matter got to be determined by the arbitration should be for
the purpose of insolvency proceedings or relating to such proceedings. And the case should not be one
which is covered by Section 41(1) of the Arbitration Act (as discussed above).
50.14. REMOVAL OF AN ARBITRATOR BY THE ARBITRAL TRIBUNAL
The power to remove the arbitrator has been vested in the arbitral tribunal. Under the old Arbitration
Act, 1940, the court had the power to remove the arbitrator in circumstances specified in Section 11. As
a matter of fact, all the discretionary powers of the court have been curtailed by Section 5 of the
Arbitration and Conciliation Act, 1996. This section specifically provides that in matters governing the
arbitration, no judicial authority shall intervene except where so authorised under the new Act. Thus,
under the new Act, the court has the power only, in those cases where specific provisions have been
made e.g. for termination of arbitrator's authority, and setting aside an award as discussed in Art. 50.15
and Art. 51.11 respectively.
As regards the removal of arbitrator, the provisions are contained in Section 12 and 13 of the Arbitration
and Conciliation Act, 1996, and may be studied under the two heads, namely (a) grounds for challenge,
and (b) procedure for removal of arbitrator.
1. Grounds for challenge [Section 12]: The appointment of the arbitrator may be challenged only on the
following grounds:
(a) Where there are doubts about arbitrator's independence or impartiality [Section 12 (3) (a)]:
Sometimes, there are certain circumstances which give rise to justifiable doubts about arbitrator's
independence or impartiality. It is a valid ground for challenging arbitrators appointment, and he may be
removed if proved guilty. This clause may cover the cases, where the arbitrator is guilty of 'misconduct.'
The 'misconduct' by the arbitrator will be discussed later, in the following pages.
(b) Where the arbitrator does not posses the qualifications as agreed between the parties [Section
12(3) (b)]: The parties to the arbitration agreement are free to prescribe the qualifications which the
arbitrator must possess. If the arbitrator does not posses the qualifications as prescribed by the parties by
their agreement, then his appointment can be challenged on this ground, and he may be removed from
his office.

The new Arbitration Act prescribes only the above two grounds for challenging the arbitrator'
appointment. As regards arbitrator's independence or impartiality, it has been specificai] provided that
when a person is approached in connection with his possible appointment as a arbitrator, then he must
disclose, in writing, any circumstances which are likely to give rise t doubt about his independence or
impartiality [Section 12(1)]. Moreover, from the time of hi appointment and throughout the arbitration
proceedings, if there exists any circumstances which may create doubts about arbitrator's independence
or impartiality, then also he is bound to disclose the same to the parties without any delay [Section
12(2)].
We have stated above that the clause about arbitrator's independence or impartiability may cover the
cases where the arbitrator is quilty of misconduct. The arbitrator may misconduct himself or the
arbitration proceedings. It may be noted that the 'misconduct' includes both i.e. the misconduct in respect
of his own conduct (i.e. moral misconduct), and misconduct in respect of the arbitration proceedings
(i.e. legal misconduct). Thus, an arbitrator may be removed by the court on the grounds of bribery,
corruption, fraud, partiality, bias, personal disqualifications etc. Moreover, he can also be removed when
there is neglect of legal duty on his part which results in miscarriage of justice. Following are some of
the grounds of legal misconduct on which the arbitrator may be removed from • office:
(a) Where the arbitrator sends a communication relevant to the enquiry to one party and does not send
a copy of the same to the applicant inspite of request.
(b) Where he hears only one party in the absence of the other.
(c) Where he refuses to record oral evidence.
(d) Where, without the consent of the parties, he insists that a person not connected with the case
should give evidence.
(e) Where he improperly refuses to grant the necessary adjournments.
(f) Where he refuses to hear evidence within the scope of the reference.
(g) Personal disqualifications of the arbitrator may also be the grounds of legal misconduct. e.g. where
the arbitrator has acquired secret interest in the subject-matter of reference or where he is indebted to
one of the parties to the arbitration agreement. It may, however, be noted that the arbitrator may be
removed on the ground of misconduct when it takes place before the making of the award. After the
delivery of the award, there can be no question of removal of an arbitrator who has misconducted. In
such a case, the award can be set aside under Section 13(5) and 34 of the new Arbitration and
Conciliation Act, 1996.
2. Procedure for removal of arbitrator [Section 13]: The Arbitration and Conciliation Act, 1996 has
given the freedom to the parties to prescribe any procedure for the removal of the arbitrator [Section
13(1)]. In case no such procedure is agreed to between the parties, then the steps in respect of arbitrator's
removal may be stated as under:
(a) Any party may apply to the arbitral tribunal for the removal of the arbitrator on the grounds stated
in point (1) above. However, if a party wants to challenge the appointment of an arbitrator appointed by
himself or in whose appointment he has participated, he can do so only for such reasons about which he
becomes aware after the appointment i.e. he cannot challenge for the reasons know to him prior to
appointment [Section 12(4)].
(b) The application for challenge of arbitrator's appointment must be made is writing, and it must state
the reasons for the challenge of appointment [Section 13(2)].
(c) The application for challenge must be made within 15 days after becoming aware of the constitution
of the arbitral board, or after becoming aware of any ground for challenge as stated in Section 12(3), and
discussed in point (1) above [Section 13(2)].
(d) The arbitral tribunal's power to remove the arbitrator is discretionary. The challenged arbitrator may
himself withdraw from his office, or the other party may also agree to the challenge of arbitrator’s
appointment. In such a case, arbitrator’s authority stands terminated. If the arbitrator does not
withdraw or a party does not agree to the challenge, then the arbitral tribunal shall decide the application
of challege. However, depending upon the circumstances, it may remove the arbitrator or dismiss the
application [Section 13(3)].
(e) In case the arbitrator is not so removed, then the arbitral fribunal tribunal shall continue the arbitral
proceedings, and make the award [Section 13(4)].
(f) The party challenging the arbitrator's appointment may not be satisfied with the award so made by
the arbitral tribunal. Such a party may apply to the court for setting aside the award [Section 13(5)]. And
where the award is set aside under this provision, the court may decide whether or not the challenged
arbitrator is entitled to any fees [Section 13(6)].

50.15- TERMINATION OF ARBITRATOR'S AUTHORITY

We know that generally an arbitrator is appointed by the perties as per their agreement. If the parties so
agree, they may also terminate the authority of the arbitrator. The specific provisions regarding
termination of arbitrator's authority are contained in Section 14 and 15 of the Arbitration and
Conciliation Act, 1996, and may be studied under the following three heads:
(a) Termination due to arbitrator's own act or fault.
(b) Termination by the parties.
(c) Termination by the court.
These circumstances are explained in the following pages.
1. Termination of arbitrator's authority due to arbitrators own act or fault [Section 14(1), 15(1) (a)]:
Under this clause, the authority of the arbitrator shall terminale in the following three circumstances,
namely:
(a) Where he becomes unable to perform his functions.
(b) Where he fails to act without undue delay.
(c) Where he withdraws from his office.
Sometimes, the arbitrator becomes unable to perform his functions, or fails to act without undue delay
i.e. unreasonably delays the arbitral proceedings. In such cases, the authority of the arbitrator shall
terminate when, due to these reasons, he withdraws from his office or the parties agree to terminate his
authority [Section 14(1) (a) (b)]. It may be noted here that arbitrator's authority shall also terminal where
he himself withdraws from his office for any reason [Section 15(l)(a)].
The arbitrator may become de jure or de facto unable to perform his functions. He becomes de jure
unable to perform his functions when he cannot lawfully perform his duties e.g. where he becomes
insane, or is declared insolvent, or is disabled in law to act etc. And he becomes de facto unable to
perform his functions where he becomes physically unfit to perform his functions as an arbitrator. In
both these cases, arbitrator's authority shall terminate.
2. Termination of arbitrator's authority by the panics [Section 14(1), 15(l)(b)]: The parties to the
arbitration agreement may mutually agree about the circumstances in which the arbitrator's authority
may be terminated. One of the circumstances is provided in Section 14(1) which specifically states that
where the arbitrator becomes unable to perform his functions, or fails to act without undue delay i.e.
unreasonable delays the arbitral proceedings, then the parties may agree to terminate arbitrator's
authority. The parties may also enter into an agreement about termination of arbitrator's authority on any
other grounds. Where there is any such agreement, arbitrator's authority shall stand terminated as
provided in the agreement between the parties [Section 15(l)(b)].
3. Termination of arbitrator's authority by the court [Section 14(2)]: The court also has the power to
terminate arbitrator's authority in limited circumstances. On party's application, the court can terminate
arbitrator's authority only on the following two grounds, namely
(a) Where he becomes unable to perform his functions, or
(b) Where he fails to act without undue delay.
It may, however, be noted that such an application may be made to the court only if the controversy
about the termination of arbitrator's authority cannot otherwise be resolved by the parties themselves. On
receipt of such application, the court may decide on the termination of arbitrator's authority.
The termination or revocation of arbitrator's authority itself does not put an end to the arbitration
agreement.
[Juggilal Kamlapat v. General Fiber Dealers Ltd., AIR 1962 SC 11231
Notes: 1. If the arbitrator withdraws from his office, or a party agree to the termination of arbitrator's
authority, it shall not mean the acceptance of validity of the grounds on which arbitrator's authority has
been challenged [Section 14(3)].
2. The authority of the arbitrator shall also terminate with the termination of arbitration proceedings as
discussed in Art. 50.20.

50.16. SUBSTITUTION OF ARBITRATOR

We have discussed, in the last article, that in certain circumstances the authority of an arbitrator can be
terminated. On the termination of arbitrator's authority, his office shall not remain vacant. In his place,
another arbitrator shall be appointed to fill up the vacancy. It may be noted that the new arbitrator shall
be appointed according to the same rules which were applicable for the appointment of the arbitrator
being replaced [Section 15(2)]. In connection with the replacement of the arbitrator, the following
important points may be noted:
1. On the replacement of the arbitrator as stated above, any hearing previously held may be repeated
at the discretion of the arbitral tribunal. This is, however, subject to an agreement between the parties
[Section 15(3)].
2. Any order or ruling of the arbitral tribunal, made prior to the replacement of an arbitrator, shall not
be invalid simply because there has been a change in the composition of the arbitral tribunal. This is also
subject to an agreement between the parties [Section 15(4)].

50.17. POWERS OF THE ARBITRAL TRIBUNAL (OR ARBITRATOR)

Following are the powers of the arbitral tribunal (or arbitrator):
1. Power to decide on its own jurisdiction [Section 16(1)]: The Arbitration and Conciliation Act, 1996
has conferred absolute jurisdiction on the arbitral tribunal over the matter before il. The tribunal has
been empowered to decide even on its own jurisdiction. This means that any plea by the party that the
arbitral tribunal does not have the jurisdiction, or is exceeding the scope of its authority, shall be decided
by the arbitral tribunal itself. It will be interesting to know thai if the arbitral tribunal takes a decision
rejecting the plea, then it shall continue with the arbitral proceedings, and make an arbitral award
[Section 16(5)]. However, if any party is not satisfied with the award, he may apply to the court for
setting aside the award [Section 16(6)].
2. Power to decide about the existence or validity of the arbitration agreement [Section 16(1)]: The
arbitral tribunal has the powers to decide the questions about the existence or validity of the arbitration
agreement. Thus, if any party raises the question that there was no arbitration agreement between the
parties or that the arbitration agreement is not valid, then the arbitral tribunal shall have the full powers
to decide such questions.
3. Power to arrange for administrative assistance [Section 6]: The arbitral tribunal may need the
administrative assistance of any institution or person for conducting the arbitral proceedings. The
arbitral tribunal has this power to arrange for administrative assistance of suitable institution or person.
However, the tribunal can exercise this power with the consent of the parties, and for facilitating the
conduct of arbitral proceedings. This is the new provision incorporated by the Arbitration and
Conciliation Act, 1996.
4 fewer to decide atioui me removal of arbitrator [Section 13(3)]: The arbitral tribunal has the power to
decide the application for the removal of an arbitrator. A party may challenge the appointment of an
arbitrator on specified grounds, and seek his removal. The arbitral tribunal has been empowered to
decide such applications.
5. Power to make order for interim measures [Section 17]: The arbitral tribunal has the power to make
order for interim measures. This means that before making the final order the tribunal nay make interim
order as it may consider necessary for the protection of subject matter of the dispute. However, the
arbitral tribunal may do so at the request of a party to the arbitration agreement.
6 Power to decide manner for conducting arbitral proceedings [Section 19(3)]: The arbitral tribunal has
the power to conduct the arbitral proceedings in such a manner as it considers appropriate. In conducting
the proceedings, the arbitral tribunal also has the power to determine the admissibility, relevance,
materiality and weight of any evidence. It may, however, be noted that the arbitral tribunal may decide
about the procedure of conducting arbitral proceedings only if there is no agreement between the parties
about the procedure to be followed by the arbitral tribunal.
7. Power to allow amendment of arbitration petition [Section 23(3)]: The arbitral tribunal has the
power to allow the amendment of the arbitration petition if the tribunal considers it appropriate.
8. Power to appoint expert [Section 26]: The arbitral tribunal has the power to appoint one or more
experts to report to the tribunal on specific issues. Thus, if the arbitral tribunal considers it necessary to
have the expert opinion on any specific issue, it may appoint the concerned expert for this purpose. The
arbitral tribunal may also order the party to provide relevant information, document or other relevant
material for the inspection of the expert to enable him to give the correct report. This power is, however,
subject to an agreement between the parties i.e. the parties may agree that no expert is to be appointed in
the arbitral proceedings.
9. Power to seek court assistance in taking evidence [Section 27]: The arbitral tribunal has the power
to take court assistance in obtaining evidence through process in court. The court may order the
witnesses to provide evidence directly to the tribunal. The arbitral tribunal can seek court assistance by
making an application to the court, and such an application must have the following particulars:
(a) The names and addresses of the parties and the arbitrators.
(b) The nature of the claim and relief sought.
(c) The evidence to be obtained. The names and address of any person to be heard as witness.
(d) The description of any document to be produced or property to be inspected.
10. Power to encourage settlement [Section 30(1)]: The arbitral tribunal has the power to use
mediation, conciliation or other procedure, at any time of the arbitral proceedings, to encourage
settlement between the parties. However, the tribunal may take such steps, for amicable settlement, with
the consent of the parties.
11. Power to make arbitral award [Section 31]: The arbitral tribunal has the power to make arbitral
award i.e. to give decision on the matter referred to it. This is in fact the power for which the tribunal
was constituted by the parties. The parties refer their dispute to the arbitral tribunal tor a decision, and
the tribunal decides the dispute by giving the arbitral award which is binding on the parties. The award
must be in writing and signed by the members of the arbitral tribunal.
12. Power to terminate arbitral proceedings [Section 32]: The arbitral tribunal has the power to
terminate the arbitral proceedings by making an order to that effect. The arbitral tribunal shall issue an
order for the termination of the proceedings in the following circumstances:
(a) Where the claimant withdraws his claim.
(b) Where the parties agree on the termination of arbitral proceedings.
(c) Where the arbitral tribunal considers that the continuation of proceedings has become unnecessary
or impossible.
13. Power to make corrections or give interpretation of the award [Section 33]: This power will be
discussed in detail in Art. 51.8.
14. Power to make additional award [Section 33]: This power will be discussed in detail jn Art. 51.9.
In addition to these powers, the arbitral tribunal also has some other powers which may be summed up
as under:
(a) Power to award costs of reference and award.
(b) Power to award interest.
(c) Power to fix time for payment, and to allow payment by installment.
(d) Power to allow specific performance of a contract under certain circumstances.
(e) Power to allow amendment of the arbitration petition.
(f) Power to determine the question of legal heirs or representatives of a deceased party to the
arbitration agreement.

50.18. DUTIES OF THE ARBITRAL TRIBUNAL (OR ARBITRATOR)

Following are the duties of the arbitrator tribunal (or arbitrator):
1. Duty to observe principles of natural justice: We know that the arbitral tribunal holds quasi-judicial
position. Thus, it must observe the principles of natural justice while deciding the matters before it.
According to the principles of natural justice, the parties should be given an opportunity of being heard,
and the award should be made after giving proper hearing to the parties. Moreover, the arbitrator should
not hear one party in the absence of the other. The parties must be kept informed of every development
of the arbitration proceedings, and they must also be given an opportunity to cross examine the evidence
produced by other parties.
2. Duty to act judicially: It is also the duty of the arbitral tribunal to proceed in a judicial way. The
tribunal must fix a reasonable time and place for hearing the reference. And a due notice should be given
to the parties to appear and represent their case. It may be noted that the omission to give such notice is a
legal misconduct on the part of the arbitrator, and vitiates (invalidates) the award. The arbitrator should
also grant the adjournments which may be necessary in the interest of Justice.
3. Duty to act fairly to both parties: It is another duty of an arbitral tribunal to act fairly and impartially.
The tribunal should not do favour to any party e.g. passing of secret communication to one party to the
prejudice of the other. Thus, the arbitrator should not hear one party in (lie absence of the other.
Moreover, he should also not take evidence from one party without communicating it to the other party
and without giving him an opportunity to cross examine the same.
4. Duty to give a final award and decide all the matters referred to him: The arbitral tribunal should
give a final award on all the matters referred to it. If the arbitral tribunal does not decide all the matters
in dispute between the parties, then it is considered to have acted improperly and arbitrators' conduct
amount to a legal misconduct. But where the tribunal is expressly empowered to make several awards,
then it may not decide all the matters by one award. In such a case, the tribunal may make several
awards.
5. Duty to act amicably with the co-arbitrators: Sometimes, there are several arbitrators in the arbitral
tribunal. In such cases, it is the duty of all the arbitrators to act amicably and decide the dispute referred
to them. If the arbitrators fail to act amicably, and they obstruct each other-it amounts to misconduct on
their part.
6, Duty to discharge functions personally: The arbitrator should discharge all the judicial functions
personally. He must not delegate his authority to a third person or even to a co-arbitrator. [it may-
however, be noted that the ministerial acts may be delegated by the arbitrator. Instances of ministerial
acts are, receipt of written statement (i.e. reply to the arbitration petition) from a party, seeking legal
advice, taking assistance in technical matters. Though the taking of Distance may be delegated, but the
decision in the matter must be made by the arbitrator himself.
7, Duty to disclose personal interest: Sometimes, an arbitrator may have some interest in the subject-
matter of dispute, or he may be interested in one of the parties. In such cases, before accepting the work
of arbitration, he must disclose his interest to the parties [Section 12(1)].
g. Duly to make an award within time: The arbitral tribunal must make the award within the time
prescribed for the making of the award. The time for making of the award may be fixed by the parties in
their arbitration agreement. If no such time is fixed, then it is the duty of the arbitrator to proceed with
the arbitral proceeding without undue delay [Section 14(1) (a)].
9. Duty not to exceed his authority: The authority of an arbitrator is given by the arbitration agreement,
and he must act within the scope of his authority. If he decides the matter by exceeding his authority,
then the award is liable to be set aside. It may also be noted that an arbitrator cannot take upon himself
the authority which is not conferred by the arbitration agreement. Thus, where an arbitrator is appointed
to decide the boundaries of certain land, then the decision would be in excess of the authority conferred,
if he decides the title of the parties.
10. Duty not to act as an advocate or agent of a party: The arbitrator must not act on behalf of a party
who has appointed him. As the arbitrator performs the judicial functions, he must act as a judge and
refrain from doing favour to the party appointing him.
11. Duty not to misconduct himself: The arbitrator must not misconduct himself or arbitration
proceedings in any way. If he misconducts, he may be removed by the arbitral tribunal on an application
made by any one of the parties.

50.19. PROCEDURE IN ARBITRATION

We know that the parties are free to enter into a valid arbitration agreement for the settlement of their
disputes through arbitration. When there is a valid arbitration agreement, the parties may make an
application to the arbitral tribunal for the settlement of their dispute. On the reference of a dispute to the
arbitral tribunal, the procedure prescribed in the Arbitration and Conciliation Act, 1996 is followed for
the settlement of disputes. The parties may also settle their disputes through arbitration in those cases
where a suit, between the parties, is already pending before a judicial authority. However, in such a case,
a party should make an application to the judicial authority for an order of reference (i.e. for an order
refering the matter to arbitration). On such application, the judicial authority shall refer the matter to
arbitration, and thereafter the matter shall be decided by the arbitral tribunal as per the prescribed
procedure. This provision is contained in Section 8 of the Arbitration and Conciliation Act, 1996. The
analysis of this section reveals that the following conditions must be satisfied before an application, for
an order of reference, is made to the court in a pending suit.
1. There must be a valid and existing arbitration agreement between the parties.
2. The subject-matter of reference must be the matter in difference between the parties in the pending
suit.
3. The application to the judicial authority, for an order of reference, should be made by the party
before submitting his first statement on the substance of dispute.
4. The application as stated above must be accompanied by the original arbitration agreement or by its
duly certified copy.
On receipt of such application, the judicial authority shall refer the matter to arbitration. It may be noted
that even if such an application is pending before the judicial authority, the parties may commence
arbitration proceedings or continue them and arbitral award may be made [Section 8(3)]. This provision
lifts the restriction of lingering a matter in Court by any deviceful tactics. Thus, now the parties can
proceed with the arbitration even if the application to the court for an order of reference has not been
decided by it.
The court may keep the disputed matter pending and allow the parties to proceed with the arbitration. In
Rajinder K. Khanna . Union of India, 1998(5) SCALE 589, the Supreme Court passed an order stating
that the contestants having agreed to refer the dispute to arbitration, the matter be kept pending till the
arbitrtion award is received.
On a valid reference to the arbitral tribunal, whether in a pending suit or otherwise, the provisions
applicable to the procedure as contained in the Arbitration and Conciliation Act 1996, may be discussed
under the following heads:
1. Procedure to be followed by the arbitral tribunal [Section 19]: The parties are free to agree on the
procedure to be followed by the arbitral tribunal in conducting its proceedings. Thus, where any
procedure is prescribed by the parties, the arbitral tribunal must follow the same procedure However, if
no such procedure is prescribed by the parties, then the arbitral tribunal may follow the procedure which
it considers appropriate. It may, however, be noted that the procedure prescribed by the parties or to be
followed by the tribunal must not be contrary to the provisions of the Arbitration and Conciliation Act,
1996.
It is important to note here that the arbitral tribunal shall not be bound by the Code of Civil Procedure,
1908, or the Indian Evidence Act, 1872 [Section 19(1)].
2. Equal treatment of parties [Section 18]: The arbitral tribunal should treat both the parties with
equality, and both the parties must be given full opportunity to present their case. This section
incorporates the principles of natural justice.
3. Statement of claims and defence [Section 23]: The party who seeks relief from the arbitral tribunal
is known as the 'claimant', and the other party i.e. against whom relief is sought, is known as the
'respondent'. Within the time agreed between the parties or the time determined by the arbitral tribunal,
the claimant should submit his statement of claims to the arbitral tribunals. In such a statement, the
claimant should state (a) the facts supporting his claim, (b) the points of dispute, and (c) the relief or
remedy sought. And the respondent should submit his statement of defence in respect of the particulars
submitted by the claimant.
It may be noted here that if, without any sufficient cause, the claimant fails to communicate his
statement of claims as stated above, then the arbitral tribunal shall terminate the arbitral proceedings
[Section 25(a)]. However, on the other hand, if the respondent fails to communicate his statement of
defence, the arbitral tribunal shall continue the proceedings [Section 25(b)]. These two provisions are,
however, subject to any other agreement between the parties.
4. Hearing in arbitration [Section 24]: The parties are free to agree on any mode of hearings i.e.
whether the proceedings should be oral or in writing on the basis of documents. If the parties have not
agreed to any particular mode, then the arbitral tribunal shall itself decide whether to conduct the
proceedings orally or in writing. However, on a request by a party for oral hearing at an appropriate
stage of the proceedings, the arbitrator must hold the oral hearings.
The sufficient advance notice of any hearing, and of any meeting of the arbitral tribunal, must be given
to the parties to enable them to inspect the documents, goods or other property concering the dispute.
It may be noted here that if, without any sufficient cause, a party fails to appear at an oral hearing or to
produce documentary evidence, then the arbitral tribunal may continue the proceedings, and make award
on the basis of the evidence already before the tribunal. This is, however, subject to an agreement
between the parties [Section 25(c)].
5. Law applicable to the disputes [Section 28]: In the arbitral proceedings involving Indian arbitration,
the arbitral tribunal shall decide dispute in accordance with the Indian Law for the time being in force in
India. But in the arbitral proceedings involving inter arbitration, the arbitral tribunal shall decide the
dispute in accordance with that country which have already been determined by the parties in their
agreement. If no such thing has been agreed to or designated by the parties, then the arbitral tribunal
shall be at liberty to apply the rules of law as it considers appropriate in the circumstances of the case.
However, in all cases, whether national arbitration or international arbitration, the arbitral tribunal shall
decide the dispute in accordance with the terms of contract, and shall also take in to consideration the
usages of the trade applicable to the transaction. (Section 28(3)).
6. Decision by the arbitral tribunal (Section 29): In those case where the arbitral tribunal consists of
more than one arbitrator, the decision shall be made by the opinion of the majority of the members.
However, the parties may agree otherwise also e.g. they may agree that the decision of the presiding
arbitrator shall be accepted.
As regards the procedure to be followed, it may be decided by the presiding arbitrator, if so authorized
by the parties, or by all the members of the tribunal.
7. Finality of arbitral award (Section 35): The arbitral award made by the arbitral tribunal shall be final,
and binding on the parties and also on the persons claiming through them. The final award is enforceable
in the Court of Law in the same manner as if it were a decree of the Court (Section 36).
8. Place of arbitration [Section 20}: The parties are free to agree on the place of arbitration However,
if no place is agreed by the parties, then the arbitral tribunal shall determine the place of arbitration
keeping in view the circumstances of the case and the convenience of the parties.
9. Commencement of arbitral proceedings [Section 21]: The arbitral proceeding are considered to
commence i.e. begin on the date on which a request to refer the dispute is received by the respondent.
However, the parties may agree otherwise also i.e. they may fix any other date on the which the arbitral
proceedings shall be considered to begin
10. Language to be used in arbitral proceedings [Section 22]: The parties are free to agree
upon the language to be used in the arbitral proceedings If there is no such agreement, the arbitral
tribunal shall itself determined the language to be the language to be used.
The arbitral tribunal may also order that any document shall be accompanied by a translation into the
language agreed upon by the parties or determined

50.20. TERMINATION OF ARBITRAL PROCEEDINGS

The general provisions relating to the termination of arbitral proceedings are contained in Section 32 of
the Arbitration and Conciliation Act, 1996. The analysis of the Section reveals that the arbitration
proceedings shall be terminated in the following cases
1. By the final award.
2. By an order of the arbitral tribunal.
We know that the main purpose of the arbitral proceedings is to settle the dispute between the parties.
The dispute is settled by the final award i.e. the final decision on the matter. Thus when the final award
is given by the arbitral tribunal, the arbitral proceedings shall be terminated.
The arbitral proceedings shall also be terminated by an order of the arbitral tribunal. The arbitral tribunal
shall issue an order for the termination of the arbitral proceedings in the following circumstances:
(a) Where the claimant withdraws his claim [Section 32(2)(a)].
(b) Where the parties agree on the termination of the proceedings [Section 32(2)(b)].
(c) Where the arbitral tribunal finds that the continuation of the proceedings reason, become
unnecessary or impossible [Section 32(2)(c)].
It may be noted that on the termination of arbitral proceedings, the mandate i.e. authority of the arbitral
tribunal shall also terminate [Section 32(3)].

Note: The arbitral tribunal shall also terminate the arbitral proceedings, if during the arbitral proceed' the
parties settle their dispute. In such a case, if requested by the parties and not objected to by the
"tribunal, the tribunal shall record the settlement in the form of an arbitral award on agreed terms
[ 30(2)]. Such an award shall have the same status and effect as any other arbitral award made by the
tribunal [Section 30(4)].

TEST QUESTIONS
1. State the procedure relating to the appointment of an arbitrator.
2. How and when an arbitrator can be appointed by, (a) third party, and (b) Chief Justice?
3. What are the qualifications and disqualifications of an arbitrator?
4. What is the procedure for the appointment of an arbitrator by the party, and an institution? What' the
maximum prescribed limit of arbitrators?
5. What are the powers of an arbitrator ? State the remuneration payable to an arbitrator.
6. State the effect of death or insolvency of a party, on the arbitration proceedings. What amounts to
misconduct on the part of arbitrator?
7. State the circumstances in which an arbitrator can be removed by the arbitral tribunal.
8. Write a detailed note on the duties of an arbitrator. — /
9. Can a properly appointed arbitrator's authority be terminated? If yes, state when and how?

51. ARBITRAL AWARD (ARBITRATION AWARD)

51.1. INTRODUCTION
We have already discussed in the previous chapters that the very purpose of appointing arbitral tribunal
(arbitrators) is to decide the dispute referred to it by the parties to an arbitration agreement. The decision
of an arbitral tribunal is known as an arbitral award or arbitration award. The term 'award' was defined in
Section 2(b) of the Arbitration Act 1940, which read as under:
"Award means an arbitration award"
Thus, a decision made in the arbitration proceedings is called an award. It is a final decision of an
arbitrator on all matters referred to him. It is like a judgment of a Court of Law, and is binding on the
parties to the arbitration agreement.
The new Arbitration and Conciliation Act, 1996 uses the term arbitral award in place of arbitration
award. Section 2(c) of this Act defines this term in words reading as "arbitral award includes an interim
award". The effect of the new Act is that even the interim award is included in the expression 'arbitral
award'. And an arbitral award is the decision of the arbitral tribunal (i.e. arbitrators).

51.2. ESSENTIALS AND CONTENTS OF A VALID ARBITRAL AWARD

Following are the essentials of a valid arbitral award or arbitration award:
1. It must be made in writing: It is an essential element of an arbitral award that it must be made in
writing [Section 31(1)]. An oral award is not valid.
2. It must be final: It is another essential element of an arbitral award that it must be final, and give
decision on all the matters referred to the arbitrator. If all the matters are not decided, then the award is
not valid as it is not final award.
3. It must be certain: It is also an essential element of an arbitral award that it must be certain and
capable of arriving at a clear meaning. If it is uncertain, vague or indefinite, it is not valid due to is
uncertainty e.g. an award that either A or B should purchase certain land at a certain price, is not valid. It
does not make it clear which one of the two must purchase the land. Thus, an award is void due to
uncertainty if it does not precise directions with regard to the act to be done by a party e.g. if an award
directs a party to give security without specifying what kind of security he has to give, the award is not
certain, and thus void.
4. It must be on the matters mentioned in the arbitration agreement: The arbitral award must decide the
matters which are within the purview of the arbitration agreement. An award on the matters, outside the
arbitration agreement, is void. And if the void part cannot be separated from he rest of award, then the
whole award is void and without any effect.
5 It must be signed by the members of the arbitral tribunal. The arbitral award must be signed , the
members of the arbitral tribunal. If there are more than one arbitrators in an arbitral tribunal, then it must
^e signed by majority of all the members of the arbitral tribunal. However, in such
case, the reasons should be given why the signatures of remaining members are omitted [Section 11(1),
(2)]- If an award is not so signed then it is not valid. It may be noted that an award need not be signed by
the concerned parties. The award is binding on the parties if it is not signed hy them.
[Harbhajan Mai v. Diwan Chand, AIR 1916 Lah. 163].
6. It must state reasons: The arbitral award must state reasons upon which the award is based. However,
if the parties have agreed that no reasons are required to be given or if the award is On the basis of
settlement between the parties, then the reasons are not required to be stated in (the award [Section
31(3)].
7. It must state its date and place of arbitration: The arbitral award must state its date, and the place
where arbitration proceedings were conducted [Section 31(4)].
g. It must be consistent. The arbitral award must be consistent also. If it is inconsistent, it will be void
e.g. if an arbitrator decides the matter stating. " I think A is innocent", and then award against A. The
decision is quite absurd and thus void.
[Ames v. Milward (1918) Taunt 637: 129 ER 532].
9. It must be stamped: The arbitral award is chargeable to stamp duty and, therefore, it must be stamped
at the time of its execution or making. Thus, before the award is made available for any purpose, it must
be duly stamped. [Rekhabdas v. Ballabhdas, AIR 1962 SC 551].
10. It must be registered if it creates rights in immovable property: Sometimes, the arbitral award
declares, assigns, limits or extinguishes any right title or interest in or to immovable property of the
value of rupees one hundred or upward. In such cases, it must be registered under Section 71(1)) (b) of
the Registration Act [Satish Kumar v. Surendra Kumar, AIR 1970 SC 833]. If may, however, be noted
that an award does not require registration if it does not declare or create any right title or interest in an
immovable property e.g., an award which merely records a partition of immovable property already
made.
11. It may be made in any form. There is no prescribed form of an arbitral award. The only requirement
is that the award must give a decision. Thus, any words in writing expressing the decision are sufficient.
Note: After the arbitral award is made, a signed copy of the award shall be delivered to each party
[Section 31(5)].

51.3. LEGAL VALUE AND EFFECT OF AN ARBITRAL AWARD

We know that a valid arbitration award is final and binding on the parties. It is well settled law that all
claims, which are the subject-matter of reference to arbitration, merge in the award. Thus, after an award
is pronounced, no action can be started on the original claim which had been the subject-matters of the
reference [Satish Kumar v. Surinder Kumar, AIR 1970 SC 833] In fact, an award is the final judgment
by the court of parties' own choice. Once the matter is referred to arbitration, the parties are bound by its
award, whatever that may be.
It may be noted that an award is valid because of its own force. It does not get its binding force
because the parties agree to it. Thus, it is not essential for the validity of an award, made without the
intervention of the court, that the parties should signify their consent to the award before the same can
be enforced [Parkash Khurana v. Harnam Singh, AIR 1972 SC 2065]. An award derives its binding
force against the parties entirely from their previous submission. Their subsequent signatures on the
award by way of token of consent, in no way affect the character of the award. It is binding
because it is the judgment of a tribunal to which the parties h.
unconditionally submitted before adjudication, and not because they have subseque
acknowledged the justice of the decision.
As soon as the final arbitral award is made, the arbitral proceedings are terminated, and the
authority of the arbitrator ceases, and he cannot alter the award except for clerical mistakes of
[Section 33]. He can make corrections in the award only when a party requests him to do as
per the provisions contained in Section 33 of the new Act. The circumstances in which the
arbitral tribunal has the power to make corrections in the award will be discussed in Art 51.9.
The court may also set aside the award in circumstances as given in Section 34, which will be
discussed in Arts. 51.11.
The award validly made shall be final and binding on the parties. Section 35 of the new Act
makes a specific provision in this regard. The section reads as under:
"Subject to this part, an arbitral award shall be final and binding on the parties and persons
claiming under them respectively."
Thus, an award once made is final and binding on the parties. However, a party may apply to
the court for setting aside the award on the grounds stated in Section 34.
Notes. 1. Once the time for making an application to set aside the arbitral award under Section 34
has expired, or such application for setting aside has been refused by the court, then the award shall be
enforced under the Code of Civil Procedure, 1908 in the same manner as if it were a decree of the
court [Section 36].
2. The circumstances in which the arbitral may make additional award will be discussed in Art.
51.10.
51.4. ARBITRAL AWARD AN INSTRUMENT OF OFFENCE AND DEFENCE
It is often said that the award is an instrument of offence and defence. The award is regarded as
an instrument of offence as once the final arbitral award is made, it is binding on the parties
[Section 35]. And no appeal lies against the award. It means that no party can agitate the matter
already referred to the arbitration. Whatever be the decision of the arbitral tribunal, the parties
are bound by the same.
The award is regarded as an instrument of defence, as a valid award is final upon all the matters
covered by it. The matters decided by the award cannot be reopened by a suit in a court of law.
Thus, a party who is not satisfied with the award cannot go to the court on the matter already
decided by the arbitrator in his award. If he goes, then the other party can defend the same on
the ground that he has no right to go in court as the matter has already been decided by the
arbitrator. In legal sense, a valid award operates as res judicata i.e. a suit on the same subject
matter is barred. It may, however, be noted that the award does not operate as res judicata on a
matter which was not referred to arbitration, nor does it operate as res judicata if the arbitrator
refuses to decide the question on the ground that he has no jurisdiction over it.
[Kerorimall v. Union of India, AIR 1964 Cal. 545]
Note: The term 'res judicata' means that once a matter is finally decided by the court, a
subsequent suit between the same parties on the same cause of action is barred.
51.5. PROCEDURE AFTER AN ARBITRAL AWARD IS MADE
The procedure, after the award is made, may be discussed under the following two heads:
1. Signing of the arbitral award by the arbitrator and its copy to the parties [Section 31].
2. Enforcement of the arbitral award [Section 35].
These two points will be discussed in detail in the following pages

SIGNING OF AN ARBITRAL AWARD BY THE ARBITRATOR AND ITS COPY TO THE

PARTIES
After an arbitral award is made by the arbitral tribunal. It must be signed by the members of .£ arbitral
tribunal i.e. arbitrators. If there are more than one arbitrator, then it is sufficient if ,he award is signed by
majority of all the members of the tribunal. However, in such a case, [he reasons for not signing by the
remaining member should be stated in the award [Section 31(1), (2)1- Thereafter, a signed copy of the
award must be delivered to each party [Section 31(5)]. The object of such a copy is to apprise the parties
about the making of the award. It enables the parties 10 aPP^ to t'ie ar'3'tral tribunal for correction,
interpretation or additional award under Section 13 or apply to the court for setting aside the award
under Section 34, as the party may decide. The application for correction etc. of the award can be made
by a party within thirty days of the receipt of the arbitral award, and an application for setting aside the
award can be made within ihe three months of the receipt of the arbitral award.

51.7. ENFORCEMENT OF ARBITRAL AWARD

After an arbitral award is made, and a signed copy is received by the parties, the parties may then get it
enforced and have the benefits of the decision given in the award. However, the award can be enforced
only when the time for making an application for setting aside the award has expired or where an
application for setting aside the award has been refused by the court. The award can be enforced under
the Code of Civil Procedure, 1908 in the same manner as if it were a decree of the court [Section 36].

51.8. FILING OF AN ARBITRATION AWARD BY THE ARBITRATOR IN THE COURT

UNDER THE OLD ACT
tinder the new Arbitration and Conciliation Act, 1996, there is no provision regarding filing of an award
in the court. Section 35 of this Act makes specific provision regarding finality of the award, and states
that an arbitral award shall be final and binding on the parties. The provision regarding filing of an
award in the court was contained in Section 14(2) of the Arbitration Act, 1940 which is discussed below
for the information of students.
An award is filed in the court so as to make it a rule of court. After an award is made a rule of court, it
can be enforced as a decree of the court. However, an award need not be filed in the court if the award is
accepted and acted upon by the parties, and the dispute is settled accordingly. It will be interesting to
know that the filing of the award in the court is not compulsory. It is, however, advisable for the parties
to have the award filed in the court. The reason for the same is that if the award is not filed in the court,
then the parties cannot approach the court for its enforcement if any party fails to obey the award.
The award can be filed in the court only by the arbitrator (or umpire). He may either suo rnoto (i.e. of its
own) file the award irr the court or may be required by the party or the court to file the award in the
court. The party to the arbitration agreement himself cannot file the award in the court. If any party
desires to file the award, he should move an application for filing the award which may be in the form of
a letter.
[Kumbha Mawji v. Dominion of India, AIR 1963 SC 313].
The party may either directly request the arbitrator (or umpire) for filing the award, or may apply to the
court for directing the arbitrator to file the award in the court. If may be noted that such an application to
the arbitrator or court must be made by the party within 30 days Of the service of the notice of the
making of the award. The arbitrator (or umpire) may or may not file the award in the court. But in the
following two circumstances, he is bound to file the award or its signed copy in the court:
1. Where any party to the arbitration agreement or any party claiming under (through) such party
requests the arbitrator (or umpire) to file the award in the court.
2. Where the court directs the arbitrator (or umpire) to file the award in the court. Anv to the
arbitration agreement may apply to the court for such direction.
However, the arbitrator or umpire is bound to file the award in the court only on the p av of fees and
charges in respect of (a) the arbitration and award, and (b) costs and charges for f i "' the award. If may
also be noted that where an award or its signed copy is to be filed in the co " S it is to be filed alongwith
any dispositions and documents which may have been taken and prov J before the arbitrator (or umpire).
The award may also be filed in the court by a party on behalf of the arbitrator (or urnpj r \ But the
party can do so only if he is authorised by the arbitrator (or umpire). It may be note I that such
authority to file the award must be specifically given by the arbitrator (or umpire) Th mere handing over
the original award by the arbitrator (or umpire) to both the parties does not mean that he has authorised
the parties to file the same in the court on his behalf [Kumbha Mawn v. Union of India, AIR 1953 SC
313] The award stands filed in the court and is enforceable as a decree of the court unless it is set
aside or remitted for consideration of the arbitrator.
After the award is filed in the court, the court must give notice to the parties of the filj ng of the
award. It may be noted that once an award is filed in the court, the court is bound to give notice to all
the concerned parties including the party applying for filing the award [Parashmmka Commercial Co. v.
Union of India, AIR 1970 SC 1954]. Omission to give the notice is a material irregularity, and a decree
passed by the court, without such notice, is liable to be set aside [£). Ramayya v. Papayya (1943) 2
MLJ 152]. It may be noted that the parties are entitled to have the notice of the date of filing the
award, even if they had the knowledge of the date on which the award was filed. As a matter of fact,
the notice must be personally served on the parties. However, the word 'notice' does not mean only a
formal notice, but also an informal one. Thus, the notice of filing of the award need not be in writing, it
can also be given orally e.g. oral notice to the parties present in the court. But where the
arbitration proceedings are without the intervention of the court, no party is expected to be
present in the court at the time of filing the award. In such cases, a written notice must be given to
the parties [Nilkantha v. Kashimath, AIR 1962 SC 666]. If the parties are present in the court at the
time of filing the award, written notice under Section 14(2) of the filing of the award need not be
issued.
Note: The limitation period for filing an award in Court was 30 days from the date of service of
notice of making of the award upon the parties [(Art. 119(a) of the Limitation Act, 1963.]

51.9 CORRECTION & INTERPRETATION OF AN ARBITRATION OF AN AWARD BY TH

ARBITRAL TRIBUNAL
The powers to make corrections and give interpretation of an arbitral award have given to the
arbitral tribunal only under Section 33 of the Arbitration and Conciliation Act, 1996. Under the
old Arbitration Act, 1940 the power to modify or correct the award was given to courts only.
Under the new Act, the court has no power to make corrections and give interpretation of the
award. Before discussing correction and interpretation of the award under the new Act, a brief
description of court's powers,under the old Act, to modify or correct the award is necessary for
additional knowledge of students. Under the old Act, on the award being filed in the court, the
court had the power to modify or correct the award in certain circumstances. The power of the
court to modify or correct the award was discretionary, and contained in Section 15 of the
Arbitration Act 1940. The analysis of this section reveals that the cou.rt had the power to modify
or correct the award only in three cases, namely (a) where the award is on a matter not referred
to arbitration and such a part is separable, (b) were the award is imperfect or contains obvious
errors, and (c) where the award contains a clerical mistake. It may be noted that this power of
the court is limited to these grounds only. Apart from these three grounds, the court has no inherent
Power to modify or correct the award [Mehar Singh & Sons v. State of Punjab, AIR 1973 P &
Jl 14]. Under the new Arbitration and Conciliation Act, 1996, the powers of the arbitral tribunal make
corrections, and give interpretation of the award are contained in Section 33, and may be discussed as
under:
1. Power to make corrections in the award [Section 33(l)(a)]: Sometimes, an arbitral award contains
certain errors such as, (a) computation error, or (b) clerical error, or (c) typographical error, or (d) any
other error of a similar nature. In such cases on the request of a party, Ihe arbitral tribunal shall make
correction of the award. However, the corrections can be made only in respect of the above types of
errors. The term 'clerciaF means something mechanical, a slip of the pen or something of the kind. It may
be noted that under this clause, the power Of the arbitral tribunal, to correct the award, is limited to the
computation or clerical types of errors as mentioned above. The arbitral tribunal has no power to make
any change of substance which varies the decision of the award.
2. Power to give interpretation of the award [Section 33(l)(b)}: Sometimes, an arbitral award does not
give the interpretation of all the points, and a party seeks interpretation (i.e. explanation) of a specific
point or of a part of the award. In such cases, on the request of a party, the arbitral tribunal shall give
interpretation of the points or part requested by the party. The interpretation so given shall form part of
the arbitral award [Section 33(3)].
It may be noted that the powers of the arbitral tribunal to interfere with the award once given is limited
to the above mentioned grounds only. Apart from these grounds, the arbitral tribunal has no inhernet
powers to make corrections or give interpretation of the award.
Other legal provisions relating to the correction or interpretation of the award, as given in Section 33 of
the new Act, may be summed up as under:
(a) The application, by the party, for correction or interpretation of the award must be made within
thirty days from the receipt of the arbitral award or within the time as agreed to between the parties
[Section 33(1)].
(b) The party applying for the correction or interpretation of the arbitral award, must give a notice of
the same to the other party [Section 33(1) (a) (b)].
(c) The arbitral tribunal, if considers the request of the party to be justified, shall make correction or
give interpretation of the award within thirty days from the receipt of the request [Section 33(2)].
(d) The arbitral tribunal may also correct any computation error or any clerical or
typographical error, on its own initiative i.e. without any application by the party. The arbitral tribunal
may make such corrections within thirty days from the date of the arbitral award [Section 33(3)].
(e) The arbiral tribunal may extend, if necessary, the period of time within which it shall make a
correction or give an interpretation of the award [Section 33(6)].
(f) The correction or interpretation of the award must be signed by the members of the arbitral tribunal
as required in case of a fresh award. It must also be dated, and state reasons as in case of a fresh award
[Section 33(7)].

51.10. ADDITIONAL ARBITRAL AWARD

Sometimes, while making an arbitral award, the arbitral tribunal omits to make award on certain claims
already presented in the application of reference. In such cases, the arbitrator tribunal has been
empowered to give an additional award on such matters. In simple words, if the award leaves any matter
undecided, then on the request of a party, the arbitral tribunal has the power to give an additional award
on such matters.
The power to make an additional arbitral award has been given to the arbitral tribunal under Section
33(5) of the new Arbitration and Conciliation Act, 1996. The addition may be made by the arbitral
tribunal regarding the claims presented in the arbitral t but omitted from the arbitral award. The legal
provisions relating to the making of an ° M' arbitral award may be stated as under:
1. The application by the party, for an additional arbitral award, must be made within 30days from the
receipt of the arbitral award [Section 33(4)].
2. The party applying for an additional arbitral award, must give a note of the same other party
[Section 33(4)].
3. The application for an additional arbitral award can be made only for the claims al presented in the
arbitration proceedings but omitted from the arbitral award [Section 33(4)].
4. The arbitral tribunal, if considers the request of the party to be justified, shall make additional
arbitral award within sixty days from the receipt of such request [Section 33(5)].
5. The additional arbitral award must be signed by the members of the arbitral tribunal required in case
of a fresh award. It must also be dated, and state reasons as in case a fresh award [Section 33(7)].

Note: In the old Arbitration Act, 1940, there was no provision for making an additional award, thoueh
there was a provision for the reconsideration of an award. Under Section 16 of that Act, the court had
the power to remit the award to the arbitrator for his reconsideration in three cases, namely (a) where the
award left any matter undetermined or determined a matter not referred, (b) where the award was
indefinite and incapable of execution, and (c) where the award was not legal. This power of the court
was limited to these three grounds only. Apart from these grounds, the court had no power to remit the
award for reconsideration.

51.11 SETTING ASIDE AN ARBITRAL AWARD

The court may set aside the award in certain circumstances. It may be noted that the award can be set
aside by the court only and not by arbitral tribunal. If any party, to an arbitration agreement, desires that
the award should be set aside, he should apply to the court for setting aside the award. It may be noted
that the award can be set aside by the court only when an application is made to the court for this
purpose [Section 34(1)]. Without such application, the court cannot suo moto (i.e. of its own) exercise its
power of setting aside the award. [Madan Lai v. Sunderlal, AIR 1967 SC 233; Guruhariram's Case,
AIR 1981 Bombay 260].
The application for setting aside the award should be made in writing, and must be made within the
limitation period which is three months from the date on which the party making the application had
received the arbitral award. And where the party had earlier applied to the arbitral tribunal for the
correction or interpretation of the award, the limitation period is three months from the date on which
party's application had been disposed of by the arbitral tribunal. However, if the court is satisfied that the
applicant was prevented by sufficient cause from applying within the said period of three months, it may
entertain the application within a further period of 30 days but not thereafter [Section 34 (3)]. If the
application is made after the expiry of this limitation period, the award cannot be set aside.
The power of the court to set aside an award is contained in Section 34 of the Arbitration and
Conciliation Act 1996. The analysis of this section reveals that the court may set aside an award in any
of the following circumstances, namely:
1. Where a party was under some incapacity [Section 34(2) (a) (i)]: Sometimes, a party to the
arbitration agreement was under some kind of incapacity i.e. was not capable of being entering into a
valid agreement. In such cases, the court may set aside the award, if the party making the application
furnishes the proof about the incapacity of the party.
2. Where the arbitration agreement is invalid [Section 34 (2) (a) (ii)]: Sometimes,
Nitration agreement is not valid under the law for the time being in force. In such cases, , court may set
aside the award made on the basis of such agreement, if the party making he application furnishes the
proof about the invalidity of the arbitration agreement.
3 Where the party applying for setting aside was not given proper notice [Section 34 (2) (a) (iii)].
Sometimes, the party applying for setting aside the arbitral award was not given oper notice of either of
the following, namely:
(a) of the appointment of an arbitrator, or
(b) of the arbitration proceedings.
In such cases, the court may set aside the award, if the party making the application furnishes the proof
about the non receipt of proper notice of either of these matters. Under this clause, the court may also set
aside the award if such a party proves that he was otherwise unable to present his case properly.
4. Where the award contains decision on matters not submitted to arbitration [Section 34(2) (a) ('v)l-
Sometimes, the award contains a decision on a matter which was not referred to arbitration, and such
matter cannot be separated without affecting the decision on the matter referred. In such cases, the court
may set aside the award, if the party making the application furnishes the proof about a decision on a
matter not submitted for a decision. In Rajinder Krishna Kanna v. Union of India, 1998(5) SCALE
589, the Supreme Court has also held that where the arbitral award fell outside the scope of reference to
arbitration and was not in relation to the dispute contemplated thereby, the award is liable to be set aside.
It may, however, be noted that if the decision on the matter submitted to arbitration can be separated
from those not so submitted, then only that part of the arbitral award may be set aside which contains a
decision on a matter not submitted to arbitration.

Example 51.1: A dispute arose among A, B and C regarding the partition of a plot P,. They referred
their dispute to arbitration for settlement. The arbitrator gave an award in which the Plot P, was given to
A and another plot P2, which was not the subject-matter of arbitration, was divided between B and C in
equal shares. In this case, the court may set aside the whole award as it cannot be separated without
affecting the decision relating to plot B
In this example, if the arbitrator gives an award by which A is given the smaller share in plot P)( but
compensated by giving a larger share in plot P2. In this case also, the court may set aside the award as it
cannot be separated without affecting the decision relating to plot Pr And if the arbitrator gives an award
by which the plot P, is equally divided among A, B and C, and the plot P2 is also equally divided among
them, then the court may set aside the award relating to plot P2 only as it can be separated without
affecting the decision relating to plot P, [Based on Badal Singh v. Shen Manga! Singh AIR 1936
Oudh 72].
Note: Under Section 16(a) of the old Arbitration Act, 1940, the above ground was a ground for
remission of award by court for reconsideration by the arbitrator.
5. Where the composition of the arbitral tribunal was not proper [Section 34(2) (a) (v)]: Sometimes,
the composition of the arbitral tribunal, which gave the award, was not proper. In such cases, the court
may set aside the award, if the party making the application furnishes the proof about the same. The
composition of the arbitral tribunal is not proper if it is not in accordance with the provision of the
Arbitration and Conciliation Act, 1996.
The court may also set aside the award if the arbitral procedure followed by the arbitral tribunal was not
in accordance with the provisions of the new Act.
6. Where the subject matter of dispute is not capable of settlement by arbitration [Section 34(2) (b) (()]'•
Sometimes, the court finds that the subject-matter of dispute is not capable of settlement, by arbitration,
under the law for the time being in force. In such cases, the court may set aside the award.
7. Where the arbitral award is in conflict with public policy [Section 34(2) (b) (if)]: Sometimes, the
court finds that the arbitral award is in conflict with (i.e. opposed to) the public policy of India. In such
cases, the court may set aside the award.

51.12. MISCONDUCT BY THE ARBITRATOR

The arbitrator may be guilty of misconduct in two ways, namely (a) he may misconduct himself during
arbitration proceedings, or (b) he may misconduct the arbitration proceedings. These points are
explained below:
1.Misconduct by the arbitrator. Sometimes, the arbitrator misconduct himself during the arbitration
proceedings. In such cases, the court may set aside the ward if it is proved that the arbitrator gave
his award by misconduct himself. The term ‘misconduct’ is used to describe variety of grounds,
for which the award may be set aside on the ground of public policy [A Irani v State of M.P.,
AIR 1974 MP 199.] The misconduct under this clause comprises ‘legal misconduct’ which is
complete if the arbitrator, on the face of the award, arrives at a conclusion which is inconsistent
with his own findings [K.P Poulose v State of Kerala, AIR 1975 SC 1259]. The legal misconduct
means and includes some honest, though erroneous, breach of duty causing misconduct on which
the court may set aside the award:
(a) Where the arbitrators interested in the subject-matter of reference.
(b) Where the arbitrator is proved to be guilty of partiality.
(c) Where the arbitrator has reached a decision which no person acting judicially could have
done e.g. where an arbitrator has awarded Rs. 2000 on account of costs where the ordinary
costs would have been about Rs. 100 only.
(d) Where the arbitrator has accepted hospitality from any party and it is proved that such a
hospitality has influenced his award. But the mere fact that the arbitrator simply dined with
the party, does not amount to misconduct.
(e) Where the arbitrator has made an award on the basis of claims of one party only and the
counter-claims of the other party were kept for consideration subsequently.
[K.V. Garg v Secretary, Water & Power Dept. Trivandrum AIR 1990 SC 53]
(f) Where the arbitrator has accepted bribe from a party.
(g) Where, before making the award, the arbitrator accepted money, whether for fee or for
anything else, from one party without the knowledge of the other.
A. Irani v State of M.P AIR 1974 MP 199].
(h) Where the arbitrator makes an award on no evidence or without any material or record.
[A. Irani v State of M.P AIR 1974 MP 199]
(i) Where the arbitrator has refused to record evidence when tendered, and such evidence was
necessary.

Paying all the debts of the firm, there is any surplus of partnership property, it shall be treated as
separate property of each partner in proportion to their rights and interest in the partnership property.
2.The separate property of each partner is first utilized for the payment of separate debts of that
 partner. And if after paying the separate debts of a partner, there is any surplus of his reparate
property, it shall be treated as part of the partnership property and shall be applied for the
payment of partnership debts, if any.
Notes: The above provisions are contained in Section 61 (4) of the Provincial Insolvency Act, and
Section 49 (4) of the Presidency Towns Insolvency Act, which are similar in both the Acts.

Thus, the court may set aside an award on the above instances of misconduct of the arbitrator. However,
the award is not open to challenge simply on the ground that the arbitrator has reached a wrong
conclusion or has failed to appreciate the facts.
[Hindustan Tea Co. v. K. Sashikant & Co., AIR 1987 SC 81].
In EC.I. v. Joginderpal Mohinderpal, AIR 1990 SC 1263 also, the Supreme Court has held that it is not
rnisconduct on the part of an arbitrator to come to an erroneous decision, whether his error is one of fact
or law, and whether or not his findings of fact are supported by evidence. 2 Misconduct of arbitration
proceedings'. Sometimes, the arbitrator misconducts the arbitration proceedings. In such cases, the court
may set aside the award if it is proved that the arbitrator gave his award by misconducting the arbitration
proceedings. The misconduct of arbitration proceedings means mishandling the arbitration proceedings
which is likely to cause some substantial miscarriage of justice [Mehta Teja Singh & Co. v. Union of
India, AIR 1977 Delhi |69]- Thus, where the arbitrator or umpire adopts a procedure which is irregular
and opposed to principle of natural justice, he is guilty of misconduct with regard to the proceedings,
and (he court may set aside the award. Following are some of the instances of misconduct of this kind on
which the court may set aside the award.
(a) Where the arbitrator ignores a very material document which throws abundant light on the matter in
controversy.
(b) Where the arbitrator makes the award without giving notice that the proceedings are closed.
(c) Where the arbitrator closes the case too hastily and does not give the parties a fair and reasonable
opportunity of placing their case and views before him.
(d) Where the arbitrator refuses to hear evidence upon a material issue or where he acts beyond the
terms of reference. [Union of India v. Santiram Ghosh, AIR 1989 SC 402].
(e) Where the arbitrator fails to give the parties a notice of any meeting at which the parties should
appear and present their case before him.
(/) where the arbitrator conducts the arbitration proceedings ex pane, without giving due
notice of his intention to do so. (g) Where the arbitrator fails to grant necessary adjournments which are
sought without any
intention of delaying the proceedings.
(h) Where the arbitrator fails to fix a time and place for hearing of the reference and does not give
sufficient notice of every meeting to enable the parties to present their case. (/') Where the arbitrator
examines witnesses in the absence of the parties. (/) Where the arbitrator makes private enquiries and
gathers evidence, and then gives his
award based upon the information and evidence gathered from such enquiries. It may, however, be noted
that the award is not vitiated simply on the ground that in deciding the dispute before him, the arbitrator
does not record his reasons, and does not indicate the principles of law on which he has proceeded.
[Raipur Development Authority v. Chokhamal Contractors, AIR 1990 SC 1426]. We have noted above
that the court may set aside the award in both kinds of misconduct, namely (a) where the arbitrator has
misconducted himself, or (b) where he has misconducted the arbitration proceedings. It may be noted
that the misconduct as a ground for setting aside the award, as discussed in the above two points, is
misconduct prior to making of the award. The misconduct, after the making of the award, does not
invalidates the award [Louis Dreyfus £ Co. v. Tarachand, AIR 1926 Sind 242]. Thus, a failure to give
notice of making of award docs not invalidates it.

51.13. FINALITY AND ENFORCEMENT OF ARBITRAL AWARD

The new Arbitration and Conciliation Act, 1996 makes specific provisions about the finality of the
arbitral award, and its enforcement. Section 35 of the Act specifically states that arbitral award
shall be final and binding on the parties, and on the persons claiming them. Thus, once an
arbitral award is made, no party can go to the court of law on the matters already decided by
the arbitral tribunal. It means that, after an award is pronounce no action can be started on the
origional claims which had been the subject-matter of th reference [Satish Kumar v. Surinder
Kumar, AIR 1970 SC 833]. It may also be noted that no appeal lies against the arbitral award
given by the arbitral tribunal [Section 37],
Even the arbitral award cannot be set aside if one of parties is not satisfied with the same or it is
not favourable to any party. It can be set aside only on the specified grounds a contained in
Section 34 which have already been discussed in Art. 51.11 However, an appeal lies against court's
order of setting aside or refusal to set aside the arbitral award.
The arbitral award is enforceable under the Code of Civil Procedure, 1908 in the same manner as
if it were a decree of the court. The award becomes so enforceable in the following cases [Section
36]:
1. Where the time limit for making an application to set aside the award has expired, or
2. Where the application to set aside the award was made in time, but the same has been
refused by the court.
Thus, in the above cases, the arbitral award is final, and the parties can enforce their rights under the award
through the courts of law.

TEST QUESTIONS
1. Define arbitral award. Explain the essentials of an arbitral award.
2. "Award an instrument of offence and defence" critically examine.
3. What is the legal value and effect of an award? Is the signing and stamping of award
required?
4. Explain the legal provisions relating to the correction and interpretation of arbitral award
by the
5. arbitral tribunal.
6. When and by whom can an award be set aside?
7. Define 'misconduct' on the part of arbitrator. State the instances of misconduct on which an
award can be set aside. „„,-
Write notes on (a) additional arbitral award, and (b) finality and forcement of arbitral award. /

52. CONCILIATION

52.1 INTRODUCTION
The conciliation is the new process introduced by Arbitration and Conciliation Act, 1996 in part III of
the Act. The expression conciliation may be defined as the process of bringing about amicable
settlements between the two parties. It is, in fact, the first friendly effort by the parties to settle their
dispute. This has now got the legal recognition under the new Act of 1996
The parties to a dispute may like to arrive at amicable i.e. friendly settlement of the dispute
between them. This process gives opportunity to the parties to avoid the lengthy and expensive
procedure of Court or arbitral procedure, and to settle the dispute as per agreed terms. Since the process
has been duly recognized under the new Act, the conciliation settlement will have binding force between
the parties. The person appointed to bring about amicable settlement of disputes is known as a
‘conciliator’. In this chapter will shall discuss the legal provisions relating to conciliation.

52.2 COMMENCEMENT OF CONCILIATION PROCEEDINGS

The conciliation proceedings are commenced, by a party to the dispute, by sending written invitation to
the other party to conciliate (i.e. to settle or reconcile) the matter. The legal provision relating to the
commencement of conciliation Act, 1996, and may be explained as under:
1. The conciliation proceedings are initiated by a part to the dispute [Section 62(1)]
2. The party initiating the conciliation proceedings should send a written invitation to the other
party to reconcile the matter [Section 62 (1)]
3. The written invitation for reconciliation should briefly indentify the subject of dispute to the
reconciled [Section 62 (1)]
4. The conciliation proceedings shall commence (i.e. begin to start) when the other party accepts
the invitation to conciliate i.e. to reconcile. It may be noted that such acceptance must be in
writing [Section 62 (2)]. On acceptance of the invitation to conciliate, the matter must be
submitted to the conciliator for settlement.
5. In case the other party rejects the invitation to conciliate, there will be no conciliation
proceedings [Section 62 (3)]
6. In case the party initiating the conciliation does not receive any reply within 30 days from the
date on which he sends the invitation, or within such time as specified in the invitation, he may
elect to trat this as a rejection of the invitation to conciliate. When the party elects to treat it as
rejection, then he must inform in writing the other party accordingly [Section 62 (4)]

52.3 NUMBER& APPOINTMENT OF CONCILIATORS

The maximum number of conciliators must not exceed three. Within this limit, the parties to the dispute
may agree that there shall be one, two or three conciliators. It may be noted that t if the parties does not
prescribe any number of conciliators, then the law is that the matter shall be referred to a single
conciliator [Section 63(1)]. It is also important to note here that where there are more than one
conciliators, all should act jointly with co-conciliators [Section 63(2)].
The appointment of conciliators is made by the parties with their mutual agreement. The provisions
relating to the appointment of conciliators are contained in Section 64 of the Arbitration and
Conciliation Act, 1996, and may be explained as under:
1. In case of conciliation proceedings with one conciliator, the parties may agree on the name
of the sole conciliator. In simple words, the sole conciliator is appointed with the mutual
consent of both the parties [Section 64 (1) (a)].
2. In case of conciliation proceedings with two conciliators, each party may appoint one conciliator. In
simple words, in such a case, each party has the freedom to appoint the conciliator of his choice [Section
64 (1) (b)].
3. In case of conciliation proceedings with three conciliators, each party may appoint one conciliator
of his choice, and the third conciliator may be appointed with the mutual consent of the parties. The
third conciliator shall act as the 'presiding conciliator' [Section 64(1) (c)].
Thus, the parties have been given the freedom to appoint the conciliators as per the rules stated above.
Sometimes, the parties may feel the necessity of assistance of a particular institution or person in
connection with the appointment of conciliators. In such cases, a party may request such an institution or
person to recommend the name of a suitable person to act as conciliator [Section 64 (2) (a)]. The parties
may also agree that the appointment of one or more conciliators shall be made directly by such an
institution or a person requested by the parties for this purpose [Section 64(2) (b)]. It may be noted that
in recommending the name of a person to act as conciliator, such an institution or a person must have
regard to the following:
(a) A person recommended for appointment should be such who will act independently and impartially.
This means that the independence and impartiality of the person is the qualification of a person to be
appointed as a conciliator.
(b) In case of appointment of a sole or third conciliator, the institution or a person approached for such
appointment, must take into account the advisability of appointing a conciliator of a nationality- other
than the nationality of the parties. This means that if the parties advise the appointment of a person of
some other nationality, the institution or the person should consider such advice while recommending a
person to be appointed as the sole conciliator or the third conciliator.
52.4. PROCEDURE IN CONCILIATION
We know that the conciliation proceedings are started by an invitation by one party to the other to
conciliate on the matter under dispute. When the other party agrees to such invitation, the process of
appointment of conciliators, and further procedure is commenced. The procedure in conciliation, as
contained in various Sections of the Arbitration and Conciliation Act, 1996 may be discussed as under:
1. Submission of statements to conciliator [Section 65]: On the appointment of the conciliator, the
further process in conciliation is initiated by the conciliator. On his appointment, the conciliator may
request each party to submit to him a brief written statement describing the general nature of the dispute
and the points at issue.
In support of the earlier statements, the conciliator may also request the parties to submit 'o him further
written statements accompanied by documentary and other evidence as the parties consider appropriate.
It may be noted that each party must also send a copy of his 'statement' and 'further statement' to the
other party. At any stage of the conciliation proceedings, the conciliator may request a party to submit
To him such additional information as he considers appropriate.
2. Procedure to be followed [Section 67]: The conciliator may conduct the conciliator
proceedings in such manner as he considers appropriate, keeping in view the circumstances
of the case before him. However, the conciliator should duly consider the wishes or request
of the parties in this regard e.g. the parties may require that the conciliator should hear oral
statements or that there is a need for a speedy settlement of the dispute, then the conciliator
r
should act accordingly [Section 67(3)].
It is also important to note here that in proceeding with the settlement of the disn the conciliator
shall be guided by the principles of objectivity, fairness and justice. Moreover, he should also give due
consideration to the following [Section 67(2)]:
(a) The rights and obligations of the parties.
(b) The usages of the trade concerned.
(c) The circumstances surrounding the dispute.
(d) The previous business practices between the parties.

The conciliator shall assist the parties in an independent and impartial manner in their attempt to reach
an amicable settlement of their dispute [Section 67(1)]. Further, at any stage of the conciliation
proceedings, the conciliator may make proposals for a settlement of the dispute. Such proposals need not
be in writing, and also need not be accompanied bv any statement of reasons thereof [Section 67(4)].
Note: The conciliator is not bound by the Code of Civil Procedure, 1908, or the Indian Evidence Act,
1872.
3. Communication and co-operation between conciliator and parties [Section 69, 71]; Tlie
conciliator may invite the parties to meet him or may communicate with them orally or in
writing. He may meet or communicate with the parties together or with each of them separately
[Section 69(1)].
So far as the parties are concerned, it is their duty to cooperate with the conciliator in good faith. If the
conciliator makes any request to the parties to submit to him some written materials or some evidence, or to
attend the meetings, then the parties should make best efforts to comply with such requests [Section 71].
4. Disclosure of information by the conciliator [Section 70]: In case, the conciliator receives
some factual information concerning the dispute from one party, then he shall disclose the
same to the other party. The purpose of such disclosure is to enable the other party to have
the opportunity to present any explanation which he considers appropriate.
5. Settlement agreement [Section 72, 73]: The parties may submit to the conciliator the
suggestions for the settlement of the dispute. Each party may do so on his own initiative
or at the initiation of the conciliator [Section 72].
When it appears to the conciliator that there exists elements of a settlement, which may be acceptable
to the parties, he shall formulate the terms of a possible settlement and submit the same to the parties for
their observations. The parties may examine the same and submit their observations to the conciliator. After
receiving the observations from the parties, the conciliator may consider them, and reformulate the terms of
a possible settlement in the light of parties' observations [Section 73(1)]. If the parties reach agreement
on a settlement of the dispute, they may draw up and sign a written settlement agreement. On request of
the parties, the conciliator may also draw up the settlement agreement or help the parties in drawing the same
[Section 73(2)].
It is important to note here that when the parties sign the settlement agreement, it shall be final and
binding on the parties and on the person claiming through them [Section 73(3)] Thereafter, the conciliator
shall authenticate the settlement agreement, and furnish a copy of the same to each party [Section 73(4)]
6. Status and effect of settlement agreement [Section 74]: The settlement agreement. The same status
and effect as if it is an arbitral award on agreed terms given by an. arbitral tribunal.
7. Effect of conciliation proceedings [Section 77]: The effect of conciliation proceeding
that, during the continuation of such proceedings, the parties shall not initiate any arbitral
Judicial proceedings in respect of a dispute which is the subject-matter of conciliation
proceedings. However, if a party is of the opinion that a recourse to the arbitral or judicial
,0,-eedings is necessary to preserve his rights, then he may initiate such proceedings.

52.5 TERMINATION OF CONCILIATION PROCEEDINGS

T(ie conciliation proceedings shall be terminated in the following circumstances, as specified n Section
76 of the Arbitration and Conciliation Act, 1996:
\.By singing of settlement agreement [Section 76 (a)]: Sometimes, the conciliation proceedings are
successful, and the parties sign the settlement agreement. In such cases, the conciliation proceedings
shall be terminated on the date of the agreement.
2. By a written declaration of the conciliator [Section 76 (b)]: Sometimes, after consultation with the
parties, the conciliator declares in writing that further efforts at conciliation are no longer justified. In
such cases, the conciliation proceedings shall be terminated on the date of such written declaration.
3. By a written declaration of the parties [Section 76 (c)]: Sometimes, the parties decide lo terminate the
conciliation proceedings, and address their written declaration to the conciliator that the conciliation
proceedings are terminated. In such cases, the conciliation proceedings shall be terminated on the date of
such written declaration.
4. By a written declaration of one party to the other and the conciliator [Section 76 (d)]: Sometimes,
one party address his written declaration to the other party and to the conciliator that the conciliation
proceedings are terminated. In such cases, the conciliation proceedings shall be terminated on the date of
such written declaration.
Upon termination of the conciliation proceedings, the conciliator shall fix the cost of the conciliation,
and shall give a written notice of the same to the parties. The costs means the reasonable expenses
incurred in connection with the conciliation proceedings, and also includes the fees and expenses of the
conciliator, witnesses and expert advice. Unless otherwise agreed by she parties, the cost shall be borne
equally by the parties [Section 78].

52.6. OTHER IMPORTANT PROVISIONS IN CONCILIATION

In the previous articles, we have discussed the main provisions in conciliation proceedings. The
following provisions are also important in connection with the conciliation procedings:
1. In order to facilitate the conduct of conciliation proceedings, the parties may arrange for
administrative assistance by a suitable institution or person. With the consent of the parties, the
conciliator may also arrange such assistance [Section 68].
2. The conciliator and the parties shall keep confidential all matters relating to the
conciliation proceedings. The confidentiality shall also extend to the settlement agreement,
except where its disclosure is necessary for the purpose of implementation and enforcement [Section
[75].
3. The conciliator shall not act as an arbitrator or as a representative or counsel of a party in any
arbitral or judicial proceedings in respect of a dispute which is the subject of conciliation proceedings.
This is, however, subject to a contrary agreement between the parties [Section 80 (a)].
4. The conciliator shall not be presented by the parties as a witness in any arbitral or judicial
proceedings. This is also subject to a contrary agreement between the parties [Section 80(b)].
5. The parties shall neither rely on nor introduce as evidence the following matters in the
arbitral or judicial proceedings, whether or not such proceedings relate to the dispute
which is the subject of the conciliation proceedings [Section 81]:
(a)The view expressed or suggestions made by the other party in respect of the conciliation
proceedings settlement of the dispute.
(b)The admissions made by the other party in the course of the conciliation proceedings
(c)The proposals made by the conciliator.
(d)The fact that the other party had indicated his willingness to accept a proposal for
settlement made by the conciliator.
TEST QUESTIONS
1. What do you understand by conciliation? State the procedure in conciliation.
2. Explain the procedure for the appointment of the conciliator. What is the maximum limit on th
number of conciliators?
3. Explain the legal provisions relating to the commencement and termination of conciliatio
proceedings.
Write notes on: (a) Procedure to be followed in conciliation, (b) Effect of conciliation proceedings
and settlement agreement, (c) Settlement agreement.

53. NATURE OF INSOLVENCY PROCEEDINGS

53.1. INTRODUCTION
Sometimes, a person is involved in financial difficulties and is unable to meet his financial
obligations. In general sense, such a person is called an insolvent. However, in legal sense, he
becomes an insolvent only when he is declared so by a competent court. In India, the Law of
Insolvency is contained in two Acts, namely:
1. The Presidency Towns Insolvency Act, 1909.
2. The Provincial Insolvency Act, 1920.
 The first Act applies to the Presidency Towns of Bombay, Calcutta and Madras, and the
second to the rest of the country. The scheme of both the acts is almost similar. Most of the
provisions of these Acts are common except some differences on certain matters relating to
procedure only. In our discussion on the Law Relating to Insolvency, we shall quote the
provisions of Provincial Insolvency Act, and where there is difference on any point, it shall he
explained at appropriate places during the course of our discussion. Mainly, there are
following fine points of difference between these two Acts:
1. The constitution of courts.
2. The procedure to be followed from the date of the presentation of the insolvency petition to
the date of the order of adjudication.
3. The person in whom the property of the debtor is to be vested.
4. The doctrine of relation back.
5. The machinery for investigating the conduct of the debtor.
Notes 1: The Provincial Insolvency Act, 1920 has been amended in 1926, 1927, 1935, and so far as
the Bombay Presidency alone is concerned, by the Bombay Act of 1948. The Presidency Towns
Insolvency Act, 1909, has been amended in 1914, 1920, 1926, 1927, 1930, and so for as Bombay
Presidency alone is concerned by the Bombay Act of 1939. Both the Indian Insolvency Acts have been
further amended by the Insolvency Laws (Amendment) Act, 1978, which came into force from 1st
September, 1979. In our discussion of this part of law, upto date amendments have been duly incorporated.
2. Both the Indian Insolvency Acts are based on the English Law of Bankruptcy .
53.2. OBJECTS OF LAW OF INSOLVENCY
The basic object of the Law of Insolvency is designed for the protection of both, an insolvent (debtor) as well as his
creditors. This object is beautifully explained by BLACKSTONE in the following words:
The Laws of Insolvency are made for the benefit of trade, and an- founded on the principles
°f humanity and justice; and to that end they confer some privileges both on the creditors
and the insolvent."

LAW OF INSOLVENCY
Thus, the basic object of the Law of Insolvency is based upon the principle of humanity and justice.
According to the principle, following are the two objects of the Law of Insolvency:

1. To protect the debtor (insolvent) who is in financial difficulties, and make him free from his
debts so that he can make a fresh start in life.

2. To protect the creditors and to secure fair distribution of debtor’s (insolvent’s) property among
the creditors.

Thus, the main object of the Law of Insolvency is to protect both, the debtor as well as his creditors. It
protects the debtor in the sense that he is protected from being harassed by his creditors. After the
distribution of the property of the debtor, he may get discharge from the court. Thereafter, he is free
from his former obligations, and can make a fresh start in life. It protects the creditors in the sense that
all the property of the insolvent is distributed fairly among all the creditors without any fraudulent
concealment.

Notes: 1. An insolvent suffers from certain personal disqualifications e.g. (a) he cannot be appointed as
a magistrate, (b) he cannot be elected to any office of a local authority, (c) he cannot be elected as a
member of any local authority. However, these disqualifications are removed when he obtains an order
of discharge from the court, or when an order of adjudication are removed when he obtains an order of
discharge from the court, or when an order of adjudication is cancelled.

2. Under the Companies act, 1956, an insolvent cannot be a director or manager of a company.

53.3. INSOLVENT
An insolvent is a person who is in financial difficulties, and is unable to pay his debts. But in legal
sense, such a person becomes insolvent only when he is declared so by a competent court. It will be
interesting to know that the term insolvent has not been defined anywhere in both the Indian Insolvency
Acts. However the term ‘Insolvent’ as used in India, is synonymous with the term ‘bankrupt’ as used in
English Law. According to English Law, a bankrupt is a person who has committed an act of
bankruptcy, and who has been declared a bankrupt by a competent. Thus in Indian Law, and insolvent is
a person who has committed an act of insolvency, and has been declared as an insolvent by a competent
court. It, therefore, follows that a debtor against whom an order of jurisdiction (i.e. an order declaring a
person as an insolvent) has been passed, is known as an insolvent. The term ‘act of insolvency’ will be
discussed in Art. 53.6.

53.4. INSOLVENCY PROCEEDINGS

The term ‘insolvency’ or ‘insolvency proceedings’ means the procedure by which the state takes the
possession of debtors property, who is unable to pay his debts and discharge his liabilities. This term has
also not been defined in the Indian Insolvency Acts. It is synonymous with the term ‘bankruptcy’ as
used in English Law. According to English Law, bankruptcy is a proceeding by which, when a debtor
cannot pay his debts or discharge his liabilities or the persons to whom he owes money or has incurred
liabilities cannot obtain satisfaction of their claims, the state in certain circumstances, takes possession
of the property by an officer appointed for the purpose, and such property is realized and distributed in
equal proportions among the persons to whom the debtor owes money or has incurred pecuniary
liabilities. Thus, in Indian Law, ‘insolvency’ is the proceedings by which the state takes over the
possession of the property of a debtor who cannot pay his debts or discharge his liabilities, and realizes
it and distributes the same fairly among the creditors. The state conducts these proceedings through an
officer specially appointed for this purpose. Under the Presidency Towns Insolvency Act, such an
officer is known as ‘Official Assignee’, and under the Provincial Insolvency Act, he is known as
‘Receiver’.

The insolvency proceedings are started by filing an insolvency petition in a competent court. The
insolvency petition may be filed either by any one of the creditors or by the debtor himself. On such
petition, if it is proved that the debtor has committed an ‘act of insolvency’, then
then he is declared as an insolvent by the court. When a debtor is declared insolvent, all l,j s
properties go into the hands of Official Assignee or Receiver. He takes charge of the property
of the insolvent, realises it, and distributes the same fairly among the creditors of
insolvent.

53.5. INSOLVENCY COURTS

The insolvency courts means the courts which have the jurisdiction i.e. legal authority to decide
insolvency petitions. Under both the Indian Insolvency Act, different courts have been given [de
jurisdiction to decide the insolvency petitions, which are stated as under:
1. Under the Presidency Towns Insolvency Act, the High Courts of Bombay, Calcutta and
Madras have the jurisdiction to decide insolvency petitions.
2. Under the Provincial Insolvency .Act, the District Courts have the jurisdiction to decide
insolvency petitions. However, the State Government may, by notification in the Official Gazette,
 give insolvency jurisdiction to any court subordinate to the District Court.
Thus, in Bombay, Calcutta and Madras, the High Courts act as insolvency courts, and in the
rest of the country, the District Courts act as insolvency courts. It may be noted that the
insolvency courts have full powers to decide all questions which may arise during the course
of insolvency proceedings, and which the courts deem necessary to decide. Thus, the insolvency
courts may decide all questions, whether of title or priority, whether of law or fact, which
may arise during the course of insolvency proceedings. The decisions of the insolvency
courts are final and binding upon the debtors and creditors. No second suit, in respect of the
same matter, would lie in the ordinary civil courts. However, any party, aggrieved by an order of
an insolvency court, may file an appeal in the higher court against such order.

53.6. ACTS OF INSOLVENCY

We have discussed in Art. 53.4 that a debtor can be declared as an insolvent only when it
is proved that he has committed some 'act of insolvency'. In fact an act of insolvency, on the
part of a debtor, is a condition precedent for every petition in insolvency. In other words, an
insolvency petition can only be filed in the court, if the debtor has committed some act of
insolvency. It will be interesting to know that the term 'act of insolvency' has not been
defined in both the Indian Insolvency Acts. However, an 'act of insolvency' is one which, in the
public eyes, shakes the credit of a debtor, and shows that he is in financial difficulties. In
simple words, 'an act of insolvency' is some act of the debtor which shows that he is
financially embarrassed.
Though the term 'act of insolvency' is not defined in both the Insolvency Acts, yet both these
Acts prescribe certain acts which are regarded as the 'acts of insolvency'. These 'acts of
insolvency' are contained in Section 6 of the Provincial Insolvency Act, and Section 9 of the
Presidency Towns Insolvency Act. Practically, the acts of insolvency as contained in these Acts
are almost same. It may be noted that except the acts contained in the Indian Insolvency Acts,
no other act of the debtor can be taken as an act of insolvency. The acts of insolvency, on the
basis of which a debtor can be declared as an insolvent, may be discussed under the following
heads:
1. Transfer of all the property for the benefit of the creditors: Sometimes, a debtor transfers all or substantially all
his property to a third person for the general benefit of his creditors. In such cases, the transfer of property amounts
to an act of insolvency, and an insolvency petition may be filed on this ground. As a matter of fact, the transfer of
whole or substantial portion of one's property itself indicates that a person is in financial difficulties.
This provision is contained in Section 6(1 )(a) of the Provincial Insolvency Act, and Section 9(a) of the Presidency
Towns Insolvency Act, which is similar in both the Acts

Example 53.1. A, a debtor, transferred the whole of his property to his creditors for payment Of
amount due to all the creditors named in the list. But the list turned out to be incomplete. The trans
was, however, entered into honestly by the parties. Certain creditors whose names did not appear j^' 0"
list, filed an insolvency petition against A. It was held that the transaction constituted an act of insolv ^
and the debtor (A) may be declared as an insolvent on the basis of the petition filed by the cred't^
whose names did not appear in the list. [Re Phillips (1900) 2 Q.B. 329?

It may be noted that for the application of this provision, the intention of the debtor to def or delay the creditors, is not
required to be proved. Even if such transfer is made honesiT and for the general benefit of all the creditors, it
will amount to an act of insolvency. It , n also be noted that such transfer amounts to an act of insolvency
whether it is made in Ind' or elsewhere.
Notes: 1. The creditors who have given their consent to such a transfer by the debtor, cannot fi] an insolvency petition on
this ground.
2. In case, if the debtor is declared as an insolvent within three months of the date of such transfer of property, the transfer
is void as against the Receiver or Official Assignee, and the transferee will have to hand over the same to the Receiver
or Official Assignee, as the case may be.
2. Transfer of property with the intention of deceiving the creditors: Sometimes, a debtor
transfers his property or any part thereof, with the intention of defeating or delaying (i. e
deceiving) his creditors. In such cases, the transfer of property amounts to an act of insolvency
and an insolvency petition may be filed on this ground. Such a transfer amounts to an act
of insolvency whether it is made in India or elsewhere. If may be noted that the transfer of
property must be made with the intention of deceiving all the creditors and not only a single
creditor. It is, however, not necessary that such a transfer should be of all or of substantial
portion of debtor's property. It may be of any part of his property. The requirement is that
it must be made with the intention of deceiving all the creditors. The intention of the debtor
may be gathered (a) from the facts and surrounding circumstances of the case, and (b) from
the debtor's act. This provision is contained in Section 6(1) (b) of the Provincial Insolvency
Act, and Section 9(b) of the Presidency Towns Insolvency Act, which is similar in both the
Acts.
Example 53.2. A and B were two brothers and members of a joint family. A owed heavy debts to
his creditors. He effected partition with his brother (B) and gave all the joint property to him. A retained
only a small amount of money with him. And no provision was made for the payment of /4's debt. In
this case, it was held that the partition of the property amounted to an act of insolvency. Here, the
circumstances showed that the partition was effected with an intention of deceiving the creditors as no
provision was made for the payment of their debts. [AIR 1936 Lahore 336],
In this case, the transfer need not be of the whole or substantially the whole of debtor's property, it may
be only of a part of it. The requirement for the application of this provision is that such a transfer should
be made with the intention of deceiving the creditors. Such transfers are usually without consideration
and are known as fraudulent transfers.
Note: In this case, on the passing of order of adjudication, such transfer of property is void as against the
Receiver or Official Assignee. Here, no time limit is prescribed within which the order of adjudication should be
passed for making the transfer void. Thus, as and when the order of adjudication is made, the transfer
becomes void.
3. Transfer of property which is void as fraudulent preference: Sometimes, a debtor transfers
his property or any part thereof, which would be void as being fraudulent preference under
the Insolvency Law or under any other law,* if he were declared as an insolvent. In such
cases, the transfer of property amounts to an act of insolvency, and an insolvency petition
may be filed on this ground. Such a transfer amounts to an act of insolvency whether it
is made in India or elsewhere. This provision is contained in Section 6( I )(c) of the Provincial

Insolvency Act, and Section 9(c) of the Presidency Towns Insolvency Act, which is similar both
the Acts. the expression 'fraudulent preference' means giving preference to one creditor over the
other It is a transfer of property by a debtor to one or more of his creditors with the intention
of giving preference to them over the rest of the creditors. It may be noted that the word
‘preference’ here indicates that there should be at least two creditors, and one should be
preferred over the other. Thus, where a transfer is made to any person other than the creditors, it
will not amount to fraudulent preference within the meaning of this clause. In simple words,
fraudulent preference is a voluntary transfer in order to prefer one creditor over the other. Note.
In this case, if the debtor is declared as an insolvent within three months of the date of such transfer
of property, the transfer becomes void as against the Receiver or Official Assignee, and [he transferee
will have to return the same. It may be noted that such a transfer in its inception is n0t void. It
becomes void only if the debtor is declared as an insolvent within three months of the date of transfer
[Section 54 of the Provincial Insolvency Act, and Section 56 of the Presidency Towns Insolvency Act].
4. Where the debtor remains away from his creditors: Sometimes, a debtor remains away from
his creditors with the intention of deceiving or delaying his creditors. In such cases, his
remaining away from the creditors amounts to an act of insolvency, and an insolvency petition may
be filed on this ground. Under this clause, the following three acts of the debtor amounts to an act of
insolvency if done with the intention of defeating i.e. deceiving or delaying his creditors:
(a) Where the debtor departs or remains out of India.
 (b) Where the debtor departs from his dwelling house or usual place of business or otherwise
absent hismelf.
(c) Where he secludes himself in such a way that his creditors cannot communicate with him.
It may, however, be noted that the above acts must be done with the intention of deceiving
the creditors generally and not only a particular creditor. The intention of the debtor can
be gathered from the facts and circumstances of each case. This provision is contained
in section 6(1 )(d) of the Provincial Insolvency Act, and Section 9(d) of the Presidency
Towns Insolvency Act, which is similar in both the Acts.
Example 53.3. A owed heavy debts to his creditors. With the intention of deceiving his creditors, he
went out of India, and did not return for 15 years. In this case, A's act amounts to an act of insolvency as he
remained out of India for a considerable Song time. Similarly, departure from the dwelling house for a
considerable long time also amounts to an act of insolvency.
Example 53.4. A, a businessman, owed heavy debts to his creditors. He stopped his business, and was
not found at the usual places of business. His servant was also not aware of his whereabouts. In this
case, A's act amounts to an act of insolvency as there is sufficient departure from usual place of
business with intent to delay or defeat the creditors.
Similarly, where with the intention of deceiving his creditors, the debtor avoids communication with
the creditors, it amounts to an act of insolvency, e.g. where the creditor is unable to establish
communication with debtor by reason of his (debtor's) secluding himself at a place or in a manner
which makes communication between the two impossible. It may, however, be noted that if any
of the above acts of the debtor is not with an intent to defeat or delay his creditors, that would
not amount to an act of insolvency.
Example 53.5. A firm was carrying on its business having main office at Madras. Subsequently,
the firm shifted its main office to Erode, and one person was looking after the Madras business. Some
of the creditors of the firm filed a petition for insolvency on the ground, among others, that the firm
has changed its place of business from Madras to Erode. It was held that the act of the firm did
not amount to an act of insolvency. The court observed that there could be no presumption of the
fact that the partner's departure from Madras was with intent to defeat or delay the creditors as it
had left a representative behind. [S.K. Khushi Ram v. Rama Dhenu Drinks (1978) MLJ 149].
Similarly, if the debtor departs from India for a business trip, his departure will not am to an act
of insolvency, even if creditors are delayed thereby.
[Warner v. Barber (1816) Holt. N.P)
5. Where any of the debtor's property in sold, in execution of a decree of any court for
the payment of money: Sometimes for the payment of money, a debtor's property is sold ' *
execution of a decree of the court. It amounts to an act of insvency, and an insolvency p etjt- "
may be filed on this ground. It is an 'involuntary' act of insolvency, as it is not volunta 'i
committed by the debtor. This provision is contained in Section 6(1 )(e) of the Provi nc i
Insolvency Act.
On this point, there is some difference between the two Insolvency Acts. A per Sectin
9(e) of the Presidency Towns Insolvency Act, in addition to the sale of debtor's property j
execution of the money decree, the attachment of debtor's property by the court for the payment
of money, also amounts to an act of insolvency if the attachment is for a period of not ] ess
than 21 days. Whereas, the attachment of debtor's property does not amount to an act of
insolvency under the Provincial Insolvency Act. It may be noted that the sale or attachment
of property under this clause, must be in the execution of a court decree. Thus sale of debtor's
property in execution of arbitration award, does not amount to an act of insolvency as arbitration
award is not a court decree. [Ramsahai Mull v. Joylal (1928), 32 CWN 608].
Note: The act of insolvency once committed cannot be purged (i.e. cured) by subsequent events Thus, if
the decretal amount is paid after the sale in execution of money decree, the act of insolvency is not erased.
And the other creditors can present an insolvency petition on the ground that the debtor's property is sold in
execution of a decree of the court.
6. Where the debtor is imprisoned in execution of the decree of any court : Sometimes,
for the payment of money, the debtor is imprisoned in • the execution of the decree of any
court. It amounts to an act of insolvency, and an insolvency petition may be presented on
this ground. This act of insolvency is also an involuntary act of insolvency as it is not voluntarily
committed by the debtor. It will be interesting to know that when a 'person is arrested and
imprisoned in the execution of a decree for the payment of money, there is a continuing
act of insolvency throughout the period of his imprisonment. 2 It may, however, be noted that
the debtor must be in prison at the time of presentation of the insolvency petition. Thus,
an insolvency petition cannot be founded on this ground after the debtor has been discharged
from prison.
This provision is contained in Section 6(1 )(h) of the Provincial Insolvency Act, and Section 9(h) of
the Presidency Towns Insolvency Act, which is similar in both the Acts.
Note. If the debtor is imprisoned for some criminal offence, it will not amount to an act of
insolvency on his part.
1. Where the debtor himself presents an insolvency petition: Sometimes, the debtor himself
presents an insolvency petition in the court, to be declared as an insolvent. It amounts to an act
of insolvency, and an insolvency petition may also be presented by his creditors on this ground. It
may be noted that presentation of a petiton by a debtor in itself is an act of insolvency. Thus,
even if his petition is dismissed, the presentation of the petition by the debtor remains an act of
insolvency. After the dismissal of debtor's petition, any creditor may present an insolvency petition
against the debtor founded on this act of insolvency. This provision is contained in Section 6(1 )(f)
of the Provincial Insolvency Act, and Section 9(0 of the Presidency Towns Insolvency Act,
which is similar in both the Acts.
8. Where the debtor suspends payment: Sometimes, the debtor gives notice to any of his creditors
that he has suspended or is about to suspend payment of his debts. In such cases, his act amounts
to an act of insolvency, and an insolvency petition may be presented on this ground.
It may be noted that the notice of suspension of payment must be of the entire debts and mllst amount to
an expression of general intention to stop payment to every creditor. However,
such a notice may be oral or in writing. But it must contain a declaration that the debtor has 0 intention to
make payment to any of his creditors. The notice of suspension of payment must be given by the debtor or
his duly authorised agent. It may, however, be noted that the debtor's or his duly authorised agent's refusal or
inability to pay does not amount to suspension Of payment. The notice must disclose the general intention
of the debtor to stop payment to every creditor. This provision is contained in Section 6(1 )(g) of the
Provincial Insolvency Act, and Section 9(g) of the Presidency Towns Insolvency Act, which is similar in
both the Acts.
Example 53.6. A, a businessman, sent a circular to his creditors reading as "Being unable to meet
(ny debts as they fall due, I invite your attention at the place of my business on Monday next at
10 A.M. when I will submit a statement of my position for your consideration and decision". It was
held that this circular amounted to notice of suspension as it contained the general intention of the debtor
that he was about to suspend payment of his debts. [Crook V. Morley (1891) A.C. 316].
Thus, a notice of suspensions of payment amounts to an act of insolvency even if it indicates
a temporary suspension of payment. It may, however, be noted that the section requires the |
notice of suspension of payment. A mere suspension of payment will not be sufficient if there is no notice
of the same.
[Mulla's Law of Insolvency in India, 3rd edn. P. 94, para 112].
9. Where the debtor fails to comply with the insolvency notice served by his creditor. Sometimes, the debtor
fails to comply with the insolvency notice served on him by his creditor. Such a failure on debtor's part amounts to an
act of insolvency, and an insolvency petition may be filed on this ground. An insolvency notice is one which is
served upon the debtor, by any one of his creditors, in respect of a decree or an order, for the payment of
money within period specified in the notice, which shall not be less than one months. The 'insolvency notice' will
be discussed in detail in Art. 53.7.
This provision is contained in Section 6(2) of the Provincial Insolvency Act, and Section 9(2) of the Presidency
Towns Insolvency Act, which is similar in both the Acts.
Example 53.7. A, a businessman, owed heavy debts to his creditors. B, one of his creditors, obtained
a decree from the court for payment of his debts. And he (B) served a notice upon A to pay the
decree amount within two months from the date of notice. But A did not pay the amount and the period of
two months expired. In this case A has committed an act of insolvency by not complying with the
insolvency notice.
It may, however, to noted if the debtor makes an application, to the court, for setting aside
the insolvency notice, then he shall not be deemed to have committed an act of insolvency
if his application is allowed by the court.
Note: This provision was mended by the Insolvency Law (Amendment) Act, 1978, with effect from
1.9.1979. Prior to this amendment, the non-compliance with an insolvency notice was treated an act
of insolvency only in states of Gujrat and Maharashtra. Now this provision is applicable, subject to
certain madifications, to the whole of India.

53.7. INSOLVENCY NOTICE

It is a statutory notice given to the debtor by his creditor who has obtained a decree or order
against the debtor, for the payment of any amount. By such notice, the debtor is called
upon to pay the amount within the time specified in the notice, which shall not be less
than one month. It may be noted that the notice must specify the amount, and also make it
clear that non-compliance with the notice would amount to an act of insolvency on the
basis of which an insolvency petition may be filed against the debtor. It may, further, be
noted that the requirements for giving an insolvency notice are that (a) it can only be
given by a creditor, (b) such a creditor must hold a decree or order against the debtor for the
payment of rnon and (c) such a decree or order must be capable of being executed.
On receiving the notice, the debtor must either pay the amount or give security, for the pavrnen of the amount,
to the creditor. However, within the time specified in the notice, the debt may apply to the insolvency court
for setting aside the notice on any of the following grounds-
1. That he has a counter-clam or a claim for set-off against the creditor which is equal to 0
in excess of the amount and which he could not set up in a suit in which the decree o
order for payment was obtained against him.
2. That he is entitled to have the decree or order set aside under any Debt Relief Law (i e
a local law passed by the States to give some relief to the debtor).
3. That the the decree or order is not executable under the provisions of any Debt Relief
Law.
It may be noted that if debtor's application for setting aside the insolvecy notice is allowed by the court,
then he shall not be deemed to have committed an act of insolvency. But if such application is rejected
by the court, then the debtor shall be deemed to have committed an act of insolvency on the date of
rejection of his application or the expire of period specified in the insolvency notice for its compliance,
whichever is later.
The provisions relating to the insolvency notice are contained in Section 6 of the Provincial Insolvency Act, and
Section 9 of the Presidency Towns Insolvency Act, which are almost similar.

53.8. PERSONS WHO CAN BE ADJUDGED INSOLVENTS

Any person can be adjudged i.e. declared as an insolvent, if he is a 'debtor', and has committed an 'act of
insolvency'. The term debtor as used in the Insolvency Law, has a limited meaning and includes only a
person who owes some money to others, and is subject to the laws of India. It does not mean a debtor
all the world over. In simple words, a person should be a debtor according to the Indian Laws. It may
also be noted that such a person must also be capable of entering into a contract. The reason for the
same is that a valid debt can be contracted by a person who is competent to enter into a valid contract.
Thus, a person can be declared as an insolvent if the following conditions are satisfied, that:
1. He must be a debtor within the meaning of Insolvency Law.
2. He must be competent to contract.
3. He must have committed an act of insolvency,
The capacity of some of the persons who can contract a debt, and who may be declared insolvent, is
discussed in the following pages:
1. Minors: We know that a minor is not competent to enter into a valid contract. An
agreement with a minor is absolutely void. Moreover, a minor is not personally liable for
any debt incurred by him during his period of minority. Thus, a minor cannot be declared
as an insolvent.
2. Lunatics: A lunatic is also not competent to enter into a valid contract. As such he
cannot be declared as an insolvent. However, if he contracts a debt and also commits an
act of insolvency during lucid intervals (i.e. when he is sane), then he may be declared as
insolvent.
3. Partnership firm: A partnership firm can be declared as insolvent. An order of adjudication
can be made against the firm in firm's name. However, a firm can be declared insolvent
when joint petition is filed against the firm. A joint petition can be filed only when each ol
the partners has committed an act of insolvency, or when all the partners have committed a
joint act of insolvency. Since, a partnership firm has no separate entity different from its members,
order of adjudication against the firm operates as if it were an order made against each
Of the partners. [Firm Mukand Lai \. Purshottam Singh, AIR 1960 SC 1182].
4. Partners of a firm: An individual partner can be declared as an insolvent only if he himself
has committed an act of insolvency A single petition may also be filed against two or more
partners where each of them has committed an act of insolvency, or they h we committed a
joint act of insolvency. It may, however, be noted that a minor partner, admitted to the benefits
of the firm, cannot be declared as an insolvent.
5. Karta of Joint Hindu Family: The karta of a Joint Hindu Family is personally liable
for the debts of the family incurred by him during the course of family business. As such,
he can be declared as an insolvent if he has committed an 'act of insolvency'. The other
members of the Joint Hindu Family are not personally liable for the Joint-family debts, and
they cannot, therefore, be declared insolvent in respect of joint family debts. However, the
other members may be declared as insolvent if they are personally liable on a joint debt,
and have committed a joint act of insolvency. It may be noted that a minor member of a Joint
Hindu Family cannot be declared as an insolvent in any case, even if he has taken an active
part in the joint family business.
6. Joint debtors: The debtors who obtain a joint debt, are called joint debtors. The joint
debtors may be declared insolvent on a single petition of insolvency filed against them. It
is, however, necessary that an act of insolvency must have been committed by each of them
or by all of them jointly. If only one of the joint debtor has committed an act of insolvency,
he alone can be declared insolvent if the creditor files an insolvency petition against him.
7. Companies or Corporations: A company cannot be declared as an insolvent. Where a
company is in insolvent circumstances i.e. unable to pay its liabilities in full, the only course
open to the creditors is to apply for its winding up as per the provisions contained in the
Companies Act, 1956. Similarly, a corporation, incorporated under an Act of Legislation, can
also not be declared as an insolvent.
Note: The provision in this regard is contained in Section 8 of the Provincial Insolvency
Act, and Section 107 of the Presidency Towns Insolvency Act.
8. Deceased persons: A deceased person cannot be declared insolvent even if an insolvency
petition was filed before his death. However, where a debtor dies after an insolvency petition
has been filed against him, the proceedings will continue as if he were alive. In such a case,
his estate will be administered by the Receiver or Official Assignee unless the court directs
otherwise. It may be noted that the insolvency proceedings are continued not for the purpose
of declaring the deceased as insolvent, but only for the purpose of deciding as to how his
property should be realised and distributed among his creditors.
Note: In such proceedings the legal representatives of the deceased can also not be
declared insolvents as they are not liable for deceased's debts.
9. Foreigners: A foreigner can be declared as an insolvent if he is debtor, and has committed
an act of insolvency during his personal residence in India. It is, however, not necessary
that he should be present in India at the time of the presentation of the insolvency petition.
A non-resident foreigner i.e. who has never resided is India, cannot be declared as an insolvent
even if he is carrying on business in India through an agent, and commits an act of insolvency.
[Ganeshnarayan v. Pratapgiri, 40 Bombay L R 33].
10. Convict: A convict can be declared as an insolvent.

53.9. PROCEDURE OF INSOLVENCY AND SUBSEQUENT PROCEEDINGS

The procedure for declaring a person as an insolvent may be discussed under the following heads:
1. Presentation of the insolvency petition.
2. Admission of the insolvency petition.
 3. Hearing of the insolvency petition.
4. Adjudication of the debtor as insolvent.
5. Debts and property of the insolvent.
6. Discharge of the insolvent.
These points will bediscussed in detail in chapters 54, 55 and 56.

TEST QUESTIONS
1. State objects of insolvency. Explain clearly the meaning of insolvent, insolvency proceedin
insolvency courts.
2. Explain what amounts to an 'act of insolvency'. Discuss the various 'acts of insolvency' as prescrih
under the Insolvency Law.
3. What is an insolvency notice? State the legal provisions relating to it. Can a deceased and a p art
be adjudged insolvent?
4. Write notes on the following:
(a) Fraudulent preference (b) Minor as insolvent
(c) Partnership firm as insolvent (d) Deceased as insolvent.

54 PROCEDURE OF INSOLVENCY PROCEEDINGS

54.1 INTRODUCTION

We have discussed, in the last chapter, that an insolvent is a person who is unable to pay his debts and
is declared so by an Insolvency Court. However, for declaring a person to be an insolvent, the procedure
prescribed in the Insolvency Acts is to be followed. In this chapter, we shall discuss the procedure for declaring
a person as an insolvency, and other legal provisions related thereto.

54.2. PRESENTATION OF AN INSOLVENCY PETITION

The insolvency proceedings are commenced by presenting (i.e. filing) an insolvency petition in the
competent court. It is an application filed in the Insolvency Court for the declaration of the debtor as an
insolvent. It should be in writing, and also signed and verified by the person presenting the same. 1 It may
be noted that the insolvency petition should be presented in the Insolvency Court within the jurisdiction of
which
(a) The debtor, at the time of presentation of the insolvency petition, is imprisoned in
execution of a money decree; or
(b) The debtor, within a year before the date of the presentation of the insolvency petition,
has ordinarily resided or has a diwelling house or has carried on business himself or
through an agent; or
(a) The debtor personally works for gain; or
(c) In case of a petition by or against a partnership firm of debtors, the firm has carried on
business within a year prior to the date of presentation of the insolvency petition.
The above requirements regarding the jurisdiction of an Insolvency Court are provided in both the
Insolvency Acts. However, Section 11 of the Provincial Insolvency Act. contains no limitation as regards
the length of residence or carrying on business etc.
It will be interesting to note that an insolvency petition may be presented in the court either by a
creditor or by the debtor himself. The Insolvency Acts prescribe certain conditions
which must be fulfilled before an insolvency petition is presented in the court These conditions
may be discussed under the following two heads:
1. Conditions on which a creditor may present an insolvency petition.
 2. Conditions on which a debtor may present an insolvency petition.

54.3. CONDITIONS FOR A CREDITOR'S PETITION

We know that a creditor can present an insolvency petition in the Insolvency Court requiring
that the debtor should be declared as an insolvent. However there are certain conditions which
must be fulfilled before a creditor can present an insolvency petition. These conditions are
contained in Section 9(1) of the Provincial Insolvency Act, and Section 12 of the Presidency
Towns Insolvency Act, which are similar in both the Acts. The analysis of these sections reveals
that a creditor can present an insolvency petition in the court only if the following conditions
are fulfilled:
1. The debtor must owe a debt to the creditor. The debtor must owe a debt to the creditor who
is presenting the insolvency petition. Moreover, the debt must be payable to the creditor
at the time of presenting such a petition in the court. The term 'debt' here means an unsecured
debt. It does not include a 'secured debt' i.e. the debt for which the creditor is having security. The
provisions regarding insolvency petition by a secured creditor will be discussed in next article.
2. The amount of debt must be at least five hundred rupees: The amount of debt owed
by the debtor must be at least five hundred rupees or more. Sometimes, two or more creditors
present a joint insolvency petition In such cases, the aggregate amount of debt owed to all
such creditors must be of five hundred rupees or more.
3. The debt must be a liquidated sum: The debt owed by the debtor must be a liquidated
sum. The term 'liquidated sum' means the amount which can be ascertained with certainty
However, such a debt may be payable either immediately or at some future date. It may
be noted that a claim for damages for breach of contract or tort cannot be the basis of any
insolvency petition. The reason for the same in that these damages cannot be ascertained
with certainty.
4. The debt must be in existence: The debt owed by the debtor must be in existence both
at the time of alleged act of insolvency and at the time of presentation of the insolvency
petition. Moreover, the debt must also continue to exist throughout the hearing of the insolvency
petition till the order of adjudication (an order declaring a debtor as insolvent) is made by
the court. Thus, the continuous existence of debt is necessary for passing an insolvency order
against the debtor. [Bhaskar & Co. v. Veerasikku Air 1958 Madras 3|9
5. The debtor must have committed an act of insolvency: The debtor must have committed
an act of insolvency. If there is no act of insolvency on the part of a debtor, no insolvency
petition can be presented by a creditor against the debtor. The act of insolvency has to be
determined on the date of presentation of the petition.
6. The creditor must file the insolvency petition within three months from the. date on
the debtor has -committed an act of insolvency: This period of three months is a conditions precedent for
the presentment of the insolvency petition. If once period of three months expires^ then the creditor is debarred
from presenting the insolvency petition. However, if the said period of three month expires on a day when
the court is closed, the insolvency petition may be presented on the next day on which the court
reopens.
Thus, on the fulfillment of the above conditions, a creditor can present a valid petition in the court for
declaring the debtor as an insolvent. It may, however, he noted the petition must be duly supported by
an affidavit of the creditor, and the proof of and debtor's act of insolvency.

54.4. INSOLVENCY PETITION BY A SECURED CREDITOR

A secured creditor is one who holds some security of the debtor for the repayment of his debt
e.g. where he holds a mortgage, pledge or any other charge on debtor's property as security for
repayment of a debt due to him from the debtor. It may be noted that as regards the presentation of
an insolvency petition, the position of a secured creditor in different from that of an ordinary creditor
(i.e. unsecured creditor). A secured creditor cannot present the insolvency petition unless he places
himself in the position of an unsecured creditor. If the secured creditor wants to present an
insolvency petition, he can do so by exercising either of the following options:
1. By giving up his security for the general benefit of all the creditors and then claiming
as an unsecured creditor for the whole debt; or
2. By giving an estimate of the value of the security, and deducting the amount of security
from the total debts, and then claiming for the balance as an unsecured creditor if such
balance in Rs. 500 or more.
It may be noted here that all the conditions mentioned earlier must be satisfied whether the
petition is presented by an unsecured creditor or a secured creditor.
However, the secured creditor may altogether ignore the insolvency proceedings and rely upon
his security. In this way, he stands outside the insolvency and is excluded from any share in the
dividend (i.e. the amount realised by the Receiver or Official Assignee by selling insolvent's property).
The rights of the secured creditor, to realise or deal with his security, are not affected by the
provisions of Insolvency Law. Thus, if the secured creditor does not take part in the insolvency
proceedings, he has the following rights:
(a) He has a right to realise or otherwise deal with his security. His security is not affected
by the order of adjudication.
(b) He has a right to file a suit against the debtor for the realisation of the security. And for
filing such suit, permission of Insolvency Court is not required.
The provision regarding an insolvency petition by a secured creditor is contained in Section 9(2) of
the Provincial Insolvency Act, and Section 12(2) of the Presidency Towns Insolvency Act, which is
similar in both the cases.
54.5. CONDITIONS FOR A DEBTOR'S PETITION
We know that a debtor, himself, can also present an insolvency petition in the Insolvency Court
requiring that he should be declared as an insolvent. However, there are certain conditions which must
be fulfilled before a debtor can present an insolvency petition. These conditions are contained in
Section 10(1) of the Provincial Insolvency Act, and Section 14(1) of the Presidency Towns
Insolvency Act, which are similar in both the Acts. The analysis of these sections reveals that a debtor
can present an insolvency petition in the court rinly if the following conditions are fulfilled:
1. When the debtor is unable to pay his debts. The inability of the debtor, to pay his debts, is
a condition precedent for the presentation of an insolvency petition by the debtor. The petition by
the debtor must allege that he is unable to pay his debts. The expression 'unable to pay his debts'
means that the total debts of the debtor are more than the marketable value of his assets if realised
at that time.
In Pratapmal V. Chunilal, I.L.R. 60 Calcutta 345, the Calcutta High Court has held that a
debtor is also considered to be 'unable to pay his debts' if he has no liquid (i.e. presently realisable)
assets to pay his debts at present, although he may be having more than sufficient assets to discharge
his debts. When debtor's inability to pay his debts is not due to inadequacy of assets, but due to the
fact that the assets cannot be readily turned into cash, the debtor is said to be commercially
insolvent and the insolvency petition can be filed on this ground.

On the fulfilment of the above condition of 'inability to pay the debts', the debtor may
present an insolvency petition on any of the following ground mentioned in points 2 to 4
below.
2. When the amount of debt is at least five hundred rupees: The amount of debt owed
by the debtor must be at least five hundred rupees or more.
3. When the debtor is under arrest or imprisonment in execution of the decree of any
court for the payment of money: Sometimes, a creditor obtains a money decree against the
debtor and starts execution proceedings against him for the payment of money And the debtor
is arrested or imprisoned in the execution of such a decree of the court. In such cases the
debtor may present an insolvency petition in the Insolvency court. It may be noted that the
debtor must be under arrest or imprisonment at the time of presentation of the insolvency
petition. It will be interesting to know that his prior arrest or release before the application
is no ground for presenting the insolvency petition.
4. When an order of attachment is subsisting against debtor's property: Sometimes, a creditor
obtains a money decree against the debtor and starts execution proceedings against him for
the payment of money. And the creditor obtains an order of attachment against the debtor's
property. In such cases, the debtor may present an insolvency petition in the Insolvency Court
It may be noted that the attachment order against his property must be subsisting at the time
of presentation of the insolvency petition.
Note. The insolvency petition filed by the debtor must also be supported by his affidavit, and other necessary proofs.

54.6. WITHDRAWAL OR CONSOLIDATION OF INSOLVENCY PETITIONS

The legal provisions relating to the withdrawal or consolidation of insolvency petitions filed in
the court, are as under:
1. Withdrawal of an insolvency petition: Once an insolvency petition is presented in the
court either by the creditor or by the debtor, then it cannot be withdrawn without the leave
(permission) of the court. The court allows the withdrawal of the petition after giving notice
to the other parties, and on its being satisfied that withdrawal will not be detrimental (i.e.
harmful) to the,other parties. It may however, be noted that the court cannot allow withdrawal
of the petition after the order of adjudication has been made.
This provision is contained in Section 14 of the Provincial Insolvency Act, and Section
13(8) and 15(2) of the Presidency Towns Insolvency Act, which is similar in both the Acts
2. Consolidation of two or more insolvency petition. Sometimes, two or more creditors
file separate insolvency petitions against the same debtor or against the joint debtors. In such
cases, the court may consolidate (i.e. combine) the insolvency petitions on such terms as it
thinks fit. This provision is contained in section 15 of the Provincial Insolvency Act, and
section 91 of the Presidency Towns Insolvency Act, which is similar is both the Acts.

54.7. ADMISSION OF AN INSOLVENCY PETITION AND PROCEDURE THEREAFTER

After an insolvency petition is presented to the court, it is treated in the same manner as an ordinary
plaint in a civil suit. Thus, after filing in the court, the insolvency petition is admitted by the court, and
thereafter further insolvency proceedings start. The procedure for the admission of an insolvency petition is
the same as given in the Code of Civil Procedure 1908 for the admission of the plaint.
After the admission of the insolvency petition, the procedure to be followed may be discussed under the
following heads:
1. Fixing the date of hearing: After the petition is admitted, the court shall make an order for fixing the date of
hearing the insolvency petition
2. Notice of date fixed: On making an order for the date of hearing, of the insolvency
petition, a notice of the same shall be given to all the creditors. Where the insolvency petition
; s filed by the creditor, a notice of court order fixing a date for hearing the petition shall
also be given to the debtor.
3. Appointment of interim receiver: The 'interim receiver' means an official appointed by
the court to take possession of the property of the debtor pending the insolvency petition
and before an order of adjudication is made. At the time of making an order admitting the
insolvency petition, the court may appoint an interim receiver of the property of the debtor,
if the interim receiver is not appointed at the time of admitting the insolvency petition, the
court may make the appointment at any subsequent date, but before the order of adjudication.
The purpose of appointing an interim receiver is to take possession and protect the property of the
debtor. It may, however, be noted that the property of the debtor does not vest in the interim receiver
unless the court makes an order to that effect. Thus, the ownership of the property remains in the debtor.
The interim receiver mainly preserves and protects the debtor's property. When an interim receiver is
appointed, he will take immediate steps to take the possession of the property of the debtor and exercise
such powers as conferred by the court.
On the appointment of the interim receiver, there is some difference between the two Insolvency Acts.
Section 20 of the Provincial Insolvency Act provides for two different circumstances for receiver's
appointment, namely:
 (a) When an insolvency petition is presented by the creditor, the court may appoint an interim
receiver of the property of the debtor or any part thereof, i.e. in case of creditors petition,
to make appointment of interim receiver is the discretion of the court.
(b) When an insolvency petition is presented by the debtor himself, the court ordinarily must
appoint an interim receiver i.e. in case of debtor's petition, the court is bound to appoint
an interim receiver.
But as per Section 16 of the Presidency Towns Insolvency Act, there is no such distinction regarding the
appointment of interim receiver on an insolvency petition presented either by the creditor or the debtor.
Under this Act, the court may appoint an interim receiver if it is satisfied that such an appointment is
necessary for the protection of the property of the debtor. Thus, the court is not bound to appoint an
interim receiver when the insolvency petition is presented by the debtor himself.
4. Interim orders against the debtor. At the time of making an order for admitting the
insolvency petition, or at any time after admission of the petition but before the order of
adjudication, the court may make one or more of the following interim orders against the
debtor. The court may make such order on its own motion or on the application of any creditor.
The provision in this regard is contained in section 21 of the Provincial Insolvency Act, and
Section 34 of the Presidency Towns Insolvency Act, which is similar in both the Acts.
(a) Order as to security for appearance: The court may order the debtor to give a reasonable
security for his personal appearance in the court until final orders are made upon the
insolvency petition. The court may further direct that in default of giving such security
he shall be detained in the civil prison.
(b) Order as to attachment of property: The court may make an order of attachment of the
property of the debtor which is in his possession or under him control. However, the
properties exempted from attachment, under the Code of Civil Procedure or any other
enactment, are not attached by the court.
Order as to arrest of the debtor. The court may also order a warrant for the arrest of the
It may, however, be noted that the orders under clause (b) or clause (c) above shall h made only
when the court is satisfied that with the intent to defeat or delay the creditor or to avoid any
process of the court, the debtor
(i) has absconded or is about to abscond from the local limits of the jurisdiction of court-or
(ii) has failed to disclose or has destroyed, or is about to destroy any document which is likely to be
of use to his creditors in the course of hearing of the petition.
5. Duties of the debtor on admission of the insolvency petition: After the insolvency petition is
admitted by the court and before the passing of the order of adjudication, the debtor is required to
perform the following duties:
(a) He must produce all books of account.
(b) He must give such details of his properties, and such list of his creditors and debtors and
the amount of debt due to and from them as may be required by the court or receiver
(c) He must submit himself to be examined by the court when the court or receiver wants
to examine his in respect of his property or creditors.
(d) He must appear before the court or receiver as and when required.
(e) He must execute such instruments and do all such acts regarding his property as may be
required by the court or receiver.
It may be noted that the debtor is bound to perform the above duties when an insolvency petition
is admitted by the court. It may also be noted that the debtor is bound to perform the first duty
i.e. to produce all the books of account only when the insolvency petition is filed by the debtor
himself. Where the insolvency petition is filed by the creditor, the debtor is not bound to produce
all the books of account. However, the other duties are to be performed by the debtor whether the
insolvency petition is filed by the creditor or the debtor himself. In this case, it is for the court or
the receiver to make requisition for the performance of these duties at the appropriate stage.
[Akhoy Chand V. King Emperor (1934) 61 Cal 537]
The above duties are contained in Section 22 of the Provincial Insolvency Act. Section 69 of
this Act further provides that, where the debtor wilfully (i.e. intentionally) fails to perform these
duties, he may be convicted with imprisonment which may extend to one year.
 Note Section 33(1) and (2) of the Presidency Towns Insolvency Act also contains certain duties of the
insolvent. But these duties are to be performed after the order of adjudication, and will be discussed in
Art. 54.18
54.8. HEARING OF AN INSOLVENCY PETITION
We have noted above that after the admission of the insolvency petition, the court makes an
order fixing a date for the hearing of the petition. On the day fixed for hearing of the petition, the
court shall require the proof on the following points:
1. Where the insolvency petition is filed by the creditor, the court shall require the proof
that he is entitled to present the petition. Thus, the creditor will have to prove that the
conditions, which entitle a creditor to present an insolvency petition, are fulfilled.
Moreover, if the debtor does not appear on a petition filed by the creditor, the creditor
must also prove that the debtor has been served with the notice of the order of admitting
the petition.
2. Where the insolvency petition is filed by the debtor, the court.shall require the proof that
he is entitled to present the petition. Thus, the debtor will have to prove that the conditions
which entitle a debtor to present an insolvency petition are fulfilled.
3. The court shall also require the proof that the debtor has committed an act of insolvency.
The purpose of requiring the proof of above facts is to determine whether a debtor owes
a debt to a creditor, and whether he is unable to pay his debts or not. It may be noted here
that if at the time of hearing, the debtor is present in the court then the court must examine him as
to his conduct, dealings and property. The debtor should be examined in the presence of the
creditors who appear at the hearing. The present creditors shall also have the right to
question the debtor on the above matters. This requirement as to examination of the debtor •
mandatory i.e. compulsory under law, and if the debtor present in the court is not so
examined any order passed by the court (e.g. order rejecting the petition or order of
Hjudication), will be bad in law and inoperative.
[Bhawani Prassad v. Shri Krishan Vidisha, 1969 MPLG 562] 2
The provisions regarding hearing of an insolvency petition, as discussed above, are contained : n
Section 24 of the Provincial Insolvency Act, and Sections 13(2) and 15(1) of the Presidency Towns
Insolvency Act.
However, on the point of examination of the debtor, there is difference between the two ]nsoivency
Acts. The examination of the debtor as stated above (i.e. before the order of adjudication) is required
only under the Provincial Insolvency Act [Section 24.] The Presidency Towns Insolvency Act does
not require examination of the debtor at the hearing of the insolvency petition or at the time of
passing of an order of adjudication. Under Section 27 of this Act, the debtor can be so examined
only after an order of adjudication is made. This is called 'public examination' and will be
discussed in Art 54.19
On the hearing of an insolvency petition, the court may either dismiss the petition or pass an
order of adjudication declaring the debtor as an insolvent. These two points will be discussed in the
following pages.
54.9. DISMISSAL OF AN INSOLVENCY PETITION
After hearing an insolvency petition, the court may either dismiss the same or pass an order of
adjudication. The provisions regarding the dismissal of the insolvency petition are contained in
section 25 of the Provincial Insolvency Act, and Section 13(4) of the Presidency Towns Insolvency
Act, which are similar in both the Acts. These may be discussed under the following [wo heads:
1. Dismissal of an insolvency petition presented by the creditor: The insolvency petition presented
by the creditor shall be dismissed by the court in any of the following circumstances:
(a) When the court is not satisfied with the proof of creditor's right to present the petition,
i.e. when the conditions which entitle the creditor to present the insolvency petition are
not fulfilled.
(b) When the court is not satisfied with the proof of the service, on the debtor, of the notice
of order admitting the insolvency petition.
(c) When the court is not satisfied with the proof of alleged act of insolvency.
 As a matter of fact, these are the points which must be proved by the creditor at the time of
hearing of the insolvency petition filed by him. If these are not proved, to the satisfaction of the
court, the court must dismiss the insolvency petition. Moreover, the insolvency petition filed by
the creditor must also be dismissed by the court when it is satisfied that the debtor is, at present,
able to pay his debts, or when it thinks that for any other sufficient cause, the petition should not
be granted.
It may further be noted that when the insolvency petition filed by the creditor is dismissed by the
court, the debtor may file an application in the court that he has been unnecessarily dragged in the
Insolvency Court, therefore, he should be compensated. And if the court is satisfied that the
insolvency petition filed by the creditor was frivoluous (i.e. of trifling nature) or vaxatious (i.e. of
causing annoyance), the court may award compensation of such amount up to Rs. 1000 to debtor.
If the compensation is awarded on such application filed b debtor, then he cannot file any suit for
compensation [Section 26 of the Provincial Insolv Act]. On this point, there is some difference
between the two Insolvency Acts. The mentioned application for compensation can be filed
only under the Provincial Act. Under the Presidency Towns Insolvency Act, the debtor's
semedy is to file a suit for compensation or damages, and not merely an application.
2. Dismissal of an insolvency petition presented by the debtor: The insolvency pe ti t presented
by the debtor himself shall be dismissed by the court when it is not satisfied w>h the debtor's right
to present the petition. In other words, when the conditions, which entitl the debtor to present the
insolvency petition, are not fulfilled, the court must dismiss th petition e.g. where the debtor fails
to prove that he is unable to pay his debt and the amount of debt exceeds Rs. 500.

54.10.ORDER OF ADJUDICATION
The term 'order of adjudication' may be defined as an order passed by the Insolvency Court by
which a debtor is declared to be an insolvent. We have already discussed, in the last article, that
at the time of hearing the insolvency petition, the court may either dismiss it or pass an order of
adjudication. The provisions regarding order of adjudication are contained in section 27 of the
Provincial Insolvency Acy, and Section 13(5) and 15(1) of the Presidency Towns Insolvency Act,
which are almost similar in both the Acts.
If at the time of hearing, the court does not dismiss the petition and is satisfied with the proof of
the petition, it shall pass an order of adjudication. And in such order, the court must specify the
period within which the insolvent must apply for his discharge. However, under the Presidency
Town Insolvency Act, the court is not required to specify the time within which the insolvent may
apply for his discharge.
The order of adjudication shall be notified to the public by publication in the Official Gazette
[Section 30, Provincial Insolvent Act]. The notification contains the particulars regarding the
following points:
1. The name, address and description of the insolvent.
2. The date of adjudication.
3. The time within which the insolvent should apply for his discharge.
4. The court by which the order of adjudication is made.
Note: Under the Presidency Towns Insolvency Act, only the court by which the order of adjudication
is made and the date of presentation of the petition are required to be stated in such publication.
54.11.EFFECTS OF AN ORDER OF ADJUDICATION
The effects of the order of adjudication may be discussed under the following heads:
1. The property of insolvency vests in the Receiver or Official Assignee : We know that a
'Receiver' or an 'Official Assignee' is an official appointed by the court for the purpose of
administering the property of the insolvent. Under the Provincial Insolvency Act, such an official is
called a Receiver, and under the Presidency Towns Insolvency Act, he is called an Official
Assignee. On the making of an order of adjudication, the whole of the insolvent's property is
administered by the court.- 1 Under the Provincial Insolvency Act, when the order of adjudication is
made, the property of the insolvent shall vest in the court or the Receiver. Under the Presidency
Towns Insolvency Act, the property of the insolvent shall vest in the Official Assignee. It may be
noted that the property vests in the Receiver or Official Assignee for the purpose of administering
the estate of the insolvent for the payment of his debts after realising his assets. It may also be
noted that the property of the insolvent vests in the Receiver or official Assignee not for all
purposes. But only for the purpose of insolvency (i.e. for paying insolvent's debts after
realising his property). And the Receiver or Official Assignee has no interest of his own in the
property.
[Fruits & Vegetable Merchants Union v. Delhi Improvement Trust, AIR 1957 SC 344]
Thus, the insolvent is not divested from all his interest in such property. He can have legal
grievance against the act of the Receiver or Official Assignee in respect of such property 4. However,
the insolvent is deprived of all powers to deal with his property except witi» the permission of
the Receiver or Official Assignee. After the order of adjudication, only the Receiver or Official
Receiver can deal with the property, and any transaction by the insolvent in respect of the
property is not binding on the Receiver or Official Assignee.
Example 54.1 An order of adjudication was passed against A. After this order, A made a gift
of his landed property in favour of B, his son. In this case, the gift is void and shall not be
binding on the Receiver or Official Assignee. The property gifted shall vest is the Receiver or
Official Assignee for the purpose of distributing among A's creditors.
Thus, after the order of adjudication, the insolvent has no right to deal in any way with the
property. He cannot even file a suit in his own name to recover any part of his property from a
third person. Moreover, he can also not proceed with the suit already filed by him before
adjudication. After the order of adjudication, all the payments due to the insolvent should be
made to the Receiver or Official Assignee.
Note: On the vesting of the property in the Receiver or Official Assignee, there :s some
difference in the movable and immovable property. All the movable property of the insolvent
whether situated in India or in a foreign country, vests in the Receiver or Official Assignee. The
immovable property which vests in the Receiver or Official Assignee is only the property which is
situated within India. Thus, the immovable property of the insolvent situated in a foreign country
shall not vest in the Receiver or Official Assignee, unless the foreign law permits it.
[Yokohama Specie Bank \. Curlenders & Co. 43 Cal. L J 436]
2. No fresh suit can be filed by the creditors without the permission of the court: After an
order of adjudication is made, no creditor shall have any remedy, against the property of the
insolvent, in respect of the debts. And thus, the creditors cannot start any legal proceedings
against the insolvent. In other words, the creditors can neither file any suit nor enforce any
remedy against the property of the insolvent, for the realisation of their debts. Thus, the order of
adjudication takes away the rights of the creditors to proceed against the property of the
insolvent. Their only remedy is to prove their claims in the insolvency procedings. However,
the creditors may start the legal proceedings with the permission of the court and on such
terms as the court may impose. It is important to note here that the rights of a secured creditor
are not affected in any way by the order of adjudication. A secured creditor can realise the
security of the insolvent in his possession, or he may file a suit to realise the security without
the permission of the court.
The permission of the court, for instituting fresh suits against the insolvent, is also not
necessary in the following cases:
(a) Where the insolvent has committed an offence, to file a criminal suit against the insolvent.
(b) Where the debt in question is not provable in insolvency e.g. a debt contracted by the
insolvent after adjudication, or a claim for unliquidated damages arising otherwise than
by reason of breach of contract or breach of trust such as claim for damages for tort.

The above provisions regarding the effects of an order of adjudication are contained in
Section 28 of the Provincial Insolvency Act, and Section 17 of the Presidency Towns Insolvency
Act.
Note: There was some controvercy on the point whether the prior permission of the court js before
commencing any suit or other legal proceedings against the insolvent. Earlier, the view rf St courts was
that the prior permission of the court is a condition precedent in the absence of Wh the suit or legal
 proceedings shall be ineffective i.e. not maintainable.
[K. Sreeramma v. The Official Receiver, Guntur, AIR 1955 A P. 115)
But now the accepted view is that prior permission of the court is not a condition precedent
Th permission can be granted by the court before the commencement of a suit or proceeding.
And it also be granted is a suit or proceeding which is instituted after the order of
adjudication
[B. Shankar Lai v. Mohd. Ibrahim AIR 1971 SC 1292)
3. Stay of pending suits: Sometimes, at the time of making an order of adjudication, some suit
or other legal proceeding is pending against the insolvent in some other court. In such cases, the
court in which such suit or legal proceeding is pending may, either stay it or allow it to continue
on such terms as the court may impose. However, the court shall do so on the proof that an
order of adjudication has been made against the debtor (insolvent). Thus the court has the
discretion to stay or not to stay a suit or other proceeding. It may be noted that' this power can be
exercised by the court after an order of adjudication has been made The mere filing of an
insolvency petition does not empower the court to grant stay.
[Harshamal Shivbux v. Ram Kishan Das Sagamal, AIR 1984 Raj. .IS] 6. It may also
be noted that the proceedings pending against the debtor are not automatically stayed on the
passing of an order of adjudication. They are stayed only when an order to that effect is made
by the court.
[Realisations Industrialists Et. Commercials \. Loescher (1957) All E.R. 241]
Note The provisions regarding stay of pending suits are contained in Section 29 of the
Provincial Insolvency At, and Section 18 (3) of the Presidency Towns Insolvency Act.
4. Personal disqualifications of an insolvent: After the order of adjudication is made, the
insolvent suffers from certain disqualifications from holding certain offices. These disqualifications are
based on the principle that a person who cannot manage his own affairs and who has deprived
himself of all his property of every kind, should not be trusted to manage the public affairs. The
personal disqualifications of an adjudged insolvent are as under.
(a) He cannot be appointed or act as a magistrate.
(b) He cannot be elected to any office of the local authority.
(c) He cannot be elected or sit or vote as member of any local authority.
However, these disqualifications are removed in the following cases:
(i) If the order of adjudication is annulled by the court, or
(ii) If the insolvent obtains an order of discharge from the court with a certificate that his
insolvency was caused by misfortune and without any misconduct on his part.
Note: The provisions regarding personal disqualifications are contained in Section 73 of the Provincial
Insolvency Act, and Section 103-A of the Presidency Towns Insolvency Act, which are similar in both the
Acts.
5. Transactions entered into by the insolvent, after the order of adjudication, are not binding on the
Receiver or Official Assignee: We have already discussed that, after an order of adjudication is
made, all the property of the insolvent vests in the Receiver or official Assignee, and such official
alone is entitled to deal with the property. And the insolvent has no right to deal with the
property in any manner. Any transaction in respect of the property, entered into by the
insolvent, is not binding on the Receiver or Official Assignee e.g. where after the order of
adjudication, the insolvent sells his property , the buyer will not get any title to the property
because the property has already vested in the Receiver or Official Assignee

6. Relation back: This means that an order of adjudication relates back to, and take effect
from, the date of presentation of the insolvency petition. In simple words, the effects of an
order of adjudication starts from the commencement of the insolvency, and not from the date
O f order of adjudication. This point will be discussed in detail in the next Article 54.12.
 7. Stopping of limitation period. After the passing of an insolvency order, the limitation
period will not run during the period of insolvency i.e. from the date of adjudication till
the date of order of discharge. Thus, if a debt is not already time barred at the time of
adjudication order, the limitation period for filing the suit for such a debt will not run during
the period of insolvency. However, on the annulment of the order of adjudication, the time
w j|l again run, for computing the period of limitation from the date of annulment order.

54.12. DOCTRINE OF RELATION BACK

We know that after an order of adjudication, the property of an insolvent vests in the Receiver or
official Assignee. It may, however, be noted that insolvent's property vests in the Recover or
Official Assignee not from the date of order of adjudication but from a much earlier date. This
mean that an order of adjudication shall relate back to, and take effect from, a date earlier than
the date of making such order. This is known as the 'doctrine of relation back, According to this
doctrine, the insolvency of a debtor commences not from the date of an order of adjudication, but
it commences from an earlier date. The earlier date, on which the insolvency is considered to
commence, is known as the date of commencement of insolvency. On the date of commencement
of insolvency, there is some difference between the two Insolvency Acts, which is as under:
1. Under the Provincial Insolvency Act. the insolvency commences from the date of
presentation of the insolvency petition. Thus, under this Act, the order of adjudication
relates back to i.e. takes effect from the date of presentation of the insolvency petition
on which order of adjudication is made [Section 28(7)].
2. Under the Presidency Towns Insolvency Act, the insolvency commences from the date of
first act of insolvency committed within three months before the presentation of the
insolvency petition. Thus, under this Act, the order of adjudication related back to i.e.
takes effect from much earlier date which is the date of the first act of insolvency
committed within three months before the presentation of insolvency petition [Section 51].
It, therefore, follows that the title of the Receiver or Official Assignee does not commence from
the date of the order of adjudication. But it commences from a date much earlier to it. Thus, the
property of the debtor, who has been declared insolvent, shall vest in the Receiver or Official
Assignee much earlier i.e. from the date of presentation of the insolvency petition or from the date
of commission of first act of insolvency as the case may be. It may, however, be noted that until an
order of adjudication is made, there is no insolvency and the property remains with the debtor. In
other words, the property does not vest in the Receiver or Official Assignee until the order of
adjudication is made. But once the order of adjudication is made, the property of the debtor vests
in Receiver or Official Assignee from the date of commencement of insolvency which is always
some prior date and not the date of order of adjudication. The effect of the doctrine of 'relation back' is
that all the dealings and transaction by the insolvent in respect of his property, between the
commencement of the insolvency and the date of order of adjudication, are not binding on the
Receiver or Official Assignee.
Generally on the eve of insolvency, the debtors transfer their property to their relations with a
view to defraud the creditors. The lustice to the creditors requires that such transfers should not be
allowed to be valid. It is for this purpose that the doctrine of 'relation back' is incorporated in
the Insolvency Acts. The Receiver or Official Assignee is deemed to be the owner of the
property of the insolvent from the date of presentation of the insolvency petition or from the
date of first act of insolvency committed within the three months bef the presentation of the
insolvency petition, as the case may be. Therefore, all such objection hi transactions entered into by
the .debtor after these dates will not be binding on the Receiver or Official Assignee. The
objectionable transactions made by the insolvent during the pende of insolvency proceedings
must be pronounced to be void and inoperative.
[Kashinath V. Ganesh, AIR 1939 Nagpur 207]
The Receiver or Official Assignee may challenge and set aside all the objectionabl
transactions. However, the Insolvency Acts provide certain bonafide transactions which ar
binding on the Receiver or Official Assignee. Such transactions are known as 'protected
transactions' and will be discussed in detail in Art. 54.17.
 The following are the important points in connection with the doctrine of relation back-
(a) The doctrine of relation back is applicable only when the order of adjudication is made
(b) The property of the insolvent vests in the Receiver or Official Assignee only when an
order of adjudication is made.
(c) The vesting of the property relates back to (i.e. effective from) the date of commencement
of insolvency and not to the order of adjudication.
(d) Until an order of adjudication is made, there is no insolvency and the property remains
with the debtor.

54.13.EFFECT OF INSOLVENCY ON ANTECEDENT TRANSACTIONS

The 'antecedent transactions' are those transactions which are entered into by the insolvent, in
respect of his property, prior to the commencement of insolvency. Such transactions can be of
the following four types:
1. Transfer of property in execution of a decree against the insolvent.
2. Voluntary transfers.
3. Fraudulent preferences.
4. Protected transactions.
The effect of insolvency on these transactions is discussed in the following pages.

54.14. TRANSFERS IN EXECUTION OF A DECREE

Sometimes, a creditor gets a money decree, against the debtor and on the basis of the decree, starts
execution proceedings in a Court of Law. The court may issue execution against the property of the
debtor who, during the execution proceedings, has been declared as insolvent by an Insolvency
Court. In such cases, no person is entitled to any benefit under the execution against the Receiver or
Official Assignee i.e. if any person gets some benefit, as a result of the execution of the decree,
he will be entitled to restore the same to the Receiver or Official Assignee for its general
distribution among all the creditors. In simple words, when some property is sold or some assets
are realized in an execution proceedings against an insolvent judgment-debtor, then the decree-
holder (i.e. the creditor executing the decree) is not entitled to the benefits, of the assets realized,
against the Receiver or Official Assignee. However, if any property is realized is execution or
otherwise, before the insolvency petition is admitted in court, the decree-holder is entitled to retain
the sale proceeds. The rights of following persons are also not affected by this provision:
1. Rights of secured creditor: A secured creditor can proceed with the execution of decree
irrespective of the order of adjudication, and can retain the benefits so obtained.
Rights of a bonafide purchaser: A person who, in good faith, purchases the property of
a debtor under a sale in execution of the decree, shall in all cases gets a good title to
it against the Receiver or Official Assignee i.e. the Receiver or Official Assignee cannot
get back the same from such bonafide purchaser.

Sometimes, an execution of a decree has been issued against any property of the debtor,
uj cn js saleable in execution. And before the sale of the property, a notice is given to the
ecution court that an insolvency petition, by or against the debtor, has been admitted in
' insolvency Court. In such cases, on an application made to it, the executing court must
jjrect the property, if in its possession, to be delivered to the Receiver. Under the Presidency
Towns Insolvency Act, such a duty of the executing court to deliver the property to the Official
Assign 66 arises, when before the sale of the property a notice is given that an order of
adjudication has been made against the debtor.
•Note: The above provisions are contained in sections 51 and 52 of the Provincial Insolvency
Act, nd Sections 53 and 54 of the Presidency Towns Insolvency Acts, which are similar in both
the Acts.
54.15. VOLUNTARY TRANSFERS
 The term 'voluntary transfer' under the Insolvency Law may be defined as a transfer without
co nsideration. Sometimes, a debtor is not in a position to meet his debts, and he fears that he may
be declared insolvent. In such cases, he may transfer his property to his relatives Or friends so
that it may not be realised in insolvency proceedings. Such transfers may be with or without any
consideration. Any transfer of the property without any valuable consideration is known as
voluntary transfer. And a voluntary transfers become invalid if the debtor is declared insolvent
within the time specified in the two Insolvency Acts. On the invalidity of a voluntary transfer,
there is some difference between the two Insolvency Acts on the following two points:
1. Effect on a voluntary transfer.
2. The time during which such a transfer should be made so as to become invalid.
Under the Provincial Insolvency Act, any voluntary transfer by the debtor is viodable against
the Receiver if an insolvency petition is presented against the debtor within two years of such
voluntary transfer and on the basis of such petition the debtor is declared insolvent. Here the
time of presentation of insolvency petition is to be considered and not the time of order of
adjudication, Thus, a vduntary. transfer by the insolvent is voidable if it is made within two years
before the presentation of the insolvency petition. Such a transfer may be annulled by the court
[Section 53].
Example 54.2. A, a businessman, owed heavy debts to his creditors. On 1st January 1997, he
transferred some of his properties to his wife without any considerration. On 21st February 1997, B one of
A's creditors, presented an insolvency petition against A in the Insolvency Court. On the basis of this
petition, an order of adjudication was passed against A on 15th march 1999. In this case, the transfer of
property by A to his wife is voidable and the Receiver may apply to the court for the annulment of the
same.
An application for the annulment of a voluntary transfer may be made by the Receiver or by
any creditor with the leave (permission) of the court. However, the court will grant permission to
the creditor if he satisfies the court that the Receiver has been requested to make such
application but he refused to do so. Such an application may be made at any time during the
pendency of the insolvency proceedings. [Section 54-A, Provincial Insolvency Act].
Under the Presidency Towns Insolvency Act, any voluntary transfer by the debtor is void as
against the official assignee, if the debtor is declared insolvent within two years of such transfer.
Here the time of order of adjudication is to be considered and not the time of presentation of
insolvency petition. Thus a voluntary transfer by the insolvent is void if it is made within two
years before the order of adjudication [Section 55]. It may be noted here that under this Act, the
voluntary transfer is void, whereas under the other Act, it is voidable.
Example 54.3. A, a businessman, owed heavy debts to his creditors. On 31st January 1997, he
transferred some of his properties to his brother without any consideration. On 21st March 1997, B
one of A's creditors, presented an insolvency petition against A in the Insolvency Court. On the
of this petition, an order of adjudication was passed against A on 31st March, 1999. In this case 6
the Presidency Towns Insolvency Act, the transfer of property by A to his brother is not void'
order of adjudication was passed after two years of voluntary transfer. Suppose, that an ord
adjudication is passed on 1st January 1999, Now the transfer of property by A to his brother 0'
be void as he is declared insolvent within two years of the voluntary .transfer.
However, in any of the following two cases, the voluntary transfers are not void-
(a) When such transfer is made before and in consideration of marriage.
(a) When such transfer is made to a purchaser in a good faith and for valuable consideratio
The transfer in favor of an encumbrancer (i.e. a person who is having some charge ov
the property) is also valid if it is made in a good faith and for valuable consideration
(Strictly speaking such transfers are not voluntary transfers).
54.16. FRAUDULENT PREFERENCES
Sometimes, a debtor may like to give preference to some creditors over the others. The preference
may be given by satisfying the debts or transferring certain property to some creditors and excluding
others. Such payment of debt or transfer of property to some creditor to the exclusion of others is
known as a 'fraudulent preference' It may be noted that a fraudulent preference is always made to
some creditor and not to a third party. A fraudulent preference is void if the debtor is declared
insolvent on a petition presented within three months of such transfer. Such a transfer shall be
annulled by the court, if the following conditions are fulfilled:
1. The debtor must, at the time of preference, be unable to pay his debts from his own money.
2. The transfer or payment must be made is favour of some creditor.
3. The transfer or payment must, in fact, prefer one creditor over the other.
1. The transfer or payment in favour of a creditor must be with the intention of giving
preference to such a creditor over the others.
2. The debtor must have been declared insolvent on a petition presented within three months
of the date of such transfer or payment.
Thus, any transfer made with the intention of giving preference to some creditors, over the
others, becomes void if the insolvency petition is presented within three months of such transfer and
the debtor in declared insolvent on the basis of such petition. It may be noted that the intention of
the debtor in important factor i.e. the transfer must be made with the intention of giving
preference to one creditor over the other.
Example 54.4. A owed heavy debts to many creditors and was unable to pay his debts. With the
intention of giving preference to B, one of his creditors, over the others, he paid Rs. 20,000 to
B on 15th March 1998. On 10th June 1998, C, another creditor of A, filed an insolvency petition
against A on the basis of above act of insolvency (i.e. fraudulent preference). On the basis of this
petition, A was declared insolvent on 15th December, 1998. In this case, the payment of money
by A to B, shall become void as the insolvency petition was filed within three months of the
fraudulent preference (i.e. payment of money).
Sometimes, the creditor to whom the fraudulent transfer is made, further transfers the property to
any person who purchases it is a good faith and for valuable consideration. In such cases, the third
person will get a good title to the property i.e. the transfer in his favour will be valid.
Notes: 1. The above provisions are contained in section 54 of the Provincial Insolvency Act, and
Section 56 of the Presidency Towns Insolvency Act, which are similar in both the Acts.
2. Any transfer made to a secured creditor cannot be held void on the ground of fraudulent
preference. [Jadu Natli Haldar v. Manindra Nath Chandra, AIR 1923 Calcutta 689]
54.17. PROTECTED TRANSACTIONS
The term 'protected transactions' may be defined as the transactions which are not affected
the insolvency proceeding, i.e. which are not invalidated on account of insolvency
ce edings. These are the bonafide transactions entered into with or by the insolvent after , &
presentation of the insolvency petition, but before the order of adjudication. Following e the
transactions which are protected under the insolvency law. I Any payment by the insolvent
to any of his creditors.
2. Any payment or delivery to the insolvent.
3. Any transfer by the insolvent for valuable consideration.
4. Any contract or dealing by or with the insolvent for valuable consideration.
However, the above transactions will be protected only if the person with whom such
transactions are entered into do not have, at the time of such transaction, any notice of the
presentation of the insolvency petition by or against the debtor. Moreover, the following
conditions must also be satisfied for a transaction to fall in the category of protected transaction:
(a) Such transaction must have taken place before the date of order of adjudication.
(b) Such transaction must be bonafide i.e. fair and honest.
(a) Such transaction must not be a transaction amounting to a 'voluntary transfer' or a
'fraudulent preference'.
Example 54.5. A borrowed certain money from a bank. Two loan accounts (No. 1 and No. 2) were
opened with the bank. Loan in Account No 1. was secured by the title deeds of his property,
and in loan Account No. 2, there was no security. After sometimes insolvency proceedings were
started against A During the pendency of the insolvency petition, A had obtained another loan from B,
a money lender. Out of this amount, he paid off the loan amount in Account No. 1, and got back
the title deeds. Thereafter, these title deeds were again handed over to the bank as security for
Account No. 2. The bank had no knowledge of the insolvency petition against A. On the insolvency of
A, the Official Assignee claimed the securities from the bank. It was held that official Assignee
was not entitled to get the securities. In this case the transaction (i.e. deposit of title deeds with
the bank as security) is covered under the category of a 'protected transaction', as it was made
bonafide, before the adjudication order was passed, and the bank had no knowledge of the filing
of the insolvency petition.
[Re Seymour (1937) 1 (Ch. 689].
Note: The provisions relating to protected transactions are contained in section 55 of the Provincial
Insolvency Act, and Section 57 of the Presidency Towns Insolvency Act, which are similar in
both the Acts.
54.18. DUTIES OF AN INSOLVENT AFTER ADJUDICATION
After the order of adjudication, the insolvent becomes bound to perform certain duties which are
enumerated in the Insolvency Acts. These duties are different under both the Insolvency Acts.
And thus, these are discussed separately:
1. Duties under the Provincial Insolvency Act: The duties of an insolvent, under this Act,
are contained in Section 28(1) of the Act, which may be summed up as under:
(a) The insolvent must assist the Receiver in the realisation of his property.
(b) The insolvent must also assist the Receiver in the distribution of the proceeds among the
creditors.
Note: Under the Provincial Insolvency Act, the debtor also becomes bound to perform certain
duties as soon as the insolvency petition is admitted. These duties are contained in Section 22 of
the Act and have already been discussed in Art. 54.7
2. Duties under the Presidency Towns Insolvency Act: The duties of an insolvent, under
this Act, are contained in Section 33 of the Act, which may be summed up as under:
(a) The insolvent must attend any meeting of his creditors which the Official Assignee may
require him to attend. And in such meeting, he must submit himself to such examination and
give such information as the creditors may require. However, when he is sick prevented by
other sufficient cause, he is excused from attending the meeting.
(b) The insolvent must give such detail of his property, lists of his creditors and debtors a rt
the debts due as may be required by the Official Assignee or special manager or cou
(c) The insolvent must submit himself to such examination, in respect of his property
creditors, as may be required by the Official Assignee, special manager or the court
(d) The insolvent must meet the Official Assignee or special manager at such times and plac
as may be required by them.
(e) The insolvent must execute such powers of attorney, transfers and instruments as may h
required by the Official Assignee, special manager or court..
(f) The insolvent must do all such acts and things, in relation to his property and distribution
of the proceeds amongst his creditors, as may be required by the Official Assignee, special
manager or the court.
(g) The insolvent must assist, to the utmost of his powers, in the realisation of his property
and the distribution of the proceeds among his creditors.
The above duties are obligatory and the insolvent must perform all of them. If he wilfully fails to
perform any of the above duties, he will be guilty of contempt of court and liable to be punished
for it. He will also be guilty of contempt of court if he fails to deliver possession to Official
Assignee, of any part of his property, which is divisible among his creditors
It is also the duty of the insolvent to answer all questions put to him during public
examination. This point will be discussed in detail in the next article.
In addition to the above duties, the insolvent is also bound to prepare and submit to the
court a schedule of his assets and liabilities. Such a schedule is known as 'schedule of insolvent's
affairs' and is to be submitted to the court when an order of adjudication is made against a debtor.
This schedule shall be in a tabular form and shall contain particulars of his property, debts,
outstandings and similar matters. It shall also explain how the deficiency has arisen i.e. how the
liabilities exceded over the realisable value of assets. The schedule shall be varified by an
affidavit. Such schedule must be submitted to the court (i) within thirty days of the order of
adjudication, if the order is made on a petition presented by the debtor, and (ii) within thirty days
of the service of the order of adjudication, if the order is made on a petition presented by the
creditor. If the insolvent fails to prepare and submit the schedule, he may be committed to prison
by the court. And in such a case, the schedule may be prepared by the Official Assignee [Section
24, Presidency Towns Insolvency Act].
Note: Under Provincial Insolvency Act, is no such requirement on the part of the insolvent to
prepare and submit a 'schedule of insolvent's affairs'.
54.19. PUBLIC EXAMINATION AFTER THE ORDER OF ADJUDICATION
The term 'public examination' means examining the insolvent in presence of all the creditors. The
object of public examination is to enquire into the conduct, dealings and property of the
insolvent and to determine the cause of insolvency. At such examination, the insolvent is
required to answer all the questions put to him by the court, Official Assignee or any creditor.
The provisions for public examination of the insolvent, after the order of adjudication, are contained
in Section 27 of the Presidency Town Insolvency Act and may be summed up as under:
1. After the court makes an order of adjudication it will fix the date for holding a public
examination of the insolvent in order to determine the causes of insolvency.
2 A notice of holding such public examination shall be given to the creditors.
3. The insolvent must attend the court on the date fixed for public examination and answer
all questions put to him by the court, Official Assignee and any creditor
4. The notes of examination shall be taken down in writing, and shall be read out to the insolvent and
signed by him. Thereafter, the notes may be used in evidence against the insolvent in any civil or criminal
proceedings. This record shall also be open to inspection of any creditor at all reasonable times.
5. When the insolvent is examined and the court is of the opinion that the affairs of the insolvent have
been sufficiently investigated then the court shall, by order, declare that his examination is concluded.
However, the court may again direct the further examination if it thinks necessary to do so.
6. The public examination of the insolvent may be dispensed with in the following cases:
(a) Where the insolvent is a pardanashin woman. A pardanashin woman is one who
according to the custom and manners of the country does not appear in public.
(b) Where the insolvent is a lunatic or suffers from any mental or physical disability
which makes him unfit to attend his public examination.
It may be noted that under the Provincial Insolvency Act, there is no such provision for public
examination of the insolvent after the adjudication. Under this Act, the examination Of the insolvent is
held before the order of adjudication is made i.e. at the hearing of the insolvency petition. Such
examination of the debtor is in respect of his conduct, dealings and property, where the creditors
present in the court may put questions to the debtor. This point has already been discussed in Art. 54.8.

54.20. PRIVATE EXAMINATION AFTER THE ORDER OF ADJUDICATION

The term 'private examination' means the examination of third persons with a view to enquire into the
conduct, dealings and property of an insolvent. At such examination, the third person is required to
produce any document-in his custody or power relating to the insolvent. He is also required to answer
the questions put to him by the court. The provisions for private examination, after the order of
adjudication, are contained in both the Insolvency Acts, which may be summed up as under [Section 59-
A, Provincial Insolvency Act, and Section 36, Presidency Towns Insolvency Act]:
1. The private examination is done on the application of the Receiver, Official Assignee or
any creditor who has proved his debt in insolvency proceedings.
2. On such application, the court may summon, at any time after the order of adjudication,
the following persons:
(a) Any person who is known or suspected to have in his possession any property
belonging to the insolvent, or
 (b) Any person who is supposed to be indebted to the insolvent; or
(c) Any person who is capable of giving informations regarding the insolvent, his
dealings or property.

3. The court may examine such person concerning the insolvent, his dealings or property.
Such person may be represented by a legal practitioner.
4. The court may require any such person to produce any document in his custody or power
relating to the insolvent, his dealings or property.
5. If any such person summoned by the court refuses to attend the court or to produce any
document as may be required by the court, the court may issue a warrant for his arrest
and bringing him in the court for examination. The above five points are common under
both the Insolvency Acts. However, Section 36 of the Presidency Towns Insolvency Act
contains the following three extra points which are not contained in Section 59-A of the
Provincial Insolvency Act on this examination:
(a) The court may also summon the insolvent for the purpose of above examination. Sometimes, the
person examined by the court admits that he is indebted to the insolvent. In such cases, the
court may, on the application of the Official A
order such person to pay to the Official Assignee the amount in which he is
on such terms as the court may think just.
(c) Sometimes, the person examined by the court admits that he has, in his DOS .
the property belonging to the insolvent. In such cases, the court may 0 SS ' 0n -
application of the Official Assignee, order such person to deliver to the' Of'r
Assignee, that property on such terms as the court may think just. '°'a'
Note: Under the Provincial Insolvency Act, the points (b) and (c) mentioned above
have bee applicable in State of U.P. only by the State Amendment of made 1954.
54.21. PROTECTION ORDER
The term 'protection order' may be defined as an order of the court granting full protect' to the
insolvent from being arrested or detained in prison for any debt. An adjudged insolv may apply
to the court for protection order. It may be noted that the protection from arr> or detention
here means the protection from such arrest or detention which is in pursuanc of an order of a
civil court passed in execution of a decree of such court. Thus, the term 'arrest or detention'
does not include arrest in execution of a criminal court process, or detention under a sentence of
imprisonment passed by a criminal court.
[Shyama Charan v. Anguri Devi, AIR 1938 All 253; ILR 1938 All 486] The object
of the protection order is to protect the honest insolvent debtor from being harassed by his
creditors after he is declared as an insolvent. The protection order can only be issued by the
Insolvency Court after the order of adjudication has been made by this court i.e. after the debtor
has been declared as an insolvent. It may be noted that this is the discretionary power of the
court. The court may or may not grant a protection order. However, this discretion should not be
exercised arbitrarily. The provisions for the protection order are contained in both the Insolvency
Acts which may be summed up as under [Section 31, Provincial Insolvency Act, and Section
25, Presidency Towns Insolvency Act]:
1. The protection order can be granted by the court only after the order of adjudication i.e. only
after the debtor has been declared as an insolvent. Thus, the protection order, which is made
pending insolvency proceedings, is a pure nullity and inoperative. Under the
2. Provincial Insolvency Act, The protection order is granted on the application made by
the debtor who has been declared insolvent. But under the Presidency Towns
Insolvency Act, the protection order is granted on the application made by the debtor who has
submitted hi* schedule of assets and liabilities (called the insolvent's schedule), On such
an application, the court may make an order for the protection of the insolvent from arrest or
 detention. If the insolvent is already in prison or under arrest, the court may order his
release.
4. The protection order may apply to all the provable debts of the insolvent or only to some of
the debts as the court think proper.
5. The protection order protects the insolvent from being arrested or detained in prison in
respect of any debt to which the order applies i.e. the debts which are included in the order.
6. The protection order may take effect at such time as the court may direct. The time for which
the order shall remain in force is fixed by the court.
7. The protection order may be revoked or renewed at any time as the court may think tit. It
may also be cancelled at any time even before the expiry of the fixed period for which the
order is to remain in force.
(b) 8. If the protection order is revoked or the adjudication is annulled, the protection order
shall not operate to prejudice the rights of any creditor
9. Any creditor may appear and oppose the grant of a protection order. The above provisions relating to a
protection order are common in both the Insolvency Acts. However, there are certain additional provisions which are
contained in the Presidency Insolvency Act only. These may be stated as under:
(a) The Court may also issue an 'interim protection order' i.e. the court may make the
protection order before the insolvent has submitted his schedule if it thinks necessary to do
s o in the interest of justice. The interim protection order protects the insolvent in the same if any as protection order

till a formal protection order is passed.

(b) The insolvent is entitled to the protection order if he produces a certificate by the
Official Assignee that he has so far conformed to the provisions of the Act. Thus, under the
presidency Town Insolvency Act, generally the protection order must be issued if the insolvent
produces the certificate by the Official Assignee.

54.22. ANNULMENT OF THE ORDER OF ADJUDICATION

An order of adjudication may be annulled (cancelled) in certain circumstances as provided in
the Insolvency Acts 7 . When an order of adjudication is annulled, it removes the stigma of
insolvency, and the debtor is restored to his original situation i.e. as if no insolvency
proceedings were started against him. He becomes liable to his creditors as he was before the
order of adjudication. Following are the circumstances in which an order of adjudication can be
annulled by the court:
1. Where, in the opinion of the court, the debtor ought not to have been declared insolvent.
In simple words, where the order of adjudication was wrongly made e.g. where it is proved
that (a) a person declared insolvent is a minor or was dead at the time of petition, or
(b) the order was obtained by committing a fraud on the court, or (c) the act of insolvency
did not exist on the basis of which the petition was filed.
2. Where an order of adjudication is made on an insolvency petition of a person who was
not entitled to present such petition e.g. on a petition of a creditor to whom the debtor
owed less than Rs. 500, or on the petition of a debtor who owed less than Rs. 500 to
his creditors.
3. Where it is proved to the satisfaction of the court that the debts of the insolvent have
been paid in full.
4. Where the insolvent submits a proposal for a composition or a scheme of arrangement
which is approved by the court. This point will be discussed in detail in Art. 54.24.
5. Where the order of adjudication is made on an insolvency petition presented without the
permission of the court where such permission was necessary e.g. where the earlier order
of adjudication was annulled due to dabtor's failure to apply for discharge and the second
insolvency petition is filed by the debtor without the permission of the court, and the court
make the order of adjudication on the second petition.
6. Where an order of adjudication is made by one court, and the insolvency proceedings
are also pending in another court against the same debtor. In such cases, the Insolvency
Court making an order of adjudication may annul the adjudication or stay its own
proceedings if it is proved to its satisfaction that the insolvency proceedings are also
 pending in another court, and the property of the debtor can more conveniently be
distributed by the other court.
Note: The insolvency proceedings may be initiated against the same debtor at two different places 'n
different courts e.g. in a court of place where the debtor resides, and in court of place where the
debtor carries on his business.
after the order of adjudication, the insolvent does not apply for dischars the time specified by the
court, or where the insolvent fails to appear on the d ' for the hearing of his application for
discharge.
It may be -noted that where an order of adjudication is annulled, the notice of the of
annulment must be published in the Official Gazette and in such other manner a be prescribed.
An order for annulment of adjudication may be made by the court eith ^ its own motion or on
an application by the insolvent or any creditor or Receiver or Off ° Assignee.
Note: The provisions relating to the annulment of the order of adjudication are contained in Se t'
35 to 37 of the Provincial Insolvency Act, and Sections 21 to 23 of the Presidency Towns Insolvency
Act.
54.23. EFFECT OF ANNULMENT OF THE ORDER OF ADJUDICATION
The effect of annulment of the order of adjudication depends upon the terms of the order of
annulment made by the court. The terms of the order of annulment varies according t 0 the nature
of each case. However, the general effect of an order of annulment may be summed up as under:
1. After the annulment of the order of adjudication, the debtor reverts back to the position
as he was before the insolvency. As a matter of fact, the state of insolvency ceases on
the annulment of the order of adjudication. And the creditors may have their rights against
the debtor in the ordinary Court of Law.
2. After the annulment of the order of adjudication, the following acts done by the court
or Receiver, or Official Assignee before the annulment of the order of adjudication, shall
remain valid:

(a) All sales and disposition of the property.

(b) All payments duly made.
(c) All acts done in relation to sale, disposition and payments duly made.
3. Subject to the sales and dispositions as stated above, the property of the insolvent shall
vest in such persons as the court may appoint. The person so appointed will hold the
property of the insolvent for the benefit of the creditors, who may proceed against such
property through an ordinary court of law.
[Srinivas Rai v. Secretary of State, 1935 Madras 931; AIR 1936 Rangoon 284]
4. In case, no person is appoined by the court as stated abdve, then the property shall revert
back to the insolvent to the extent of his right or interest therein. As a matter of fact,
all the assets and properties, in which title had not passed to the third person by the act
of the court, Receiver or Official Assignee, shall revert back to the insolvent on the
annulment of the order of adjudication. The property shall so revert back to the insolvent
on such conditions as the court may declare by ah order in writing.
[Kishan Singh v. Thakur Lai, 1970 A.L.J. 1242]
5. After the annulment of the order of adjudication, the debtor may be recommitted to custody
if he was released from a civil prison by the order of adjudication. Thereupon, all processes
against the debtor which were in force at the time of his release shall be deemed to be
in force against him". It may be noted that the effect of annulment of the order of
adjudication relates back to the date of adjudication as if no adjudication has taken place.
[Arunachalam v. Narayan Swami, AIR 1956 Madras 63 (F.B.]
Note: While passing an order of annulment, the Insolvency Court retains control over the
property of the debtor to the extent required to see that the distribution of assets is fairly made
among all creditors of the insolvent. And thus, the creditors who had not already proved their claims in the sol |vency
proceedings, can prove the same after the passing or an order vesting the property m some person.
[Venkatrayudu v. Narasimham, AIR 1944 Madras].
54.24. COMPOSITION AND SCHEME OF ARRANGEMENT
A debtor who is unable to pay his debts may come to an understanding with his creditors regarding
the payment of his debts. Such an understanding between the debtor and his creditors may be in the
form of 'composition' or a 'scheme of arrangement'. The term 'composition' may be defined as an
agreement between the debtor and all or some of his creditors by which the debtor agrees to pay
some money less than the amount actually due to his creditors, an d the creditors agree to accept
such money in full satisfaction of their claims.
Example 54.6. A, a businessman was unable to pay his debts. He entered into an agreement
with all his creditors and agreed to pay 75 paise in a rupee due to each of the creditors. The
creditors agreed to accept this payment in full and final settlement of their claims. And A paid
the amount as agreed. It is a composition.
The term 'scheme of arrangement' may be defined as an agreement between the debtor and his
creditors by which they agree to a scheme in which the debts due to the creditors are gradually
liquidated in due course of time, generally by payment of less amount in full satisfaction e.g. the
assignment of debtor's assets to trustee for realisation and distribution of proceeds rateably among
all the creditors or among those creditors who assent to and take the benefit of assignment . It may,
however, be noted that generally the debts are liquidated under the scheme without selling all • the
assets of the debtor.
The debtor may enter into the above type of arrangements for the discharge of his debts. However,
after the commencement of the insolvency proceedings, the debtor cannot make any out of court
settlement with his creditors. After an order of adjudication is made, The 'composition' and 'scheme
of arrangement' can be made as per the provisions of Insolvency Acts. The provisions relating to
these arrangements are contained in sections 38 to 40 of the Provincial Insolvency Act, and
sections 28 to 32 of the Presidency Towns Insolvency Act which will be discussed in the next
article.
54.25. PROCEDURE OF COMPOSITION AND SCHEME OF ARRANGEMENT
The procedure and the rules relating to composition and scheme of arrangement, as contained
in the Insolvency Acts, may be summed up as under:
1. The proposal for composition or a scheme of arrangement, can be submitted by the debtor only
after the order of adjudication.
The proposal for composition or a scheme of arrangement should be submitted by the debtor
only, and it should be in writing and personally signed by him. Under the Provincial
Insolvency Act, the proposal is submitted to the court. On receipt of the same, the court shall
fix a date for the consideration of the proposal and shall issue a notice to all the creditors. Under
the Presidency Towns Insolvency Act, the proposal shall be submitted to the Official Assignee.
On receipt of the same, the Official Assignee shall summon a meeting of the creditors for
consideration of the proposal, and shall send a copy of debtor's proposal, alongwith his own
report, to each creditor. At the meeting of the creditors, the debtor may also amend the terms
of his proposal if in the opinion of the court (or Official Assignee under the Presidency Towns
Insolvency Act), the amendment is beneficial to the general body of creditors. At the meeting
of the creditors, the proposal shall be considered by them. The proposal shall be deemed to be
5 accepted by the creditors when it is approved by the majority

the creditors who represent tnree rounn in value or an me creuuors wnose ueois are proven
6. Under the Provincial Insolvency Act, the proposal is already before the court as jt •
submitted to the court itself. And the court shall fix a date for hearing for its appr 0v.i
But under the Presidency Towns Insolvency Act, the proposal is with the Official Assigne
And thus, under this Act, after the acceptance of the proposal, the insolvent or Olfj ej,|
Assignee may apply to the court for its approval. Thereafter, the court shall give a notic
of the date fixed for hearing, to each creditor who has proved his debts.
7. The court has the discretion either to approve the proposal or to reject it. In arriving ai
the decision, the court shall consider the report of the Receiver or Official Assignee and
 hear the objections made by the creditor or on their behalf.
8. In any of the following cases, the court shall refuse to approve the proposal for composition
or scheme of arrangement:
(a) If the terms of the proposal are not reasonable.
(b) If the proposal is not calculated to benefit the general body of creditors.
(a) If the circumstances are such that the court would have refused the debtor's
discharge if he were insolvent e.g. where reasonable security' 1 is not provided f or
the payment of debts.
(b) If the proposal does not provide for the payment in priority of the preferential
debts.
9. When the court approves the proposal, for composition or a scheme of arrangement, the
terms must be embodied in an order of the court.
On the approval of this proposal by the court, the order of adjudication shall be annulled by the
court, and the effect of annulment, as regards debtor's property, shall follow, (discussed in Art.
54.23). The composition or the scheme of arrangement, if approved by the court, shall be binding on
all the creditors so far as it relates to any provable debt due to them from the insolvent. Thus, a
composition or a scheme of arrangement is effective and binding on the creditors if both the
following conditions are satisfied:
(a) It is approved by the majority of the creditors who represent the three-fourth in
value of all the creditors who have proved their debts, and
(b) It is approved by the court.
Note: 1. A secured creditor is also affected by the composition and scheme of arrangement if the
same is approved by the court and consented by him i.e. he will also be paid in accordance with
the terms of the composition or scheme of arrangement.
[Jagmohan v. Indra Chandra, 63 PC. 895 Cal].
2. In case the secured creditor's right over his security is expressly reserved in the
composition or scheme, then he can realise the same and utilize the proceeds for the reduction
of his debts." 1
54.26. ANNULMENT OF COMPOSITION AND SCHEME OF ARRANGEMENT
The composition or a scheme of arrangement may be annulled (cancelled) by the court in certain
circumstances. And when it is annulled by the court, the debtor is re-adjudge as an insolvent i.e. the
court again passes the order declaring the debtor as an insolvent. The composition or a scheme of
arrangement may be annulled by the court in any one pf the following circumstances:

9. Under the Provincial Insolvency Act, the court shall refuse to approve the proposal if it does not provide
for the payment of at least six annas in the rupee on all the unsecured provable debts. And under the
Presidency Towns Insolvency Act, if it does not provide for at least twenty five paise in the rupee
on all such unsecured debts.
10. Halsbury's law of England, 2nd Edn. Volume II under Part II of the section relating to Bankruptcy
and Insolvency. When the debtor commits default in making the payment of any instalment due
under the composition or the scheme.
2. When it appears to the court that the composition or the scheme cannot proceed without
injustice or undue delay.
3. When the approval of the court to the composition or the scheme was obtained by fraud.
It may be noted that when, on the annulment of the composition or scheme, the debtor
is re-adjudged as insolvent, all his property shall revert in the Receiver or the Official Assignee.
However, any transfer or payment duly made by the debtor under the composition or scheme before
its annulment, shall remain valid.
Note: The court will not ordinarily annul a composition or a scheme and re-adjudge the debtor as an
insolvent, if in its opinion, the creditors will not be benefited by such order.
[Re Krishna Kishore Adhikari (1927) 54 Cal. 605].
TEST QUESTIONS
1. What are the circumstances in which a creditor can present an insolvency petition? State the
 position
of a secured creditor regarding presentation of an insolvency petition.
2. Can a debtor himself present an insolvency petition for his own insolvency? If yes, state the
circumstances?
3. Explain the procedure on admission and hearing of an insolvency petition. What are the duties of
the debtor on admission of the petition?
4. State the provisions of Insolvency Law regarding the dismissal of an insolvency petition. Can an
insolvency petition be withdrawn by the debtor? If yes, when?
1. What is an order of adjudication? State its effects in detail.
2. Explain fully the doctrine of relation back.
3. What are antecedent transfers? State the effect of insolvency on such transfers.
5. Explain the 'voluntary transfers' and 'fraudulent preferences'. What is the difference between the
two?
4. What are the duties of an insolvent after adjudication?
10. Explain public examination and private examination. What is a protection order?
11. Can an order of adjudication be annulled? If yes, state the procedure? What are the effects of
annulment of adjudication?
12. What do you mean by 'composition' and 'scheme of arrangement'? Explain the procedure and
legal provisions relating to such composition, and scheme

55. DEBTS AND PROPERTY OF INSOLVENT

55.1 INTRODUCTION
"We have discussed, in the last Chapter, the procedure for declaring a debtor as an insolvent. On such
declaration, the property of the insolvent vests in the Receiver or Official Assignee for the purpose of
realisation and distribution among his creditors for the payment of their debts. In this chapter, we shall
discuss the debts for which the creditors are entitled to receive the proceeds of insolvent's property, and
the property of the insolvent which is available for such distribution among his creditors.

55.2 DEBTS OF AN INSOLVENT

We known that when a debtor is declared insolvent, his property vests in the Receiver or Official
Assignee for the purpose of distribution among his creditors. But only those creditors are entitled to get
a share in insolvent's property who have proved their debts against the insolvent. The share of insolvent's
property to which such creditors are entitled, is called dividend. It may be noted that when a debtor is
declared insolvent, the creditors cannot sue him for the recovery of their debts. They are entitled to get
only a dividend out of the property of the insolvent. The debts of the insolvent in respect of which the
creditors are entitled to get a dividend, are called 'provable debts'. Thus, under the Law of Insolvency,
the terms 'debts of insolvent' is used for those debts which are provable in insolvency i.e. for which the
creditors can get the dividend out of insolvent's property.
The method of proving the debts, and other legal provisions relating thereto, will be discussed in Art.
55.6.
55.3. DEBTS PROVABLE IN INSOLVENCY PROCEEDINGS
The following debts are provable in insolvency proceedings, and the creditors can claim dividends by
proving such debts:
1. All debts and liabilities, present and future, certain or contingent, to which the debtor is subject (i.e.
for which the debtor is liable)
2. All such debts and liabilities to which the debtor may become subject, after the order of adjudication
but before an order of discharge, by reason of any obligation incurred before the date of such
adjudication.
Thus, practically, all kinds of debts of an insolvent are provable in insolvency, with certain exceptions as
will be discussed in Art 55.5, However, the requirement is that, the provable debts must accrue before
the order of adjudication i.e. the insolvent must be liable for the payment of such debts before he was
declared insolvent. The debts which accrue after the order of adjudication are not provable in insolvency
proceedings. However, the debts accruing after the order of adjudication can be proved in the insolvency
proceedings if the two conditions are satisfied, namely (a) such debts were incurred before the order of
discharge, and (b) the obligation to pay the debts was incurred by the debtor before the order of
adjudication. Thus, the debts for the payment of which the debtor becomes liable only after the order of
adjudication or after the order of discharge, are not provable in insolvency proceedings. It may also be
noted that the debts are provable in insolvency proceedings only if the following conditions are satisfied:
(a) The debt must be a liquidated sum of money i.e. which can be ascertained before hand.
(b) The debt must have been incurred before the date of adjudication, though it may have become
actual liability after the adjudication.
Example 55.1. Some of the instances of the debts which are provable in insolvency, are (a) A claim for
maintenance, (b) Damages for breach of contract, (c) Damages for breach of trust, (d) Outstanding rent
of the landlord (e) Liability to pay calls on shares of a company purchased by an insolvent (f) Annuities
for life, (g) The balance of a loan under the decree of the court.
Note: The debts provable in insolvency are specified in Section 34 of the Provincial Insolvency Act.
Section 46 of the Presidency Towns Insolvency Act also contains a similar provision.

55.4. INTEREST ON PROVABLE DEBTS

The rules relating to the payment of interest on provable debts may be summed up as under:
1. Where no interest is agreed upon: Sometimes, no interest is agree upon the debt, but the debt is
already overdue when the debtor is declared insolvent. In such cases, the creditor may prove interest at a
rate not exceeding six percent per annum. Under this clause, the following points regarding the time for
which interest may be proved, are important to note:
(a) Where the debt is payable on account of some written instrument (i.e. document), the interest is
provable from the due date to the date of adjudication.
(b) Where the debt is payable otherwise than on written instrument, the interest is provable from the
date of 'demand notice' to the date of adjudication. However, the debtor must have been informed
through such demand notice in writing that the interest will be claimed form the date of demand until the
time of payment.
2. Where interest is agreed upon: Sometimes, the interest payable by the debtor is agree upon. In such
cases also, the creditor may prove interest at a rate not exceeding six percent per annum up to the date of
adjudication. However, the creditor remains entitled to claim interest at the agreed higher rate, out of
debtor's estate, after all the debts proved in insolvency have been paid in full.
Note: The provisions, relating to payment of interest on provable debts, are contained in Section 48 of
the Provincial Insolvency Act. Rule 23 of Schedule II of the Presidency Towns Insolvency Act, contains
similar provisions.

55.5. DEBTS NOT PROVABLE IN INSOLVENCY PROCEEDINGS

The following debts are not provable in insolvency, and the creditors cannot claim any dividends for
such debts:
1. Debts which are incapable of being fairly estimated.
2. Debts due to a creditor who has advanced money to the insolvent after notice of the
3. presentation of the insolvency petition.
 4. Debts which are not recoverable in law i.e. illegal debts.
5. Debts incurred after the order of adjudication.
6. Unliquidated damages which arise otherwise than by reason of breach of contract or breach
of trust.
Example 55.2. Some of the instances of the debts which are not provable in insolvency proceedings, (a)
A claim for damages for tort, (b) A claim for damages in respect of fraud, (c) The debts incurred carry
on immoral business, (d) The debts which were barred by limitation at the commencement Of
insolvency.

55.6. PROOF OF DEBTS BY UNSECURED CREDITORS

The 'proof of debts' is the method by which the provable debts are established (i.e. proved). It may be
noted that if the creditors desire to take a dividend, out of the property of the insolvent, then they must
prove their debts in the prescribed manner. The rules relating to the proof of debts, as contained in the
Insolvency Acts, may be summed up as under:
1. Under the Provincial Insolvency Act, the creditor may prove his debts by lodging the proof of his
debts with the court. But under the Presidency Towns Insolvency Act, the proof of debts is lodged with
the Official Assignee.
2. The proof of debts may be lodged by delivering or sending an affidavit verifying the debts. Such
affidavit must be sent by post is a registered letter.
3. The affidavit must contain a statement of accounts which shows the particulars of the debts. It must
also specify the vouchers, if any, by which the debts can be substantiated (supported). The court or the
Official Assignee, as the case may be, may also ask for the particulars of such vouchers at any time.
4. The proof of debts may be admitted or rejected by the court or the Official Assignee, as the case
may be.
5. The proof of debt is lodged after the order of adjudication is passed by the court. But the debts must
be proved before the discharge of the insolvent from the state of insolvency.
Note: The provisions relating to proof of debts by unsecured creditors are contained in Section 49 of the
Provincial Insolvency Act. Rule 2 and 4 of Schedule II of the Presidency Towns Insolvency Act also
contains a similar provision.

55.7. SCHEDULE OF CREDITORS

We know that after the declaration of the debtor as an insolvent, his creditors become entitled to receive
dividends, out of the assets of the insolvent, for the debts provable in insolvency. All the creditors of the
insolvent who want to prove their debts in insolvency, must tender to the court proof of their respective
debts, and produce evidence of the amount due to them. On such tender of proof to the court, it shall
determine the persons who are creditors in respect of the provable debts, and the amount of all such
debts. And the court shall frame a schedule of such creditor and their debts. If, in the opinion of the
court, the value of any debt is incapable of being fairly estimated, it may make an order to that effect,
and then such debt shall not be included in the schedule. The copy of every such schedule shall be
posted in the court.
It may be noted that, it is the duty of the court to determine who are the creditors of the insolvent, and to
frame a schedule showing the amount of the debt. However, it is also obligatory on the part of the
creditors to tender the proof of their debt. Thereafter, it is the duty of the court to frame a schedule. If
proofs are tendered to the Receiver, it is his duty to place them before the court for necessary action.
It may also be noted that the creditors must tender the proof of their debts before the discharge of the
insolvent. Sometimes, the name of a creditor is not entered in the schedule as originally framed. In such
cases, he may, at any time but before the discharge of insolvent tender proof of his debts and apply to
the court for an order directing his name to be included in the Schedule. The court may either accept or
reject his application. However, before taking any decision in this respect, the court shall give notice to
the Receiver and other creditors who have proved their debts and shall hear their objections, if any.
It will be interesting to know that no period of limitation has been prescribed in the Provincial
Insolvency Act for application by creditors to be brought on the schedule of creditors. As a matter of
fact, such matters are left to the the discretion of the court. However, the application must always be
made before the discharge of the insolvent.
Note: The above provisions, relating to schedule of creditors, are contained in Section 33 of the
Provincial Insolvency Act. Under Section 24 of the Presidency Towns Insolvency Act, an insolvent is
himself required to prepare a schedule of his affairs.

55.8. MUTUAL DEALINGS AND SET-OFF

Sometimes, the insolvent and the creditors have mutual dealings between themselves. In the course of
such mutual dealings, each party may owe some amount to the other i.e. insolvent and creditor may owe
some debts to each other. In such cases, the debts of one party may be set off against the other. It may be
noted that where there have been mutual dealings, between an insolvent and a creditor, proving or
claiming to prove a debt, an account shall be taken of what is due from one party to the other in respect
of such mutual dealings. And the sum due from one party shall be set-off against the sum due from the
other and the balance of the account, shall be claimed or paid by one party to the other.

Example 55.3. A, an insolvent, and B, his creditor had mutual dealings. B was claiming Rs. 50,000 from
A on account of debt due from him (A), and A was claiming Rs. 30,000 from B. In this case, the amount
due by B to A will be set-off against the amount due to B. The balance of Rs. 20,000 (50,000-30,000) is
provable in insolvency. Thus, B can claim dividends out of A's properly for the amount of Rs. 20,000
only.
It may, however, be noted that the debts between the insolvent and the creditor can be set-off only if the
following conditions are satisfied:
1. The debts of both the parties must be ascertained and legally recoverable.
2. The debts must be due at the time of the admission of the insolvency petition and at that time the
parties must have mutual dealings.
3. The debts must be provable in the insolvency proceeding.
4. The debts must be between the same parties who are claiming their rights e.g. a joint debt cannot be
set-off against a separate debt.
5. The debts contracted with the notice of the presentation of the insolvency petition cannot be set-off
e.g. when a creditor gives money to the debtor knowing that insolvency proceedings have been started
against the debtor, then he cannot claim set-off for such debts. This provision is only in the Presidency
Towns Insolvency Act.
Note: The provisions, regarding mutual dealings and set-off, are contained in Section 46 of the
Provincial Insolvency Act. Section 47 of the Presidency Towns Insolvency Act also contains a similar
provision.

55.9. PROOF OF DEBTS BY SECURED CREDITORS

We know that a secured creditor is one who holds some security from the debtor for the repayment of
his debts e.g. a creditor who holds a mortgage, charge or lien on the property of the debtor or on any part
of the property as 'security for a debt due to him from the debtor. Under the Insolvency Law, the
position of a secured creditor is different from that of an ordinary, (i.e. unsecured) creditor.
As a matter of fact, the rights of a secured creditor are not affected in any way by the insolvency
proceedings. He may realise his security independently of the insolvency courts, and utilise the amount
so realised for the payment of his debts. And thus, a secured creditor need not prove his debts in the
insolvency. However, if he so desires, he may come in the insolvency proceedings as an unsecured
creditor by relinquishing his security. It is the option of the secured creditor; he may or may not
participate in the insolvency proceedings. Generally,a secured creditor does not participate in the
insolvency proceedings if the security is sufficient to realise his debts. But if the security is not
sufficient, he may participate in the insolvency proceedings after complying with the requirements of the
Insolvency Acts. In such a case, a secured creditor may adopt any one of the following three courses:
1. He may realise his security and prove for the balance due to him i.e. after deducting the net amount
realised from the amount of the debt.
2. He may surrender the security for the general benefit of the creditors, and prove for the whole of
the debt.
3. He may assess the value of his security and state the same in his proof of debts. In such a case, he
may prove for the balance that remains after deducting the assessed value from the debt due to him.
It may be noted that if the secured creditor does not comply with the above provisions, then he is
excluded from all shares in any dividend out of insolvent's property. In such a case, he will have to rely
upon his security whether or not it is sufficient for the payment of his debts.
Note: The provisions regarding proof of debts by the secured creditor, are contained in Section 47 of the
Provincial Insolvency Act. Rules 9 to 18 of Schedule II of the Presidency Towns Insolvency Act also
contain provisions in this regard

55.10. PROPERTY OF AN INSOLVENT

We have already discussed that when the debtor is declared insolvent, his property vests in the Receiver
or Official Assignee for the purpose of distribution among the creditors. And the creditors get the
dividends, only for the provable debts, out of the property of the insolvent. The term 'preoperty' is
defined in Section 2 (1) (d) of the Provincial Insolvency Act' which reads as under:
"Property includes any property over which or over the profits of which any person has a
disposing power which he may exercise for his own benefits".
The analysis of this section reveals that insolvent's property includes not only those properties of which
he is the owner but also such properties over which he has a disposing power i.e. which can be disposed
of by the insolvent for his own benefit. Moreover, it also includes the property the profits of which can
be disposed of by the insolvent. Such property of the insolvent is available for distribution amont his
creditors. It may be noted that under Insolvency Law, the property of the insolvent always means the
property which-is divisible among his crediors. For the purpose' of Insolvency Law, the property
includes immovable property, movable property, actionable claims, money, goods, land, interests and
profits. As a matter of fact, all valuable rights, which may be converted into money or whose worth can
be assessed in money, fall under the definition of property. For the purpose of insolvency, the property
of an insolvency may be classified into two categories, namely:
1. Property divisible among creditors.
2. Property not divisible among creditors.

55.11. PROPERRTY DIVISIBLE AMONG CREDITORS

We know that when the debtor is declared insolvent, his entire property (except that discus » in the next
Art.) comes into the hands of Receiver or Official Assignee and becomes divisible among his creditors.
The properties of the insolvent which are divisible (i.e. available f distribution) among the creditors may
be discussed under the following heads:
1. The property which belongs to the insolvent: All the properties which belong to the-insolvent on the
date of the commencement of the insolvency, are available for distribute among the creditors. This
includes both the movable and immovable property of the insolvent
2. The property which is acquired after adjudication but before the discharge of insolvent from the state
of insolvency: Sometimes, an insolvent acquires some property even after the order of adjudication but
before he is discharged from the state of insolvency. Such property is known as "after acquired
property'. The after acquired property is also divisible among the creditors of the insolvent. Such a
property may be acquired by an insolvent in the following ways:
(a) After the insolvency, the insolvent may carry on some business, and in the course of such business
he may acquire some property.
(b) He may get some property by inheritance e.g. he may get some share in his father's property after
his father's death.
(c) He may also get some property by way of gift, or under a settlement or will.
(d) He may have some personal earning. The 'personal earnings constitute wages and other money
earned by the insolvent by his personal labour and exertion. The personal earnings vest in the Receiver
or Official Assignee like any other property if it is surplus over the amount as is necessary for the
maintenance of the insolvent and his family.
On the point whether such property automatically becomes available for distribution or some formality
is required, there is some difference between the two Insolvency Acts as stated below:
Under the Provincial Insolvency Act, all the property acquired by the insolvent after adjudication and
before his discharge shall forthwith vest in the court or Receiver, i.e. as soon as the order of adjudication
is passed such property automatically comes in the hands of the court or Receiver, and became available
for distribution among the creditors. TV insolvent cannot deal with or dispose of such property [Section
28 (4)]. The effect of this rule is that all the property owned by the insolvent whether at the time of
commencement of insolvency or acquired after adjudication but before discharge, vests in court or
Reciever and become available for the distribution among the creditors as soon as the order of
adjudication is passed.
Under the Presidency Towns Insolvency Act 2, all such property does not automatically vest in the
Official Assignee. Under this Act, the1 Official Assignee has to intervene and assert a right to distribute
the after acquired property among the creditors of the insolvent. In other words, the Official Assignee is
required to claim title in all after-acquired properties before he can distribute them among the creditors
of insolvent. If the Official Assignee does not intervene, and the insolvent transfers the property to
another person who takes it in good faith and for value, the transferee gets a good title to the property.
Thus, the insolvent can validly deal in or dispose of such property before the intervention of the Official
Assignee1
3. The property of which the insolvent is the reputed owner: The term 'reputed ownership' be defined as
the supposed or deemed ownership. Sometimes, the circumstances show
that a person is the owner of the certain goods in his possession. But in reality, he is not. In such cases,
he is considered to be the reputed (supposed) owner of the goods e.g. if a person delivers certain goods
to a commission agent for sale. The commission agent will (,e considered as the reputed owner of such
goods. And if he is declared insolvent, the unsold goods in his possession will be available for
distribution among his creditors. It may, however, l,e noted that this rule covers only the movable goods.
This is known as the doctrine of reputed ownership and will be discussed in detail in Art. 55.13
4. The property over which the insolvent has a disposing power: All the property, which can be
disposed of by the insolvent for his own benefit, is divisible among his creditors. Thus, will be the
property which belongs to other persons is also available for distribution among the creditors of the
insolvent if the insolvent has disposing power over such properties, and can use them for his own
benefits, e.g. an auctioneer has a disposing power over the sale proceeds of the goods sold by him. In
such a case, the commission of the auctioneer will be available for distribution among the creditors.
Likewise, on the insolvency of a Hindu father, his property shall include his son's undivided interest in
the property. The reason for the same is that the father enjoys a disposing power over his son's interest.
5. The property transferred in voluntary transfers made by the insolvent: We know that a 'voluntary
transfer' means the transfer of property made without any consideration. An insolvent may make the
voluntary transfer of his property to his relatives with a view to protect such property from being
realised in insolvency. Such transfer of property is not valid and the property so transferred is available
for distribution of among the creditor. This point has already been diiscussed in the previous chapter in
Art. 54.15.
6. The property transferred by way of fraudulent preference: We also know that a 'fraudulent
preference' means favouring one crediotr to the exclusion of others. The preference may be given by
satisfying the debts of one creditor or by transferring certain property to one creditor excluding others.
The transfer of property by way of fraudulent preference is not valid, and the property so transferred is
divisible among all the creditors. This point has already been discussed in the provious chapter in Art.
54.16

55.12. PROPERTY NOT DIVISIBLE AMONG CREDITORS

We have discussed in the last article, that on the insolvency of a debtor, his property is distributed
among his creditors. However, certain properties in the hands of an insolvent are not available for
distribution among the creditors and as such they do not vest in the Receiver or Official Assignee when
the debtor is declared insolvent. On the point of properties of the insolvent, which are not available for
distribution among the creditors, there is some difference between the two Insolvency Acts, and is
discussed separately hereunder:
1. Properties exempted (i.e. not divisible) under the Provincial Insolvency Act: This Act contains a
general provision regarding the insolvent's properties which are not divisible among his creditors.
According to Section 28 (5) of the Act, the property not available for distribution is the property which
is exempted from attachment and sale in execution of a decree under the Code of Civil Procedure, 1908
or under any other anactment for the time being in force. The properties so exempted under the Code of
Civil procedure, 1908 [Section 60], include the following:
(a) Necessary wearing-apparel, cooking vessels, beds and bedding of a person and his wife and
children, and such personal ornaments which a lady has to wear according to religious customs.
(b) Tools of artisans. In case the insolvent is an agriculturist, his implements of husbandry
etc. which are necessary to enable him to earn his livelihood. The term agriculturist me a person whose
only means of living is earned by cultivating a small holding.
(c) House and other building (with materials and sites thereof) belonging to an agriculturist or a
labourer or a domestic servant and occupied by him.
(d) A mere right to sue for damages.
(e) Any right of personal service.
(f) Stipends and gratuities allowed to pensioners of Government or of a local authority
of any employer.
(g) The wages of labourers and domestic servants, whether payable in money or in kind
(h) Salary to the extent of first four hundred rupees and two third of the remainder in execution
of any decree other than a decree of maintenance.
(i) One third of the salary in execution of any decree for maintenance.
(j') The pay and allowance of persons to whom the Air Force Act, 1950, or the Army Act
1950, or Navy Act, 1957 applies.
(k) All compulsory deposits and other sums in or derived from any fund to which the Provident Fund
Act 1925 applies, in so far as they are declared by the said Act not be liable to attachment.
(l) All deposits and other sums in or derived from any fund to which the Public Provident
Fund Act 1968, applies.
(m) All money payable under a policy of insurance in the life of the insolvent,
(n) An expectency of succession by survivorship or other merely contingent or possible rights
or interest e.g. chance of succeeding to the property on the death of a relative,
(o) A right to future maintenance.
(p) any allowance declared by any Indian Law to be exempted from liability to attachment
or sale in execution of a decree.
(q) Where the insolvent is liable for the payment of land revenue, any movable property which, under
any law for the time being applicable to him, is exempted from sale for the recovery of an arrear of such
revenue.
Notes: 1. The amount of Provident Fund is not available for distribution. But as soon as the amount of
Provident Fund reaches the hand of insolvent, it becomes divisible among the creditors. As a matter of
fact, when the money of Provident Fund is paid to the insolvent, it falls within the category of 'after
acquired property and vests in the Court or Receiver.
[Marten v. Putt, AIR 1938 Nagpur 408]
2. The pensions and gratuties are exempted from attachment in execution of a decree, and thus, not
available for distribution. But as soon as the amount of pension or gratuity are paid to the employee
concerned, they become divisible among the creditors.
2. Properties exempted (i.e. not divisible) under the Presidency Towns Insolvency Act: This Act contains
a specific provision regarding insolvent's properties which are not divisible among his creditors.
According to Section 52 (1) (a) and (b), the following properties of an insolvent not divisible among his
creditor:
(a) The property, which the insolvent is holding as a trustee, under a trust, is not divisible among the
creditors. Such property does not pass to the Official Assignee on the insolvency of the debtor.
Similarly, the property held in fiduciary capacity or on behalf of other persons, is not divisible among
the creditors, e.g. the property held by the insolvent as a bailee, factor, broker, solicitor is not divisible
among the creditors as it is held in fiduciary capacity. Moreover, the property held for specific purpose
is also not available for distribution among the creditors. Thus, when the debtor is declared insolvent,
such properties belong to the principle (i.e. owner) and do not vest in the Official Assignee.
(b) Tools of trade, necessary wearing apparel, bedding, cooking vessels and furniture for the insolvent
himself, his wife, and children not exceeding in value of Rs. 300 in

5.13. DOCTRINE OF REPUTED OWNERSHIP

We know that the term 'reputed 'ownership' means the supposed or deemed ownership. Sometimes, the
circumstances show that a person is the owner of certain goods in his possession, gut in reality, he is not.
In such cases, he is considered to be the reputed (supposed) owner f the goods e.g. if a person delivers
certain goods to a commission agent for sale. The commission agent will be considered as the reputed
owner of such goods. And if he is declared insolvent, the unsold goods in his possession will vest is the
Receiver or Official Assignee, and will be available for distribution among the creditors of the insolvent
commission agent. This is known as the doctrine of reputed ownership. This doctrine is based on the
provision Of insolvency law as contained in Section 28(3) of the Provincial Insolvency Act, and Section
52 (2) of the Residency Towns Insolvency Act, which is similar in both the Acts. According to this
provision, the goods, of which the insolvent is the reputed owner, shall be considered to be the property
of the insolvent, and shall be available for distribution among his creditors. Thus, for the purpose of
distribution among the creditors, it is not only the goods of which the insolvent is the true owner, but
also the goods which belong .to some other persons, of which the insolvent is the reputed or apparent
owner (i.e. deemed to be the owner of goods). This doctrine has been incorporated in the insolvency law
to check the tendency on the part of the insolvent to disown certain properties which may be possessed
by him on the commencement of the insolvency. Generally, some dishonest insolvents indulge in various
tricks to circumvent (i.e. avoid or by-pass) the provisions of the law, and attempt to prevent the vesting
of certain properties in the court, Receiver or Official Assignee by transferring the ownership therof to
some third person. It is to prevent such attempts on the part of the insolvent that this doctrine has been
incorporated.
Example 55.4. A delivered certain goods to B a commission agent, for being sold. The goods remained
unsold with B, and in the meantime he (B) was declared insolvent. In this case, B is the reputed owner of
the goods. Thus, these goods shall vest in the Receiver or Official Assignee and shall be available for
distribution among the creditors of B.
55.14. ESSENTIALS OR CONDITIONS OF DOCTRINE OF REPUTED OWNERSHIP
Following are the essential conditions which must be satisfied for the application of the doctrine of
reputed ownership:
1. The goods must be movable: The doctrine of reputed ownership applies only to movable goods. The
immovable property is not covered by this doctrine
2. The insolvent must be a trader: This doctrine applies only to those goods of which the insolvent is a
trader, i.e. he is carrying on a regular trade or business in those goods, or is carrying on his trade with
the help of such goods. The goods which are not used in insolvent's trade or business are not covered by
this doctrine.
Example 55.5. A was carrying on a business of auto spare parts. B bough certain spare parts from A, but
left the same in A's possession. Subsequently, A was declared insolvent. In this case, as A is the trader
and deals in the goods sold, he shall be deemed to be the reputed owner of the goods (spare parts) sold to
B. And thus, these shall also be realised for the purpose of distribution among A's creditors.
3. The goods must be in the possession of the insolvent: This doctrine applies only to the goods which
are in the possession, order or disposition of the insolvent in his trade or business at the commencement
of the insolvency. Thus, the goods of other persons which are not-in possession of the insolvent at the
time of his insolvency, are not covered by this doctrine.
Example 55.6. A, the owner of horses, delivered two pairs of horses to B, a horse-dealer, for sale. B sold
one pair of horses to C, who paid the price and took the horses with him. But C found that the horses
were not according to the terms of the contract and he wanted to return them. However, ii was then
arranged between B and C that C should use the horses until B supplies him with better horses, and till
then he (C) will have lien upon the horses. In the meantime, B was declared and the Receiver claimed
the horses from C. In this case, the Receiver is not justified in claiming the horses from C as the
insolvent [B) is not the reputed owner of these horses. Here the horses were not in the possession of B at
the time of his insolvency.
4. The insolvent must have the possession of the goods with the consent of the true owner: This doctrine
applies only to the goods which the insolvent possesses with the consent of the true owner. If the
insolvent retains the goods without the consent of the true owner these are not covered by this doctrine.
Example 55.7. A bought a car from B, a car dealer. He paid the price of the car. But B did not deliver the
car to A on the ground that first he should be paid the money which is due on some
other account. Afterwards, B was declared insolvent. In this case, the car sold to A will not vest
the Receiver or Official Assignee because B was having its possession without A's consent

Example 55.8. A purchased some goods from market and went to meet his friend B. By m' A left the
goods at B's house. Afterwards, B was declared insolvent. In this case, the goods will not vest in the
Receiver or Official Assignee as B was not having the possession of the goods with A’s consent.
5. The circumstances must show that the insolvent is the reputed owner: The circumstances,
under which the goods are in possession of the insolvent, must show that the insolvent is the reputed
owner of the goods. And there must be no mark or other indication to show that the goods belong to
some other person.

Example 55.9. A was a dealer in cars. He was also undertaking repair work. In this case, he may be
regarded as the reputed owner of the new cars because the circumstances are such. However he cannot
be regarded the reputed owner of the old cars which are received by him for repairs. Because there is an
indication that these belong to others and the dealer might have received these cars for repairs only.

Example 55.10. A and his brother B' were carrying on business in A's name. B was a sleeping partner,
and the business was carried on ostensibly as A's own business. Afterwards, A was declared insolvent. In
this case, the entire partnership property shall vest in the Receiver or Official Assignee as the
circumstances shows that the entire business belongs to A. Here, A was carrying on business as his own
which lead others to believe that the goods belong to A.
6. The goods must be in the sole possession of the insolvent: This doctrine applies only
to the goods which are in the sole reputed ownership of the insolvent. If the insolvent is
Jointly possessing the goods with others who are not insolvent, then such goods are not covered
By this doctrine.

On the point of reputed ownership, there is some difference between the two Insolvency
Acts. The points of difference may be summed up as under:
(a) Under the Provincial Insolvency Act, the doctrine is effective from the date of presentation of the
insolvency petition i.e. the goods of other persons which are in the possession or disposition of the
insolvent at the time of presentation of the insolvency petition, are
divisible among the crediters. Whereas, Under the Presidency Town Insolvency Act, the
doctrine is effective nom the act of insolvency on which the insolvency petition was filed.
(b) Under the Provincial Insolvency Act, the doctrine is not applicable to the goods which are
mortgaged or hypothecated with the insolvent. Thus, the Receiver takes such goods subject to the charge
of martgage or hypothecation. But, under the Presidency Town Insolvency Act, the doctrine is
applicable to such goods also.

Notes: 1. The doctrine does not apply to the goods which are iin possession of an insolvent as
a bailee, repairer, carrier, trustee or administrator etc. because these are not the goods in trade.
Moreover, any property of the insolvent over which a secured creditor is having a charge does not vest
in the Receiver or Official Assignee, and is not divisible among other creditors.
 1. The true owner whose goods are taken by a Receiver or Official Assignee for distribution among
the creditors of the insolvent, shall be entitled to prove for the value of the goods and can claim
2. The true owner whose goods are taken by a Receiver or Official Assignee for distribution among
the creditors of the insolvent, shall be entitled to prove for the value of the goods and can claim
dividend for the same as an unsecured creditor.
[Section 52 (2) (last para), Presidency Towns Insolvency Act].
55.15. RELAXATION OF THE PROPERTY
We know that the object of the insolvency proceedings is to realise the property of the insolvent for the
purpose of distribution among his creditors. Thus, after the declaration of the debtor as an insolvent, the
next step is the realisation of his property, and its distribution among his creditors. Both the Insolvency
Acts provide for the appointment of an officer for this purpose, who takes the possession of the
insolvent's property, realises it and distributes the same among the crediotrs of the insolvent. Under the
Provincial Insolvency Act, such officer is known as the Receiver, and under the Presidency Towns
Insolvency Act, he is known as the 'Official Assignee'. In the following pages, we shall discuss the
appointment of Receiver or Official Assigne in detail along with their duties and powers.

55.16. APPOINTMENT OF RECEIVER

A Receiver is an official appointed under Section 56 of the Provincial Insolvency Act. He is appointed
to take possession of the property of the insolvent, to realise and distribute the same among the creaditor
most fairly. We know that under this Act, on the insolvency of a debtor, his property vests in the court or
Receiver. It may be noted that so long as the Receiver is not appointed, the property of the insolvent
vests in the court. As soon as the receiver is appointed, the property of the insolvent vests in him. The
receiver is appointed by the court. And the court may appoint a Receiver, for the property of the
insoslvent, at the time of order of adjudication or at any time afterwards. It may be noted that the
Receiver is appointed for the whole property of the insolvent. He cannot be appointed for a part of the
insolvent's property". While appointing a Receiver, the court.may require him to give such security as it
thinks fit for due accounting for the insolvent's property which he receives. The court shall fix the
amount of the remuneration for the services of the Receiver, which is to be paid out of the assets of the
insolvent. It will be interesting to know, that there is no time limit for the appointment of the Receiver5.
He may be appointed even after an order of discharge of insolvent if there is some property of the
insolvent which may vest in him.
Under Section 57 of the Provincial Insolvency Act, the State Government may also appoint a Receiver,
known as Official Receiver, for the property of the insolvent. He may be appointed with in such local
limits as may be prescribed by the Government. When any Official Receiver is appointed by the State
Government, then the court under whose jurisdiction he acts, shall appoint him as Receiver under
Section 56 of the Act. On such appointment by the court, he will have the powers of an ordinary
Receiver. As a matter of fact, when any person is appointed by the State Government as an Official
Receiver, it is then generally the duty of the court to appoint the same person as the Receiver of
insolvent's property. The reason for the same is that when any Official Reciever is appointed by the
Government, generally all insolvencies should be kept within his control unless very exceptional reasons
connected with his personality are put forward to deprive him of that control7. It may be noted that the
property of the insolvent does not vest in the Official Receiver immediately on the order of adjudication
It vests in him only when he is appointed as Receiver by the order of the court. Till tin the Official
Receiver cannot validly deal with the property of of insolvent. And any purch ° from him does not get a
valid title to the insolvent's property*. Though, generally the Offj & Receiver is appointed as a Receiver
by the court. But when the Official Receiver appoint H by the Government suffers from certain personal
disqualifications, the court may appoint a other person to be the Receiver for the property of the
insolvent. Moreover, the court m also, if good reasons are shown, remove the Official Receiver
appointed originally at an time whatsoever. The point of difference between the Receiver and' 'Official
Receiver' js th the Insolvency Court cannot delegate any of its power to a 'Receiver'. Whereas, under
Sectio 80 of the Provincial Insolvency Act, the Insolvency Court may delegate all or any of the
following powers to an Official Receiver if so directed by the High Court:
1. Power to frame Schedules and to admit or reject proof of creditors,
2. Power to make interim orders in case of urgency.
3. Power to hear and determine any application which is not opposed by the other party It may be noted
that when, in the exercise of the above powers, any orders in made by
the Official Receiver or any act is done by him, it will be deemed to be an order or act of the court. This
is, however, subject to the appeal to the court from such order or act It may also be noted that the
Official Receiver cannot make an order on the claim of a third person where such third person claims the
property of the insolvent to be his own property. Such claims can be decided by the court only.
Note: Receiver may not be appointed at all (as in case of small insolvencies). And where no Receiver is
appointed, the court shall have all the powers which are conferred on a Receiver under this Act. [Section
58, Provincial Insolvency Act].

55.17. APPOINTMENT OF OFFICIAL ASSIGNEE

An Official Assignee is an official appointed under Section 77 of the Presidency Towns Insolvency Act.
He is appointed to take possession of the property of the insolvent, to realise and distribute the same
among the creditors most fairly. We know that under the Presidency Towns Insolvency Act, on the
insolvency of a debtor, his property vests in the Official Assignee. As this Act applies to three states
namely Madras, Calcutta and Bombay, the appointment in the three states differ, which is as under:
(a) Madras: The Official Assignee is appointed by the Chit" Justice of Madras High Court.
(b) Calcutta: The Official Assignee is appointed by the State Government of West Bengal in
consultation with and with concurrence of the Chief Justice of Calcutta High Court.
(c) Bombay: The Official Assignee is appointed by the State Government of Maharashtra. It may be
noted that every Official Assignee shall give such security as may be prescribed.
The Official Assignee is paid such remunerations for his services as may be prescribed by the rules. The
rules may prescribe the remuneration as the amount of commission or percentage on the amount realised
by him after payment to secured creditors; or the commission or percentage on the amount distributed in
dividends; or the commission or percentage partly on the amount realised and partly on the amount
distributed.

55.18. DUTIES OF RECEIVER OR OFFICIAL ASSIGNEE

We have already discussed that when a Receiver or Official Assignee is appointed, the property of the
insolvent vests in such Receiver or Official Assignee. Thereafter he is bound to perform certain duties in
respect of the property of the insolvent. The duties of the Receiver or Official Assignee are contained in
Section 59 of the Provincial Insolvency Act, and Section 68 of the Presidency Towns Insolvency Act,
which are similar in both the Acts. These duties may be summed up as under:
1. He must take all the steps for the discovery of the property of the insolvent and take the possession
of such property.
2. He must realise the entire property of the insolvent with all convenient speed, and should not be
negligent in his duties.
3. He must maintain the account, for the money received by him, according to the rules made by
court. This provision is under the Presidency Towns Insolvency Act only.
4. He must do all such acts as may be required by the court from time to time e.g. he may be asked to
investigate the conduct of insolvent and make a report to the court, which may guide the court in making
an order of discharge.
5. He must distribute the property, so realised, among the creditors of the insolvent. In this
connection, he must obey the instructions of the court, and act in an honest and impartial manner.
6. If he receives any proposal for composition or scheme of arrangement from the debtor, the same
should be submitted to the creditors.
7. If any resolution is passed in creditors' meeting, the Receiver or Official Assignee should pay a due
regard to such resolution

55.19. POWERS OF RECEIVER OR OFFICIAL ASSIGNEE

We have discussed, in the last article, that it is the duyt of the receiver or Official Assignee to realise the
property of the insolvent and distribute the same among his creditors. For this purpose, certain powers
are given to him under both the Insolvency Acts. [Section 59, Provincial Insolvency Act, and Section 68
of the Presidency Towns Insolvency Act]. The powers of the Reciever or the Official Assignee may be
discussed under the two heads, namely (a) Power which can be exercised without the leave (permission)
of the court, and (b) Powers which can be exercised with the leave of the court.
1. Powers without the leave of the court: The Receiver or Official Assignee may exercise the following
powers without the leave (permission) of the court:
(a) To sell all or any part of the property of the insolvent. It may be noted that this power can be
exercised by the Receiver or Official Assignee only for the purpose of realising the property of the
insolvent in order to distributed the same among insolvent's creditors.
(b) To give receipts for any money received by him.
2. Powers with the leave of the court: The Receiver or Official Assigne may exercise the following
powers with the leave (permission) of the court:
(a) To carry on the bussiness of the insolvent. It may, however, be noted that he may carry on the
business if it is necessary for the beneficial winding up of the business.
(b) To institute the suits or leagal proceedings in respect of the insolvent's property. If any such suit is
already pending, he may continue the same. And if any such suit is filed against the insolvent, he may
also defend the same.
(c)To employ a legal practitioner or other agent to conduct any proceedings or to do any business which
may be sanctioned by the court.
(d) To accept the money consideration for the sale of any property of the insolvent which is payable at
a future time. However, he may accept the same subject to such stipulations as to security and otherwise
as court thinks fit. Under the Presidency Towns Insolvency Act, he may also accept the fully paid
shares, debentures or debenture stock in any limited company, as such consideration.
(e) To mortgage or pledge any part of the insolvent's property. However, he may do so only if it is
necessary for the purpose of raising money for payment of debts of the insolvent.

Under the Presidency Towns Insolvency Act, he may also, for carrying on insolvent' business, mortgage
or pledge the insolvent's property.
(f) To refer the disputes to the arbitration. It may be noted that, he may also compromise all debts,
claims and liabilities on such terms as may be agreed upon.
(g) To divide insolvent's property, in its existing form, among the creditors of the insolvent This power
can be exercised when insolvent's property cannot be readily or advantageously sold due to its peculiar
nature or some other special circumstances. It may be noted that the exercise of all the above powers is
subject to the control Of the court. In case, any person is aggrieved by any act or decision of the Receiver
or Official Assignee, he may apply to the court within twenty one days from the date of such act or
decision. The court may confirm, reverse or modify the act or decision, and make such further order as it
thinks just.

55.20. SUPERIOR TITLE OF THE RECEIVER OR OFFICIAL ASSIGNEE

We have already discussed that when a debtor is declared insolvent, his property vests in the Receiver or
Official Assignee i.e. he gets the possession of insolvent's property. It will be interesting to know that
the title of the Receiver or Official Assignee, to the property of the insolvent, is superior to that of
insolvent himself. This superior position of the Receiver or Official Assignee is clear from the following
provisions contained in the Insolvency Acts:
1. Doctrine of reputed owernship: According to this doctrine, the Receiver or Official Assignee can
take the possession of the goods which belong to some other person, but at the commencement of
insolvency are found in the possession of the insolvent. He may then realise such goods and distribute
the same among the creditors of the insolvent. While the insolvent himself cannot claim such goods as
his own, and cannot utilise them for the purpose of paying of his debts. It may be noted that even the
true owner of the goods cannot claim them from the Receiver or Official Assignee.
2. Avoidance of voluntary transfers: We know that a voluntary transfer means a transfer of property
made without any valuable consideration. The debtor may make the voluntary transfer of his property to
his close relatives with a view that such property may not he realised in the insolvency. It may be noted
that such transfer is not valid as against the Receiver or Official Assignee. He can, therefore, get such
transfers avoided (rescinded) by the court, and can take the possession of such property from the
transferee and distribute the same among the creditors of the insolvent. This right of the Receiver or
Official Assignee is definitely superior to that of the insolvent. This point has already been discussed in
detail in Art 54.15.
3. Avoidance of fraudulent preferences: We know that a fraudulent preference means favouring
one creditor to the exclusion of others. The preference to a creditor may be given by satisfying his debt
or by transferring certain property to some creditors to the exclusion of others. Such transfers are not
valid as against the Receiver or Official Assignee. He can, therefore, get such transfer rescinded by the
court and can utilise the property for the purpose of distribution among the creditors of the insolvent.
This right also supports the view that the title of Receiver or Official Assignee is superior to that of
Insolvent. This point has also been discussed in Art 54.16.
4. Right to claim after-acquired property: The term 'after-acquired property' means the property
acquired by the insolvent after the order of adjudication but before he is discharged from the state of
insolvency. Such property also vests in the Receiver or Official Assignee, and is available for
distribution among the creditors of the insolvent. Thus, the Receiver or Official Assignee can claim the
after-acquired property from the insolvent. This right of the Receiver or Official Assignee is also
superior to that of insolvent.
5. Right to disclaim onerous property. The right 10 disclaim 'onerous property' is available to the
Official Assignee only under the Presidency Towns Insolvency Act. Sections 62 to 67 of this Act
contain provisions in this regard. There is no such corresponding provision in the Provincial
Insolvency Act.
The term 'onerous property' may be defined as the property the burden of which is more than its benefits
and value e.g. land burdened with onerous covenants (agreements), partly paid shares in a company the
market value of which is less than the amount of calls due on them, any other property that is unsalable
or not readily saleable, unprofitable contracts etc. As a matter of fact, such property increases the
liability of the Official Assignee. He may, therefore, disclaim the onerous property and avoid his
personal liability. It may, however, be noted that the insolvent has no such right to disclaim his onerous
property.
Generally, the Official Assignee takes the property of the insolvent subject to all equities as to those it
was subject to in the hands of the insolvent. The right to disclaim the onerous property is an exception to
this general rule. The Official Assignee can disclaim all onerous property. The formal notification by the
Official Assignee of his refusal to accept the ownership of the onerous property is known as disclaimer.
The disclaimer of the onerous property must be in writing and signed by the Official Assignee. It must
also be made within 12 months of the date of the order of adjudication. And if such property has not
come to the knowledge of the Official Assignee within one month after the order of adjudication, then
he may disclaim such property within 12 months of the date on which the Official Assignee came to
know of the existence of such property. On disclaimer, the liability of the Official Assignee, in respect
of such property, comes to an end from the date when the property vested in him. Any person who is
affected by the right of disclaimer is treated as creditor of the insolvent, and may prove his debt in
insolvency to the extent of the loss suffered by him due to such disclaimer.
All the above provisions contained in the Insolvency Acts, clearly show that the title of the Receiver or
Official Assignee is superior to that of the Insolvent.

55.21. DISTRIBUTION OF INSOLVENT'S PROPERTY

We know that on the declaration of a debtor as an insolvent, his property vests in the Receiver or
Official Assignee, and is realised by him. After the realisation of insolvent's property, the next step is the
actual distribution of proceeds among the creditors of the insolvent. We have already discussed that the
Receiver or Official Assignee must, with all convenient speed, realise the insolvent's property and
distribute the proceeds among the creditors. The distribution of insolvent's property may be studied
under the following three heads:
1. Declaration and distribution of dividends.
2. Retention of assets while calculation of dividends.
3. Final dividends.
These points are discussed is detail in the following pages.

55.22. DECLARATION AND DISTRIBUTION OF DIVIDENDS

The term 'dividend' may be defined as the amount which is distributed among the creditors of the
insolvent. The dividend is declared and distributed out of the property of the insolvent which is realised
by the Receiver or Official Assignee. The dividend is declared and distributed by the Receive or Official
Assignee, and he is required to do so with all convenient speed. It may be noted that, the dividends are
paid to those creditors who have proved their debts in the insolvency preceding. On the point of
declaration and distribution of dividends, There is some difference between the two Insolvency Acts.
The Presidency Towns Insolvency Act, contains special provisions in this regard, which may be
summed up as under [Section 69]:
1. The first dividend (if any) shall be declared and distributed within one year after adjudication.
However, this may be postponed to a later date if the Official Assignee satisfies the court that there is
sufficient reason for doing so.
2. The subsequent dividends must be declared and paid at intervals of not more than months. This
interval of six months may also be increased if the Official Assignee satisfies the court that there are
sufficient reasons for doing so.
3. Before declaring dividend, the Official Assignee is required to give notice of his intent' to declase a
dividend to each creditor who has not proved his debt, but who is mention 1 in the insolvents schedule.
Such notice should also be published in the prescribed manner.
4. After the dividend is declared, he is required to give notice to each creditor who has proved his
debts, showing the amount of dividend and the time and mode of payment of dividend
Under the Provincial Insolvency Act, the Receiver is required to declare and distribut the first and
subsequent dividends with all convenient speed. There is no time limit fo declaration and distribution of
the first and subsequent dividends. Moreover, no notices of declarations are required to be given to the
creditors.
As a matter of fact, the dividends are paid to those creditors who have proved their debts before the
declaration of any dividend or dividends. It may however, be noted that a creditor who has not proved
his debt before the declaration of a particular dividend does not lose his right to claim the dividend. If
there is any money in the hands of the Receiver or Official Assignee, he is entitled to be paid the
dividend for the debts proved by him, before that money is applied to the payment of any future
dividend. But he cannot distrub the distribution of any dividend already declared before his debt was
proved.
Note: Any creditor, who has not notified his claim to the Official Assignee, is not entitled to any
dividend. However, if a declaration of dividend is set aside, the court will allow such creditor to come
and prove his debts. Then he is entitled to get the dividend rateably with all other creditors.
55.23. RETENTION OF ASSETS WHILE CALCULATION OF DIVIDENDS
We have discussed, in the last article, that the dividends are declared and distributed by the Receiver or
Official Assignee out of the assets of the insolvent. While calculating the dividends to be distributed, the
Receiver or Official Assignee must retain in his hands sufficient assets to meet the following claims:
1. The claims of the creditors who are residing in places so distant that in the ordinary course of
communication, they have not had sufficient time to tender their proofs.
2. The claims not yet determined.
3. The claims which are disputed.
4. The expenses which are necessary for the administration of estate or otherwise necessary. Note: The
provision' regarding retention of assets is contained in Section 62 of the Provincial
Insolvency Act. Section 71 of the Presidency Towns Insolvency Act also contains a similar provision.

55.24. FINAL DIVIDEND

On the realisation of all the property of the insolvent, the final dividend is declared by the Receiver or
Official Assignee. The rules relating to the declaration and distribution of final dividend are contained in
Section 64 of the Provincial Insolvency Act, and Section 73 of the Presidency towns Insolvency Act,
which are almost similar in both the Acts. These rules may be summed up as under:
1. The final dividend is declared by the Receiver or Official Assignee when practically all the property
of the insolvent has been realised. It may be noted that under the Presidency Towns Insolvency Act, the
final dividend is declared by the Official Assignee only with the leave (permission) of the court. But
under the Provincial Insolvency Act, the Receiver is not required to obtain the permission of court to
declare the final dividend.
2. Before declaring the final dividend, the Receiver or Official Assignee must give notice to the
creditors, whose claims have not been proved, that if they do not prove their claims within the time
prescribed in the notice, he will proceed to make a final dividend without regard to their claims. The
purpose of such notice is that the creditors who have not already proved their debts can come in and
porve their debts in time, before the declaration and distribution of final dividend.
3. If the creditors, as stated above, do not prove their claims within the time specified in the notice,
the Receiver or the Official Assignee shall declare the final dividend without regard to the claim of such
creditors.
4. The final dividend can be declared at any time, and the time of discharge of an insolvent from the
state of insolvency has no relation to the time for declaring final dividend.
[Arjun Dad v. Marchia Telini, ILR 1937, 1 Cal. 127].
It may be noted that if, after paying all the creditors and after meeting all expenses including interest,
any surplus is left, it will be handed over to the insolvent1". Sometimes, after the declaration of the
dividend, it remains unclaimed by the creditors. If the dividend remains unclaimed for a period of fifteen
years from the date of its declaration, then in the absence of any directions from the court, the Official
Assignee shall pay it to the credit of the Central Government. Any creditor who is entitled to such
money may apply to the court for payment. If the court is satisfied, it will issue the necessary order for
payment of money to him.

Note: No suit for the recovery of dividend shall lie against the Receiver or Official Assignee. But if the
Receiver or Official Assignee refuses to pay the dividend, the creditor aggrieved by such refusal (or
whose name is entered in the schedule in case of Provincial Insolvency Act) may apply to the court for
payment of dividend. And on such application, the court may order him to pay the dividend. The court
may also order him to pay the interest on it for the time the payment was withheld, and the cost of the
application out of his his own money. This provision is contained in Section 65 of the Provincial
Insolvency Act. Section 74 of the Presidency Towns Insolvency Act also contains a similar provision.

55.25. PRIORITY REGARDING PAYMENT OF DEBTS

The rules regarding the priority of debts are contained contains in Section 61 of the Provincial
Insolvency Act. Section 49 of the Presidency Towns Insolvency Act also contains similar provisions.
While distributing the proceeds realised from the property of an insolvent, certain expenses and debts
have priority over the others. The expenses and debts having the priority are paid first; thereafter the
other ones are paid. Following is the order in which the expenses and debts of the creditors are paid:
1. Expenses of administration: We know that the Receiver or Official Assignee takes the possession of
insolvent's property, and at the time of taking over, he has to incur some expenses for the administration
of the property. Some expenses are also incurred while realising the property. Such expenses have
priority over all other debts of the creditors. Thus, before making any payment to the creditors, the
expenses of administration are retained by the Received or Official Assignee.
2. Preferential debts: The preferential debts are those debts which have priority over the other debts of
the insolvent. After retaining the expenses of administration, the payment of preferential debts is made.
Both the Insolvency Acts provide a list of preferential debts, which is almost similar. However, there is
also some difference on certain points which is discussed at appropriate places. Following are the
preferential debts and have priority over all other debts, and are paid in the order stated below:
(a) AH debts due to Government or any authority e.g. income tax, municipal tax, land revenue etc.
(b) The salaries or wages of any clerk, servant or labourer in respect of services rendered to the
insolvent during four months before the date of the presentation of the insolvency petition. However, the
amount of salaries or wages which has preference, differs under both the Acts. Under the Presidency
Towns Insolvency Act, the amount due to each clerk should not exceed Rs. 300, and the amount due to
each servant or labourer should not exceed Rs. 100. Thus, under this Act the amount of salaries or wages
which has preference over the other debts is Rs. 300 in case of each clerk, and Rs 100 in case of each
servant or labourer. But under the Provincial Insolvency Act, the amount due to each clerk, servant as
labourer should not exceed Rs. 20. Thus, under this Act, the amount of salaries as wages which has
preference over the other debts is Rs. 20 in case of clerk, servant or labourer, Here the clerk is not
distinguished from servant or labourer. The excess of salaries or wages over fixed limit should be treated
as unsecured debt, and shall rank alongwith other unsecured creditors. Thus, after the debts due to the
government or local authority, the preference is given to the salaries or wages due to the clerks or
servants etc. of the insolvent.
(c) The rent due to the insolvent's landlord for a period of one month only. This preference is given
under the Presidency Towns Insolvency Act only. No such preference is given under the Provincial
Insolvency Act.
The above mentioned preferential debts have priority over all other debts. These debts rank equally
among themselves. If the assets of the insolvent are sufficient for the payment of these debts, they are
paid in full forthwith i.e. at once. If the assets are not sufficient to meet them, they abate (i.e. diminish)
in equal proportions among themselves.
3. Non-preferential debts: After making the full payment of preferential debts, the other debts are paid
rateabaly i.e. proportionately according to the amount of such debts. These debts are paid without any
preference over one another. According to the Provincial Insolvency Act, these are the debts which are
entered in the 'schedule of creditors'. And according to the Presidency Towns Insolvency Act, these are
the debts which are proved in insolvency proceedings.
4. Interest: The interest up to the date of order of adjudication is claimed along with the principal
amount of debt. After the order of adjudication, the interest ceases to be payable and this cannot be
proved is insolvency proceedings. However, if there is any surplus after the payment of preferential and
non-preferential debts, then the amount of interest due from the order of adjudication is paid to the
creditors. In case of such surplus, the interest is paid at the rate of 6% from the date of order of
adjudication to the date of actual payment. Any surplus, after the payment of all the above amounts is
paid to the insolvent".

55.26. PAYMENT OF PARTNERSHIP DEBTS AND SEPARATE DEBTS OF PARTNERS

In the case of insolvency of all the partners of a firm, there may be debts due from the partnership firm,
and also the debts due from the partners separtely. In such cases, the payment of these debts is made in
the following manner:
1. The partnership property is first utilised for the payment of partnership debts. And if after paying
all the debts of the firm, there is any surplus of partnership property, it shall be treated as
separate property of each partner in proportion to their rights and interest in the partnership
property.
2.The separate property of each partner is first utilized for the payment of separate debts of that
partner. And if after paying the separate debts of a partner, there is any surplus of his reparate
property, it shall be treated as part of the partnership property and shall be applied for the
payment of partnership debts, if any.
Notes: The above provisions are contained in Section 61 (4) of the Provincial Insolvency Act, and
Section 49 (4) of the Presidency Towns Insolvency Act, which are similar in both the Acts.
55.27 COMMITTEE OF INSPECTION
Sometimes, the creditors have a desire to keep a watch on the superintendence and administration of
insolvent’s property by the Receiver or Official Assignee. In such cases, they may apply to the court for
the same. If the court thinks fit, it may authorize the creditors to appoint, among themselves, a
‘committee of inspection’ for this purpose. Both the insolvency acts, contain provisions for the
appointment of a committee of inspection. it may, however be noted that a committee or inspection is
appointment from among the creditors who have proved their debts in the insolvency proceedings or
who hold general power of attorney from such creditors. Thus, the members of the committee must be
the creditors. The committee conveys their debts or who hold general power of attorney from such
creditors. The committee conveys to the Receiver or Official Assignee, the wishes of the creditors and
keeps a watch over the administration of insolvents’ property by the receiver or official Assignee.
Note: The above provision is contained in Section 67-A of the Provincial Insolvency Act. Section 88
and 89 of the Presidency Towns Insolvency Act also contain a provision in this regard.
TEST QUESTIONS
1.What do you mean by the ‘debt provable in insolvency? State rules relating to payment of interest
on provable debts.
2.Explain the legal provisions relating to proof of debts by the unsecured creditors as well as by the
secured creditors. Remunerate the debts not provable in insolvency.
3.What do you understand by the property of an insolvent? Explain fully the property of the
insolvent which is (i) divisible, and (ii) not divisible, among his creditors.
4.What do you understand by the ‘doctrine of reputed ownership’ in insolvency? Explain with
examples, and state the conditions which must be satisfied for the application of the doctrine.
5.How the Reciver and Official Assignee is appointed under the Insolvency Law? Explain the duties
and power of a Receiver or Official Asisgnee
6.“ In matters arising out of insolvency, the Receiver or official Assignee has a superior title than the
insolvent”. Explain with reasons.
7.Explain the legal provisions relating to the distribution of insolvent’s property, with special
reference to declaration and distribution of dividend.
8.Enumerate the provisions relating to the priority of debts over the others. In case of insolvency of
partners, how the partnership debts, and individual debts are paid?
9.Write a note on the following:
(a) Schedule of creditors
(b) Mutual dealings and set-off
(c) Committee of inspected
OBJECTIVE TYPE QUESTIONS
1.The share of insolvent’s property to which the creditors are entitled to receive on proving their
debts is known as
(a) Dividend (b) Returns
(b) Prorata return (d) Interim return

56. DISCHARGE OF INSOLVENT FROM THE STATE OF INSOLVENCY

56.1. INTRODUCTION
We have already discussed, in the previous chapters, that when a person is declared insolvent, he
suffers from certain disqualifications. But the law does not require that once a person is
declared insolvent, he should always remain in the state of insolvency. In fact, the intention of the
legislature is that the insolvent should not remain in a state of insolvency for all of his life time.
But he should be a free man again with liberty to earn his livelihood. To enable an insolvent to start
a fresh life, the Insolvency Law provides for the discharge of an insolvent from the state of insolvency.
The 'discharge of an insolvent' is the last stage in the insolvency proceedings.
The insolvent must apply to the court for an order of discharge, and the court may make an
order discharging the insolvent from the state of insolvency. After an order of discharge the stigma
of insolvency is removed i.e. the insolvent again becomes a free man, and can start his life
afresh. It may be noted that an order of discharge releases the insolvent from all debts provable
in insolvency. In this chapter, we shall discuss the legal provisions relating to the discharge of an
insolvent from the state of insolvency.
56.2. PROCEDURE REGARDING DISCHARGE OF INSOLVENT
The procedure regarding the discharge of an insolvent may be discussed under the following heads:
1. Application for an order of discharge.
2. Procedure on receipt of application.
3. Powers of the court in making an order of discharge.
All these points are discussed in detail in the following discussion.
56.3. APPLICATION FOR AN ORDER OF DISCHARGE
The insolvent is not automatically discharged from the state of insolvency. He must apply to the
court for an order of discharge, and he is discharged only when such order by the court. 1 The
insolvent can make an application for discharge after the order r adjudication. But the time,
within which it should be made, differs under both the Insolven • Act, which in stated hereunder:
1. Under the Provincial Insolvency Act, the court is required to specify the time withj
which the debtor must apply for discharge, i.e. the court must specify the time. And the debto-
is bound to apply for an order of discharge within such time. If, he fails to do so within
the specified time, the court may annul (cancel) the order of adjudication. On such annulment
the debtor is deprived of the benefits of order of discharge [Sections 27 and 43].
2. • Under the presidency Towns Insolvency Act, the court is not required to specify the
time within which the debtor must apply for discharge. Thus, the debtor may apply to the
court, for an order of discharge, at any time after the order of adjudication. There is no time
within which he must apply for discharge. It may be noted that, though the court is not bound
to specify the time within which the debtor shall apply for discharge, but it may specify
such time if it thinks necessary. If any such time is specified by the court, then the debtor
must apply for an order of discharge within the time specified-by the court. And if he fails
to do so, the court may annul the order of adjudication [Sections 13(5), 15(1) and 41].
Note: The right to apply for and, obtain an order of discharge is for personal benefits of the insolvent
and has no relation whatever with-:the heirs of<a deceased insolvent. Thus, if the insolvent does not
apply for an order of discharge; his heirs do not suffer from any liability or disqualification after his
death. (Gain Cliand v. Hakim Chand, AIR 1972 Bombay 192]

56.4. PROCEDURE ON RECEIFf OF APPLICATION

On the receipt of the application for an order of discharge, the procedure 2 adopted by the court
may be summed up as under:
1. The court shall fix a date for hearing of the application for discharge, and for hearing
any objection to such application.
2. The notice of the date fixed for the hearing of the application for discharge shall be given
in such a manner, as may be prescribed by the rules. Under the Presidency Towns
Insolvency Act, the prescribed rule is that the notice shall be sent to each creditor who
had proved his debt, at least one month before the day fixed for the hearing. Under this
Act, the notice is also required to be published in the prescribed manner.
3. The application for discharge is heard in the open court on the day fixed for the purpose.
4. On the day fixed for hearing, the court shall take into consideration any report of tlie
Receiver or Official Assignee as to the conduct and affairs of the insolvent. On such date,
the court may also hear the Receiver or Official Assignee.
5. At the time of hearing, the creditors may putforth their objections, and the court shall
take into consideration such objections. The Presidency Towns Insolvency Act provides
that the court may also put questions to the insolvent. Moreover, the court may also receive
such evidence as it thinks fit.
After considering the report of the Receiver or Official Assignee and the objections of
the creditors, the court may grant or refuse an order of discharge. The powers of the court
to make an order of discharge or refusal to make such order will be discussed in detail
in Arts. 56.5 to 56.10
56.5. POWERS OF THE COURT IN MAKING AN ORDER OF DISCHARGE
The court has discretionary powers to grant or refuse an order of discharge. However, before passing
any order of discharge, the court will examine the insolvent and satisfy itself that the insolvent
has not committed any act of bad faith. The court will also take into consideration the conduct of the
insolvent from the date of his adjudication to the date when he applied for an order of discharge.
In the exercise of its discretionary powers, the court may pass any one of the following orders:
1. Grant an absolute (i.e. unconditional) order of discharge.
2. Grant an order of discharge, but suspend the operation of the order for a specified time.
3. Grant an order of discharge subject to any conditions with respect to insolvent's future
earning or income or with respect to his after acquired property.
4. Refuse to grant an absolute order of discharge.
The powers at serial numbers 2 and 3 above may be exercised simultaneously i.e. the court
may suspend the operation of the order of discharge for a specified period and at the same time
attach conditions to the order for payment out of the future earnings or property of the insolvent.
Note: The provision regarding court's powers in making an order of discharge is contained in Section 41(2)
of the Provincial Insolvency Act, and Section 38(2) of the Presidency Towns Insolvency Act, which is
similar in both the Acts.
56.6. LIMITATIONS ON COURT'S DISCRETIONARY POWERS
We have discussed, in the last article, that the court has a discretion to grant or refuse an order of
discharge. The Insolvency Law puts certain limitations on the court's discretionary powers. These
limilations may be studied under the following two heads.
1. Refusal of an absolute order of discharge.
2. Absolute refusal of an order of discharge.
56.7. REFUSAL OF AN ABSOLUTE OR UNCONDITIONAL ORDER OF DISCHARGE
An absolute or unconditional order of discharge is one which is to take effect immediately and to
which no conditions are attached. We have discussed, it. the last article, that the court may either
grant an absolute order of discharge or refuse to grant an absolute order of discharge. There are certain
circumstances in which the court must refuse to grant an absolute order of discharge. It may be
noted that, in these circumstances, the refusal to grant an order of discharge is not absolute. But
the refusal is only to grant an absolute (i.e. unconditional) order of discharge. However, in such
circumstances the court may issue a conditional order of discharge. The circumstances in which
the court must refuse to grant an absolute or unconditional order of discharge are contained in
Section 42 of the Provincial Insolvency Act, and Section 39(2) of the Presidency Towns Insolvency
Act, which are similar in both the Acts. These may be discussed as under:

I. When the insolvent's assets are not of full value: Sometimes, the value of insolvent's free
assets is very small. On the proof of this fact, the court must refuse to grant an unconditional
order of discharge. On the value of assets, there is difference between the two Insolvency Acts.
Under the Provincial Insolvency Act the unconditional order of discharge is refused if the value
of insolvent's 'assets is not equal to eight annas in the rupee (i.e. 50%) of the amount of his
unsecured liabilities i.e. when 50 paise in a rupee cannot be paid to the unsecured creditors.
Under the Presidency Towns Insolvency Act, the unconditional order of discharge is refused if
the value of insolvent's assets is not equal to 25 paise in a rupee (i.e. 25%) of the amount of his
unsewred liabilities. However, if the insolvent satisfies the court that the deficiency is not due to
his misconduct, but is due to the circumstances for which he cannot justly be held liable, then
the court may grant an unconditional order of discharge.
2. When the insolvent has failed to keep proper books of accounts: Sometimes, the insolvent
fails to keep the proper booked of his accounts. On the proof of this fact, the court must
refuse to grant an unconditional order of discharge. The proper books of accounts are those
which are usual and proper in the business carried on by him and which sufficiently discloses
his business transactions and financial position within three years immediately preceding his
insolvency.
3. When the insolvent continues his trade: Sometimes, after knowing himself to be an
insolvent, the insolvent continues his trade. On the proof of this fact, the court must refuse
to grant an unconditional order of discharge. The expression 'after knowing himself to be
insolvent' means that after becoming aware of the fact that he is unable to pay his debts
in the ordinary course of his business.
4. When the insolvent has contracted debts without any reasonable expectation of repaying
them: Sometimes, the insolvent contracts any provable debt, and at the time of contracting
the debt, he has no reasonable ground of expectation to be able to repay it. On the proof
of this fact, the court must refuse to grant an unconditional order of discharge. However,
an unconditional order of discharge may be granted if the insolvent proves that when he
contracted the debt he had reasonable expection to be able to repay the debt.
5. When the insolvent has failed to give account of loss in assets: Sometimes, the insolvent
fails to account satisfactorily for any loss of assets or for any deficiency of assets to meet
his liabilities. On the proof of this fact, the court must refuse to grant an unconditional order
of discharge.
6. When insolvency is caused by insolvents bad or wrongful acts: Sometimes, the insolvency
is caused by the bad acts of the insolvent himself. On the proof of this fact, the court must
refuse to grant an unconditional order of discharge.
This clause will include the cases where insolvency is caused by insolvent's rash or hazardous
speculation, or by unjustifiable extravagance in living, or by gambling, or by neglect of his business
affairs.
7. When the insolvent has given undue preference to any of his creditors: Sometimes, the
insolvent gives an undue preference to any of his creditors. On the proof of this fact, the
court must refuse to grant an unconditional order of discharge. It may be noted that such
undue preference must be given within three months before the date of the presentation of
the insolvency petition when he knew that he was unable to pay his debts.
8. When the insolvent has concealed his property: Sometimes, the insolvent conceals or
removes his property or any part thereof. On the proof of this fact, the court must refuse
to grant an unconditional order of discharge. The unconditional order of discharge must also
be refused when the insolvent has been guilty of any other frand or fraudulent breach of
trust in the course of insolvency proceedings.
9. When the insolvent was also previously declared insolvent:' Sometimes, the insolvent
had also been declared insolvent on any previous occasion. On the proof of this fact, the
court must refuse to grant an unconditional order of discharge. The unconditional order of
discharge must also be refused when the insolvent had made a composition or arrangement
with his creditors. This clause is contained in the Provincial Insolvency Act only.

10. When the insolvent puts his creditors to unnecessary expenses by defending a properly
filed suit: Sometimes, a suit is properly filed against the insolvent by his creditor. But the
insolvent puts forward frivolous or vexatious defences (i.e. the defences which are of little
importance and which cause annoyance or trouble to the creditor) and thereby puts the creditor
to unnecessary expenses. On the proof of this fact, the court must refuse to grant an
unconditional order of discharge. This clause is contained in the Presidency Towns Insolvency Act
only.
11. When the insolvent has brought a frivolous or vexatious suit: Sometimes, the insolvent has
brought a frivolous or vexatious suit and has incurred unnecessary expenses on such a suit. On the
proof of this fact, the court must refuse to grant an unconditional order of discharge. It may, however,
be noted that such a suit must be brought within three months before the presentation of the
insolvency petition. This clause is also contained in the Presidency Towns Insolvency Act only.
Note: Though the court must refuse an unconditional order of discharge in any one of the above
circumstances. But court's order should not be such under which a debtor will remain an undischarged
insolvent for ever. As a matter of fact, the Law of Insolvency does not expect that the debtor should
always be the slave of his creditors. The object is to release the debtor at the appropriate time taking
into consideration several factors as enumerated above.
[T.R Kunhiaman Petitioner v. Official Assignee, Madras, AIR 1983 Madras 148].
56.8. ABSOLUTE REFUSAL OF AN ORDER OF DISCHARGE
We have discussed, in the last article, the circumstances in which the court must refuse to make
an absolute order of discharge. However, there are certain circumstances in which the court must
absolutely refuse to make an order of discharge. In other words, no order of discharge should be made
at all, and the insolvent is left to be an undischarged insolvent for his life. It may be noted that
such circumstances, are provided in Presidency Towns Insolvency Act only [Section 39(1)]. The
circumstances in which the court must refuse an order of discharge may be discussed under the
following two heads, namely:
1. When the insolvent commits any offence under the Presidency Towns Insolvency Act.
2. When the insolvent commits any offence under Section 421 to 424 of the Indian Panel
Code.
56.9. ABSOLUTE REFUSAL WHEN THE INSOLVENT COMMITS ANY OFFENCE
UNDER THE PRESIDENCY TOWNS INSOLVENCY ACT
The offences under the Presidency Towns Insolvency Act are contained in 3 Section 103 of the
Act. And if the insolvent commits any one of these offences, the court must refuse to grant an
order of discharges. Following are the offences under this Act.
1. Destruction of books, papers etc: Sometimes, the insolvent, with the intention of
concealing the state of his affairs or to defeat the purpose of insolvency, fraudulently destroys
or otherwise wilfully prevents or personally withholds the production of any book, paper or
writing relating to such of his affairs as are subject to investigation under the Presidency
Towns Insolvency Act. In such cases, he is guilty of an offence under the Insolvency Law,
and the court must refuse to grant an order of discharge if it is proved that the insolvent
has committed this offence.
2. Keeping false books of accounts: Sometimes, the insolvent, with the intention of
concealing the state of his affairs or to defeat the purpose of insolvency, fraudulently keeps
false books of accounts. In such cases also, he is guilty of an offence under the Insolvency
Law, and the court must refuse to grant an order of discharge if it is proved that the insolvent
has committed this offence,
3. Making false entries in or withholding entries from any books of accounts etc. Sometimes,
the insolvent, with the intention of concealing the state of his affairs or to defeat the purpose
of insolvency, fraudulently makes false entries in or withholds entries from any book, paper
Section 69 of the Provincial Insolvency Act also provide for similar offences. But this Act, does not
contain any provision requiring the court to refuse discharge in such cases or writing relating to such
of his affairs as are subject to investigation under the Presidency Towns Insolvency Act. In such
cases, he is guilty of an offence under the Insolvency Law Moreover, willful alteration or
falsification of such books etc. is also an offence. The court must refuse to grant an order of
discharge if it is proved that the insolvent has committed this offence.
4. Discharging or concealing any debt: Sometimes, the insolvent, with the intention of
diminishing the amount to be distributed among his creditors or of giving an undue preference
to any of the said creditors, discharges or conceals any debt which is due to him or due
from him. In such cases, he is guilty of an offence under the Insolvency Law, and the court
must refuse to grant an order of discharge if it is proved that the insolvent has committed
this offence.
5. Charging or concealing any property: Sometimes, the insolvent, with the intention of
diminishing the amount to be distributed among his creditors or giving an undue preference
to any said creditors, charges, mortgages, conceals or makes away with any part of his property
whatsoever kind. In such cases, he is guilty of an offence under the Insolvency Law. And
the court must refuse to grant an order of discharge if it is proved under the insolvent has
committed this offence.
Note: An insolvent who had committed any one of the above offences, shall also be punishable with
imprisonment for a term which may extend to two years. Under the Provincial Insolvency Act, the
insolvent is punishable with imprisonment which may extend to one year.
56.10. ABSOLUTE REFUSAL WHEN THE INSOLVENT COMMITS ANY OFFENCE
UNDER SECTIONS 421 TO 424 OF THE INDIAN PENAL CODE
Following are the offences which are contained in Section 421 to 424 of the Indian Penal Code,
and if an insolvent commits any one of these offences, the court must refuse to grant an order of
discharge.
1. Dishonest or fraudulent removal or concealment of property to prevent distribution among
creditors: Sometimes, the insolvent dishonestly or fraudulently removes, conceals or delivers
to any person, any property, without adequate consideration, with the intention of preventing
the distribution of that property among his creditors. In such cases, he is guilty of an offence
under Section 421 of the Indian Penal Code, and the court must refuse to grant an order
of discharge if it is proved that the insolvent has committed this offence.
2. Dishonestly or fraudulently preventing the debts being available for creditors: Sometimes,
the insolvent dishonestly or fraudulently prevents any of his debts from being made available
for payment to his creditors. In such cases, he guilty of an offence under Section 422 of
the Indian Penal Code, and the court must refuse to grant an order of discharge if it is proved
that the insolvent has committed this offence.

3. Dishonest or fraudulent execution of deed of transfer containing false statement of

consideration: Sometimes, the insolvent dishonestly or fraudulently signs, executes any deed
or instrument which purports to transfer or subjects to any charge any property, and which
contains any false statement relating to the consideration for such transfer or charge. In such
cases, he is guilty of an offence under Section 423 of the Indian Penal Code, and the court
must refuse to grant an order of discharge if it is proved that the insolvent has committed
this offence.
4. Dishonest or fraudulent removal or concealment of property: Sometimes, an insolvent
dishonestly or fraudulently conceals or removes any property or assists in the concealment
or removal thereof. In such cases, he is guilty of an offence under Section 424 of the Indian
Penal Code, and the court must refuse to grant an order of discharge if it is proved that
the insolvent has committed this offence.

Note: An insolvent who has committed any one of the above offences, shall also be punishable
with imprisonment for a term which may extend to two years, or with fine, or with both.
56.11. EFFECTS OF AN ORDER OF DISCHARGE
The order of discharge, restores the insolvent to his original status of a free man. All the personal
disqualifications of an insolvent are removed, and he can start his life afresh. Generally, an order of
discharge releases the insolvent from all debts which were provable in insolvency proceedings. And the
creditors cannot hold him again personally liable for such debts. However, the insolvent is not
released from the following debts and liabilities:
1. Any debt due to the Government.
2. Any debt or liability incurred by means of any fraud or fraudulent breach of trust to
which the insolvent was a party.
3. Any debt or liability in respect of which the insolvent has obtained forbearance by any
fraud to which he was a party.
4. Any liability under an order for maintenance made under Section 125 of the new Code
of Criminal Procedure. According to this Section, the minor children or a married woman
who has been deserted without any valid reason, can claim maintenance allowance from
their father or husband as the case may be. And thus, when an order of maintenance is
made against the insolvent, he is not released from this liability by an order of discharge.
It may be noted that the order of discharge does not exempt an insolvent from criminal
liability. Thus, the insolvent remains punishable for any offence, committed by him. It may
also be noted that the order of discharge releases only the insolvent himself. It does not release
any other person who, at the date of presentation of the insolvency petition, was jointly liable
with the insolvent. [Parasurama v. B. Ramanathan, AIR 1981 Madras 33]
 Notes 1: The provisions relating to the effects of an order of discharge are contained in
Section 44 of the Provincial Insolvency Act, and Section 45 of the Presidency Towns Insolvency
Act, which are similar in both the Acts.
2. The order of discharge does not really operate as a termination of insolvency proceedings so
far as the powers of Receiver or Official Assignee and the court are concerned. These official's
powers to deal with the property vested in him, do not cease on the making of an order of
discharge. The court also retains powers to give directions as to the distribution of assets
among the creditors.
56.12. EFFECT OF REFUSAL OF AN ORDER OF DISCHARGE
We know that the court may also refuses to grant an order of discharge. And when the order of
discharge is refused by the court, the insolvent remains in a state of insolvency. It may be noted
that an undischarged insolvent is not released from his liability to pay the debts. Thus, the
creditors may file a suit against him with the leave of the court. And the debtor may also be
arrested in execution of money decree obtained against him. In fact the insolvency proceedings are not
terminated until the insolvent gets an unconditional order of discharge or until the order of
adjudication is annulled.
56.13. REMEDIES ON REFUSAL OF AN ORDER OF DISCHARGE
On court's refusal to grant an order of discharge, the insolvent has the following remedies:
1. He may apply to the court for review of its orders. On such application, the court may
review, rescind or vary the order.
2. The insolvent may renew his application for an order of discharge if the court permits him to
do so. Though there is no such provision in the Provincial Insolvency Act. But this Act also does
not contain the provision that once an application for an order discharge is refused it is
refused for ever. Thus, an insolvent may also file a fresh application for an order of discharge.
3. The insolvent may appeal to the higher court against the order of refusing discharge.
56.14. EFFECT OF FAILURE TO APPLY FOR AN ORDER OF DISCHARGE
Sometimes, the insolvent fails to apply for an order of discharge within the time fixed h the court
in the order of adjudication. In such cases, the court may annul the order Of adjudication. On such
annulment, all the effects of annulment of the order of adjudication will follow. The order of
adjudication may also be annulled when the insolvent fails to appear on the day fixed for the hearing
of the application for an order of discharge. This point has already been discussed in Arts. 54.22
and 54.23.

56.15. DUTIES OF AN INSOLVENT AFTER AN ORDER OF DISCHARGE

Only the Presidency Towns Insolvency Act contains a provision which provides for a duty of the
insolvent after discharge. There is no such provision in the Provincial Insolvency Act. Insolvent's duty
as given in Section 43 of the Presidency Towns Insolvency Act is to assist the Official Assignee in
realisation and distribution of his property as vested in the Official Assignee. Thus, even after the
discharge, the insolvent should give such assistance to the Official Assignee as he may require in
the realisation and distribution of the property as is vested in him. If the insolvent fails to assist the
Official Assignee, he shall be guilty of 'contempt of court'. In such a case, the court may also
revoke the order of his discharge and if the order of discharge is revoked, its result would be
the same as if there had been no discharge, and the debtor had continued to be an insolvent
throughout. However, the revocation does not affect the sales and other disposition of property or
any payment duly made by the insolvent subsequent to the order of discharge but before its
revocation.
56.16. REVOCATION OF AN ORDER OF DISCHARGE
Under certain circumstances, an order of discharge may be revoked. It may, however, be noted that
such circumstances are provided in the Presidency Towns Insolvency Act only, and there is no such
provision in the Provincial Insolvency Act. Following are the circumstances in which an order of
discharge may be revoked by the court:
J. Where the insolvent does not assist the Official Assignee in the realisation and distribution of the
property.
2. Where the insolvent does not file a statement showing the particulars of his after-acquired
property in those cases where he was bound to do so.
3. Where an order of discharge is made conditional upon the insolvent's consenting to a
decree being passed against him and in favour of the Official Assignee, for any balance
of debt provable in insolvency which is not satisfied at the date of his discharge, and he
fails to give his consent within the prescribed time. Such conditional order of discharge
may be made under Section 39(1) (d) of the Presidency Town Insolvency Act.

56.17.SUMMARY ADMINISTRATION IN CASES OF SMALL INSOLVENCIES

An insolvency is considered to be small when the value of the debtor's property does not
exceed the amount specified in the Insolvency Acts. The amount of debtor's property on the basis
of which the insolvency is considered to be small, is different under the two Insolvency Acts. Under
the. Provincial Insolvency Act, an insolvency is small when the value of debtor's er ty is not likely to
exceed Rs. 500. (In Uttar Pradesh this amount is of Rs. 1000, and ?r punjab Rs. 2000)x. And under
the Presidency Towns Insolvency Act, the insolvency is small '"hen the value of debtor's property is
not likely to exceed Rs. 3000. The Insolvency Law provides for the disposal of such cases in a
summary manner (i.e. speedier manner than an odinary one). Thus, where an insolvency petition
is presented by or against a debtor and ° he court is satisfied, by affidavit or otherwise, that the
debtor's property is not likely to exceed in value, as a stated above, (i.e. Rs. 500 under the
Provincial Insolvency Act, and 3000 under the Presidency Towns Insolvency Act), the court
may make an order that the debtor's estate be administered in a summary manner. The provisions
relating to small nsolvencies are contained in Section 74 of the Provincial Insolvency Act, and
Section 106 of the Presidency Towns Insolvency Act.
The purpose of summary procedure (manner) is to dispose of the insolvency proceeding in a
speedier manner. Thus, in a summary procedure, the provisions of the Insolvency Law are applied
subject to certain modifications. The modifications in the insolvency provisions differ under both
the Acts, as discussed below:
1 Modifications Under the Provincial Insolvency Act:
Under this Act, the procedure of insolvency, as discussed earlier, shall be subject to the
following modifications:
(a) No notice is required to be published in the Official Gazette unless the court directs
otherwise.
(b) On the admission of insolvency petition filed by the debtor, the property of th.e debtor
shall vest in the court as a Receiver.
(c) At the hearing of the insolvency petition, the court shall inquire into the debts and assets
of the debtor and shall determine the same by order in writing. And it shall not be necessary
for the court to frame a schedule of creditors as required by Section 33.
(d) The property of the debtor shall be realised with all reasonable despatch (i.e. speed). And
if practicable, it shall be distributed in a single devidend.
(e) The debtor must apply for his discharge within six months from the date of adjudication.
Thus, in case of small insolvencies, the insolvency procedure is subject to above
modification. The court may also provide for such other modifications as may be necessary with the
view of saving expenses and simplifying the procedure. It may, however, be noted that the court
may also direct, at any time, that the ordinary procedure provided in the Act be followed in regard
to debtor's estate. And thereafter, the ordinary procedure prescribed in the Act shall apply to the
small insolvencies.
2. Modifications Under the Presidency Towns Insolvency Act:
Under this Act, the procedure of insolvency, as discussed earlier shall be subject to the
following modifications:
(a) No appeal shall lie from any order of the court except with the permission of the court.
 (b) No examination of the insolvent shall be held except on the application of a creditor or
the Official Assignee.
(c) Where practicable, the estate of the insolvent shall be distributed in a single dividend.
Thus, in case of small insolvencies, the insolvency procedure is subject to above
1. modifications. The court may also provide for such other modifications as may be necessary
with the view of saving expenses and simplifying the procedure. It may, however, he noted
that the provisions relating to the discharge of insolvent cannot be modified under this Act. It
may also be noted that if the court thinks fit, it may, at any time, revoke an order for the
summary administration of the insolvent's estate.
56.18. COMPARISON BETWEEN THE PROVINCIAL INSOLVENCY ACT AND THE
PRESIDENCY TOWNS INSOLVENCY ACT
The following table gives the comparison between the Provincial Insolvency Act and Presidency Towns
Insolvency Act, in respect of main points of difference:
S. No. Provincial Insolvency Act execution of a money decree is an ‘act of insolvency’ if
the property was attached for a period of not less than 21
1 It applies to the whole of India except the presidency days.
towns of Bombay, Calcutta and Madras. Under this act, the order of adjudication relates back to
2. Under this ACT, THE District Courts are the proper the date, of first acxt of insolvency committed within
courts which have the insolvency jurisdiction. three months before the presentation of the insolvency
However, the State Government may also, by petition.
notification in the Official Gazette, authorize any other Under this Act, all such transfers shall be void if an order
subordinate court to function as insolvency Court. of adjudication is passed against the debtor within two
3. Under this Act, the officer who is appointed to take years of the date of such transfer
over the property of the insolvent, is called the
‘Receiver’
4. Under this Act, the attachment of debtor’s property in
execution of a money decree is not an ‘act of
insolvency’. Under this Act, the insolvent is required to prepare and
submit to the court a schedule of his affairs in the
4. Under this Act, the order of adjudication relates back prescribed from and verified by an affidavit. Such a
to (i.e effective from) the date of the presentation of schedule is to be submitted within 30 days of the order of
the insolvency petition. adjudication in case where the insolvency petition was
5. Under this act, the order of adjudication relates back filed by the debtor. And where the insolvency petition
to the date, of first act of insolvency committed within was filed by the creditor, the schedule is to be submitted
three months before the presentation of the insolvency to the court within 30 days of the service of order of
petition adjudication [Section 24]
6. Under this act, all the voluntary transfers by the Under this Act, the creditors are required to submit their
insolvent, except the transfer made before and in claims to the Official Assignee.
consideration of marriage or in favour of a person who
purchases in good faith and for valuable consideration,
shall be voidable if these are made within two years of
Presidency Towns Insolvency Act
the date of presentation of insolvency petition on the basis
Calcutta and Madras. of which the debtor is declared insolvent

Under this Act, the High Court of Bombay, Calcutta and 7. Under this Act, the court prepares a schedule of
Madra are the proper courts which have the insolvency creditors after satisfying itself as to the validity of the
jurisdiction. claims of creditore [Section 33].

Under this Act, such officer is called an ‘Official

Assignee’.
8. Under this act, the creditors are required to submit
Under this Act, the attachment of debtor’s property in their claims to the court.
9. Under this Act, the debtor is examined by the court
only at the hearing of the insolvency petition. There is no 11.Under this Act, the first dividend must be declared and
provision for examining the debtor after the order of distributed within one year after adjudication. And the
adjudication. subsequent dividends must be declared and distributed at
10. Under this Act, the debtor is bound to perform certain an interval of not more than six months. However, these
duties when an insolvency petition is admitted by the time limits may also be extended if the Official Assignee
court. He is also bound Perform certain duties after an satisfies the court that there are sufficient reasons for the
order of adjudication is made. same.
12.Under this Act, one month’s rent, due to the landlord
by an insolvent, is treated as a preferential debt.
It applies only to the three presidency towns of Bombay, 13.Under this Act, such salaries or wages are also treated
as preferential debt it the amount due to each clerk does
not exceed Rs. 300, and the amount due to each servant or
11. Under this Act, no time limit is fixed for the laborer does not exceed Rs. 100.
declaration and payment of dividend to the creditors.

12.Under this Act, the outstanding rent of a landlord is not 14.Under this Act, an insolvent’s property, not available
treated as a preferential debt. for distribution among his creditors, has been specified in
the Act itself. It includes, tools of trade, necessary
13.Under this Act, the salaries or wages of any clerk, wearing apparel, bedding, cooking vessels and furniture
servant or labourer in respect of the services rendered to for the insolvent himself, his wife and children not
the insolvent during four months before the presentation exceeding in value of Rs.300 in all. [See Art. 55.11]
of the insolvency petition are treated as preferential debt if 15.Under this Act, such property does not vest in the
the amount due to each clerk, servant or labourer does not Official Assignee automatically. It vests in him only when
exceed Rs. 20. he intervenes to claims the title of the property.

14.Under this Act, an insolvent’s property not available

for distribution among his creditors is the property which
is exempted from attachment and sale in execution of a 16.Under this Act, an insolvency is said to be a small
decree under the Code of Civil Procedure 1908, or under insolvency if the value of insolvent’s estate does not
any other enactment for the time being in force. (These exceed Rs. 3000.
properties have already been discussed in Art. 55. 11). 17.Under this Act, the court may absolutely refuse to
grant an order of discharge. (This point has already been
15.Under this Act, an insolvent’s after-acquired property discussed in Art. 56.8)
(i.e. the property acquired after adjudication but before an 18.Under this Act. The court must refuse to grant an
order of discharge) automatically vests in the Receiver unconditional order of discharge when the value of
immediately on the making of an order of adjudication. insolvent’s estate in not equal to 25 paise (i.e. 25%) in a
rupee of the amount of his unsecured liabilities)
16.Under this Act, an insolvency is said to be a small
insolvency if the value of insolvent’s estate does not 19.Under this Act, the insolvent is required to assist the
exceed Rs. 2000 in Punjab) Official Assignee in the realization and distribution of his
property even after an order of discharge.
17.Under this Act, the court cannot absolutely refuse to
grant an order of discharge as there is no provision to this
effect.
18.Under this Act, the court must to grant an
unconditional order of discharge when the value of
insolvent’s estate is not equal to eight annas (i.e. 50%) in
a rupee of the amount of his unsecured liabilities.

19.Under this Act, the insolvent is not required to perform

any duty after an order of discharge
 TEST QUESTIONS
1. Explain the procedure regarding discharge of an insolvent. What are court's powers in making
order of discharge?
2. Distinguish between an 'absolute order of discharge', and a 'conditional order of discharge' What
are the circumstances under which the court must refuse an absolute order of discharge?
3. In certain circumstances, the court can absolutely refuse to make any order of discharge. Exnl •
such circumstances.
4. What are the effects of an order of discharge? Also state the effect of (a) refusal of an order for
discharge, and (b) failure to apply for an order of discharge.
5. Explain briefly insolvent's duties after an order of discharge, and revocation of an order of discharge
For what offences under the Indian Penal court, the Code must refuse any order of discharge?
6. What do you understand by small insolvencies? In case of small insolvencies, the legal provisions
are applied subject to certain modification. What are such modification?
State the comparison between the Provincial Insolvency Act and the Presidency Towns Insolvency
Act.

61. NATURE AND KINDS OF INSURANCE

61.1. INTRODUCTION
In business as well in private life, there are uncertainties and risks of every kind. As a matter of
fact, these uncertainties and risks are incidental to life, and the loss may occur at any time. The
loss may be of life or property, and may occur due to death, accident, fire, floods, perils of sea,
earthquakes etc. All these events, being uncertain, there is always the risk and insecurity of life
and property. Thus, every prudent person will carefully think how best he can prevent such
risks or minimise them. It is possible through insurance. The aim of insurance is to make
provisions against the dangers and risks arising from the uncertain events. With the help of
insurance, a person keeps himself protected against the losses which may occur due to the
uncertain events. The insurance is a way, by which the loss, likely to be caused by an uncertain
event, is spread over a large number of persons who are also exposed to the same type of risks
and insure themselves against those risks. It may be noted that the insurance does not avert the
loss arising from uncertain events. It only minimizes the loss by spreading it over a large number
of persons who are also exposed to the same type of risks and insure themselves against those
risks.
All the insurance business in India has been nationalised and is under the complete ownership
and control of the Central Government. The life insurance business was nationalised in 1956.
Since then it is carried on by the Life Insurance Corporation of India' which was set up under
the provisions of the Life Insurance Corporation Act 1956*. It may be noted that the life
insurance business is the exclusive domain of the Life Insurance Corporation alone [L/C of India
v. Vishwanath Verma, AIR 1995 SC 189J. However, at that stage, the general insurance business
(i.e. the fire, marine, and miscellaneous insurance business) was allowed to continue in the hands
of private companies. In 1971, the Government took a policy decision to nationalise the genera!
insurance business also. And the General Insurance (Emergency Provisions) Ordinance, 1971 was
issued. This was followed by Act of Parliament called the General Insurance (Emergency)
Provisions) Act 1971 which was passed to protect the interest of the policy-holders pending the
nationalisation of the general insurance business. Finally, the general insurance business was
nationalised in 1972, and the General Insurance Business (Nationalisation) Act 1972 was passed to
carry on this business. Since then it is carried on under the control and supervision of General Insurance
Corporation of India (a Government Company)2 which was set up under the provisions of this Act of
1972. Under the scheme of this Act, all the existing In'dian Insurance Companies carrying on the
general insurance business, are merged into one another, and now there are only the following four
Insurance Companies operating under the control and supervision of General Insurance Corporation of
India:
 1. The New India Assurance Company Limited 3.
2. The United India Fire and General Insurance Company Limited 4.
3. The Oriental Fire and General Insurance Company Limited 5.
4. The National Insurance Company Limited''.
In this chapter we shall discuss the nature of contract of insurance, its kinds and general principles.
' Notes: 1. In addition to the General Insurance Corporation of India and its four subsidiaries,
mentioned above, the following three corporations can also carry on general insurance business
namely (a) Export Credit and Guarantee Corporation Ltd. (b) Calcutta Hospital and Nursing Home
Benefits Association, and (c) Deposit Insurance Corporation. [Section 36 of the General Insurance
Business (Nationalisation) Act, 1972.
2. The exclusive privilege of the Life Insurance Corporation of India to carry on the life insurance
business shall cease on and from the commencement of the Insurance Regulatory Act, 1998.
Thereafter, it shall carry on the life insurance business in India in accordance with the provisions of
Insurance Act, 1938. Similarly, the exclusive privilege of the General Insurance Corporation and its
four subsidiaries to carry on general insurance business shall also cease on and from the
commencement of the Insurance Regulatory Act, 1998 [See Schedule II and Schedule III of the
Insurance Regulatory Bill, 1998 introduced in Lok Sabha on 15.12.98].
61.2. CONTRACT OF INSURANCE
The term 'contract of insurance' may be defined as a contract whereby a person, in consideration of a
certain sum of money, undertakes to make good the loss of another arising on the happening of
uncertain specified event e.g. death, accidenct, etc. In other words, it is the contract where a person
in consideration of certain sume of money agrees to bear the risk regarding the property or life of
another person in which such other person has insurable interest (i.e. the pecuniciary interest which he
has in the subject matter of insurance). The following two parties are involved in a contract of
insurance:
1. Insurer. The person who undertakes to make good the loss is called the insurer (assurer
or underwriter), such as Life Insurance Corporation of India, General Insurance Corporation
of India, an insurance company e.g. New India Assurance Company Limited etc.
Hereinafter, we shall use the term 'insurance company' for the term 'insurer'.
2. Assured: The person, whose loss is to be made good, is called the assured ('insured' or
'insured person').

The consideration, for which the insurer agrees to make good the loss, is called the 'premium'. The thing
or property which is insured is called the 'subject matter of insurance'. And the pecuniary interest
which the 'assured' has in the subject matter is called the 'insurable interest'. The instrument (i.e.
written document) containing the contract of insurance is called the 'policy'.
61.3. NATURE OF A CONTRACT OF INSURANCE
The contract of insurance is an aleatory contract (i.e. a contract depending upon chance or uncertain
event). At the first sight, it appears to be a wagering agreement. A wagering agreement is one in which
one person promises to pay a certain sum of money to the other on the happening or non-happening of
an uncertain event 7. The essence of such a contract is that one party is to win and the other is to lose
on the happening or non-happening of the uncertain event. A fair amount of uncertainty is also
involved in a contract of insurance, as in 'it the assured has to receive some money on the happening of
uncertain event (e.g. accident, tire, death etc). Because of this uncertainty, Lord Mansfield" described
insurance as a 'contract on speculation'. Though a contract of insurance resembles to a wagering
agreement, but it is not actually a wagering agreement or a speculative contract. The contract of
insurance is perfectly a valid contract, whereas a wagering agreement is void. In a contract of
insurance, the assured (i.e. insured person) has an insurable interest in the life or property which is to be
insured, whereas in a wagering agreement, there is no such insurable interest. Moreover, the assured is
indemnified for his loss and he does not gain by the happening of the event insured against, i.e. he does
not make a profit of his loss. As a matter of fact, the essence of a contract of insurance is not to win
or lose, but to indemnify (i.e. compensate) the assured for the loss suffered by him. Thus, a contract
of insurance is a contract of indemnity. A contract of indemnity is one in which one person promises to
indemnity (i.e. compensate) the other for the loss suffered by the latter i.e. where one person promises to
make good the loss suffered by the other. This means that in case of loss due to happening of the event
insured against, the assured shall be paid the actual amount of loss suffered by him.
It may be noted that a contract of life insurance and of personal accidental insurance is not a
contract of indemnity. The reason for the same is that the loss of life or personal injury cannot be
determined in terms of money. In fact, the loss of life or personal injury cannot be indemnified
(compensated). In these cases, on the happening of the event (death or accident), the insurer is liable
to pay the fixed amount mentioned in the policy. Thus, these two contracts of insurance are
contingent contracts and not the contracts of indemnity. The nature of life, fire and marine insurance
will also be discussed separately in Arts. 62.3, 63.4 and -64.4 respectively.
Note: The comparison between the contract of insurance and wagering agreement has already been
discussed in Chapter1" on 'Void Agreements'.
61.4. ESSENTIALS OF A CONTRACT OF INSURANCE
As a matter of fact, a contract of insurance is a kind of general contract. Therefore, it must satisfy all
the essential elements of a valid and legally binding contract. In brief, the essentials of a valid contract
are as under:
1. There must be offer from one side and its acceptance by the other. The offer is made by
the insured to the insurer. It is made in the form of a proposal for insurance against some
loss and is accepted by the issue of an insurance policy.
1. The parties must be competent to contract.
2. The object of the contract must be lawful.
3. The contract must be supported by consideration (premium in this case).
4. The consent of the parties must be free.
Note: The essential elements of a valid contract have already been discussed in detail in Art
2.2

61.5. KINDS OF INSURANCE BUSINESS

There are various kinds of insurance business depending upon the event isured against. In fact the
risk against the happening of any event may be insured e.g. death, fire, perils of sea, accident theft, riot
etc. However, the insurance business may, broadly, by grouped under the two heads namely:
1. Life insurance business, and
2. General insurance business.

61.6. LIFE INSURANCE BUSINESS

It is the business of effecting contracts of insusrance upon human life. In this case, the human life is
insured against death (other than death caused by accident), or other contingencies dependent on
the human life. Thus, it is the insurance business, which covers the losses and risks of human life. The
life insurance business is carried on by and under the control of Life Insuarnce Corporation of India.
This will be discussed in detail in Chapter 62.

61.7. GENERAL INSURANCE BUSINESS

It means and includes the three kinds of insurance business 9, namely:
1. Fire insurance business.
2. Marine insurance business.
3. Miscellaneous insurance business.
The general insurance business is carried on by and under the control of General Insurance
Corporation of India.

61.8. FIRE INSURANCE BUSINESS

It is the business of effecting contracts of insurance against the loss by or incidental to fire. In this
case, the property of a person is insured against the loss caused by fire or the loss incidental to fire.
Thus, it is the insurance business which covers the losses and risks, of property, which may be
caused by fire. This will be discussed in detail in Chapter 63.
61.9. MARINE INSURANCE BUSINESS
It is the business of effecting contract of insurance against the loss by perils of sea. In this case, the
vessels (ships etc.), cargoes (goods etc. loaded in the ship) of a person are insured against the loss
caused by perils of sea. Thus, it is the insurance business which covers the losses and risks of, ships,
cargoes etc, which may be caused by perils of sea. This will be discussed in detail in Chapters 64 to
66.
61.10.MISCELLANEOUS INSURANCE BUSINESS
It means and includes every kind of insurance business other than the life, fire and marine insurance
business10. Thus, all other insurance business except life, fire and marine insurance
business will fall under this category, e.g. personal accident insurance, property insurance, motor vehicle
insurance, fidelity insurance etc. This will be discussed in detail in Chapter 67.

61.11. FUNDAMENTAL PRINCIPLES OF INSURANCE

The contracts of insurance are based on certain fundamental principles which are almost common
to all types of insurances. These fundamental principles may be discussed under the following
heads:
1. Good faith: A contract of insurance is a contract uberrimae fidei i.e. a contract requiring
utmost good-faith. Thus, in every contract of insurance, both the parties must observe complete
goodfaith while entering into the contract. In other words, the parties are required to make a full
and fair disclure of all material facts" within their knowledge, i.e. there must be frankness between
the insurer and assured, and the whole truth about the subject-matter of insurance must be
discussed. This duty to disclse the material facts continues upto the time, the negotiations for the
contract are completed and the contract is concluded. And if the utmost goodfaith is not observed
by either party, the other pary may avoid (i.e. put an end to) the contract. It may, however, be noted
that the duty to disclose is not a continuing obligation. The party is under no legal obligation to
disclose any fact which may come to his knowledge after the contract of insurance has been
concluded.
Though the obligation to disclose the material facts is on both the parties, yet it generally arises
out of the conduct of the proposer (assured). The reason for the same is that he is on the vantage
ground (i.e. in advantageous position) and knows more about the subject-matter of the contract of
insurance than the insurer. Thus, the assured is under a legal duty to disclose fairly and accurately
all the material facts in his knowledge, and which are not in the knowledge of - the insurer. It may
be noted that he should disclose not only those facts which he honestly belives to be material, but
every fact which a reasonable man would have thought to be material. However, the non-disclosure of
the facts which are not known to the assured himself, does not affect the contract. Moreover, he need
not dislose the facts which are already known to the insurer. Similarly, the assured is under no legal
obligation to dislose any facts which may come to his knowledge after the contract of insurance
has been concluded 12. Like assured, the insurer is also under the legal obligation to observe the
same goodfaith in disclosing the scope of insurance policy which he is prepared to grant.
Example 61.1: A made a proposal to B an insurance company, for an insurance policy on his life foi
Rs. 100,000. On the proposal form, he truthfully answered all the questions and disclosed all the material
facts. After a few days, but before the acceptance of the proposal by the insurance company, A seriously
fell ill. But this fact was not disclosed to the insurance company. The proposal was accepted by the
company the next day. And two days thereafter, A died due to A's illness. The insurance company came
to know about A's illness for the first time only on his death. In a claim on the policy, it was held the
insurance company was not liable to pay the claim. In this case, due to A* illness there was material
alteration in the risk between the date of the proposal and its acceptance. And the notice of the same
was not given to the company. Thus, there was a breach of good faith
[Based on Looker v. Law Union & Rock Insurance Co. Ltd. (1928) 1 K.B. 554].
It may be noted that the non-disclosure of material facts makes the contract of insurance
voidable, whether such non disclosure was intentional or unintentional. As regards the observance
of good faith, Section 45 of the Insurance Act 1938 makes a special provision in respect of life
insurance policy. According to this section, if a policy of life insurance has run for two years from
the date when it was taken, then it cannot be questioned on the ground of non-observance of good
faith except when the insurer proves the following two facts, that
(a) The insured person (assured) with a fraudulent intention, had concealed or misrepresented
the facts material to the contract, and
(b) The insured person had the knowledge about the falsity of the fact when he asserted (stated)
them to be true.
In L.I.C. of India v. G. M. Channabasemma, AIR 1991 SC 392, the Supreme Court has held that
an assured is under a duty to disclose material facts fully. But the burden of proof is on the
corporation if it alleges that insured is guilty of falsely representing and suppressing material facts.
2. Insurable interest: The 'term insurable interest' may be defined as a pecuniary (i.e. monetary)
interest in the subject-matter of insurance. A contract of insurance to be valid, the assured must have
an insurable interest in the subject-matter of insurance. A person is said to have an insurable interest
in the subject-matter of insurance if he will suffer a monetary loss on its destruction by the happening
of the event insured against. Thus, the assured must be in a legally recognised relationship to the
subject-matter of insurance in such a way that he will suffer a direct pecuniary (monetary) loss on the
happening of the event isnsured against. It, therefore, follows that the 'insurable interest' is the 'risk
of loss' to which the assured is likely to be exposed on the happening of the event insured against.
An owner of a property has an insurable interest in it, and may insure the same. It may, however, be
noted that it is not the owner alone who has an insurable interest in his property Any other person
who will suffer a direct monetary loss on the destruction of the property insured, also has an
insurable interest in the same.
Example 67.2: A borrowed Rs. 100,000 from B, a money-lender, and mortgaged his house with
him (B) as security for the repayment of loan. In this case, both A and B has an insurable interest in
the house, and may insure the same in order to protect their respective interests.
Similarly, a person has an insurable interest in his own life, and may insure it. A person may also
have an insurable interest in the life of another if he has some pecuniary interest in other's life and
will suffer a monetary loss on his death, e.g. a wife has an insurable interest in the life of hej
husband or vice versa. A creditor also has an insurable interest in the life of debtor.
Example 61.3: A borrowed Rs. 50.000 form B, a money-lender. In this case, B gets an insurable
interest in the life of A and can take out an insurance policy on his (A's) life. And on A's death, B
can recover the amount of the policy, from the insurance company. It may be noted that 6 can
recover the amount of the policy even if A dies after paying off B debt.
It may be noted that the existence of insurable interest is kn essential element of every contract of
insurance. This element distinguishes a contract of insurance ,from a wagering agreement. In the
absence of an insurable interest, the contract of insurance will merely be a wagering agreement,
and will be void and without any legal effect. The insurable interest must be actual and real, and not a
mere expectation or anxiety. Thus, a mutual love and affection is not sufficient to constitute an
insurable interest.
Notes: 1. In a life insurance, the insurable interest must exist at the time of completion of the
contract i.e. when the policy is effected. It need not exist at the time of the death of the person whose
life is insured.
2. In a fire insurance, the insurable interest must exist both at the time of insurance and at the
time
of the loss of the subject-matter.
3. In a marine insurance, the insurable interest must exist at the time of the loss of the subject-
matter.
It need not exist at the time when the contract of insurance is entered into (i.e. made).
3. Indemnity: The term 'indemnity' may be defined as the security against the loss. The object of
contract of insurance is to make good the loss suffered by the assured (insured person) i.e. to place
the assured as nearly as possible in the same position in which he was immediately before the
happening of the event against which he was insured. Thus, every contract of insurance,except life
insurance and personal accidental insurance, is a contract of indemnity. This means that in case of
loss due to the happening of the event insured against, the assured (insured person) shall be paid the
actual amount of loss, but not exceeding the amount of the policy. It may be noted that the assured is
not allowed to make any profits out of the happening of the loss insured against. This is against public
policy. Moreover, if that were so, the assured might make efforts in bringing about the event insured
against in order to get the policy money. Thus, the assured can recover the actual loss suffered by
him and not more.
Example 61.4: A insured his house against fire with B, an insurance company. The house was
insured for Rs. 100.000. Afterwords, the house was destroyed by fire, and it was estimated that it
would be restored to its original condition by spending Rs. 40,000. In this case, A can recover Rs.
40,000 from the insurance company as the actual loss suffered by him is Rs. 40,000 only.
It may be noted that a contract of life insurance and of personal accidental insurance in not
a contract of indemnity. The reason for the same is that the loss of life or personal injury cannot
be determined in terms of money. And thus, the death or personal injury cannot be indemnified.
In these cases, on the happening of the event (death or accident), the insurance company is liable
to pay the fixed amount mentioned in the policy. It may be noted that the amount fixed in the
policy remains constant and invariable. These insurances are, therefore, exceptions to the general
rule that all contracts of insurance are contracts of indemnity. It will be interesting to know that
even the fire or marine insurance need not necessarily be the contracts of indemnity. If these
insurances provide for the payment of fixed amount of money irrespective of the loss, the contracts
will not be one of indemnity. x
Note: A contract of insurance, which provides for the payment of fixed sum of money on the
happening of the event, is a contingent contract and not a contract of indemnity.
4. Causa Proximo.: The term 'causa proxima' may be defined as the proximate or immediate cause.
The assured (insured person) can recover the loss from the insurance company only when it is caused
by an event insured against, and such event is the proximate cause of loss. This is called the rule of
'causa proxima', and is based on the maxim 'causa proxima non remota spectaur' i.e. the proximate
and not the remote cause is to be looked into while determining the liability of the insurance company.
And if the proximate cause of loss is the event insured against, the assured (insured person) can
recover the amount of loss from the insurance company.
In this connection, it may be noted that if there is only one cause of loss, there is no difficulty in
fixing the liability of the insurance company. But sometimes the loss has been caused by a series of
causes i.e. by two or more causes. In such cases, the rule of causa proxima applies. And the
proximate i.e. the immediate cause of loss is looked into, although the result would not happen without
the remote or other causes. The term 'proximate cause' does not mean the latest i.e. nearest in time. It
means the cause which is proximate in efficiency i.e. the direct, operative, dominant and effective
cause of loss.
In other words, a proximate cause is the active and efficient cause which sets the other causes in
motion and brings about the loss. If the proximate cause is within the risk covered, the assured can
recover the compensation from the insurance company. But if the loss is brought about by the cause
which is attributable to the misconduct of the assured, the insurance company is not liable. The
principle of causa proxima is applicable to all kinds of insurances.
Example 61.5: A cargo of rice in a ship was insured against the loss arising on account of sea
water. The cargo was destroyed by sea water flowing in the ship through a hole, in the bottom of the
ship, made by rats. The insurance company refused to pay the compensation on the ground that the
loss was caused by rats which was not an insured peril. It was held that the assured was entitled to
receive the compensation from the insurance company as the loss was caused by a peril of the sea. In
this case, the proximate cause of loss was an insured peril (i.e. sea water) and the rats were the
remote cause.
[Hamilton Fraser 11. v. Pandrof (1887) 12 AC 518].

Example 61.6: A cargo of oranges in a ship was insured against loss arising on account of
collision The ship carrying the oranges collided with another ship. As a result of the collision, the
cargo \va mishandled and the arrival of the ship was delayed. Due to the delay, the oranges
deteriorated and becam unfit for human consumption. The insurance company refused to pay the
compensation on the ground that the loss was not caused by insured peril. It was held that the
insurance company was not liable as th damage to the cargo was not caused due to collision, but
due to the mishandling and delay of the cargo In this case, after the collision of the ship, a new and
independent cause i.e. 'mishandling and delay" had arisen which was not an insured peril. The
collision, therefore, was the remote cause of loss and the proximate cause was the 'mishandling
and delay' which was not insured against.
[Pink v. FlemminK (1899) 2.1 Q B D 396]
Example 61.7: A cargo of meat in a ship was insured against loss arising on account of perils of
sea The ship carrying the meat was delayed by storm. Due to the delay, the meat deteriorated and had
to he thrown away. It was held that the insurance company was not liable as the loss was not caused
by the perils of sea but by the delay which was not an insured peril.
(Taylor v. Dunbar (1869) 38 L J C P 178; (1869)4 PC 206].
Example 61.8: A was insured against "death from the effects of the injury caused by accident".
He met with an accident and dislocated his shoulder. As a result, he was confined to bed and caught cold
which developed into pneumonia, and ultimately he died. It was held that A's death was caused due to
the effect of injury caused by accident within the meaning of the policy. And the insurance company,
was held liable. In this case, A was confined to bed due to the accident, and the catching of cold and
pneumonia were attributable to the state of health consequent on the accident.
[Isitt v. Railway Passenger Assn. Assurance Co. (1889) QBD 5],
5. Subrogation: The term 'subrogation' may be defined as the substitution of one person for another.
In case of law of insurance, the subrogation means the substitution of the insurance company in place
of the assured in respect of all the rights and remedies which the assured has against the third party.
Thus, if the assured (insured person) recovers the full extent of the loss from the insurance company,
them the insurance company gets the rights and remedies of the assured, and can proceed against the
third party for the recovery of compensation. And if the assured also receives the compensation from
the third party in respect of the same loss, then he must pay over that amount to the insurance
company. In other words, on paying the amount of the policy to the assured, the insurance company
steps into the shoes of the assured and become entitled to all the rights of the assured. This is known as
the 'doctrine of subrogation'. The following important points may be noted in connection with the
doctrine of subrogation:
(a) The insurance company is subrogated only when it pays the loss for which it is liable
under the policy. In other words, the insurance company becomes entitled to the rights
of the assured only on making good the loss suffered by the assured.
(b) The insurance company is subrogated only to those rights which are available to the
assured in respect of the thing to which the contract of insurance relates.
(c) The insurance company is subrogated only to the extent of value insured and no more.
Moreover, it is entitled to the benefit only to the extent of payments made by it.
(d) The insurance company is entitled to the .benefit only when the assured has recovered
a full indemnity from it.
(e) The doctrine of subrogation does not apply to personal insurances such as life and personal
accidental insurances. In such cases, the assured or his nominee, as the case may be, can
recover the policy amount from the insurance company as well as the damages from the
person responsible for injuries caused to the assured.
Example 61.9: A insured his factory against fire with B, an insurance company. The factory was damaged by
fire which was caused by C, a miscreant. The insurance company compensated A for the full loss suffered by
him. Now, the insurance company can proceed against C as it acquires all those rights which are available to A
against C.
Example 61.10: A's goods were lying in B's warehouse. A insured the goods against fire with C, an insurance
company, for Rs. 40,000. The goods were destroyed by a fire in the warehouse, and A recovered the full
amount of Rs. 40,000 from C, the insurance company. Thereafter, A proceeded against B and recovered Rs.
40,000 from him also. In this case, the insurance company is entitled to this sum of Rs. 40,000 which A
has recovered from B. Thus, A must return this amount to the insurance company.
Example 61.11: A owned two ships, ship I and ship II, which were insured with B and C respectively,
the two insurance companies. Both the ships collided with one another due to the fault of ship I. C, the
insurance company of the ship II indemnified A, the owner of Ship it,,for the loss. Thereafter, C proceeded
against A, as the owner of Ship I, the ship at fault, by virtue of subrogation, for claiming the amount paid in
respect of Ship II. It was held that it could not recover as there can be no subrogation to those rights which
the assured himself does not have. As a person cannot file a suit against himself, and thus, A being the
owner of both the ships has no right to file a suit against himself.
[Simpson v. Thompson (1877) 3 AC 279].
6. Contribution: The term 'contribution' may be defined as the method of distributing the loss among
the different insurance companies whose policies attach to the same risk. i.e. who are liable for the
same risk. The principle of contribution applies only where there is double insurance i.e. where there are
two or more insurance policies on the same subject-matter. It may be noted that there is nothing in
law to prevent a person from effecting two or more insurance policies in respect of the same subject-
matter. Thus, a person may take out two or more different insurance policies in respect of the same
subject-matter. But in case of loss, the assured is not entitled to recover more than the full amount of
his actual loss, though he may recover the full amount from one insurance company. And if he recovers
the full amount of his actual loss from one insurance company, he will have no rights to obtain further
payment from the other insurance companies. On paying the assured the full amount of loss suffered by
him, the principle of contribution applies among the different insurance companies and the whole loss
is shared by each of them in proportion to the amount insured with each of them. Thus, where the full
amount of loss is paid by one insurance company, it becomes entitled to recove the proportionate
contribution from the other insurance companies. It may be noted that like the principle of subrogation,
this principle also does not apply to personal insurance. The following conditions must be satisfied for
the applicability of the principle of contribution:
(a) The assured must be the same person in all the insurance policies.
(b) The event, insured against, must be the same in all the insurance policies.
(a) The subject-matte of the insurance must be the same in all the insurance policies. However,
the amount of insurance, in each policy, may be different.
(b) The insurance policies must be with the different insurance companies and all the policies
must be in force at the time or loss.
(c) One of the insurance companies must have paid to the assured more than the share of
its loss.
The liability of an individual insurance company is detemined by applying the following formula:
The sum insured with an individual insurance company × Loss
total sum insured with all the insurance companies
Example 61.12: A insured his commecial flat against tire for Rs. 100,000 with B, an insurance company,
and fo Rs. 200,000 with C, another insurance company. The fire broke out in the building, and a loss of
Rs. 150,000 was caused to A's flat. In this case, A may file a suit against both the insurance companies or
against one only. Suppose, he files a suit against C insurance company, and recovers from it the whole
amount of Rs. 150,000.
Then, the C insurance company may recove Rs. 50,000 from B on the basis of the principle of
contribution. The liability of B and C on the basis of this principle, will be calculated as under:
Liability of B = Rs. 100,000 × Rs. 150,000 = Rs. 50,000
Rs. 300,000

Liability of C = Rs. 200,000 × Rs. 150,000 = Rs. 100,000

Rs. 300,000

7. Mitigation of loss: The tem 'mitigation of loss' may be defined as the minimisation of the
loss. On the happening of the event insured against, it is the duty of the assured (insured person)
to take all reasonable steps fo the purpose of minimising the loss. It may, howeve, be noted that
the assured is not required to risk his own life for this purpose. He is required to take such steps
as an uninsured prudent man would take unde the similar circumstances. Thus, the assured is
required to make his best efforts to minimise the loss under the circumstances. And he should
not become negligent or inactive on the happening of the event merely because the property is
insured. If his negligence is proved, the insurance company may avoid the payment of loss
atributable to his negligence.
Example 61.13: A insured his goods against fire for Rs. 40,000 with B, an insurance company. The
fire broke out in the godown where these goods were lying. But A did not take any step to put out the
fire. The goods worth Rs. 25,000 were destroyed in the fire, and it was proved that out of this, the loss
of Rs. 10,000 was due to A negligence. In this case, the insurance company may be held liable to pay
Rs. 15,000 only.
8. Risk must attach to every contract of insurance: We known that a contract of insurance
is made to cover a risk to which the assured (insured person) is exposed. And the insurance
company receives the premium for running the risk. The premium is, therefore, the consideration
for the risk run by the insurance companies. Thus, the risk must attach to every contract of
insurance. And if there is no risk for any reason, the consideration for which the premium was
given fails. In such cases, the insurance company must return the premium to the assured. In
other words, where the insurance company does not have any risk, it cannot be said to have earned
premium. And thus it must return the premium to the assured.
9. Term of insurance policy: It means the time period for which an insurance policy remains
effective. It is specified in the policy and is determined by the nature of risk against which
the insurance is sought. A life insurance policy may cove a specified number of years, or the
remaining period of policy holder’s life. A contract of fire insurance is for a particular period,
usually one year. It automatically comes to an end after the expiry of fixed period. A contract
of marine insurance may be either for a particular period (usually one year), or for a particular
voyage (i.e. sea journey). If it is for a particular period, the liability of the insurance company
comes to an end after the expiry of the fixed period even if the voyage has not ended during
the period. And if it is for a particular voyage the liability of the insurance company comes to
an end only after the completion of the voyage.
61.12. PREMIUM
The 'premium' may be defined as the consideration for the contract of insurance. And it is paid by the
assured (i.e. insured person) to the insurance company for the risk undertaken by it. In other words, the
premium is the price for the risk undertaken by the insurance company. The contract of insurance must
specify the rate of premium. The rate of premium is calculated keeping in view the average of losses as
compared with profits. And in determining the rate, all circumstances affecting the risk, are taken into
consideration. Besides this, the insurance companies also keep a margin for their office expenses, other
charges and profits. In case of life insurance, the premium is calculated on the basis of average rate of
mortality. And in other insurances, all the circumstances affecting the risk are taken into account, such as,
the locality, the construction and use of the property etc.
The usual mode of payment of premium is cash, thought it is also acceptable through cheques as well.
Generally, it is paid in installments which may be annual, half yearly, quarterly or monthly as agreed
between the parties. In case of property insurance, the entire premium may be paid at the beginning
of the insurance policy. The insurance policies, usually, provide that they shall lapse if the premium is
not paid when it falls due or within the days of grace allowed by the insurance company. It may be
noted that in most of the cases, the payment of premium is the necessary condition for the creation of
a complete and binding contract of insurance. Though the advance payment of premium is not a
necessary condition for the creation of a binding contract of insurance, but in actual practice, it is
generally considered the condition precedent (i.e. the necessary condition) for the validity of a
contract of insurance.
61.13. RETURN OR REFUND OF PREMIUM
We know that the premium is the consideration paid, to the insurance company for the risk
undertaken by it. Once the insurance policy becomes binding i.e. the risk undertaken by the insurance
company begins to run, the premium is not returnable (refundable). However, in the following
circumstances, the premium is returnable and the insurance company can be asked to return the same:
1. Where the risk insured against has not begin to run, the consideration fails and the premium
paid can be recovered from the insurance company, e.g. where before the policy comes
into force, the subject-matter of insurance ceases to exist, or where in case of marine
insurance, the insured ship had already arrived safely before the contract of insurance
comes into force.
2. Where the contract of insurance was beyond the powers of the insurance company i.e.
where it was not authorised to grant the policy.
 3. Where the insurance policy is void on account of some illegality and the risk has not begin
to run. However, there should not be any illegality on the party of assured.
4. Where the payments of premium were made by mistake or when they were induced by
fraud, and there was no fraud on the part of assured.
5. Where, due to bonafide mistake, the over-insurance or double-iunsurance has been
effected. In such cases, a proportionate part of the premium is returable, because the over
or the double premium has not been earned by the insurance company. However, the over
or double insurance must have been made in good faith.
61.14.DAYS OF GRACE
The term 'days of grace' may be defined as the days allowed by the insurance company, after
the expiry of due date for payment of premium, during which the assured can pay the premium
in order to renew or continue the policy. In cases where the contract of insurance is for a fixed
period e.g. in the case of fire insurances, the days of grace are allowed to afford to the assured
an additional opportunity of renewing the policy and not of continuing it. And if he does not
agree to renew the policy before the expiry of the fixed period, and the property is damaged
during the days of grace, the insurance company will not be liable. Thus, if before the expiry
of the term of an insurance policy, the insurance company gives a notice to the assured that unless
the premium is paid, the policy would not be renewed, and if the assured refuses to pay, the
insurance company is not liable if the property is destroyed by fire after the expiry of the term
of the policy though within the days of grace. '
On the other hand, in case of life insurances, the policy creates a continuing risk and the assured (i.e.
insured person) has no option but to continue the policy on the payment of the premium. And if the
assured dies during the days of grace without paying the premium, the insurance company remains
liable to pay the amount due under the policy. For such liability of the insurance company, a clause is
usually added in the life insurance policy.

61.15. INSURANCE POLICY

An 'insurance policy', usually called a 'policy', is the formal document containing the terms of a contract
of insurance between the parties. It is a stamped document, which is signed and issued by the insurance
company. The policy is a documentary evidence of a contract of insurance between the parties. However,
an oral evidence is also admissible to prove the terms of the contract of insurance. It will be interesting to
know that the existence of a policy is not necessary f 0r the validity of the contract of insurance, except in
case of marine insurance. A contract of marine insurance is valid only if it is expressed in an insurance
policy, called the Sea or Marine Policy The other contracts of insurance are valid even if there is no
insurance policy.
It may be noted that an insurance policy is a unilateral document i.e. containing the terms stated by
one party only. It is issued by the insurance company and bears its seal, and is signed by the authorised
officers of the company. The assured (i.e. policy-holder) is not a party to the policy as it is not signed by
him. Through the policy is not signed by the assured, but he can enforce his rights under it if the same
has been validly issued to him.
It may also be noted that the delivery of the policy to the assured is not necessary to make the
contract binding. The contract will be binding if it is otherwise complete and the first premium has been paid
even if no policy is delivered to the assured. Similarly, on maturity, the production of the policy is not
necessary for the payment of money due under it if there are sufficient reasons for its non-production e.g.
where it is lost, or is in the hands of a person who does not part with it.
61.16.COVER NOTE
We have discussed, in the last article, that an insurance policy is issued to the assured, and is the
documentary proof of a contract of insurance. However, there is always some time between the date of
proposal and the issue of the policy. In order to protect the assured during this period, a document called a
'cover note' may be issued by the insurance company. On recieving the proposal, the insurance company
may issue a cover note pending the execution of the policy or the final decision of directors regarding the
acceptance or rejection of the proposal. The cover note acknowledges the receipt of premium and forms a
binding contract of insurance during the interval between the proposal and the final acceptance or rejection
of the proposal. Thus, the insurance company shall be liable for all the losses occurring during the period
of the cover note. A cover note is, therefore, a temporary or provisional contract of insurance. The practice
of issuing cover notes is very common in fire, theft, and accident insurance.
61.17.RE-INSURANCE
It is an important and commonly used term in the Law of Insurance. The term 're-insurance' may be
defined as the insurance by the original insurance company to protect its own interest created by its
contract of insurance. Sometimes, an insurance company finds that it has entered into an insurance
contract which is an expensive proposition for it, or it wishes to minimise the chances of the possible loss
without giving up the contract. In such cases, it may re-insure a portion of the risk with some other insurance
company. And this is known as re-insurance. The insurance company may also reinsure the risk with the
object of earning some profits when it is able to get it reinsured at a lower rate of premium. It may be
noted that an insurance company can validly re-insures the risk because a contract of insurance creates, in
the insurance company, an insurable interest in the subject-matter insured to the extent of amount insured
by it. Thus, re-insurance is a contract which insures the thing originally insured. And by this contract the
original insurance company is to be indemnified against any loss which it may sustain by paying life
assured under the original contract of insurance.

Example 61.14: A wanted to insure his house for against fire Rs. 500,000 and went to B, an insurance
company. B found the proposal to be profitable and accepted it. However, to minimise its own loss B
reinsured the house with C, another insurance company, for Rs. 200,000. In this case, the second insurance
between B and C is the re-insurance. And if the house is totally burnt, B will pay Rs. 500,000 to A, and
may recover Rs. 200,000 from C. In this way B's loss will be reduced by Rs. 200,000.

The rules relating to re-insurance may be summed up as under:

1. The re-insurance can be effected in all kinds of insurances.'
1. The re-insurer (i.e. the second insurance company) is liable to pay the amount of loss
to the the original insurance company only if the original insurance company has paid
the amount to the assured.
2. The second insurance company is not liable to the assured because there is no privity of
contract between them. It is liable only the original insurance company.
3. The re-insurance contract is governed by the same principles which apply to the origianl
contract of insurance such as insurable interest, good faith, indemnity, subrogation etc.
4. The contract of re-insurance is always a contract of indemnity. And thus, the second
insurance" company becomes liable to pay only when the original insurance company has
paid the amount due under the policy.
5. The contract of re-insurance is subject to all the conditions in the original policy. If, for
any reason, the original policy comes to an end or cancelled, the re-insurance policy also
comes to an end automatically.
6. The contract of re-insurance is also a contract of good faith. Thus the original insurance
company must disclose to the second insurance company all the material facts disclosed
to it. Moreover, the original insurance company should also disclose all such facts which
come to its knowledge subsequent to the original contract.
7. On making the payment, the second insurance company is entitiled to be subrogated to
all rights of the original insurance company, including the rights of the assured to which
the original insurance company is subrogated.

61.18. DOUBLE INSURANCE

It is another important term in the law of Insurance. The term 'double insurance' may be defined as
the insurance of the same subject-matter with more than one independent insurance companies in such
a way that the total sum insured exceeds the actual value of the subject matter. Sometimes, a person
insures the same subject-matter with two or more insurance companies, and the total sum insured
exceeds the actual value of the subject-matter. In such cases, the insurance is known as double
insurance, and it amounts to over-insurance. It-may, however, be noted that if the total sum insured
does not exceed the actual value of the subject-matter, there is no double insurance. The advantages of
double insurance is that it protects the assured against loss if one or more of insurance companies
becomes insolvent. Because, then, he may recover, up to the value of the policy, from the other solvent
insurance companies.
Example 61.15: A insured his factory worth Rs. 400,000 with two insurance companies B and C. With
B, he insured the factory for Rs. 200,000; and with C, for Rs. 300,000. This is a case of double insurance
because the total sum insured (i.e. Rs. 500,000) exceeds the value of the factory (i.e. Rs. 400,000). But
if A insures the factory with B and C for Rs. 200,000 each, there is no double insurance.
The rules relating to double insurance may be summed up as under:
1. The assured may claim payment from the insurance companies in such order as he thinks
fit, and can recover the whole amount of the loss suffered by him. But in any case, he
cannot recover more than the actual loss suffered by him.
2. If the assured recovers more than the loss suffered by him, he holds the excess amount
on behalf of the insurance companies.

3. The insurance companies, as between themselves, are liable to contribute to the loss in
proportion to the amount for which each is liable. If any-insurance company pays more
than its liability, then it can claim contribution from the other insurance companies.
4. In case of life insurance, there is no question of double insurance 13. The human life is
priceless and a person can get any number of policies on his life and for any amounts
as he likes. And on maturity, he shall be entitled to claim money under all the policies

61.19. COMPARISON BETWEEN RE-INSURANCE AND DOUBLE INSURANCE

The following table gives the comparison between the’re-insurance' and -double insurance':

S. No. Re-surance Double Insurance

1. It is effected by the original insurance It is effected by the same assured (insured

Company with some other insurance person) with different insurance companies

Company between the assured (insured person)

And Reinsurer i.e. second insurance company

2. The assured cannot claim any part of his loss The assured can claim his loss from each of the

Loss from the insurer i.e. second insurance insurance companies up to the amount insured

Company. with each of them. However, he cannot recover

More than the total loss suffered by him.

3. The original insurance company can claim Each insurance company, as between them

From the re-insurer ( second insurance selves, shall be liable to contribute rateably

Company) a part of the loss proportionate towards the loss suffered by the assured
 To the risk insured by it.

61.20. THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999

The Insurance Regulatory Authority Bill, 1998 was introduced in the Lo.k Sabha on 15-12-1998 for
setting a statutory Insurance Regulatory Authority and to permit the entry of private Indian Companies
into the insurance sector and to make certain consequential amendments in Acts governing Insurance
Law. The Bill was referred to the standing committee on Finance on 4-1-1999 for examination and
report. The standing committee suggested some amendments which were accepted by the
Government. However, the Bill could not be taken up for consideration due to dissolution of the
Lok Sabha. On the basis of the recommendation of the standing committee, a fresh Bill titled
Insurance Regulatory and Development Authority Bill was introduced in the Parliament which was
duly passed and become the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999).
The objects of this Act are (a) to provide for the establishment of an effective and statutory
autonomous body known as Insurance Regulatory and Development Authority (IRDA), (b) to protect
the interest of holders of insurance policies, (c) to promote and ensure orderly growth of the
insurance industry and for matters connected there with and (d) to amend the Insurance Act, 1938,
the Life Insurance Act, 1956 and the General Insurance Business (Nationalisation) Act, 1972.
The new Act provides for the establishment of Insurance Regulatory and Development authority
(IRDA) and also permits the entry of private Indian companies into the insurance sector. The
important provisions of this Act are stated here under :
13. Till the passing of the Insurance Regulatory and Development Authority Act, 1999, the LIC was the only
insurer of life Insurance. Now the monopoly of LIC to carry on life insurance business has ceased to exist as
other Indian Insurance companies can also start the life insurance business.

1. Insurance Regulatory and Development Authority: The Insurance Regulatory and Development
Authority (IRDA) shall be a body corporate having perpetual succession and a common seal with power
to acquire, hold and dispose of property and to contract. The IRDA shall consist of a Chairperson and
other members not more than nine in number. Out of these nine members, not more than five shall be
whole-time members and not more than four shall shall be part-time members. The Chairperson shall
hold office for a term of 5 years or until the age of 65 years. The whole-time members shall hold
office for a term of 5 years or until the age of 62 years. The part-time members shall hold office for a
term not exceeding 5 years. It may be noted that the IRDA shall be a statutory autonomous body
having more powers than the existing Interim Insurance Regulatory Authority constituted through a
government resolution for discharging certain functions and discharging powers of the controller.
The statutory status has been conferred on IRDA to enable it to function in a truly independent manner
and to discharge its assigned responsibilities effectively. Various power and functions have been given to
IRDA to enable it to perform the role of an effective watchdog and regulator for the insurance sector
in India. The important duties, powers and functions of the Insurance Regulatory and Development
Authority may be summed up as under:
(a) To regulate, promote and ensure orderly growth of the insurance business and reinsurance
business.
(b) To issue to the applicant a certificate of registration, to renew, modify, withdraw, suspend
or cancel such registration.
(c) To protect the interest of the policy holders in matters concerning assignment of policy,
nomination by policy holders, insurable interest, settlement of insurance claims, surrender
value of policy, and other terms and conditions of contracts of insurance.
(a) To promote efficiency in the conduct of insurance business.
(b) To regulate investment of funds by insurance companies.
(f) To adjudicate dispute between insurers and intermediaries or insurance intermediaries.
 (g) To specify requisite qualifications and practical training for intermediaries or insurance
intermediaries and agents.
(h) To specify the code of conduct for surveyors and loss assessors.
(j) To promote and regulate professional organisations connected with the insurance and reinsurance
business.
(k) To exercise such other powers as may be prescribed.
2. Amendment of the Insurance Act, 1938: The Insurance Act, 1938 shall be amended as per the
amendments specified in the First Schedule of the new Insurance Regulatory and Development
Authority, Act, 1999. The amendments provide for the substitution of the word 'Controller' by the
word 'Authority' and substitution of the word 'Central Government' by the word 'Authority' in certain
sections of the Insurance Act, 1938. The amendments to this Act are consequential in nature to
empower the Insurance Regulatory Authority to effectively regulate, promote and ensure orderly
growth of the insurance industry.
To permit the entry of private Indian companies into insurance sector, a new Section 2(7A) has
been inserted defining the term 'Indian insurance company'. According to this section, the expression
Indian insurance company means and includes the following:
(a) Any insurance company which is formed and registered under the Companies Act, 1956.
(a) Any insurance company in which the aggregate holdings of equity shares by a foreign
company do not exceed 26% paid up capital in such Indian insurance company.
(b) Any insurance company whose sole purpose is to carry on life insurance business, general
insurance business or reinsurance business.
Other amendments empower the IRDA in certain matter such as (a) registration of insurers, (b)
percentage of equity capital to foreign company, (c) manner and conditions of investments by
insurers, (d) issue of license to intermediaries or insurance intermediaries and (e) power IRDA to
make regulations.
3. Amendment of the Life Insurance Corporation Act, 1956: The Life Insurance Corporation
Act, 1956 shall be amended as per the amendments specified in the Second Schedule of the ne
Insurance Regulatory and Development Authority Act, 1999. The amendments provide for the
substitution of the word 'Controller' by the word 'Authority' wherever it occurs in the Act
To permit the other Indian insurance companies to carry on the life insurance business, a ne Section
30 has been inserted. This section provides that, the exclusive privilege of carrying n life insurance
business in India by the Life Insurance Corporation shall cease on and from the commencement of
the Insurance Regulatory and Development Authority Act, 1999, and thereafter the LIC shall carry on
the life insurance business in accordance with the provisions of the Insurance Act, 1938.
4. Amendment of the General Insurance Business (Nationalisation) Act, 1972: The General
Insurance Business (Nationalisation) Act, 1972 shall be amended as per the amendments specified
in the Third Schedule of the new Insurance Regulatory and Development Authority Act, 1999
To permit the other Indian insurance companies to carry on general insurance business, a new Section
24 A has been inserted. This section provides that the exclusive privilege of the General Insurance
Corporation (GIC) and its four subsidiary companies of carrying on general insurance business in India
shall cease on and from the commencement of the Insurance Regulatory and Development Authority
Act, 1999, and thereafter the GIC and its subsidiary companies shall carry on the general insurance
business in India in accordance with the provisions of the Insurance Act, 1938.
Thus, on the enactment of the new Insurance Regulatory and Development Authority Act, 1999, the
exclusive privilege of the LIC and GIC to carry on their respective insurance businesses has ceased to
exist. This means that the other Indian insurance companies have been permitted to carry on life
insurance as well as the general insurance business.

TEST QUESTIONS
1. Define contract of insurance, What are its essentials? Explain the nature of contract of insurance.
 1. How would you classify the insurance business? What are the organisations which are carrying on
the different kinds of insurance business in India?
2. Explain with examples the fundamental principles of insurance.
2. What do you understand by 'insurable interest'? What is the requirement of law as lo insurahlc
interest in case of life, fire, and marine insurance?
3. What do you understand by 'doctrine of cause proxima'? What is its importance in the Insurance
Law?
4. Define the term 'premium'. What are the circumstances in which premium is returnable by the
insurer?
3. Write notes on the following:
(a) Doctrine of subrogation (b) Doctrine of contribution.
(c) Days of grace (d) Insurance policy.
(e) Cover note (/) Contract of insurance and wager

62. LIFE INSURANCE

62.1. INTRODUCTION
We know that life insurance business is the business of effecting contracts of insurance upon human
life. In India, the life insurance business was nationalised in 1956, and the Life Insurance Corporation
Act, 1956 was passed to carry on this business. Since then it is carried on by the Life Insurance
Corporation of India1 (hereinafter also referred to as LIC or Corporation) which was set up under the
provisions of this Act of 1956. Till the passing of Insurance Regulatory and Development Authority
Act, 1999, LIC had the monopoly of carrying on this business. The Supreme Court had also held that
life insurance business is the exclusive domain of the Life Insurance Corporation alone. In a case
before the Supreme Court, a municipal corporation introduced a scheme in which the family members
of the employee would get financial help from the municipal corporation on the death or retirement of
such employee, and such financial help would be proportionate to monthly contribution made by the
employee concerned. It was held that the municipal corporation cannot run such scheme as it partakes
the character of the life insurance business.
[Life Insurance Corporation of India v. Vishwanath Verma, AIR 1995 SC 189].
The life insurance business is governed by the provisions of the Insurance Act, 1938, and the Life
Insurance Corporation Act, 1956. Both these Acts have been amended several times. Lastly, The
Insurance Act, 1938 was amended in 1983 by the Delegated Legislation Provisions (Amendment)
Act,. 1983, and the Life Insurance Corporation Act, 1956 in 1981 by the Life Insurance Corporation
(Amendment) Act, 1981 and in 1999 by the Insurance Regulatory and Development Authority Act,
1999. The law of insurance has been discussed keeping in view all the up-to-date developments.
Note: On the passing of the Insurance Regulatory and Development Authority Act, 1999, the monopoly of
LIC to carry on life insurance business has ceased to exist. A new Section 30A has been inserted to the Life
Insurance Corporation Act, 1956 which provides that the exclusive privilege of carrying on the life insurance
business in India by the L.I.C. shall cease on and from the commencement of the Insurance Regulatory and
Development Authority Act, 1999, and thereafter, the L.I.C. shall carry on the life insurance business in
accordance with the provisions of the Insurance Act, 1938. This amendment enables the other Indian insurance
companies to do life insurance business.
62.2. CONTRACT OF LIFE INSURANCE
The term 'contract of life insurance' may be defined as a contract by which an insurer (i.e. Life
Insurance Corporation) in consideration of certain sum of money (premium) undertakes to pay to the
assured (insured person) or to a person for whose benefit the policy is taken, a stated sum
of money on the death of the insured person or on the expiry of certain period, whichever is earlier. In other
words, a contract of life insurance is a contract to pay a certain amount of money on the death of a person or
on the expiry of fixed period, in consideration of certain premium. The premium may be paid in lump sum, or
by periodical instalments. However, it is usually paid in instalments.

62.3. NATURE OF A CONTRACT OF LIFE INSURANCE

We have already discused in Art. 61.3 that a contract of life insurance is not a contract of indemnity. Under
a contract of indemnity, one person promises to compensate the other for the loss or damage sustained by
him (the latter). A contract of life insurance does not resemble a contract of indemnity because the insurance
company does not undertake to compensate the assured (insured person) for the loss sustained on the death
or maturity, but promises to pay certain sum in that event. Moreover, the loss resulting from death cannot be
estimated in terms of money. As a matter of fact, the loss of life cannot be indemnified i.e. compensated.
Thus, a contract of life insurance is not a contract of indemnity. It is merely a contract to pay a certain sum of
money on the death of a person or on the expiry of certain period. A contract of life insurance is,
therefore, a contingent contract and not a contract of indemnity. The following observations are
worthnoting in this regard:
"The contract commonly called life insurance when properly considered is a mere contract to pay
a certain sum of money on the death of a person, in consideration of the due payment of a certain
annuity for his life. This species of insurance in no way resembles a contract of indemnity 2."

62.4. TYPES OF LIFE INSURANCE POLICIES

We know that an insurance policy is a written document which contains the terms of the contract of
insurance between the assured (insured person) and the insurance company. The life insurance policies
are of various types which are issued to meet the varying needs, and tastes of the different classes of
people. Under Section 49 of the Life Insurance Corporation Act, 1956, the LIC is empowered to issue
various types of policies. Thus from time to time, the LIC may issue new policies to suit the
requirements of the people. There are many types of life insurance policies, with slight differences,
issued by the LIC. The principal and important types of life insurance policies need special mention,
and are discussed in the following pages:
1. Whole life Policy: It is the policy under which the premiums are payable throughout the
life of the assured (insured person), and the sum insured (i.e. policy money) becomes payable
only on the death of the assured. It is also known as'ordinary life policy'. It is the cheapest policy,
because the premium charged under this policy is the lowest. This policy is suitable to the persons
who intend to make provision for financial assistance to their heirs.
2.Limited payment life policy: It is the policy under which the premiums are payable for a
selected period of years or until death of the insured person if it occurs within this period. It
may be noted that the amount of the policy (i.e. policy money) becomes payable only on the
death of the insured. If the assured has paid the premium for the specified number of years and
is still alive, then no premium is required to be paid after the expiry of these years. And the
policy continued to be in force. However, the policy money becomes payable only on the death
of the insured person. This is the best form of life insurance policy to suit the family needs. As
in this case, insured person knows how much and for how many years he will be required to
pay the premium. By selecting the period of policy according to his own convenience, the insured
person may relieve himself from making the payments of premium in old age when he may not be
able to pay. Thus, this policy has the advantage over the whole life policy in which the insured person
Is required to pay the premium throughout his life, even in old age when he may not be able to
pay.
3. Endowment policy: It is the policy under which the premiums are payable upto a particular
age of the insured person or until his death if it occurs within that age. In this case, the amount
of the policy becomes payable when the insured person reaches a particular age or on his death,
whichever is earlier. This policy resembles the 'limited payment life policy' as the term of
payment of premium is fixed in both the cases. But in case of endowment policy, the policy amount
becomes payable immediately when the insured person reaches a particular age. Whereas in case
of limited payment life policy, the policy money becomes payable only on the death of the insured
person. This is very popular form of policy as it serves a dual (double) purpose. On the one hand,
it makes a provision for the family of the insured person in the event of his early death. And
on the other hand, it assures a lump sum money to the insured person at any desired age.
4. Double endowment policy: This policy is similar to an endowment policy. The only
difference is that in this case, the double of the policy amount is payable to the insured person
himself if remains alive after the expiry of endowment period (i.e. the fixed period of the policy).
 5. Pure endowment policy: This policy is also similar to an endowment policy. But in this
case, the policy amount is payable only if the isured person remain alive after the expiry of
endowment period. And if he dies within that period, then only the premium paid to the insurance
company is payable to persons who are entitle to receive it after the death of the insured person.
However, if the insured person dies within first and the second years of policy, the premium
payable to the entitled persons will be 80% and 90% respectively of the premium paid to the
insurance company.
6. Joint life policy: It is the policy under which two or more lives are insured by one policy.
In this case, the policy money becomes payable at the end of the term of the policy or on the
death of any one of the insured persons, whichever is earlier. The joint life policies are usually
taken by the partnership firms on the lives of the partners in order to make a provision for the
return of the capital of the deceased partner.
7. Convertible whole life policy: It is the policy originally issued as a whole life policy, which,
subsequently, can be coverted into an endowment policy at the option of the insured person. In
the beginning, the premiums are payable at a lower rate for specified years. And after the expiry
of these years, the insured person is given an option to convert the policy into an endowment
policy. II this option is not exercised, the policy continues to be a whole life policy. This policy
provides maximum insurance protection at the minimum cost and at the same lime offers a flexible
contract. It suits the requirements of those persons who are initially unable to pay the higher
rate of premium required for the endowment policies, but hope to be able to do so within a few
years.
8. Participating or with profit policy: It is the policy under which the insured person (policy-
holder) is allowed a share in the profits of the insurance company in the form of bonus declarded
by the company. The bonus declared by the company is added to the value of the policy, and
is paid at the time of its maturity. In such policies, the rate of premium is usually higher as
compared to other policies (i.e. non-participating policies).
9. Non-participating or without profit policy: It is the policy under which no profit of the
insurance company is added to the value of the policy. In such policies the rate of premium is
lower as compared to participating policies.
10.Money back policy: It is the policy which provides the payment of policy money at regular
intervals before the policy expires e.g. on a 20 years policy, the insured person gets 20% of the
insured sum at the end of first 5 years, another 20% at the end of next 5 years and another 20%
at the end of next 5 years. The balance amount along with the bonus is paid at the end of 20
years i.e. at the end of the term of the policy. And if the insured person dies before the expiry of the
term of the policy, the entire policy money becomes payable on the death, irrespective Of the
installments already paid.
11.Annuity policy: It is the policy under which the sum insured (i.e. policy money) is payable
jo the insured person or policy holder not in lump sum but by installments which may be monthly,
quarterly, half yearly or yearly. It may be noted that the policy money becomes payable after
the insured person has attained a certain age. The premium may be payable by regular installments
over a certain period, or it may be paid in lump sum at the outset i.e. in the beginning. Such
policies are useful for those who wish to provide a regular income for themselves and their family
after the expiry of a fixed period.
12.Ascending premium policy: It is the policy under which the lower rates of premium are
payable in the beginning, and it increases gradually. It suits the people who expect the gradual
increase in their income. Such people can take out a policy for a sum which at present, is beyond
their resources but which will be within their earning capacities after a few years.
13.Children endowment policies: These are the policies which are taken to provide funds for
She marriage or education of the children. As usual, under these policies also, the assured insures
his own life, but the purpose is different i.e. to ensure the education or marriage of children. Under
these policies, the premiums are payable for a fixed period. The sum insured (i.e. policy money)
becomes payable only at the expiry of fixed period even if the policy-holder dies earlier. It may
be noted that after the expiry of the fixed period, the policy amount is payable even if the child
also dies before that date. In case of marriage endowment policy, the policy money is paid in
lump sum. And in case of education endowment policy, the policy money is paid in equal half
yearly instalments.
14.Janata policy: It is the policy under which the risk of death by accident is covered for
one year only. In such policies the premium charged is very nominal. And if the insured person
dies by accident within a year, a fixed amount is payable to the entitled persons. However, this
policy is not issued by L.I.C. But it is issued by the companies carrying on general insurance
business such as General Insurance Corporation of India.
15.Multipurpose policy: It is the policy which meets the several insurance needs of a person.
e.g. provision for self in old age, provision for one's family, provision for education or marriage
of the children. In case of such policies, the premiums are payable durigh the fixed number of
years or till death if if occurs within the fixed period. On the maturity of the policy, the insured
person may get the policy money in lump sum, or in the form of monthly pension, or in case
of death of the insured person, an increased amount be paid to the entitled persons.
16.Sinking fund policy: It is the policy under which a fixed amount of premium is paid
annually, and it goes on accumulating at a certain rate of interest. At the end of the policy period,
the amount of policy so accumulated is paid back. Such policies are, usually, effected by the
companies for the payment of its liabilities or replacement of assets. Out of the funds received,
the insured company may pay off its liabilities or replace the assets.
17.Progressive protection policy: It is the policy which increases in value every few years
on the payment of increased rate of preimium. e.g. a 20 years policy for Rs. 50,000 may increase
to Rs. 60,000 after 5 years, or Rs. 70,000 after 10 years, and so on. However, the rate of premium
will also go on increasing every year.
In order to satisfy the requirements of the people, the LIC usually brings out new policies from
time to time. The following are the new attractive policies introduced by the LIC:
(a) Jeevan Sathi: Double Joint Life Policy with Profits
(b) Jeevan Mltra: Double Cover Endowment Policy with Profits.
Bima Nivesh: It is the latest short-term, single premium life insurance scheme. It also provide safety,
liquidity and attractive returns. The term of this policy is 5 years and i 0 years. In this case, single-premium is paid in the
beginning. The sum assured along with guaranteed addition will be paid to the assured on the expiry of
stipulated term or on death during the trem of the policy. However if death takes place during the first 6
months from the date of policy then only 95% of the premium paid will be payable. If the assured dies
after six months but before completion of one year, then the whole premium paid will be payable by
the insurance corporation.
62.5. SURRENDER VALUE OF A LIFE INSURANC POLICY
It is an important term in the life insurance business. The term 'surrender value' of a policy may be
defined as the amount which the insurance company is prepared to pay to the assured (insured person
or a policy-holder) immediately on his surrendering (i.e. giving up) the policy to the insurance
company. A person usually surrenders the policy when he does not want to continue it for any
reason. Sometimes, before the maturity of an insurance policy, an insured person (policy-holder)
voluntarily decides to surrender all his rights under the policy to the insurance company. And the
insurance company agrees to pay some amount to the policy-holder. Such amount is called the
surrender value of the policy. The payment of surrender value brings about the termination of the
contract of insurance. It may be noted that a policy acquires a surrender value only when it has run for
a certain minimum number of years, and all the premiums during the said period have been paid in
full.
As regards the period after which a policy acquires surrender value, the Life Insurance
Corporation of India provides as under:
1. In case of policies completed before 1st April, 1973: In this case, a policy will acquire
the surrender value (i) after two full years' premiums have been paid, when the policy
is for 20 years or more; or (ii) after one-tenth of the total number of stipulated premiums
have been paid, when the policy is for 11 to 19 years; or (Hi) after more than one year's
premium is paid, when the policy is for 5 to 10 years.
2. In case of policies completed on and after 1st April, 1973: In this case, a policy will acquire
 the surrender value after the payment of three full year's premiums.
3. In case of policies completed on and after 1st January, 1976: In this case, a policy will
acquire the surrender value after the payment of five full year's premiums or for at least
one-forth of the total term of the policy, whichever is less, but in the latter case the payment
of at least three full year's premium is necessary.
4. In case of policies completed on or after 1st January, 1979: In this case, the policy will
acquire the surrender value after the payment of three full year's premiums. This rule is
extended restrospectively to all policies.
The surrender value is calculated keeping in view the class of policy, and the number of years it has
remained in force. Usually, it is calculated as a percentage of total premium paid. It may be noted
that the surrender value increases with each payment of premium. The rate on which the surrender
value is allowed, is generally given in the policy.
62.6. PAID-UP VALUE OF A LIFE INSURANCE POLICY
It is another important term in the life insurance business. The term 'paid-up value' of a policy may be
defined as the amount to which the sum insured is considered reduced in the event of the assured
discontinuing the polity after some period. Sometimes, the insured person has paid premiums for a
certain minimum number of years and the policy has acquired a surrender value, but he is not in a
position to pay the further instalments of premium and discontinues the same. In such cases, he may
excused from further payment of the premium, and the policy amount originally insured is considered
reduced to the value known as paid up value. In this way, the insurance policy becomes a policy for
the reduced (paid-up) amount. It may be noted that the life insurance policy remains in full force but its
value is reduced to the paid-up value. The paid-up value is calculated by the following formula.

Number of premiums actually paid

Paid - up value = Number of total premiums payable x Sum assured

Suppose, in a simple endowment policy of Rs. 60,000 for 20 years with annual premium of Rs.
2,500, the assured discontinues the payment of premium after 5 years. In this case, the paid up
value will be Rs. 15,000 calculated as under 5/20 x 60,000
It may be noted that the amount of paid-up value of the policy is payable on maturity only i.e.
on the happening of the event insured against or on the expiry of the period of the policy, as the
case may be. Thus, where after the policy has acquired a surrender value and the policy-holder
discontinues the payment of premium, the policy does not become void. It continues to subsist as a
paid-up policy.

62.7. LOANS ON A LIFE INSURANCE POLICY

We have discussed in Art. 62.5 that a policy acquires a surrender value after it has remained in
force for a certain period. On acquiring the surrender value, the policy also acquires a loan value.
The Corporation (i.e. LIC) usually gives loan upto 90% of the surrender value keeping the
balance of 10% as margin. Thus, the policy holder enjoys the privilege of getting loan on the
security of his policy. However, he can get loan only within the surrender value of the policy. The
loan may be repaid as per the terms of loan agreement. And if the loan is not repaid, it is
deducted from the policy money when it falls due. This is the best way of investments for the
insurance companies as there is no danger on money being lost.

62.8. PRINCIPLES OF LIFE INSURANCE

We have already discussed, in Art. 61.11, the fundamental principles of a contract of insurance in
general. However, the following two principles require special discussion in connection with
the contract of life insurance.
I.Insurable interest: We know that 'insurable interest' is the pecuniary (i.e. monetary) interest in
 the subject-matter of insurance. The existence of insurable interest is the essential element of
every contract of insurance. In case of life insurance, the subject-matter of insurance is the life of
a person. Thus, in order to effect a valid contract of life insurance, a person must have insurable
interest in the life sought to be insured. Every person has an insurable interest in his own life and
may insure the same. A person may also have an insurable interest in the life of another if he has
some pecuniary interest in other's life, and will suffer a monetary loss on his death, e.g. a wife has
an interest in the life of her husband or vice versa. It may, however, be noted that mere natural
love and affection is not sufficient to constitute an insurable interest in one's life. The
insurable interest must be actual and real. In the case of life insurance, the insurable interest must
exist at the time of contract of insurance i.e. when the policy is taken. And it may or may not be in
existence at the time of the death of the insured person or when the policy falls due. It will be
interesting to know that in the following three cases there is a presumption of insurable interest
i.e. the insurable interest is presumed to exist and no proof for the same is required:
(a) One's own life;
(b) Husband in the life of wife;
(c) Wife in the life of husband.
It may be noted that in these three cases the insurable interest is always presumed even if
no pecuniary interest is shown. As a .matter of fact, interest in these cases is much higher the pecuniary
interest and is incapable of valuation. Thus, there is no limit to the amount insurable interest, and one
can insure the life for any amount he likes. However, in actual practice the financial status of the assured
and his capacity to pay the premium is kept in view while fixing the amount of insurance policy.
In all other ceases, the insurable interest has to be proved and must be shown that one h pecuniary
interest in the life which he wants to insure. There are certain other cases, in which there is no
presumption of insurable interest, but the persons are held to have insurable interest in the life of
another person. These are:
(a) A person may have an insurable interest in the life of a relative by whom he is supported
e.g. a son has an insurable interest in the life of his supporting father. But a father has
no insurable interest in the life of his son unless he is dependent on the son. Similarly
an elder brother has no insurable interest in the life of his younger brother.
(b) A creditor has an insurable interest in the life of his debtor to the extent of his debt
(c) A guarantor has an insurable interest in the life of his principle debtor (i.e. on whose behalf
he has given the guarantee). A creditor also has an insurable interest in the life of the
guarantor to the extent of the amount guaranteed.
(d) An employee employed for a fixed period has an insurable interest in the life of his
employer to the extent of his salary for the term of service. An employer may also have
an insurable interest in the life of his employee who is bound by the contract to serve
for a certain time.
Example 62.1: A took out a life insurance policy for Rs. 50,000 on the life of his wife, B. Subsequently,
due to regular quarrels and other reasons, there was judicial separation between them, but .4 continued the
payment of premium. After sometimes, B died, and A claimed the amount of the policy from the insurance
company. In this case, the insurance company is liable to pay the policy money to A. The reason for the
same is that a husband has an insurable interest in the life of his wife. And the insurable interest must
exist at the time of taking the policy. It need not exist at the time of claiming the amount. Here A had
insurable interest in -fl's life at the time of policy, though due to judicial separation, he ceased to have
an insurable interest thereafter.
Example 62.2: A owed Rs. 10,000 to B. And B insured A life for Rs. 10,000. Subsequently, A repaid
the entire amount of debt to B, and thereafter died. B claimed the amount of the policy from the insurance
company. In this case, the insurance company is liable to pay the policy amount to B. The reason for the
same is that a creditor has an insurable interest in the life of his debtor to the extent of the amount of
debt. Here, at the time of insurance, B had insurable interest in A's life to the extent of Rs. 10,000.
Though on repayment of the debt by A, the insurable interest ceased to exist, yet the insurance company
remains liable because the insurable interest must exist at the time of insurance. It need not be there at
the time of claim.
Similarly, the insurance company will also be liable to the creditor even if the debt due by the debtor
had become time-barred, i.e. not recoverable due to the expiry of time prescribed by law for its recovery.
 2. Good faith: We know that every contract of insurance requires utmost good faith, i.e. the parties must
make a full and fair disclosure of all the material facts within their knowledge. Thus, in case of life
insurance also, the insured person must disclose everything which is likely to affect the judgment of the
insurance company. Moreover, what is disclosed must also be true. If the utmost good faith is not
observed by the insured person, the insurance company may put an end to the contract and may not be
liable to pay the claim amount.
Example 62.3: A took a life insurance policy on his life from an insurance corporation. In the proposal
form, there was a clause requiring whether previous proposals on his life had been made to any other
Insurance company, and if so whether they had been accepted at the ordinary rates. While filling the proposal
form, A replied this question stating that-he was insured with two insurance companies at ordinary rates.
But he omitted to disclose the fact that his proposal for insurance was also declined by two other insurance
companies. In a claim on the policy, it was held that the insurance company was not liable as the insured person
(A) had concealed material facts.
[Based on London Insurance Co. v. Mansel (1879)11 Ch. D. 363].
Example 62.4: A took a life insurance policy on his life from insurance corporation (i.e. L.I.C.). Earlier
he had suffered from a heart disease but in the proposal from he had stated that he did not suffer from
any ailment. In a claim on the policy, it was held that the insurance corporation was not liable as all the
material facts were not disclosed. In this case, A knowingly made the false statement about his state of
health, which was a material matter. [Krishna Vanti v. L.I.C. AIR 1975 Delhi 19].

It may, however, be noted that if the life insurance policy has run for two years from the date when it
was taken, the insurance company cannot challenge it on the ground of non-observance of good faith
unless it can prove the following two facts, that
(d) The insured person (assured), with a fraudulent intention, had concealed or misrepresented the
facts material to the contract, and
(b) The insured person knew that the statement was false and made it with full knowledge
of its falsity 3.
It may also be noted that when the insurance company wants to escape its liability on the ground
of non-observance of good faith, then it must prove positively that the misstatement or concealment
was deliberate and was made with intent to deceive. Mere inaccuracies or false statements, which are
not material, cannot be regarded as sufficient to entitle the insurance company to escapt liability
under the life insurance policy which is of two years duration 4. Thus, in case of life insurance, the
interest of the insured person is protected by restricting the insurance company's right to avoid
(escape) the liability on the ground of non-observance of good faith. The burden of proof is on the
Life Insurance Corporation if it allege that the insured is guilty of falsely representing and
suppressing material facts.
[L./. v. G.M. Channabasemma, AIR 1991 SC 392].

62.9. ASSIGNMENT OF A LIFE INSURANCE POLICY

The term 'assignment of a policy' may be defined as the passing of the rights and liabilities of the
insured person, under the policy, to a third party. And on a valid assignment, the assignee (i.e. the
person to whom the rights under the policy are transferred) becomes entitled to all the benefits under
the policy, and can sue the insurance company on the policy in his own name. It may be noted that,
a life insurance policy is the property of the policy-holder, he may assign the policy in any way he
likes. The assignment may be with or without any consideration. Thus, he may sell, mortgage or gift
his life insurance policy. It will be interesting to know that for the validity of assignment, it is not
necessary for the assignee to have any insurable interest in the life insured. The person to whom the
policy is assigned, can claim the policy money on
maturity.
Example 62.5: A assigned his life insurance policy to B for valuable consideration. The prescribed
procedure for assignment was followed and due notice of the same was given to the insurance corporation.
Thereafter, A died. In this case, B can claim the amount of the policy as on valid assignment he became
entitled to receive the benefits of the policy.
 The assignment is valid only if it is made by following the prescribed procedure. The procedure for
assignment is laid down in Section 38 of the Insurance Act, 1938, which may be summed
up as under:
1. The assignment or transfer of the life insurance policy can be made in either of the
following two ways:
(a) By an endorsement on the policy itself.
(b) By a separate instrument (i.e. written document).

But in both the cases, the facts of assignment or transfer must be specifically stat H the endorsement or
instrument. And the endorsement or the instrument must be C ' by the assignor or transferor or his duly
authorised agent. Moreover, these must a attested by at least one witness.
2. The assignment or transfer shall be complete and binding upon the insurance corp or f only when
a writted notice of the same is delivered to the insurance corporation s -h notice must be
accompanied by the said endorsement or instrument, or a copy of the ^ certified to be correct by
both, the transferor and the transferee. However, the con • of the insurance corporation is not
necessary for the validity of the assignment
3. The date on which the notice of assignment is given to the insurance company sh II
determine the priority of all claims, under the assignment, as between the person
interested in the policy. Thus, when there are more than one assignments, the priority of
claims of the assignee is governed by the order in which the said notices are delivered
4. On receipt of the notice, the insurance corporation shall record the facts of the assignment
alongwith the date of the receipt of the notice and the name of the assignee.
5. On the request of the person who gave the notice or of the assignee or transferee, the
insurance corporation shall grant a written acknowledgement of the receipt of such notice
However, such acknowledgement shall be granted on the payment of a fee not exceeding
one rupee. Any such acknowledgement shall be conclusive evidence against the insurance
corporation that it has received the said notice.
6. On the completion of the assignment i.e. from the date of receipt of notice by the insurance
corporation, the assignee is the only person entitled to the benefits under the policy.
However, he shall also be subject to all liabilities and equities to which the assignor was
subject at the date of assignment.
7. The assignee may institute any proceedings in relation to the policy without the consent
of the assignor or transferor. He may do so in his own name even without making assignor
a party to such proceedings.
8. The assignment may be absolute or conditional. Thus, an assignment made in favour of
a person subject to the condition that it shall be inopertative or that the interest shall pass
to some other person on the happening of specified event during the life time of the insured,
shall be valid.
9. The assignment validly made is irrevocable, and cannot be cancelled subsequently.
Example 62.6: A assigned his life insurance policy to B on 31st January 1999, by a separate instrument
(document) of assignment. On 15th February 1999, A assigned the same policy to C by an
endorsement on the policy, and gave a prescribed notice of this assignment to the insurance
corporation. On maturity, both B and C claimed the money of the policy from the insurance
corporation. In this case, C will have the priority to receive the policy amount as notice of assignment
in his favour was given to the insurance corporation.
Example 62.7: A assigned his life .nsurance policy to his wife B on the condition that the benefits under
the policy will revert back to him if B died during A's life time. The notice of the assignment was given
to the insurance corporation. Subsequently, A revoked (concelled) the assignment on the ground that it was
conditi nal. And thereafter, A died during B's lifetime. Both B and A's other legal heirs claimed the policy
money from the insurance corporation. In this case, B is entitled to receive the policy money as the
conditional assignment is valid and the assignment in favour of B is effective, as the condition for reverting
back the policy in A did not happen. The cancellation of a valid assignment completed by notice is not
effective. [Based on Bai Ltikshmi v. J. L Tribhuvandas, AIR 1947 Bombay 309]
62.10. NOMINATION BY THE POLICY-HOLDER
The term 'nomination' may be defined as the appointment of some person to whom the policy money
shall be payable in the event of the death of the policy-holder. The policy-holder has the right to
nominate any one or more persons to whom the policy money shall be payable after his death. The
person so nominated is known as the nominee. The nominee can claim the policy money from the insurance
company in the event of death of the insured person. And the payment of the insurance claim to the
nominee will discharge insurance company from its liability to any of the Claimants or legal heirs of the
decessed policy-holder.
Example 62.8: A took out a life insurance policy on his own life and made a nomination in favour of his
wife B. After sometime, A died. In this case, B is enetitled to receive the policy money from the insurance
corporation, and the insurance corporation will be discharged from its liability by making the payment to B.
The other legal heirs of A cannot claim the money from the insurance corporation.
The nomination is valid only if it is made in accordance with the legal rulels. The legal rules relating
to the nomination are laid down in Section 39 of the Insurance'Act. 1938, which may be summed up
as under:
1. The nomination can bemade by either of the following two ways:
(a) By incorporating such nomination in the text of the policy.
(b) By an endorsement on the policy itself.
But in the latter case, the fact of nomination must be communicated to the insurance
company who shall register it in the records relating to the policy.
2. The nomination can be made by a policy-holder only if the insurance policy is on his
own life. Thus, the assignee of a policy, or a person obtaining the policy on the life of
another, cannot make any nomination in that policy.
3. The nomination may be made at the time of taking the policy or at any time before the
policy matures for payment.
4. The nomination can be changed or cancelled any number of times by the insured person
at any time before the policy matures for payment. However, such change or cancellation
shall be effective only if a written notice of the same is given to the insurance company.
Otherwise, the insurance company will be discharged from its liability by making payment
to the already registered nominee.
5. On receipt of the notice of the nomination, change or cancellation of the nomination, it
is the duty of the insurance company to issue an acknowledgment to the policy-holder
stating that the nomination, change or cancellation has been registered. However, the
insurance company may charge a fee not exceeding one rupee for each registration and
acknowledgment of the change and cancellation of nomination. But the insurance
company cannot charge any fee for registering any nomination made by endorsement on
the policy for the first time.
6. An assignment of the policy automatically cancels all the prior nominations. However,
an assignment to the insurance company as security for the loan does not cancel the
nomination. It only affects the nominee's right to the extent of insurance company's right
in the policy.
7. The nominee is entitled to receive the policy money only if the insured person dies before
the policy matures for payment. If the policy matures for payment during the life time
of the insured person, the policy money shall be payable to the insured person or his legal
reprasentatives (heirs), as the case may be.
8. Where the nominee dies before the policy mature for payment, the policy money shall be
payable to the insured person or his legal representatives (heirs), but not to the 1 representatives of
the nominee.
Example 62.9: A took out a life insurance policy on his life and made nomination in favour of his
B. Thereafter, A made a valid assignment in favour of C. After sometimes, A died. In this case C (i.e.
the assignee) is entitled to receive the policy money as a valid assignment automatically cancels all the
prior nominations.
Example 62.10: A took out a life insurance policy on his life and made nomination in favour of
ft And B died before the policy matures for payment i.e. before the death of A. In this case, B's
legal he' cannot claim the policy money from the insurance company. The reason for the same is
that when the nominee dies before the policy matures for payment, the policy money is payable to
the insured person or his legal representatives, as the case may be, but not to the legal heirs of the
nominee.

62.11. LEGAL POSITION OF A NOMINEE

We know that a nominee is entitled to receive the money due under the policy if the insured person
dies before the policy matures for payment Whether such money belongs to the nominee or forms
part of the estate of the deceased is to be determined keeping in view the judicial decisions. Prior to
the Insurance Act, 1938, the judicial view about the legal position of a nominee was that the money
payable under the policy did not belong to him, but formed a part of the assets of the estate left by
the deceased5. It may be noted that the legal position of the nominee seems to be the same even after
the Insurance Act, 1938. Section 39(6) of this Act merely provides that the money due under the policy
shall be payable to the nominee if the insured person dies before the policy matures for payment. It
does not provide that the nominee acquires title to the amount to the exclusion of all other heirs 6. The
legal position of the nominee has been considered by various High Courts 7 and the Supreme Court of
India", the result of these judicial decisions may be summed up as under:
1. The nominee acquires no beneficial interest under the nomination. He is merely an agent
to receive the money due under the policy.
2. The policy-holder is the owner of the policy and continues to hold interest in it till his
death. If the policy matures for payment during the life-time of the policy-holder, then
the benefits arising under the policy shall belong to him and not his nominee.
3. The benefits secured by the policy i.e. money due under the policy from part of the estate
of the deceased policy-holder. And thus, his creditors can realise their loan from the money
paid to the nominee.
4 As after the death of the policy-holder the money due under the policy becomes part of his
estate, it is governed by the law of succession applicable to him. i.e. his legal heirs are
entitled to the same.
Thus, the nominee does not become the owner of the money which he receives under a policy of
which he is the nominee. The receipt of money by the nominee merely gives a valid discharge to the
insurance company, the money belongs to the legal heirs of the deased.
Notes: 1. Under the English Law, the legal position of the nominee is the same as discussed above. 2. The
money payable under a policy of insurance on the life of a judgment-debtor is not liable to attachment or
sale by the court order
62.12 COMPARISON BETWEEN ASSIGNMENT AND NOMINATION
The following table gives the comparison between ‘assignment’ and ‘nomination’.

No. Assignment Nomination

1.This case, all the rights of the policy-holder In this case, all the rights of the policy-holder

pass to the assignee in his own name and for his does not pass to the nominee. He simply gets the
own benefit i.e..the assignee becomes the owner right to collect the policy money in the event of the
of the policy. Death of the insured person i.e the nominee does
not become the owner. He simply gets the
beneficial interest in the policy

2.It is irrevovable, and cannot be cancelled. It is revocable.and thus it can be cancelled or

3.It may be made with or without consideration. Changed.

4.In this case, the attestation by a witness is required. It is made without consideration.

5.It can be made by an endorsement on the policy itself, In this case, no attestation is required
or by a separate written document.
 6.In this case, the policy money is to be paid to the assignee It can be made by mentioning the name of the
in any case. Nominee in the policy itself, or by an
endorsement on the policy. But it cannot be
made by a separate document

7 .It is made for the purpose of transferring the right In this case, the policy money shall be paid to the
under the policy nominee only if he survives the insured person.
It is made for the sake of convenience of the
beneficiaries after death of the insured.

62.13. PROOF OF AGE

The age of the insured person is very meterial fact to be proved, in case of life policies. Because, for
most of the life policies, the rate of premium depends on the age of the life insured. Moreover, in
endowment policies the money is payable to the insured person on his attaining certain age. Thus, the
correct age should be stated in the proposal form. And the corporation (i.e. LIC) may require a
satisfactory and reasonable proof of age. If the age is not stated in the policy, the proof of age may be
given at any time subsequent to the issue of the policy or on maturity. However in the following cases,
usually the proof of age must accompany the proposal form, as the proposal will not be completed
unless the age is proved:
1. Where the assured has not completed 20 years of age.
2. Where the assured has completed 50 years of age.
3. Where the proposal is under 'Salary Saving Scheme'.
4. Where the proposal in under 'Temporary Assurance Plan' or 'Convertible Term Assurance
Plan.'
5. Where the proposal is under Immediate Annuity, Deferred Annuity or Retirement Annuity
Plans.
6. Where a supplementary benefits for child is desired under a multi-purpose policy, the proof
of age of the beneficiary child.
7. Where the proposal is under the Children's Deferred Endowment Assurance Plan, the proof
in support of (a) the age of the life to be insured, and (b) the age of the proposer, if the
premium waiver benefit is desired.
The age may be proved by any satisfactory evidence, e.g. by production of certified copy Of an entry
in the Register of Birth kept by the local bodies, or by school certificate, or by horoscope
Or Dy any Oilier available evidence. The evidence of a person who is older in
age than the insured
person is also considered sufficient. And if no evidence is available, then an affidavit on oath is
acceptable. When the proof of age is given and the insurance corporation is satisfied with the same, it
writes on the policy the words, 'age admitted', or issues a certificate to the insured person stating that
his age has been admitted as correct. Once the correctness of the age is admitted by insurance
corporation then it cannot be challenged by the corporation unless it can show that some fraud was
practised upon it in this regard. It will be interesting to know that the insurance corporation cannot
refuse to pay the claim even if the age truns out to be more than what was given. However, in such
cases, it can deduct the amount of difference of premium between the two ages.
62.14. PROOF OF DEATH
The death of the insured person is also the material fact to be proved in case of life insurance policies.
Because, in most of the policies, the policy money becomes payable on the death of the insured
person. Thus, the death of the insured person must be proved to claim the money from the insurance
company. The fact to be proved is that the person insured under the policy has died. It may be
proved by a death certificate or by direct evidence. It will be interesting to know that the death of a
person is presumed where it is shown that he has not been heard of for seven years. On the proof of
the death of the insured person, the insurance corporation may pay the policy money to the persons
who are entitled to receive the same.
Note: The cause of death is immaterial for settlement of insurance claim. Thus, whether the death
is caused by murder or military operation, it is covered under the policy, unless otherwise specified in
the policy. However, the death due to capital punishment (i.e. death sentence by court because of
criminal act of assured) is not covered by the policy unless otherwise specified in the policy.
62.15. PAYMENT OF CLAIMS
On maturity of the life insurance policy, the money due under the policy (i.e. policy money) becomes
payable. And the person claiming the money on maturity, must satisfy the insurance company that he is
entitled to receive the money due under the policy.
An endowment policy matures on the expiry of specified period for which the policy was taken, or on the
death of the insured person (assured), whichever is earlier. If the assured is alive on the maturity of such
policy, he is entitled to claim the policy money or his assignee if the policy was assigned. And if the
assured is dead on the maturity, his legal representatives (heirs) are entitled to claim the policy money, or
the nominee of the policy if there is any. A whole life policy matures on the death of the insured person
(assured). In such cases, the legal representatives of the assured are entitled to claim the policy money, or
his assignee or nominee if there was any assignment or nomination.
Example 62.11: A took out a life insurance policy on his life for 20 years. He nominated his wife
B, in the policy. On the due date of maturity, A was also alive. In this case, A is the rightful claimant to
claim the policy money from the insurance company. However, had he died before maturity, his wife B
(i.e. the nominee) whould have been entitled to receive the policy money.
Note: Suppose, in the above example, that there is no nomination, and A dies before the policy
matures for payament. In such a case, the legal representatives of A will be entitled to receive the
policy money. And the insurance corporation will be discharged from its liability by making the
payament of claim to the rightfull claimant.
Example 62.12: A took out a whole life policy on his life, and nominated his wife B in the policy
itself. Subsequently, A made a valid assignment of the policy in favour of C and gave a written
notice of the same to the insurance corporation. In this case, on As death, C (i.e. the assignee) is the
rightfull claimant to claim the policy money. The reason for the same is that a valid assignment cancels all prior
nominations.
Note: Suppose, in the above example, mat there is no nomination and assignment. In such a
case, the legal representatives of A will be entitled to receive the policy money. And the insurance
corporation will be discharged from liability by making the payment of claim to the rightful
claimant.
Sometimes, there are conflicing claims to the amount due under the policy, i.e. the different
presorts claim the money due under the insurance policy. In such cases, Section 47 of the Insurance
Act, 1938 protects the insurance companies from paying the policy money to any wrong person.
According to this section, the insurance corporation may apply to the court for making payment of
the policy money in the court. Section 47 provides for three circumstances in which the
corporation may make such application for the payment of policy money in the court:
1. Where there is conflict of claims.
2. Where there is insufficiency of proof of title to the amount due under the policy.
3. Where there is any other adequate reason.
And where it appears to the court that a satisfactory discharge by the insurance company cannot
otherwise be obtained, it may permit the insurance company to make payments in the court. It may
be noted that by making payment in the court, the insurance corporation is discharged from its
liability.
On receipt of the money, the court shall cause a notice to be given to every ascertained claimant,
that the amount has been paid in the court. And the claimants may apply to the court for the
withdrawal of the amount. On receipt of the application of such withdrawal, the court shall also
cause a notice to be given to every other ascertained claimant. The court shall have the power to
decide all questions relating to the disposal of claims in respect of the amount paid in the court.
62.16. SUICIDE BY THE ASSURED (INSURED PERSON)
We know that the life insurance policies also mature on the death of the life insured person
(assured). In this connection, the term 'suicide' is also important as its ultimate result is the death of
the person. The term 'suicide' may be defined as a willful and intentional taking of one's own life.
The life insurance policies usually contain a clause that no payment shall be made in case the
assured commits suicide. Where such clause is there in the life insurance policy and the assured
commits suicide, the Life Insurance Corporation (LIC) is not liable to pay the amount due under
the policy. However, the burden of proving suicide is upon the insurance corporation (LIC). i.e. it
is the duty of the LIC to prove that the assured (insured person) has committed suicide. But it
there is no specific clause in the policy in respect of suicide, LIC cannot avoid (escape) its liability
on the ground of suicide. Thus, the Life Insurance Corporation cannot escape its liability on the
ground of suicide unless there is a specific clause to that effect in the policy 10 . This is so because
in India, the suicide in itself is not an offence, only an attempt to commit suicide is an offence.
It may be noted that in the absence of the specific clause, the insurance corporation will be liable in
case of suicide whether the assured was of sound or unsound mind at the time of suicide. In order
to overcome this difficulty, all the insurance policies issued by the Life Insurance Corporation of
India generally contain a 'suicide clause'. According to this clause, if the insured person (assured)
commits suicide within one year of the commencement of the policy, the Corporation shall not be
liable to pay the policy money. However, if the assured validly assigns the policy for valuable
consideration, then the assignee can make the Life Insurance Corporation liable even if the assured
has committed suicide within a year of the issue of the policy. However LIC must have been
intimated about assignment at least one month before the date of suicide. Example 62.13: A insured
his life with the L.I.C. for Rs. 250,000. The policy dated 31.3.98 contained a 'suicide clause' which stated
that the L.I.C. would not be liable if the life assured committed suicide within one year from the date of
policy. Subsequently, A became insane i.e. of unsound mind, and after one year of the policy, A
committed suicide on 31.4.99. In this case, As legal representatives can recover the amount from B.
The reason for the same is that A has committed the suicide after the expiry of on-year from the
commencement of the policy, and the unsoundness of the assured (A) does not make any difference.
It may be noted that the L.I.C. may add any clause in the policy limiting its liability in case of
suicide by the assured. In a case before the Supreme Court, an insurance policy contained a clause that
in the event of suicide before the expiry of three years from the date of the policy, the corporation's
liability shall be limited to the sum equal to the total amount of premium paid under the policy without
interest. The assured committed suicide with in three years of the date of policy, the Supreme Court
held that corporation's liability would be limited to the amount of premium paid under the policy
without interest.
[Life Insurance Corporation of India v. Dharam Veer Anand (1998) 5 SCALE 584]
Note: On the point of suicide, the position under the English Law is different. Under the English
Law, suicide amounts to crime and the insurance company will not be liable to pay the policy money if
the assured commits suicide while of sound mind. But if the assured commits suicide while of
unsound mind, the insurance company remains liable to pay the policy money. And the legal
representatives of the deceased assured can recover the policy money from the insurance company.
Thus, the English Law makes the difference between the assured committing suicide while of sound
mind and of unsound mind. Whereas, the Indian Law makes no such distinction.
62.17. LIFE INSURANCE CORPORATION OF INDIA
We have already discussed in Art. 62.1 that the life insurance business in India, was nationalised in
1956. On 19th January 1956 the Government of India issued an Ordinance nationalising the life
insurance business, and in September 1956, this Ordinance became the Life Insurance Corporation
Act. Under this Act, the Life Insurance of India (hereinafter also referred to as 'Corporation') was set
up, which came into existence on 1st September, 1956. Since then Life Insurance Corporation had the
monopoly* of carrying on the life insurance business in India. On the establishment of the Life
Insurance Corporation, the business of all the then existing insurance companies, their assets,
liabilities and empliyees were transferred to the Corporation with immediate effect. The main objects
of the nationalisation of the life insurance business may be summed up as under:
1. To ensure absolute security to the policy-holder.
1. To encourage public savings, and to have better utilisation of those savings, e.g. by
 investing them under five years plans.
2. To spread insurance in rural areas by creating the insurance habit among the people.
2. To prevent misappropriation of funds and malpractices in the administration of the
insurance companies.
The constitution, capital, functions etc. of the Life Insurance Corporation as contained in the Life
Insurance Corporation Act, 1956, may be discussed as under:
1. Constitution of the Corporation: The Life Insurance Corporation is a body corporate
constituted under the special Act i.e. Life Insurance Corporation Act of India. It consists of 16
members. These members are appointed by the Central Government, and one of them is appointed
as the chairman. While appointing the members of the Corporation, the Central Government shall
satisfy itself that the persons to be apponted has no financial or other interest as is likely to prevent
him from carrying out the functions of the Corporation independently and to the best interest
of the society [Section 4].
Capital of the Corporation: The Life Insurance Corporation has the original total paid up
capital of Rs 5 crores. The entire capital of Rs 5 crores has been provided by the Central
government. However, on the recommendation of the Corporation, the Central Gvernment may reduce
the capital to such an amount as the Government may determinene [Section 5].
3. Functions of the Corporation: We have already discussed that the Corporation has the complete
monopoly of carrying on the life insurance business in India. Thus, the primary and general function of
the corporation is to carry on the life insurance business in India. In carrying ollt its functions, the
Corporation shall make attempts in securing the development of life insurance business to the best
advantage of the society. As for as possible, the Corporation shall carry on its functions on business
principles [Section 6(1)]. It will be interesting to know that the Corporation has also started the
general insurance business" since 1st April, 1964. The powers of the Corporation may be summarised
as under [Section 6(2)]:
1. To carry on capital redemption, annuity and reinsurance business.
2. To acquire, hold and dispose of any property for the purpose of its business.
3. To take all necessary steps for the purpose of protection and realisation of its investments.
4. To borrow or advance money upon such security, movable or immovable, as the
Corporation may think fit.
5. To transfer the whole or any part of the life life insurance business carried on outside
India to any other person if it is necessary to do so.
6. To carry on any other business which, in the opinion of Corporation, is capable of
conveniently carried on in connection with its business. And which is likely to render
profitable the business of the Corporation.
7. To do all such acts as may be incidental and necessary for the proper exercise of any
of its powers.
4. Administration of the Corporation: The administration of the Corporation is carried on by the
committee consisting of its members. There is also an executive committee consisting of five of its own
members. The work of general superintendence and directions of the affairs of the Corporation have
been entrusted to this executive committee. There is also an investment committee to advise the
Corporation in matters of investment of its funds [Section 19]. Though the Corporation is empowered
to administer its own affairs, but the Central Government has the power to lay down general policies to
be followed by the Corporation. And the Corporation shall be guided by the directions of the Central
Government in all those matters which will involve public interest [Section 21].
The central office of the Corporation is situated at Bombay. It has five zonal offices situated at
Bombay, Calcutta, Madras, Delhi and Kanpur. There are several Divisional Offices, bub-Offices,
Branch Offices and premium collecting centres [Section 18].
The amount of the Corporation shall be audited by the professional auditors (i.e. chartered
accountants) appointed by the Central Government. The audited annual accounts and annual report shall
be submitted to the Central Government which shall place them before both Houses of Parliament
[Sections 25, 29].

TEST QUESTIONS
 1. Define contract of life insurance. What is its nature? State the principles of life insurance with
special
reference to 'insurable interest' and 'good faith'.
2. Discuss in brief the important types of life insurance policies.
3. Define the terms 'surrender value' and 'paid up value' of a life insurance policy. Distinguish
between
the two, and discuss the legal provisions relating to 'loans on a life insurance policy'.
4. What do you you understand by assignment of a life insurance policy? State the legal provisions
relating to assignment.
5. What do you understand by nomination by policy-holder? State the legal provisions relating t
nomination, and explain the legal position of a nominee,
6. State the comparison between assignment and nomination.
7. Write brief note on Life Insurance Corporation of India.
8. Discuss the legal provisions relating to payment of claims by the insurer in case of life insurance
How does the liability of insurer is affected if the assured commits suicide?
9. Write notes on the following
(a) Endowment policy
(b) Convertible whole life policy.
(c) Participating policy
(d) Money back policy.

63. FIRE INSURANCE

63.1. INTRODUCTION
We know that fire insurance business is the business of effecting contracts of insurance against the loss
by or incidental to fire. In this case, the property of a person is insured against the loss caused by fire
and the loss incidental to fire. The fire insusrance business falls under the category of general insurance
business. In India, the general insurance business was nationalised in 1972, and the General Insurance
Business (Nationalisation) Act, 1972 was passed to carry on this business. Since then it is carried on
under the control and supervision of General Insurance Corporation of India (a Government
Company)1, which was get up under the provisions of this Act of 1972. Under the scheme of this Act,
four companies, as discussed in Art 61.1, are formed to carry on the general insurance business, which
operate under the control and supervision of General Insurance Corporation of India.
The fire insurance business is governed by the provisions of the Insurance Act, 1938, the General
Insurance Business (Nationalisation) Act 1972, the India Contract Act 1872, and the Indian Stamp Act
1899. And where the law is silent on any point, the principles established by the decisions of Indian
Courts, and the English Law shall apply.
Note: On the passing of the Insurance Regulatory and Development Authority Act, 1999, as
discussed in Art. 61.20, the monopoly of GIC and its four subsidiary companies to carry on general
insurance business has ceased to exist. A new section 24A has been inserted to the General Insurance
Business (Nationalisation) Act, 1972 which provides that the exclusive privilege of the GIC and the
four acquiring companies to carry on the general insurance business in India shall cease on and
from the commencement of the Insurance Regulatory and Development Authority Act, 1999. This
amendment enables the other Indian insurance companies to do the general insurance business.
63.2. CONTRACT OF FIRE INSURANCE
The term 'contract of fire insurance' may be defined as a contract by which an insurer (i.e. insurance
company), in consideration of certain sum of money (premium), undertakes to pay to the assured
(person insuring his property) the amount of his (assureds’) loss, not exceeding a certain specified
amount, caused by fire during the specified period. In other words, a contract of fire insurance is a
contract to indemnify (i.e. compensate) the assured for the loss to his property caused by fire.
A contract of fire insurance generally specifies the maximum amount which the assured can claim
from the insurance company in the event of loss caused by fire. The purpose of fixing such amount is that
the insurance company is liable to make good the amount of loss suffered by the assured up to this
maximum limit. Thus, if the actual loss suffered by the assured exceeds
the maximum amount specified in the contract of fire insurance (i.e. fire insurance policy),this insurance company is
liable only upto the amount specified in the contract, and not for the excess In case of a contract of fire insurance the,
premium to the insurance company may be paid jri lump sum or by periodical installments.
Example 63.1: A insured his house against fire with B, an insurance company, for Rs. 1000,000. The
contract of insurance provided that if the house was destroyed by fire within a year, the insurance company
would compensate A for the loss suffered by him. The house was burnt by fire within a year, and the actual
loss was estimated to Rs. 11,00,000. In this case, B is liable to pay Rs. 10.00.000 (the limit specified)
to A.
63.3. FIRE AND LOSS BY FIRE
We know that a contract of fire insurance covers the loss caused by fire. And if fire is the proximate cause of
loss, the loss is recoverable under the fire insurance policy. The term 'fire' is used in its ordinary and
plansense, and not in any technical or restricted sense. It means the fire which has broken bounds i.e.
which has spread beyond its usual and proper limits. The term 'fire' may be defined as the production of
light and heat by combustion (i.e. process of burning). It may be noted that the light and heat alone is not
fire unless there is actual ignition (i.e. burning by flames). Thus, the loss by fire will not include any loss by
heating alone unless the property insured has been burnt by fire.
Example 63.2: A insured against fire his sugar stock lying in a go down. The sugar was spoiled by
excessive heat caused by the closing of ventilators in the go down, but there was no actual ignition. It was
held that the insurance company was not liable. In this case, the loss was not due to fire as there was no
actual burning. [Austin v. Drewe, (1816) 4 Comp 360].
It may be noted that a contract of fire insurance (i.e. fire insurance policy) covers the losses which are
directly caused by fire, and also the losses which are indidental to fire i.e. which arise consequently from
the fire. In other words, all losses which are the reasonable and natural consequences of fire, are covered
by the fire insurance policy. Thus, the following losses are also recoverable under a fire insurance policy.
1. The losses resulting from the efforts to put out or extinguish the fire. e.g. the loss caused
by fire brigade in extinguishing the fire.
2. The losses resulting from the removal or throwing away the goods from the building on
fire with the intention of saving them.
3. The losses resulting from destroying a neighbouring house for the purpose of controlling
the fire.
4. The losses resulting from theft during the confusion created by fire, which are specifically
provided for in the fire policy.
Example 63.3: A insured his house and household goods against the loss of fire. A fire broke out in
the house. During the efforts to extinguish the fire, some articles were spoiled by water, and some furniture
was thrown out of the window in order to save it from fire, which was damaged. In this case, the loss
resulting from the spoiling of the articles and throwing away the furniture are recoverable under the fire
insurance policy, as these losses are the consequence of fire.
Example 63.4: A insured his car against the loss by fire. But the car was not insured against the loss
by collision. While he was driving, a fire started in the dashboard of the car caused by a short circuit in
the electricity connections. And while trying to put out the fire, A lost control of the car and it collided
with a tree. After the collision, the fire spread and the whole car was trapped in it. It was assessed that
the loss due to collision was Rs. 10,000, and due to the subsequent fire Rs. 5000. It was held that A could
recover the entire loss of Rs. 15,000, as the loss of collision resulted in the efforts of extinguishing the
fire. [Based on Stanley v. Western Insurance Co. (1868) L R 2 Ex. 71].
In this case, the following observations of JUSTICE KELLY C. B. are worthnoting in connection
with the loss recoverable under the fire insurance policy:
"Any loss resulting from an apparently necessary and bonafide effort to put out afire, whether
be by spoiling the goods by water or throwing the articles of furniture out of the window, Or even by
destroying a neighboring house by explosion for the purpose of checking the progress of the flames, every loss
that clearly and proximately results, whether directly or indirectly, from the fire, is within the policy."
Note: Generally, losses by fire resulting from earthquakes, riots, military powers, civil disturbances,
rebellion, foreign enemy etc. are not covered by the fire policies. Moreover, the losses by theft during
or after occurrence of fire are also not covered unless specifically provided for in the fire policy.
63.4. NATURE OF A CONTRACT OF FIRE INSURANCE
We know that a contract of fire insurance is a contract of indemnity. A contract of indeminity 2 js the
contract in which one person promises to indemnify (i.e. compensate) the other for the loss or
damage suffered by him (the latter) i.e. where one person promises to make good the loss suffered
by the other person. A contract of fire insurance resembles a contract of indemnity. Because in a
contract of fire insurance also, the insurance company promises to compensate the assured for the loss
suffered by him due to the destruction of property by fire. Thus, a contract of fire insurance is a
contract of indemnity. As a matter of fact, every contract of insurance, except life and personal
accidental insurance, is a contract of indemnity. It may, however, be noted that the assured can recover
only the actual amount of loss suffered by him but not exceeding the amount of the polisy. Thus, the
assured is not allowed to make any profits out of the loss caused by fire. If that were so, the assured
might make efforts to destroy the property by fire in order to get the policy money.
Example 63.5: A insured his factory building against fire with B, an insurance company. The factory
building was insured for rupees two lacs. Subsequently, the factory building was destroyed by fire
within the period of the policy. And it was estimated that it would be restored to its original condition
by spending Rs. 50,000. In this case, A can recover Rs. 50,000 from B as the actual loss suffered by
him is Rs. 50,000 only.
However, a contract of fire insurance need not necessarily be a contract of indemnity. Where a
contract of fire insurance provides for the payment of fixed amount of money irrespective of the loss
suffered by the assured, it will not be a contract of indemnity. In such cases, the contract of fire
insuracne shall be a contingent contract.
63.5. TYPES OF FIRE INSURANCE POLICIES
We know that an insurance policy is a written document which contains the terms of the contract of
insurance between the assured and the insurance company. The fire insurance policies are of various
types which are issued to meet the varying needs pf the individual persons. The principal and important
type of fire insurance policies are discussed in the following pages:
1. Specific policy: It is the policy which is taken for a specified amount. And the specified
amount of the policy is always less than the real value of the property. This specified amount
lays down the maximum limit upto which the compensation can be claimed from the insurance
company. In the event of loss, the insurance company is liable for the actual loss if the loss falls
within the specified amount. And if the actual loss exceeds the specified amount, the insurance
company is liable for the amount specified in the policy.
2. Valued policy: It is the policy in which the amount payable is fixed at the time of the contract
of insurance. In the event of total loss, the insurance company is liable to pay the amount so
fixed without asking for any proof as regards the value of the property. This converts the fire
insurance contract from a contract of indemnity to a contingent contract. Such policies are not
common now-a-days.
Note: The valued policy is applicable in cases of total loss only. In case of partial loss the insurance
company is liable to indemnify the assured only for the actual loss suffered by him as no one is all
to make profits out of his loss. See Art. 63.6 For more detail.

3. Average policy: It is the policy which contains the 'average clause'. The average close
limits the liability of the insurance company to that proportion of the actual amount of loss which the
insured amount bears to the total value of the property. And for the balance of loss, the assurance is
deemed to be his own insurer. In such policies, the actual value of the property is more the the
insured amount. The object of inserting the average clause is to prevent the under-insurance and to
induce the assured to take out a fire policy for the correct value of the property. The claim of
insurance company is arrived at by dividing the insured amount by the actual value of the property
and multiplying it by the amount of total loss. e.g. if a house worth Rs. 100,000 is insured for Rs. 80,000
only, and if the loss caused by fire is Rs. 60,000, then the amount of loss payable by the insurance
company will be Rs. 48,000 calculated as under:
 80,000 × 60,000 = Rs. 48,000
100,000
And the assured will have to bear his own loss of Rs. 12,000 (60,000-48,000). It may be noted that
the average clause comes into operation in cases of partial loss only. If there is total loss the
insurance company is liable to pay the full sum assured. Thus, if in the above case, the total loss
caused by fore is estimated at Rs. 100,000, the claim will be settled for Rs. 80,000 i.e. the sum
assured.
4. Reinstatement or replacement policy: It is the policy in which the insurance company
undertakes to pay the cost of reinstatement or replacement of the property destroyed by fire. The
insurance company may either itself replace the property or pay in cash the cost of reinstatement.
Thus, the insurance company reserves with itself the right to reinstate the property instead of
paying the compensation in cash. It may, however, be noted that the insurance company has to
select either of these two modes. Once a mode is selected, it cannot afterwards be changed by
the insurance company e.g. if the. insurance company offers to replace the property, it cannot
later on claim to pay the cost of replacement or vice versa.
5. Floating policy: It is the policy which is taken for the property lying in different lots at
different specified places in the same city or town. e.g. a trader may take one policy for all his
goods lying in two warehouses at different places in the city. It may be noted that though the
property or the goods are at different places, but the policy is taken for a single some of money
and for single premium. Thus, one single fire policy, under one sum and for one premium, covers
the property or goods of the assured lying at different places. Sometimes, the assured is in a
position to declare only the total value of the property which is at risk, and not the separate values
of the property at separate places. In such cases, the floating policy is useful. The floating policies
are always subject to an average clause. The term 'average clause' will be discussed in Art. 63.6.
6. Consequential loss policy: It is the policy which also covers the loss of profits which the
assured (the person insuring his property) sustains due to the interruption or closure of his business,
due to the fire. This policy is of recent origin, and is also known as 'loss of profits policy'. As
a matter of fact, the fire destroys not only the property insured against, but also results in certain
consequential losses, such as (a) the profits that could have been earned had the property not
been destroyed (b) the payment of standing charges i.e. interest, salaries, taxes etc. (c) increase
in the cost of working e.g taking up of temporary building for the purpose, getting the work done
from other firms at extra costs etc. And a consequential loss policy covers all such losses resulting
due to fire.
7. Comprehensive policy: It is the policy which covers losses against various risks such as
fire, explosion, lightning, riots, civil disturbances, thefts etc. It is also known as 'all insurance"
'or all-in-one' policy.
8. Declaration policy: It is the policy which is taken for the goods which are subject to frequent
fluctuations in value or in volume. In case of such goods, the amount of the policy is determined on the
basis of written declarations, made by the assured from time to time. Under this policy the assured is
required to declare in writing within 14 days of each month (or any other date specified in the policy),
the stock covered under the policy during each month. At the end of the year, the average amount of
stock at risk is calculated on the basis of the total declarations made by the assured. And the average
amount forms the amount of policy. At the time of issue of such policy, a provisional premium on 75%
of the sum insured in charged. However, a minimum amount of premium is fixed by the insurance
company. Such polices provide the maximum cover, and at the same time help the assured to avoid over-
insurance with consequent overpayment of premium because the goods are not insured at the originally
declared amout which may turn out to be higher due to fluctuations in the value of the goods.
63.6. AVERAGE CLAUSE IN FIRE INSURANCE POLICIES
Generally the people under-insure their properties in order to save premium, i.e. the policy is
taken for the less amount than the actual value of the property. The reason for the same is that it is
very rare that whole of the property is destroyed by fire. Generally, the property is partially destroyed.
Thus, in case of partial losses, the assured may get the full amount of loss by paying the small amount
of premium. In order to discourage under-insurance, the insurance companies usually insert a special
clause, called the 'average clause', in their fire insurance policies. The average clause limits the
liability of the insurance company to that proportion of the actual amount of loss which the insured
amount bears to the total value of the property. And for the balance of loss, the assured is deemed to
be his own insurer. The object of inserting the average clause is to prevent the under-insurance, and to
induce the assured to take out a fire policy for the correct value of the property. The amount payable
by the.insurance company is arrived at as under:
Insured Amount x Total Loss
Actual Value of Property
Example 63.6: A, the owner of a house worth Rs. 200,000, insured it against fire with B, an
insurance company, for Rs. 100,000. The fire policy contained an average clause. The house was burnt
down in fire, and the total loss of Rs. 90,000 was caused by fire. In this case B is liable to pay Rs.
45,000 only which is calculated as under:

100,000 x 90,000 = Rs. 45,000

200,000

In the absense of average clause, the insurance company would have been liable for the full amount
of loss i.e. Rs. 90,000.
It may, however, be noted that the average clause applies only if the loss caused by fire is
less than amount insured. Thus, if the loss caused by fire is more that the amount insured, then
the insurance company is liable for the full amount of the policy inspite of the average clause.
[Genreal Assurance Society Ltd. V. Mohd. Salim (1965) Allahabad 561].
Example 63.7: A, the owner of a factory building worth rupees 5 lacs, insured it against fire with
B, an insurance company, for rupees 2 lacs only. A fire broke out in the factory and the building was
completely destroyed. In this case, A is entitled to recover rupees 2 lacs (i.e. the full amount of the
policy) from the insurance company.
63.7. PRINCIPLES OF FIRE INSURANCE
We have laready discussed in Art. 61.11 the fundamental principles of a contract of insurance in
general. However, the following principles require special discussion in connection with the contracts
of fire insurance.
1. Insurable interest: We know that 'insurable interest' is the pecuniary (i.e. monetary) interest in the
subject matter of insurance. The existence of insurable interest is essential element of every contract of
insurance. In case of fire insurance, the subject-matter of insurance is the property which is insured
against fire. Thus, in order to effect a valid contract of fire insurance, a person must have an insurable
interest in the property. It may be noted that in case of fire insurance the assured (i.e. the person
insuring his property) must have insurable interest in the subject matter both at the time of contract and
at the time of loss of the subject-matter. In order words, the insurable interest must exist through-out
the period of fire insurance policy.
In B.K. Sethi v Oriental Insurance Co Ltd. (1998) CCJ 245 (Delhi), the State Commission quoted
the following para, from a book, explaining the meaning of insurable interest:
"To constitute an insurable interst capable of supporting a contract of fire insurance, three conditions
must be fulfilled, namely (a) there must be a physical object capable of being destroyed by fire, (b) such
physical object must be the subject-matter of insurance, and (c) the insured must stand in some relation
thereto recognised by law in consequence of which relation he may benefit by its safety or may be
prejudiced by its loss:
Every owner of a property has an insurable interest in it, and may insure the same. However, it is
not the owner alone who has an insurable interest in his property. Any other person who will suffer
a direct monetary loss on the destruction of the property insured, also has an insurable interest in the
same. In case of property, the insurable interest may arise on account of (a) ownership, (b) lawful
possession and (c) contract. Thus, the following persons have an insurable interest in the subject
matter of fire insurance:
(a) The owner of the property has an insurable interest in it. The ownership may be absolute
or limited, e.g. the joint owners have the limited ownership. The ownership may also be
legal or equitable, e.g. a purchaser under an agreement to purchase has an equitable
ownership in the property.
(b) The persons having the lawful possessions of the goods or property have an insurable
interest in the good or property in their possession, e.g. a warehouse man, a common
carrier, a commission agent, a pawn-broker, an innkeeper, a factor, an Official Assignee
or Receiver in the property of the insolvent, a finder of goods, trustee.
(c) The persons having the possession of the goods under a contract also have an insurable
interest in the goods in their possession e.g. a mortgagee or pledgee in the property
mortgaged or pledged to him to the extent of debt secured by mortgage or pledge, a bailee
in the goods entrusted to him, a tenant in the property under his tenancy, the insurance
company itself in the property insured to it.
Example 63.8: A and B were the joint owners of certain property. In this case, both A and B have an
insurable interest in the property limited to the extent of their shares. And thus, both or any of them
may insure the property.
Example 63.9: A delivered certain goods to B, a common-carrier, for the purpose of transporting
them to a particular place. In this case, both A and B have the insurable interest in the goods. A being
the owner, and B having the lawful possession of the goods.
Example 63.10: A found some jewellery on the road. He incurred lawful expenses of Rs. 5,000 in
finding the true owner. In this case, A acquires an insurable interest in the jewellery to the extent of
Rs. 5,000 and may insure it.
Example 63.11: A borrowed Rs. 90,000 from B, and mortgaged his house with him as security for
the repayment of the loan. In this case, B (i.e. the mortagee) acquires an insurable interest in the
house to the extent of Rs. 90,000 and may insure it.
It will be interesting to know that a person having a limited interest in the property or goods may
insure them not only to the extent of his own interest, but also to cover the interest of others in such
property or goods. And in the event of loss, he may recover the whole amount of loss. However, he
will hold the amount over and above the value of his loss, in trust for the other persons who have
insurable interest in the property.

Thus, for the validity of a contract of fire insurance, the assured must have an insurable interest in the
subject matter of insusrance. A person having no insurable interest cannot recover the amount due
under the policy.
Example 63.12: A was the owner of nearly all the shares in a timber company. He insured all the timber
in his own name. A fire broke out in the factory, and all the timber destroyed in the fire. A claimed the
insurance money from the insurance company, but his claim was rejected by the insurance company. A
filed a suit against the insurance company. It was held that A had no insurable interest in the timbers and
his claim was validly rejected. In this case, though A owned nearly all the shares in the company, but he
did not become the owner of the company's property. Moreover, the timber was in possession of the
company. A company has a separate legal entity of its own capable of owning and possessing the property
in its own name. [Macaura v. Northern Insurance Co. (1925) AC 619].
2. Causa proximo: We know that the term 'causa proxima' means the proximate or immediate cause.
The assured (the person insuring his property) can recover the loss from the insurance company only
when it is caused by an event insured against, and such event is the proximate cause of loss. In case
of fire insurance, if the proximate cause of loss is fire, the assured is entitled to recover the loss from
the insurance company. It will be interesting to know that the origin of cause of fire is immaterial
unless it is the deliberate act of the assured himself. Thus, the assured is entitled to recover even if the
goods are inadvertently (i.e. accidently) and unintentionally set on fire by the assured himself.
Moreover, the loss due to assured's own negligence can also be recovered. Sometimes, the fire is
caused due to the act (accidental or intentional) on the part of a third party. In such cases, also, the
assured is entitled to recover the loss from the insurance company.
Example 63.13: A insured his household goods with B' an insurance company, against risk of fire.
While smoking in the bed, A fell asleep and the goods caught fire, however, A escaped with a few
burns. In this case, A can recover the amount of loss from B. The reason for the same is that the
goods are destroyed by fire. And the fire is not caused by the deliberate or intentional act of A
Here A's act of smoking in the bed was negligence, and the loss due to assured's negligence is
covered if the proximate cause of loss is the fire. As such A is entitled to recover, the amount of
loss from the insurance company.
Example 63.14: A insured her jewellery and other valuables with B, an insurance company, against the
risk of fire. As a precaution against theft, A hid the jewellery and valuables under the coal in her grate.
Later on, having forgotten that she had concealed the jewellery and valuables in the grate, she inadvertently
lit the fire, and consequently, the jewellery and valuables were damaged. It was held that A was entitled
to recover the loss as the proximate cause of loss was fire. In this case, A's act was neither deliberate nor
intentional. [Harris v. Poland (1941) ! K. B. 462],
Example 63.15: A insured his house against loss by fire. Later on, he became insane (i.e. of
unsound mind) and killed his wife, severely injured his only son, set fire to the house and died in the
fire. However, /Ts son survived, and he claimed the compensation, from the insurance company, for
the recovery of loss caused by fire. In this case, son was allowed to recover the money under the
policy. In this case, A was insane and his acts were not deliberate and intentional, because he himself
did not know what he was doing.
[Karow v. The Continental Insurance Co., 57 Wis. 56].
Example 63.16: A insured his goods against the loss by fire. Afterwards, A and his wife quarreled
and she set fire to the goods which were destroyed. In this case, A is entitled to recover the amount
of loss from the insurance company as proximate cause of loss was fire, and it was not the deliberate
and intentional act of assured (A).
Thus, if the proximate cause of loss is fire, the assured is entitled to recover the amount under the
policy even if the fire was caused by the unintentional act of the assured himself or by the act of a
third party. But if the fire is caused by the intentional or deliberate act of the assured, then he is not
entitled to recover the money. Moreover, the assured cannot recover the money if the proximate
cause of loss is not fire, but some other cause remotely connected with the fire. It may be noted that
the loss directly caused by lightning, electricity or explosion is not covered by a fire policy. But if any
of these things cause fire which ultimately causes the loss, the loss shall be recoverable as the
proximate cause of loss will be the fire though caused by lightning, explosion etc. A simple fire policy
usually covers loss by explosion incidental to fire. Howe the insurance company may specifically
exclude its liability for loss caused by explosion incidental to fire. In such a case, the insurance
company will not be liable even if the fire occurs after explosion and causes loss.
[Stanley v. Western Fire Insurance Co. (1868) 37 L. R. Exch 711
Example 63.17: Hr H2, and H 3 were three contiguous (adjoining) houses insured against fire A
earthquake caused house H, to fall, and in consequence fire broke out and spread to house H Thereaft " an
explosion occured by which the house H, was wrecked. In this case, the insurance company will t/ liable for
the loss caused to house H, if the explosion is caused by fire and the insurance company ha not excluded its
liability for explosion by a special clause in the fire policy.
[Insurance Co. v. Tweed (1868) 7 Wall 4]
The examples on loss by fire have also been discussed in Art. 63.3.
3. Contract from year to year: A contract of fire insurance is the contract from year to year And it
comes to an end after the expiry of one year. However, an option is given to the assured (i.e. person
insuring his property) to continue it for further period of one year on the payment of stipulated
premium. Thus, the assured can renew the contract by paying the agreed premium Usually, after the
expiry of the term of the contract, certain days of grace are allowed during which the contract can be
renewed. It may be noted that the days of grace are allowed only to afford to the assured an additional
opportunity of renewing the policy and not of continuing it. And if before the expiry of the term of
the policy, the assured agrees to renew it then he will be protected for the loss occurring during
the days of grace.

63.8. ASSIGNMENT OF A FIRE INSURANCE POLICY

The term 'assignment of a policy' may be defined as the passing of the rights and liabilities of the
assured (i.e. the person insuring his property) under the policy. And on a valid assignment, the assignee
(the person to whom the right under the policy are transferred) becomes entitled to all the benefits
under the policy and can sue the insurance company on the policy, in his own name4.
 It may be noted that a contract of fire insurance, being a contract of indemnity, is a personal contract
between the assured and the insurance company. Thus, it is not an incident to the property insured i.e. it
is entirely different and independent from the subject-matter of insurance. Therefore, the contract of
insurance does not pass, as such, with the transfer of the property insured. In other words, the
assignment of subject-matter of insurance does not mean the assignment of the. policy of the insurance.
In order that the transferee should get the benefits of the fire insurance policy, the policy must also
be duly assigned to him.
Example 63.18: A, the owner of a mill, insured it against fire with B, an insurance company.
Subsequently, A mortgaged the mill to a third person, C. However, the insurance policy was not assigned to
C. A fire broke out in the mill, and it was completely destroyed in fire. The mortgagee (C) claimed the
policy money from the insurance company. It was held that C was not entitled to claim the policy money from the
insurance company as the policy was not assigned to him. The reason for the same is that the contract of fire
insurance is one to indeminify the insured, and not to any person between whom and the insurance company
there was no privity of contract. In this case, C was not a party to the contract between A and B.5
It will be interesting to know that though the transfer of the property does not automatically assigns
the fire insurance policy to the transferee, but the transfer of property is otherwise must for a valid
assignment because a fire policy cannot be assigned without the transfer of the property insured to the
assignee. The procedure and legal provisions for a valid assignment may be summed up as under:
1. The assignment of the fire insurance policy can be made in either of the following two
ways:
(a) By an endorsement on the policy itself.
(b) By any other writing i.e. by executing a separate document.
But in both the cases, a written notice of such assignment must be given to the insurance company.
This notice is necessary to make the insurance company liable to the assignee. It may, however, be
noted that the consent of the insurance company is not required. Only the notice is required to be
given to the insurance company.
2. The assured mut have an insurable interest in the property insured at the time of
assignment, and if he parts with or loses the insurable interest, an assignment thereafter
by him will be inoperative i.e. without any effect.
3. The policy can only assigned to a person who has acquired some interest in the property,
e.g. the mortgagee, purchaser, bailee etc. Otherwise the assignee will have no insurable
interest in the subject-matter at the date of the loss. Thus, a fire policy cannot be assigned
without a transfer of the property insured to the assignee.
Sometimes, the property insured is sold to a person and the insurance policy is also assigned to him. In
such cases, the assignee becomes the absolute owner of the property, and all the rights under the policy vests
in him as if the contract of insurance had been made with himself. This provision is contained in Section 135
of the Transfer of Property Act, provides that if the assignee of the fire insurance policy also becomes the
absolute owner of the property insured, he gets all the rights under the policy as if the contract of insurance
had been made with himself. But sometimes, only the property insured is transferred to a person for
consideration, and the policy is not assigned to him. In such cases, the transferee does not get the rights
under the policy. He can only require the transferor to apply any money actually received by him under the
policy, to reinstate the property. [Section 49 of the Transfer of Property Act], It may, however, be noted that
the purchaser can neither compel the seller to enforce his rights against the insurance company, nor can
the purchaser claim the insurance money directly from the insurance company. He can claim benefit under
this section only when the seller enforces his claim against the insurance company, and actually receives
the claim money from the insurance company. It is, therefore, advisable for the purchaser to get the policy of
insurance assigned over to him at the time of purchase.
Note: Under the English Law, a policy of fire insurance can be assigned only with the consent of
the insurer (i.e. insurance company). But under the Indian Law, the consent of the insurer is not
necessary. Only a notice in writing to the insurer is sufficient.
63.9. PAYMENT OF CLAIMS
We know that in case of fire insurance, the assured (the person insuring his property) becomes entitled to
claim the amount of loss from the insurance company when the insured property is destroyed by fire.
However, he can claim the amount only if he complies with the following legal formalities:
 1. He must give a notice in writing to the insurance company immediately after the occurance
of the fire. However, the notice may also be given by any other person on behalf of the
assured. Such notice is required to enable the insurance company to take steps to safeguard
its interest, and to determine the nature of fire and extent of loss. The requirement of notice
is generally incorporated in the policy itself, and must be strictly compiled with.
2. He must submit to the insurance company, a statement containing the particulars of loss
and damage with estimated value of each article. Such statement must be submitted within
the time specified in the policy.
3. He must submit the proof of his claim i.e. the proper evidence to support his claim
the insurance company so requires.
It may be noted that if the assured fails to comply with these legal formalities, he may I his claim
altogether. Because these are usually the conditions precedent to assureds’ right to recover the loss
under the policy. The assured will also lose his claim under the policy if he makes a fraudulent claim to
the insurance company. Moreover, the assured is also not entitled to recover the loss arising due to
his own willful misconduct.
Note: In case, the loss has been caused by arson (i.e. by miscreants' deliberate act of burning property the
assured should report the matter to the police, and a copy of the report should be sent to the insurance
-company.
63.10. RIGHTS OF INSURER (INSURANCE COMPANY)
The insurance company has the following rights under a fire insurance policy:
1. Right to rescind the policy: We have already discussed that a contract of insurance is of
utmost good faith. And thus, the assured must disclose truly all the material facts to the insurance
company. Any concealment or miss-statement of facts make the policy voidable. And the insurance
company may rescind (i.e. put an end to) the policy and avoid (i.e. escape) its liability.
2. Rights of entry and control over the property: On the occurrence of any loss or damage to
the property or goods, the insurance company gets the right of entering the premises and assuming
control over the damaged property or goods. As a matter of fact, this right is necessary to protect
the interest of the insurance company because under a fire insurance contract it is the ultimate
sufferer of loss. By this right, the insurance company may ascertain the cause and extent of loss,
and may take steps for minimising the loss.
3. Right of salvage: The term 'salvage' may be defined as the property or goods saved after
fire. On paying the loss in full, the insurance company becomes entitled to take possession of
the salvage of whatever worth it may be. It may be noted that this right of the insurance company
is absolute and flows from the contract of indemnity.
4. Right of reinstatement: Instead of paying the amount of loss in cash, the insurance company
has the right to reinstate or replace the property damaged or destroyed in fire. This is called the
insurer's right of reinstatement. This right may be exercised by the insurance company at its
option. This right protects the company against unreasonable claims by the assured. In any of
the following cases the insurance company may insist on this right of reinstatement:

(a) Where it has reserved this right in the policy itself.

(b) Where it has suspicion of fraud.

5. Right of subrogation: We know that 'subrogation' means the substitution of one person for
another. According to this right, when the insurance company has paid the amount of loss due
under the policy, it gets all the rights which the assured (the person insuring his property) had
against the third party. In other words, the insurance company steps into the shoes of the assured.
And if the assured receives any compensation from a third party, the insurance company is entitled
to receive the same from him.
6. Right of contribution: Sometimes, the same property is insured with two or more insurance
companies. And in the event of loss, one of them pays full amount of loss to the assured. In
such cases, the insurance company paying the full amount of loss, is entitled to claim contribution
from the other co-insurers (i.e. insurance companies). All the insurance companies are liable to
share the loss proportionately.

63.11. COMPARISON BETWEEN CONTRACTS OF LIFE INSURANCE AND FIRE

The following table gives the comparison between the contracts of life insurance and fire
insurance:

S. No. Contract of Life Insurance Contract of Fire Insurance

1. It is contingent contract.
2. It covers the human life. It is contract of indemnity
3. In this case, the whole amount of claim as fixed in the It covers the property or goods
policy is payable In this case, generally the assured is indemnified only for
the actual loss suffered subject to the maximum limit
4. In this case, the claim is certain. The only uncertainty is fixed in the policy.
about the time of arising of the claim. The claim is In this case, the claim is uncertain. The claim may or may
payable either on the death of the assured or after the not arise as the property may not be destroyed during the
expiry of the period of the policy. continuance of the policy.
5. In this case, the period of policy is generally longer e.g.
15 years, 20 years etc. or till death. In this case, the maximum period of policy ios generally
6. In this case, the assured is required to have insurable one year.
interest in the life insured only at the time of completion In this case, the assured is required to have insurable
of the contract interest in the property insured both at the time of contract
7. In this case, there is a provision for nominating a and at the time when the loss takes place.
person who may take the amount of policy after the death In this case, there is no such provision of nomination.
of the assured.
8. In this case, the insurance policy carries a surrender
value. In this case, the insurance policy does not carry any
surrender value.

TEST QUESTIONS
1. Define contract of fire insurance. What is its nature? State the principles of fire insurance with special
reference to 'insurable interest' and 'causa proxima'.
2. What is meant by the term 'fire' in a fire insurance policy? State when and which losses are
recoverable under a fire insurance policy. Give suitable examples to support your answer.
3. Discuss in brief the different types of fire insurance policies.
4. What is the effect of 'average clause' in fire insurance policies?
5. What do you understand by assignment of a fire insurance policy? State legal provisions relating
to assignment.
6. How a claim under a fire insurance policy should be made? Discuss the rights of an insurer under
a fire insurance policy.
7. State the comparison between contracts of life insurance and fire insurance.
8. Write notes on the following:
(a) Replacement policy (b) Floating policy
(c) Declaration policy (d) Causa proxima
(e) Fire and loss by fire (f) Term of fire policy.

64. MARINE INSURANCE

64.1. INTRODUCTION
We know that marine insurance business is the business of effecting contracts of insurance against the loss by
perils of sea. In this case, the vessels (ships etc.), cargoes (goods etc. loaded in the ship) of a person are
insured against the loss caused by perils of sea The marine insurance business falls under the category of
general insurance business. In India, the general insurance was nationalised in 1972, and the General
Insurance Business (Nationalisation) Act 1972 was passed to carry on this busurance. Under the provisions
of this Act, the General Insurance Corporation of India (a Government Company)' was set up to carry on
the general insurance business. Since then it is carried on under the control and supervision of this
Corporation. Under the scheme of this Act, four companies, as discussed in Art. 61.1 are formed to carry
on the general insurance business, which operate under the control and supervision of General Insurance
Corporation of India. As already discussed in Art. 61.20, the exclusive privilege, of the General Insurance
Corporation of India and its four subsidiary companies, to carry on the general insurance business has ceased
to exist on the passing of the Insurance Regulatory and Development Authority Act, 1999. By this Act, a
new section 24A has been inserted in the General Insurance Business (Nationalisation) Act, 1972, which
enables the other Indian insurance companies to carry on the general insurance business.
The marine insurance business is governed by me provisions of the Insurance Act 1938, the General
Insurance Business (Nationalisation) Act 1972 and the Marine Insurance Act 1963. It may, however, be
noted that this business is mainly governed by the provisions of the Marine Insurance Act 1963 as it was
specifically passed for this purpose. The Marine Insurance Act is based on the English Marine Insurance
Act 1906. Moreover, some of the English usages have also been adoped in the Indian Act.
Note. In our discussion on Marine Insurance from chapter 64 to 66, unless otherwise stated, the
Sections mentioned are those of the Marine Insurance Act, 1963.
64.2 CONTRACT OF MARINE INSURANCE
The term 'contract of marine insurance' may be defined as a contract by which an insurer (insurance
company or underwriter), in consideration of certain sum of money (premium) undertakes to pay to the
assured {i.e. the person insuring his vessel or cargoes etc.) the amount of his (assured's) loss caused by
perils of sea. The contract of marine insurance is defined in Section 3 of the Marine Insurance Act 1963,
which reads as under:
"A contract of marine insurance is 'an agreement whereby the insurer undertakes to indemnify
the assured, in the manner and to the extent thereby agreed, against marine losses that is
to say, the losses incidental to marine adventure."
Thus, a contract of marine insurance is a contract to indemnify {i.e. compensate) the assurance
for the loss to his vessels or cargoes etc. caused by marine perils i.e. perils of the seas. The insurance
in marine insurance are known as the 'underwriters'.
Ordinarily, a contract of marine insurance is effected only against the risks at sea. Howev it may,
by its express terms or usage of trade, also be extended so as to protect the assured again t loss on
inland waters or on any land risk which may be incidental to any sea voyage (i e se journey).
64.3. SOME IMPORTANT DEFINITIONS
Following are some of the important definitions used in the marine insurance business.
1. Maritime perils: The term 'maritime perils' may be defined as the perils (i.e. risks or dangers)
consequent on, or incidental to the navigation of the sea. And it includes perils of the seas, fire war
perils, pirates, roves, theieves, captures, seizures, restrains! and detainment of princes and peoples,
jettisons (i.e. throughing of goods overboard with a view to save the ship from sinking and to save the
residue of cargo), barratry (i.e. fraudulent practices of master of the ship with a view of causing loss
to owner) and any other perils which are either of the like kind or may be designated by the marine
insurance policy [Section 2(e)]. It may be noted that the expression 'perils of the seas' does not include
every casuality which may happen to the subject-matter of insurance on the sea. It must be a peril of or
due to sea. Thus, it refers only to fortuitous accidents or casualities of the seas, and does not include the
ordinary action of the winds and waves. The following have been held to be 'perils of the seas':
(a) Foundering of the ship at sea i.e. filling of the ship with water and sinking. 2
(b) Collision with another ship or striking on a sunken rock or other obstructions 3.
(c) Damage to cargo by entering of sea water in the ship through holes made by rats or through
 a value left open by mistake 4.
(d) Damage by heating due to the closing of ventilators to prevent the incursion of sea water
in rough weather.
2. Marine advanture: The term 'marine adventure' may be defined to include any adventure
where
(a) any insurable property is exposed to maritime perils.
(a) the earnings or acquision of any freight, passage money, commission, profit or other
pecuniary benefit, or the security for any advances, loans or disbursements, is endangered
by the exposure of insurable property to maritime perils.
(b) any liability to a third party that may be incurred by the owner of, or other person interested
in or responsible for, insurable property by reason of maritime perils [Section 2(d)].

3. Insurable property: The term 'insurable property' may be defined as any ship, goods or
other movables which are exposed to maritime perils. And the term movables here means any
movable tangible property other than the ship, and includes money, valuable securities and other
documents [Section 2(c)].
Freight: The term 'freight' may be defined as money payable to ship-owner for the carriage
of goods. However, in the Mrine Insurance Act, it has been extended to include any benefit derived
by the ship-owner from the employment of his ship e.g. benefit derived by him from the carriage Of his
own goods, or money received from the charterer for the hire of the ship. But the term does not
include the passage money [Section 2(b)]
5. Jettison: The term 'jettison' may be defined as the throwing of goods overboard in order
to lighten the ship bona fidely, and in emergency. The goods are thrown in order to avoid the
danger of the ship sinking, and to save the residue of cargo.
6. Barratry: The term 'barratry' may be defined as the fraudulent practices of the master
(captain) of a ship or crew with a view of causing loss to the owner of the ship or cargo. It include
every intentional wrongful act committed by the mister or crew in contravention of their duties
e.g. intentionally setting fire to the ship.
7. Bottomry: The term 'bottomry' may be defined as the contract by which the money is
borrowed by the master of a sea-going ship on the security of the ship or of ship and cargo both.
The money may be required by the master to preserve the ship or to complete the voyage. Such
a contract is executed into a written document which is known as 'bottomry bond'.
8. Respondentia: The term 'respondentia' may be defined as the contract by which the money
is borrowed by the master of sea-going ship on the security of the cargo alone laden or to be
laden on board a ship. Such a contract is executed into a written document which is knows as
'respondentia bond'.
In both the above cases (bottomry and respondetia), the amount of loan is repayable when the
ship and/or the cargo, as the case may be, reaches safely at the port of destination. If the ship is lost
before arrival at destination, the money-lender loses his money, as it is payable only on the condition
that the ship and/or the cargo arrive at the destination 5. Thus, the money-lender has an insurable interest
in the ship or cargo, in respect of the loan given by him and may insure the same. However, for the
validity of contract of insurance, money-lende's interest must be specifically stated in the marine
policy. Moreover, the bottomry or respondentia bonds must be shown to be legally valid I.e. creating a
risk which a money-lender will have. Where a bond provides that the money is repayable in any event
irrespective of whether the property (ship or cargo) is lost or not on the insured voyage, nothing is
recoverable under such a bond 6.

64.4. NATURE OF A CONTRACT OF MARINE INSURANCE

We have already discussed in Art. 61.3 that a contract of marine insurance is a contract of indemnity.
A contract of indemnity is the contract in which one person promises to indemnify (i.e. compensate)
the other for the loss or damage suffered by him (the latter) i.e. where one person prmises to make
good the loss suffered by the other person. A contract of marine insurance resembles a contract of
indemnity. Because in a contract of marine insurance also, the insurance company promises to
compensate the assured for the loss suffered by him due to perils of sea. Thus, a contract of marine
insurance is a contract of indemnity. It, may, however, be noted that the contract of marine insurance
does not necessarily give a perfect indemnity. In cases, where the value of the marine policy is fixed,
the assured is indemnified for the actual loss suffered by him subject to the maximum amount fixed in the
policy.

64.5. MODE OF CONTRACTING AND CONCLUSION OF A CONTRACT OF MARINE

INSURANCE
A contract of marine insurance, like any other contract, is completed by an offer made by one party to
the other, and accepted by the latter. However, the method followed in marine insurance is different
from that adopted in other forms of insurance. In other forms of insurance contracts

a proposal form is filled in by the assured (insured person) and forwarded to the
company for its acceptance. And on acceptance by the insurance company, the
insurance is concluded. On the other hand, the contract of marine insurance is generally
through the agency of insurance brokers (i.e. insurance agents) employed by the
receiving the instructions from his principal (i.e. the assured), the broker prepares a h '
memorandum of risks to be covered. This document is called the 'slip', and contains
information as to the name of the ship, the description of the risk, the sum insured, the d
and the rate of premium. The broker takes the slip to a number of insurers (i.e. insura
companies) called the underwriters. The underwriter who is willing to accept the risk quotes th
amount he proposes to undertake, and the rate of premium. If the rate of premium is accent d
by the broker, it is entered on the slip. Then the underwriter writes on the slip the aniount whi -h
he proposes to undertake, initials this figure and puts the date on the slip. When the underwrit>
so initials the slip brought to him by a broker, it implies that he agrees to issue a policy in term
of the slip. Sometimes, an underwriter accepts only a portion of the value of the slip. I n such
cases, the broker takes the slip to other underwriters until the full value is covered. The slip duly
signed by the underwriter, is the complete and final contract by which the terms of the insurance
and premium are fixed. And thus, neither party can deviate from the terms without the consent
of the other7. It may, however, be noted that the slip is not enforceable in law unless it is stamped
The reason for the same is that a marine insurance contract can only be entered into by means
of a duly stamped policy. However, an unstamped slip is admissible for the purpose of showinp
when the proposal was accepted. Thus, though the slip has no legal value, but the contract is
considered to be concluded from the date of the acceptance of proposal by the underwriter (i.e.
from the date the underwriter initials the slip). This provision is contained in Section 23 of the
Marine Insurance Act. According to this section, the marine insurance contract is considered to
be concluded from the date when the proposal of the assured was accepted by the insurance
company (underwriter). And a slip or covering note, though unstamped, is good evidence for
showing the date of acceptance of the proposal. A 'cover note' or an 'insurance note' is the
document which is generally issued instead of a slip. Thus, the contract of marine insurance is
concluded on the acceptance of the proposal, whether or not any policy in respect thereof is issued.
It is beneficial for the assured, becaused after the acceptance of the proposal, he is not bound
to disclose any fresh fact coming to his knowledge thereafter and before the issue of the marine
policy. [Cory v. Patton (1874) LR 9 QB 577],

64.6. MARINE POLICY

A marine policy is the written document which contains the terms and conditions of the marine
insurance contact between the assured (person insuring ship or cargo etc.) and the insurer (insurance
company or underwriter). A marine policy must specify the following particulars [Section 25]:
1. The name of the assured or of some person who effects the insurance on his behalf.
2. The subject-matter and the risk insured against.
3. The voyage, or period of time, or both, as the case may be, covered by the insurance.
4. The sum or sums insured.
 5. The name or names of the insurance company.
It is the statutory requirement that a marine policy must contain these particulars. And if the marine
prolicy does not specify these particulars, it becomes invalid in law." A marine policy must be signed
by or on behalf of the insurance company. Sometimes, there are two or more insurance companies.
In such cases, the policy must be signed by or on behalf of every insurance OInpany. Unless the contrary is
expressed, it constitutes a separate contact with the assured. And thus, he (assured) acquires a right of
action against each insurance company separately and not all jointly [Section 26].
It may be noted that all the contracts of marine insurance must be embodied in a marine policy
in accordance with the provisions of the Marine Insurance Act. And if it is not embodied in the
I policy, it shall not be admitted in evidence. However, the marine pblicy may be executed and
issued either at the time when the contract is concluded or afterwards [Section 24]. Generally
it js issued after the initialling of the slip.
64.7. ESSENTIALS OF A VALID MARINE POLICY
Following are the essential requirements of a valid marine policy:
1. It must satisfy all the requirements of a valid contract namely, competency of the parties,
free consent, consideration, and legality of object and consideration.
2. It must be in writing and duly stamped.
3. It must not provide cover for more than twelve months. However, this clause is nbt
applicable in case of a voyage policy which is for a specified sea journey, and a sea journey
may exceed 12 months.
4. The assured must have insurable interest in the subject-matter of insurance.
5. The assured must observe complete goodfaith.

64.8. TYPES OF MARINE POLICIES

The Marine Insurance Act provides for various types of marine policies, which may be discussed under
the following heads:
1. Voyage policy: It is the policy under which the subject-matter is insured for a specified
voyage (i.e. sea journey between the fixed ports). In such a policy, the time that a voyage will
take is not taken into account at all. Thus, a voyage policy is one in which the subject-matter
is insured from one port to another e.g. from Bombay to London. The voyage policy may cover
the risks "at and from a port", or "from a port". [Section 27(1)]. In case of "at and from" clause,
the subject-matter is insured both, while the ship is at the port of departure, and also from the
time when ship sails from the port on her (its) voyage insured. And, in case of "from a port"
clause, the subject-matter is insured only from the time when the ship sails from the port on her
voyage insured. However, in both the cases, the policy remains in force till the ship completes
the insured voyage. The limits of the voyage are usually defined in clear terms in the policy
in order to avoid any future conflicts.
2. Time policy: It is the policy under which.the subject-matter is insured for a specified period
of time [Section 27(1)]. For example, from 10 A.M. 1st January, 1999 to 10 A.M. 31st December,
1999. It may be noted that a time policy can be made only for twelve months. And if a time
policy is made for any time exceeding twelve months, it will be invalid. However, the policy
may contain a 'continuation clause' providing that if at the end of period, the ship is still at sea,
the policy will continue for a reasonable time thereafter till the ship arives safely at the port of
destination. It may, however be noted that if the loss arises under the continuation clause policy,
the assured will have to take a fresh duly stamped policy covering the period in question, before
he can claim any loss under the policy.
3. Voyage-cum-time policy: It is the policy under which the subject-matter is insured for a
particular voyage and for a specified time. In other words, it is a combination of both the 'voyage'
and the 'time' policies, e.g. from Madras to London for 12 months.
Valued policy: It is the policy which specifies the value of the subject-matter of insurance.
Thus, a valuded policy is one in which the value of the subject-matter is determined at the time

of entering into contract, and specified in the marine policy [Section 29(2)]. In the absen fraud,
 such value shall be conclusive as between the assured and insurance company wheth the loss is
total or partial. But the value shall not be conclusive for the purpose of deterini ' whether there
has been a constructive total loss. The term 'constructive total loss' will be discu i in Art. 66.6.
5. Unvalued policy: It is the policy which does not specify the value of the subject-matt»
of insurance. Thus, an unvalued policy is one in which the value of subject-matter is
determined at the time of contract. But the value is subsequently determined in case of los
However, the value so determined shall be subject to the limit of the sum insured [Section 30]
This policy is also known as "open policy'. The value of the subject-matter is ascertained j
accordance with the provisions of Section 18 of the Marine Insurance Act, which will be discussed
in Art. 64.16.
6. Floating policy: It is the policy which describes the insurance in general terms. Thus a
floating policy is one which simply mentions the amount for which the insurance is taken out
And all other particulars such as name of the ship, cargo etc. are made by subsequent declarations
[Section 31]. The subsequent declarations may be made by endorsement on the policy, or in other
customary manner. And all such declarations must be made honestly. Thus, the policy is taken
by simply mentioning the amount for which it has been taken with a provision stating that the
benefit of the policy is to attach to the ship or cargo, 'hereafter to be mentioned'. It may be
noted that where the declaration of value is not made until after notice of loss or arrival of ship
the policy must be treated as an unvalued policy as regards the subject-matter of that declaration
The object of floating policy is to overcome the difficulty where the assured is not in a position to
know on what ship or ships the insured goods may be loaded. It may, however, be noted that a
floating policy is an exception to the general rule which requires that the name of the ship has
to be stated in every marine policy at the time of insurance is made.
7. Wagering policy: It is the policy which is issued when the assured has no interest in the
subject-matter of insurance. And at the time of contract of insurance, he has no expectation of
acquiring any interest in the subject-matter. Thus, a policy containing the words as 'Policy Proof
of Interest' (P.P.I.), 'Interest or No Interest', or 'Without Benefit of Salvage to the Insurer' or
any other words to that effect, is a wagering policy. It may be noted that a wagering policy is
void and cannot be enforced in a Court of Law [Section 6]. It will be interesting to know that
though such policies are void, but these continue to be common. The reason for the same is that
these art invariably honoured by the underwriters. These are also know n-; 'honour policies'.
64.9. IMPORTANT TERMS AND CLAUSES OF A MARINE POLICY AND RULES FOR
THEIR CONSTRUCTION (OR INTERPRETATION)
We have already discussed that a contract of marine insurance must be embodied in a marine
policy. Various terms and clauses are used in a marine policy. Subject to the provisions of the
marine Insurance Act, and unless and context of the policy otherwise provides, these terms and
clauses are construed (i.e. interpretted) as per rules for the construction (i.e. interpretation) ol
the policy given in the Schedule to the Marine Insurance Act. The interpretation, of important
terms and clauses, usually found in the marine policy, is as under:
1. 'Lost or not lost' clause. Sometimes, the ship is on a voyage (i.e. journey), and the parties do
not know whether it is still in existence. In such cases, the subject-matter can be insured by
incorporating 'lost or not lost' clause in the marine policy. The policy containing this clause is
valid even if the goods have already been lost prior to the taking of the policy. And thus, the
assured can recover the amount under the policy irrespective of the fact that the goods have already
lost prior to the date of policy. However, the assured must observe good faith at the time of taking
the policy i.e. he must not be aware of the loss. Similary, the insurance company (or underwriter) is
also entitled to its premium even if the goods have already been reached at their destination safe and sound
before the policy is taken. But the insurance company must not be aware of the
safe arrival of the goods.
2. 'From' clause. Sometimes, the subject-matter is insured 'from' a particular port. In such
cases, the policy covers the risk only when the ship sails from the port on her voyage insured.
3. 'At and from' clause. Sometimes, the subject-matter is insured 'at and trom' a particular
port. In such cases, the policy covers the risk both while the ship is at the port of departure,
and also from the time when the ship sails from the port on her voyage insured. If at the time
of contract, the ship is not at the port of departure, the risk is covered as soon as the ship arrives
there in good condition. It is immaterial that the ship is covered by another policy for a specified
time after arrival.
4. 'From the loading thereof clause. Sometimes, the goods or other movables are insured
with a 'from the loading thereof clause. In such cases, the policy does not cover the risk until
such goods or movables are actually on board. And the insurance company is not liable for them
while in transit from the shore to the ship.
5. 'Safely latlded' clause. Sometimes, the goods or other movables are insured with a 'safely
landed' clause. In such cases, the policy covers the risk until the goods or movables are safely
landed. However, the goods or movables must be landed in the customary manner, and within
a reasonable time after arrival at the port of discharge (destination). And if they are not so landed,
the policy ceases to cover the risk.
6. 'Touch and stay' clause. Sometimes, it is provided in the marine policy that the ship may
'touch an stay' at any port or place whatsoever. In the absence of any further licence or usage,
such liberty does not authorise the ship to depart from the course of her voyage from the port
of departure to the port of destination.
7. 'Running down' clause. Sometimes, the marine policy contains the 'running down' or
'collision' clause. In such cases, the shipowner is protected from compensating the owner of the
other ship to which his ship might have collided and caused some loss. The owner of the other
ship may claim compensation from the insurance company even if the loss has been caused by
the negligene of the captain and crew of the insured ship. Thus, in a policy with a 'running down'
clause, the insurance company undertakes to pay the amount of loss which the owner of the ship
insured may have to pay to the owner of another ship for damages caused due to the collision
of the insured ship with the other. The amount so payable may be fixed in the policy.
8. 'Sue and labour' clause. Sometimes, the marine policy contains the 'sue and labour' clause
This clause enables the insuranced company (or underwriter) and the assured to work together
with a view to preserve the insured property after the accident, and to make best of the bad bargain.
The assured is entitled to recover all expenses incurred by him in mitigation of loss after the
casuality (i.e. the event insured against) has occured. However, the expenses incurred for averting
the occurence of the peril are not recoverable under this clause.
9. 'All other perils' clause. The clause 'all other parils' in the marine policy means that the
losses arising from other perils which are similar in kind to the perils specifically mentioned in
the policy, are also covered by the policy. It may be noted that this clause does not mean that
the losses from all perils whatever they may be, are covered. It only means the perils similar
to those already specified in the policy.
10. 'P.P.A.' clause. The term 'ERA.' means 'free of particular average'. This clause exempt the
insurance company from liability for particular average. The term 'particular average' means partial
loss of the subject-matter insured. However, assured's claim under 'sue and labour' clause is not
affected. Sometimes, F.A.A. i.e. free of all average clause is also there in the marine policy. This
exempts the insurance company from liability for all types of partial loss. The term 'partial loss' and
its kinds will be discussed in Art. 66.7.
11. 'EC. & S. clause. The term 'EC. & S.' means free of capture and seizure. This clause
exempts the insurance company from liability for loss caused by the capture and seizure of the
ship. "e
12. 'Memorandum' or 'N.B.' clause. This clause is at the end of the policy and commence,
with the letters N.B. This clause protects the insurance company against partial losses in certain
cases. According to this clause, the insurance company is not liable to indemnify against a partial
loss or damage to:

(a) The corn, fish, salt, fruit, flour and seed unless the loss is general average loss, or unless
the ship is stranded.
 (b) The sugar, tobacco, hemp, flex, hides and skins unless the damage amounts to five percent
of the value of the things damaged.
(c) The ship, freight or any goods other than the above mentioned, unless the loss amounts
to 3% of the value of the thing lost or damaged, or unless it is general average loss or
unless the ship is stranded.
13. 'Inchmaree' clause. The word 'inchmaree' has been derived from a ship named
'inchmaree'. And this clause came to be introduced in consequence of the decision of a case in
which the ship inchamaree was involved. According to this clause, the policy also covers those losses
which strictly do not come within the definition of maritime perils. The brief facts of the case are as
under:
A ship named 'inchmaree' was insured, under a time policy, against the perils of the sea. The ship
was lying at anchor off the shore, about to proceed on her voyage. The engine was set to work for
navigation purposes in order to pump water into the main boiler. Due to the negligence of the
engineer incharge, a value of the engine remained closed whereas it should have been kept open.
In consequence of this, the water instead of passing into the boiler, was forced into the air chamber
of the pump and it was broken. The shipowner claimed compensation from the insurance company. It
was held that the insurance company was not liable as it was neighter a peril of the sea nor it was
coming within the general words, "all other perils, losses etc." 9
As a result of this decision, a special clause namely 'inchmaree clause' is usually added in the
marine policy. This clause enables the assured to recover the losses caused due to the negligence of
the master, engineers, and^ by bursting of the boilers etc. Generally, this clause specifically covers
the losses caused by
(a) negligence of the master, mariners, engineers, crew etc. during the loading or unloading.
(b) explosions, bursting of boilers, breakage of shafts etc.
(c) latent defects in any machinery.
As a matter of fact, this clause converts a marine policy into a comprehensive one providing cover
against the losses which are not even sea perils.
14. Pirates. The term 'pirates' includes the passengers who mutiny, and the rioters who attack
the ship from the shore.
15. Thieves or rovers. The term 'thieves' or 'rovers' means the strangers who commit robbery
by using force or voilence. But this does not include the clandestine thieves or pilferers or
pickpockets etc. from among the crew or passengers.

64.10. PRINCIPLES OF MARINE INSURANCE

We have already discussed in Art. 61.11 the fundamental principles of a contract of insurance in
general. However, the following principles require special discussion in connection with the contract
of marine insurance:
1. Insurable interest: We know that 'insurable interest' is the pecuniary (i.e. monetary) interest in the
subject-matter of insurance. We have already discussed that'the existence of insurable interest is the
essential element of every contract of insurance. In case of marine insurance, the subject-matter of insurance
(i.e. the insurable property) is the ship, goods or other movables which are exposed to maritime perils. Thus,
in order to effect a valid contract of marine insurance, the assured must have an insurable interest in the
insurable property at the time when the loss or damage takes place. It will be interesting to know that in
case of marine insurance, the insurable interest need not exist a the time when the contract is entered into.
This provision is contained in Section 8(1) of the Marine Insurance Act, which specifically state that, the
assured must have an insurable interest in the subject-matter of insurance at the time of loss only. He may
or may not have the insurable interest at the time of contract of insurance:
Example 64.1. A, the owner of certain goods, insured the goods which were in transit on board a
ship. Subsequently, A sold these goods to B and assigned the insurance policy to him. In the course
of transit, the goods were destroyed by a peril insured against. In this case, B is entitled to recover the
amount under the policy as he acquird an insurable interest at the time of loss because he became the
owner of the goods. In case of marine insurance, the insurable interest must exist at the time of loss,
though it may not exist at the time of insurance.
Sometimes, an insurance is effected when a ship is supposed to be on a voyage, and the parties do not
know whether it is still in existence. In such cases, the subject-matter is insured with 'lost or not lost'
clause as discussecd in Art. 64.9. It will be interesting to know, that in case of 'lost or not lost' insurance,
the assured can recover the amount under the marine policy even though the goods might been destroyed
prior to the taking of the policy or the assured might have acquired his interest only after the loss had occured
(e.g. a purchaser of goods on voyage). However, the assured must observe good faith i.e. at the time of
contract of insurance, he must not be aware of the loss [Section 8(1) (second para)]. It, therefore, follows
that in case of 'lost or not lost' insurance, the assured may recover the amount under the policy even if he is
not having insurable interest at the time of loss. Thus, in an action to recover loss on a 'lost of not lost'
policy the insurance company cannot escape its liability on the ground that (a) the assured acquired an
interest in the property after the loss had occured, or (b) the goods were totally lost at the time when the
assured made the contract to purchase the goods."1 However, at the time of insurance the assured must not
be aware that the loss had already occured. Because, otherwise it would amount to concealment of facts,
and breach of good faith. Thus, the effect of the 'lost or not lost' clause is to make the marine policy
retrospective so as to cover the past loss or the loss that had already occured". It maybe noted that the
assured is bound to pay the premium even if the subject-matter has arrived safely at the time when the
contract is concluded. But if at the time of contract, the insurance company knew about the safe arrival of
the subject-matter, the premium is not payable, and if already paid, it is returnable.

Example 64.2. A insured his ship with B. When the ship was due for arrival, B re-insured the ship with
'lost or not lost' clause at a heavy premium. In fact, at the date of re-insurance, the ship had already arrived
safely. But neither party knew about the safe arrival. It was held that B was liable to pay the premium
to the re-insurer. [Bradford v. Symondson (1881) 7 QBD 456]
It may be noted that it is not the owner alone who had the insurable interest in the subject-matter of
insurance. But every person has an insurable interest who is interested in a marine adventure [Section 7].
A person is interested in a marine adventure when he has such a legal or equitable relation with the
adventure or insurable property that
(a) He may derive benefit by the safety or due^ arrival of the insurable propery, or
(b) He may suffer loss or damage by the destruction of the insurable property.
The following persons have been recognised by the Marine Insurance Act, to have an insurable interest in the
subject-matter, and can validly insure their interest:
1. The insurer (i.e. insurance company) under a contract of marine insurance has an insr hi
interest in his risk. And he may reinsure the said risk to the extent of his interest
[Section in
2. The lender of money on bottomry or respondentia bond has an insrable interest in resne i
of the loan [Section 12]. The bottomry bond is the written document by which the mone
is borrowed on the security of the ship or ship and cargo both. And the respondentia bond
is one by which the money is borrowed on the security of cargo alone. These terms hav
already been discussed in Art. 64.3.
3. The master or any member of the crew of a ship has an insurable interest of his wages
[Section 13]
4. The person paying the freight in advance has an insrable interest in the advance freight But his
interest is insurable only in so far as such freight is not repayable in case of loss
[Section 14].
5. The assured also has an insurable interest in the charges of any insurance which he may
effect. [Section 15].
6. The mortgagor of the subject-matter has an insurable interest in the full value of the
subject-matter mortgaged. [Section 16(1)].
7. The mortgagee has an insurable interest in respect of any sum due or to become due under
the mortgage. [Section 16(1) (2)].
8. The owner of the insurable property has an insurable interest in respect of the full value
of the property. [Section 16(3)].
Notes. 1. A defeasible interest as well as a contingent interest is also insurable [Section 9]. A defeasibel
interest is one which is liable to be defeated by a third person, or which is capable of being cancelled.
And a contingent interest is one which is dependent on the happening of some future event.
2. A partial interest of any nature is also insurable [Section 10]. Thus, a part owner has an insurable
interest to the extent of his own interest, e.g. joint owner has insurable interest to the extent of his undivided
interest in the joint property.
3.All persons irrespective of nationality have the right to protect their property by insurance, excepting
alien enemies. I
2. Good faith (disclosure and representations): We have already discussed that a contract of insurance is a
contract uberrimae fides i.e. a contract of absolute good faith. Thus, the assured must disclose all the
material facts affecting insurance. Moreover, all the representations made by him must also be true. If the
good faith is not observed by the assured, the insurance company may put an end to the contract of insurance,
and escape liability under the policy. This provision is contained in Section 19 of the Marine Insurance Act,
which specifically states that if good gaith is not observed by one party, the contract of marine insurance
may be put to an end by the other party. Thus, where a contract of insurance has been concluded and at the
time of the contract, the assured knew of the loss of the property, the insurance company has the right to
put an end to the contract. Similarly, when at the time of insurance, the insurance company knew that the
insured ship has already arrived safely, the assured has the right to put an end to the contract, and is entitled
to the return of the premium12. Though both the assured and the insurance company should boserve good faith,
but particular importance; is attached to assured's duty as the Marine Insurance Act makes special
provisions in this regard, which may be discussed under the following sub-heads:
(i) Disclosure by the assured [Section 20(1)}: The assured is bound to disclose, to the insurance company,
every material circumstance known to him or deemed to be known to him in the ordinary course of business. If
he fails to do so, the contract is voidable at the option of the insurance company, and it may put an end to
the came. Such disclosure is to be made before the contract of marine insurance is concluded. It may be
noted that this duty is mandatory (i.e. legally compulsory) and the failure to observe it makes the
contract voidable at the option of the insurance company and it may put an end to the contract.
Example 64.3. A, a merchant, on hearing that a vessel similar to his own was captured, effected an
insurance with B, an insurance company. But at the time of contract, A did not disclose the fact that
a vessel, similar to his own, had been captured. It was held that B could put an end to the contract,
and avoid (escape) liability as the assured (A) failed to disclose the material fact.
[De Costa v. Scandret (1817) 2 K.B. 184].
It may, however, be noted that the insurance company can put an end to the marine insurance contract
only if the non-disclosure is of material circumstances (i.e. facts). A material circumstance is one
which influences the willingness of the prudent insurer (insurence company) in determining whether or
not to accept the risk, or in fixing the amount of premium payable. The concealment of the following
facts have been held to be material entitling the insurance company to put an end to the marine
insurance contract:
(a) The nationality of the assured concealed at a time when his nationality was important 13.
(b) The fact that the goods insured were 'new men's clothes in bales for export' whereas the
goods were in fact war surplus and twenty years old. 14
(c) The fact that the ship had grounded and sprung a leak before the insurance was effected.15
(d) The previous losses and claims under other policies. 16
(e) The fact of over-insurance i.e. the property is insured at a value greather than its real
value."
The above decided cases merely give an indication of what conclusion a court can reach in any
particular case. And question of materiality is a pure quetion of fact depending upon the facts and
circumstances of each particular case [Section 20(2) (5)]. There are certain circum stances (facts)
which need not be disclosed unless an enquiry is made about them [Section 20(3)]. These
circumstances are:
(a) The fact which diminishes the risk.
(b) The fact which is known or presumed to be known to the insurance company.
(c) The fact as to which the inonnation is waived by the insurance company.
(d) The fact the disclosure of which is superflous by reason of any express or implied warranty,
(ii) Representations by the assured [Section' 22]: The term 'representation' may be defined
as the oral or written statement made by the assured or his agent to the insurance company (or
underwriter) during the negotiations for the contract and before the contract is concluded. It is the
duty of assured or his agent to make true representation of all the material facts within his knowledge.
And if the representation of any material fact is unture, the insurance company (i.e. underwriter) may put
an end to the marine insurance contract. It may, however, be noted that the insurance company may
put an end to a marine insurance contract only if the untrue representation is material one. A material
representation is one which influences the willingness of the prudent insurer (insurance company) in
determining whether or not to accept the risk or in fixing the amount of primum payable. And
whether or not a representation is material is a question of facts and depends upon the facts and
circumstances of each particular case. It wiil be interesting to know that a representation may be
withdrawn or corrected before the contract is concluded. In such a case, the insurance company
cannot put an end to the marine insurance contract on the ground of untrue representation.

64.11. ASSIGNMENT OF A MARINE POLICY

We know that the assignment of a policy means the passing of the rights and liabilities of th assured
under the policy. And on a valid assignment, the assignee (the person to whom the rights under the
policy are transferred) becomes entitled to all the benefits under the policy, and can sue the insurance
company on the policy, in his own name. The procedure and legal provisions for a valid assignment
of a marine policy are contained in Section 52 and 53 of the Marine Insurance Act, which may be
summed up as under:
1. The marine policy can be assigned only if its assignment is not expressly prohibited in
the policy.
2. The assignment of a marine policy can be made in either of the following two ways-

(a) By a endorsement on the policy itself.

(b) By any other customary manner.

3. The marine policy may be assigned either before or after the loss has occurred.
4. The consent of the insurance company is not necessary for the validity of the assignment
unless the policy imposes such a condition.
5. The assured must have insrable interest in the subject-matter insured at the time of
assignment, and if he parts with or loses the insurable interest, an assignment thereafter
by him will be inoperative, i.e. without any effect. However, if before parting with or
losing the insurable interest, the assured has agreed to assign the policy, then the
assignment will be operative even if actually made after so parting with or losing the
insurable interest.
6. Where the loss has occurred, the marine policy can also be assigned by the assured even
after the occurrence of loss. In such a case, the assured can assign the policy even if,
after the occurrence of the loss, he has parted with or lost his interest in the subject-matter.
The reason for the same is that on the occurrence of the loss, the assured's right to claim
the indemnity from the insurance company, is crystallised (i.e. becomes absolute) and he
can assign the same.
Thus, a marine policy can be assigned before or after the occurrence of the loss. It may, however,
be noted that before the loss, the policy can be assigned to a person who has acquired some interest in
the subject-matter of insurance. And afte the occurrence of the loss, the policy can be assigned to any
one whether or not he has acquired any interest in the subject-matter of insurance. The reason for the
same is that in such cases, the law will imply that the assured has transferred to the assignee only his
right to claim indemnity from the insurance company.
On a valid assignment, the assignee becomes entitled to all the nenefits under the policy. And he
can file a suit against the insurance company on the policy, in his own name.
Example 64.4. A insured his ship for Rs. 50 lacs. Subsequently, he sold his ship to B but no
arrangement was made as to the assignment of the policy. Thereafter, the ship was lost. In this case,
the insurance company is not liable to B as the policy has not been assigned to him. Moreover, A
also cannot recover, as he has no insurable interest in the ship at the time of loss.
[Based on Powles v. Innes (1841) 11 M&W 10].
Example 64.5. A insured his cargo being carried by a ship. While the cargo was afloat (i.e. in
transit), A's agent sold the cargo to B. But A retained the marine policy at the time of sale by his
agent. After A's interest ceased, he assigned the policy to B. Thereafter, the cargo was damaged. In
this case, the assignee (B) cannot recover under the policy, as A had no interest at the time of
assignment.
[Based on North of England Pure Oil Cake Co. v. Archangel Martime
Ensurance Co. (1857) L.R. 10 Q.B. 247].

64.12.RE-INSURANCE
The term 're insurance' may he defined as the insurance r>y the original insurer
(if insurance
company). We know that the insurance company with whom the subject-matter is insured, acquires an
insurable interest in the subject-matter insured with it. In order to protect its own interest, the
insurance company generally insures its own risk, either partially or wholly, with another insurance
company. Thus, a 're-insurance' is the insurance of insurance. It may be noted that the same legal
provisions apply to the re-insurance as those applicable to the original insurance. And the original
insurance company can recover the amount paid to the assured, from the reinsurer (i.e. second
insurance company). However, the assured has no right against the second insurance company unless
the policy provides otherwise [Section 11].
Example 64.6. A insured his ship, valued at Rs. 50 lacs, with B, an insurance company, for Rs. 40
lacs. B re-insured its risk with C, another insurance company upto Rs. 20 lacs only. Susequently, the
ship was totally destroyed by a peril insured against, and the assured (A) recovered Rs. 40 lacs from
B. In this case, B can recover Rs. 20 lacs from C, the re-insurer.
64.13. DOUBLE INSURANCE
We know that the double insurance means the insurance of same subject-matter with more than one
insurance companies in such a way that the total sum insured exceeds the actual value of the
subject-matter. Thus, it means that taking of two or more insurance policies in respect of the same
subject-matter belonging to the same person. It may be noted that a person is at liaberty to take out as
many policies as he likes in respect of the same subject-matter. However, he cannot recover anything
more than the amount of indemnity payable to him in case of loss. In reference to marine insurance,
the term 'double insurance' is defined in Section 34(1) of the Marine Insurance Act, which provides
that where same subject-matter (i.e. adventure and interest) is insured by two or more policies, and the
total sums insured exceed the amount of total indemnity payable to the assured, there is said to be a
duble insurance by over-insurance. Thus, the following are the essential requirements of a double
insurance:
1. There must be two or more insurance policies.
2. The policies must be effected by or on behalf of the same assured.
3. The policies must relate to the same subject-matter or any part thereof.
4. The total sums insured must exceed the total indemnity allowed to the assured in case
of loss.
Example 64.7. A insurred his ship, valued at Rs. 40 lacs, with B, an insurance company for Rs. 30 lacs.
Thereafter, he (A) again insured the same ship with C, another insurance company, for Rs. 20 lacs. In this
case, there is double insurance by over-insurance as the total sum insured (Rs. 30 lacs + Rs. 20 lacs) exceeds
the total indemnity (Rs. 40 leas, the value of the ship) payable to the assured (A).
The legal provisions relating to double insurance are contained in Section 34(2) of the Marine
Insurance Act, and may be summed up as under:
1. This assured may claim payment from the insurance companies in such order as he thinks
fit, unless the policy provides otherwise. However, in any case, he is not entitled to recover
anything more than the indemnity payable to him under the Marine Insurance Act.
2. The assured may call upon any of his insurance companies to pay him in full (up to the
amount insured with that company) and the insurance company cannot take the plea that
other insurance companies are also liable.
3. If the assured recovers any sum in excess of the indemnity payable to him, he is deemed
to hold the excess amount in trust for the insurance companies.
4. The insurance companies, as between themselves, are liable to contribute to the loss in
proportion to the amount for which each of them is liable under the policy. If any insurance
 company pays more than its proportion of loss (i.e. liability), then it can claim contribution
from the other insurance companies. This is known as insurer's right of contribution
will be discussed in detail in Art. 66.16.
Example 64.8: A insured his ship, with B, an insurance company, for Rs. 40 las, and with C an
insurance company, for Rs. 60 lacs. In both the policies, the ship was valued at Rs. 80 lacs. In this °
there is double insurance. And in case of total loss of the ship, the assured (A) may recover Rs. 40^'
from B, and the balance of Rs. 40 lacs (80-40) from C, or he may recover Rs. 60 lacs from C, and rtf6
balance of Rs. 20 lacs (80-60) from B. But he cannot recover Rs. 40 lacs from A, and Rs. 60 lacs fr m
B, as in that case it would exceed the total amount of indemnity recoverable by the cs
A (i.e. Rs. 80 1 °
the value of the ship). " '
Example 64.9: A insured his ship, valued at Rs. 90 lacs, with B, an insurance company, for Rs 20
lacs. Thereafter, A valued151 the same ship at Rs. 80 lacs, and insured it with C, another insurance compan
for Rs. 80 lacs. The ship was totally destroyed by perils insured against, and the assued (A) recovered Rs
80 lacs from C. In this case, B is liable for Rs. 10 lacs only (the value of ship in a policy with B i.e Rs
90 lacs-the amount recovered from C i.e. Rs. 80 lacs). And if A claims Rs. 20 lacs first from fl, then c
will be liable for Rs. 60 lacs only (the value of ship in C"s policy i.e. Rs. 80 lacs-the amount recovered
from B i.e. Rs. 20 lacs). [See Bruce v. Jones (1863), 32 L.J. Ex. 132]

64.14.UNDER-INSURANCE
The term 'under-insurance' may be defined as the insurance of the subject-matter less than its insurable
value or policy value. In case of under-insurance, the assured is deemed to be his own insurer in respect of
the uninsured balance [Section 81].
Example 64.10. A insured his cargo of certain goods, valued at Rs. 30,000 with B, an insurance company
for Rs. 20,000. The goods were damged by sea water, and the loss of Rs. 15,000 was caused. In this case,
the assured (A) is entitled to recover Rs. 10,000 (2/3 x 15,000) from B, and the loss of Rs. 5000 (1/3 x
15,000) should by borne by A himself as he is his own insurer for Rs. 10,000 (the uninsured balance).
[Based on Angle-california Bank v. London Maritine Ins. Co. (1904) 10 Com. Cas. 8].

64.15.OVER-INSURANCE
The term 'over-insurance' may be defined as the insurance of the subject-matter for more than its
insurable value or policy value. The over-insurance may be by a single policy or by several policies (i.e.
double-insurance). Over-insurance by double-insurance has alrady been discussed in Art. 64.13.
64.16. INSURABLE VALUE
The term 'insurable value' may be defined as the value of the subject-matter for which it can be
insured. The determination of the insurable value is necessary for various reasons, namely (a)
to fix the measure of indemnity in case of unvalued policy, (b) to furnish an approximate standard
for fixing the value in the valued policy, and also (c) to fix the measure of indemnity in certain
cases of valued policy e.g. where the valuation is not conclusive and can be set-aside. The rules
for determining the insurable value of the subject-matter insured are laid down in Section 18 of
the Marine Insurance Act. However, these rules are subject to any express provision or valuation
in the policy, i.e. where there is any express provision in the policy for the determination of the
insurable value, then it has to be determined in accordance with that provision; And where the
valuation of the subject-matter is expressly given in the policy, then that valuation will be the
insurable value. In the absence of any such provision or valuation in the policy, the insurable
value is determined in accordance with the following rules:
1. Determination of insurable value when the insurance is on a ship: In case of insurance on
a ship, the insurable value is the value of the ship at the commencement of the risk; including
the following:
(a) The outfit of the ship, provisions, and stores for the officers and crew.
(b) Money advanced for the wages of seamen.
(a) Other disbursements, if any, incurred to make the ship fit for the voyage or adventure
contemplated by the policy.
(c) The charges of insurance.
And in case of insurance on a steamship, in addition to the above, the insurable value also includes (a)
the machinery, (b) boilers, (c) coals and engine stores if owned by the assured. And in case of a ship
driven by power other than steam, the insurable value also includes (a) the machinery, (b) fuels and
engine stores if owned by the assured. And in case of a ship engaged in a special trade, the insurable
value also includes the ordinary fittings requisite for that trade.
2. Determination of insurable value when the insurance is on freight: In case of insurance
on freight, whether paid in advance or otherwise, the insurable value includes the following:
(a) The gross amount of freight at the risk of the assured.
(b) The charges of insurance.
3. Determination of insurable value when the insurance is on goods or merchandise: In case
of insurance on the goods or merchandise, the insurable value includes the following:
(a) The prime cost of the property insured.
(b) The expenses of and incidential to shipping.
(c) The charges of insurance.
4. Determination of insurable value when the insurance is on any other subject-matter: In
case of insurance on any other subject-matter (i.e. the subject-matter other than the above
mentioned), the insurable value includes the following:
(a) The amount at the risk of the assured which the policy attaches.
(b) The charges of insurance.
TEST QUESTIONS
1. Define contract of marine insurance. What is its nature? State the principles of marine
insurance
with special reference to 'insurable interest' and 'good faith'.
2. What are the essentials of a marine policy? State the important terms and clauses of a marine
policy,
and rules for their construction.
1. Discuss in brief the different types of marine policies.
2. What do you understand by assignment of marine policy? State legal provisions relating
to assignment.
5. What do you understand by the term 'insurable value' as used in marine insurance? State the
rules for determination of insurable value.
6. Write notes on the following
(a) Maritime perils (b) Maritime adventure
(c) Bottomry bond (d) Respondentia bond
(e) Re-insurance (/) Double insurance
(g) Under-insurance (h) Over insurance
(i) Mode of contracting and conclusion of contract of marine insurance.

65. WARRANTEES & VOYAGE IN MARINE INSURANCE

65.1. INTRODUCTION
have discussed in Art. 64.5 that a contract of marine insurance is completed by an offer made by one
party (i.e. assured or insured person) and its acceptance by the other (i.e. insurer or insurance
company). At the time of entering into contract of marine insurance, the assured gives certain
undertakings or assurances about the existence or non-existence of certain facts. Such undertakings or
assurances are known as warranties, and form a part of the contract of marine insurance. We also know
that some sea route (i.e. sea journey) is always involved in a contract of marine insurance. Such a sea
route is known as 'voyage'. Thus, both the terms 'warranties' and 'voyage' are very important in marine
insurance. In this chapter, we shall discuss the legal provisions relating to 'warranties' and 'voyage'.
65.2. WARRANTIES
The term 'warranty' may be defined as a stipulation, express or implied, in assurance of certain
particulars in connection with the contract. In marine insurance, it means a statement or promise made
by the assured (i.e. insured person) assuring certain particulars to be correct, and is considered as an
essential part of the contract of marine insurance. The term 'warranty' is defined in Section 35(1) of the
Marine Insurance Act. The analysis of this section shows that, a warranty is an undertaking by the
assured about any one of the following, that
1. some particular thing shall or shall not be done.
2. some condition shall be fulfilled.
3. some particular state of facts does or doen not exist.
Thus, in a contract of marine insurance, the term 'warranty' is usually employed in the sense of a
condition of the contract. It must, therefore, be strictly complied with. If it is no so complied with and
breach of warranty is proved, the insurer (i.e. insurance company) is discharged from liability from the
date of the breach of warranty. It may be noted that breach of every warranty discharges the insurance
company from its liability. And it is immaterial for what prupose a warranty is introduced, and
whether it is material to the risk or not.
The burdon of proving a breach of warranty lies on the insurer', i.e. it is the duty of the insurance
company to prove that a warranty has not been strictly complied with. And when the breach of
warranty is proved, the insurance company is discharged from further liability. It may be noted that a
breach of warranty can be waived by the insurance company. And when the assured (insured person)
proves that the breach of warranty has been waived, the insurance company not discharged from its liability
under the marine policy.
Notes 1. The term 'warranty' in marine insurance contract has the different meaning from the warrant used in other
commercial transactions, such as sale of goods. In commercial transactions, a breach f warranty merely gives a
rise to claim for damages, and not a right to put an end to the contract. But i -insurance law, the breach of warranty
entitles the insurance company to put an end to the contract (j e insurance policy).
2. It is often said that a breach of warranty makes the marine policy void. But this only means that the marine
policy becomes voidable. Because, a void contract cannot be ratified at all, and is without anv legal effect. Whereas, a
breach of warranty may be waived by the insurance company, and then the marine policy is binding on it (insurance
company).

65.3. TYPES OF WARRANTIES

As per section 37 of the Marine Insurance Act, 1963, The warranties may be of the following two types:
1. Express warranties.
2. Implied warranties.

65.4. EXPRESS WARRANTIES

It is a warranty which has been incorporated (i.e. expressly stated) in the marine policy, and forms an
essential part of terms and conditions of a contract of marine insurance. In other words, an express
warranty is one which is in writing and is expressly included in or written upon the marine policy. However,
no particular form of words is required to constitute an express warranty. It may be in any form of words
from which assured's intention to give a warranty can be inferred. If the express warranty is not strictly
complied with, the insurance company is discharged from its liability from the date of breach of
warranty.
Example 65.1: A insured his ship for one year stating that the ship shall sail from Bombay on 1st March
1999. This date of sailing the ship was expressly mentioned in the marine policy. But the ship sailed on
1st February 1999 i.e. one month earlier. In this case, the insurance company is not liable as the express
warranty that the ship shall sail on 1st March, 1999, has not been complied with.
[Based on Insurance Co. v. Blogg (1898)1 Q. B. 27].
It may be noted that there is no limit to the variety of express warranties. And the parties may
include any number of express warranties in a marine policy. Following are some of the common express
warranties which are generally included in a marine policy:
1. A warranty that the ship shall be in port at a given day. In case of such warranty, the
ship must be in the port on that day 2.
2. A warranty that the ship will sail 'on or before' a particular day, or 'on or after' a particular
 day. In case of such warranties, the ship must sail 'on or before' the specified day, or
'on or after' the specified day, as the case may be 1.
3. A warranty that the ship will proceed to its destination without any deviation e.g. the ship
shall not proceed east of Singapore. In such a case, the ship must not proceed east of
Singapore4.
4. A warranty that the ship will not carry any contraband goods of war. In case of such
warranty, the ship must not contain any contraband goods of war5.
5. A warranty that the ship will be 'well' or 'in good safety' on a particular day. In case
of such warranty, the ship must be safe at any time during that day [Section 40].
6. A warranty that the ship and goods are neutral and will continue to be so during the voyage. In
case of such warranty, the neutral character of the ship and goods must be preserved, as far as
practicable, during the voyage [Section 38]. The term 'neutral' means not supporting any of the
countries at war with each other. In case of warranty of neutrality, the property must have
neutral character at the commencement of the risk. And so far as the assured can control the
matter, its neutral character must be preserved. In case of ship's i,neutrality, the ship must carry
the necessary papers to establish its neutralisy.
65.5. IMPLIED WARRANTIES
It is the warranty which is not incorporated (expressly stated) in the policy, but is implied by law in
every contract of marine insurance unless excluded by some agreement in writing. In other words, an
implied warranty is one which though not in writing but is assumed to have been included in the
marine policy by law or custom, e.g. in a voyage policy there is an implied warranty that the ship is
seaworthy at the commencement of the voyage, or that the ship will not deviate from the prescribed
or usual course of voyage. The implied warranty must also be strictly complied with. If it is not so
complied with, the insurance company is discharged from its liability from the date of breach of
warranty. There are three impoitant warranties which are implied in a marine policy, namely,
(a) ^Seaworthiness of the ship.
(b) Legality of adventure.
(c) Non-deviation from the prescribed voyage.
It may be noted that these warranties are presumed to be there in the marine policy unless expressly
excluded by the parties. Moreover, even an express warranty does not exclude implied warranty unless
it is inconsistent with the express warranty [Section 37(3)]. These implied warranties are discussed
in detail in the following pages:
1. Seaworthiness of the ship [Section 41]: The term 'seaworthiness' of the ship may be defined as the
fitness of the ship in all respects to undertake the insured voyage (i.e. journey). Thus, a ship is
considered to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils
of the seas of the insured voyage. In other words, when the ship is properly equipped and is fit in all
respects to go ahead with the insured voyage, the ship is said to be seaworthy. This warranty applies
only to voyage polices. The expression 'reasonable fit in all respects' means and includes the
following: that
(a) The ship must be sound as regards her hull (the Sower most portion of the ?hip)
(b) The ship must be equipped with the necessaries for the safety of the voyage e.g. provisions,
medicines etc.
(c) The ship must have an adequate supply of fuel for voyage.
(d) The ship must not be over-loaded or badly loaded.
(e) The ship must have efficient, competent and sufficient crew and master.
(f) The ship must be fit to carry the cargo to the destination contemplated by the policy.
(g) The ship must have her engines and boilers in sound and proper condition.
It may, however, be noted that there is no fixed, standard of seaworthiness of the ship. It varies with
the circumstances of each particular case. Thus, the standard of seaworthiness may vary from one
voyage to another, from one season of the year to another, and from one kind of cargo to another kind.
Similarly, a ship may be seaworthy in herself, but not seaworth for the purpose of particular
advanture e.g. carrying deck cargo etc.
[Danids v. Harris (1874) L. R. 10 C. P. I.].
The implied warranty that the ship is seaworthy, is attached to every voyage policy (i.e. policy for a
particular journey). According to this warranty, the ship must be seaworthy, for the purpose of the
particular adventure insured, at the commencement of the voyage. Thus, this warranty
applies only to the commencement of the voyage i.e. only up to the time of the Sailing of the Snip.
Once the ship sails, the warranty of seaworthiness ceases. The important legal provisions relating to this
warranty may be summed up as under:
1. The warranty of seaworthiness attaches only to a voyage policy.
2. In a voyage policy which covers the risk while the ship is in port, there is also an implied
warranty that at the time of commencement of the risk, the ship shall be reasonably fit
to encounter the ordinary perils of the port. This means that the ship must be capable
of being moved from one part of the harbour to another for repairs, and of being anchored
alongside the wharves and quays at the harbour 6.
3. In a voyage policy where the voyage is to be performed in different stages, there is an
implied warranty that the ship shall be reasonably seaworthy at the commencement of
each stage.
4. In a voyage policy on goods or other movables, there is an implied warranty that at the
commencement of the voyage, the ship is not only seaworthy as a ship, but also that she
is reasonably fit to carry the goods or other movables to the destination contemplated by
the policy [Section 42(2)].
5. In a time policy, there is no implied warranty that the ship shall be seaworthy at any stage
of the adventure. And the insurance company will be liable even if there is breach of this
warranty. But where the assured knows about the unseaworthiness of the ship and sends
it in the sea in an unseaworthiness state, then the insurance company is not liable for any
loss attributable to unseaworthiness which was known to the assured [Section 41(5)].
6. When the ship is originally seaworthy for the voyage insured, it is not necessary that it
shall continue to remain so throughout the voyage.
7. In a policy on goods or other movables, there is no implied warranty that the goods or movables
are seaworthy [Section 42(1)]. 8. If this warranty is not complied with, the insurance company
is not liable under the policy. It is, however, the duty of the insurance company to prove that the ship
was unseaworthy at the commencement of the voyage. But in certain circumstances, the duty to prove
the seaworthiness may also be shifted upon the assured e.g. where soon after sailing, the ship becomes
disabled and founders (fills with water and sinks)
[Pick up v. Thams Ins. Co. (1878)3 Q. B. D. 594 (CA)].
Example 65.2: A ship was insured for the voyage from Montreal to Halifex. There was an
invisible defect in the boiler of the ship when it started on journey. After sometimes, the defect
became visible and became so serious that the ship had to be brought back to Montreal for repairs.
After the nessary repairs, the ship resumed its voyage but was lost due to bad weather. It was held
that the ship was not seaworthy when it originally started on its voyage. Thus, there was a breach
of the warranty as to the seaworthiness of the ship and the insurance company was not liable.
[Quebee Mar. Ins. Co. v. Commercial Bank of Canada (1870) L. R. 3 P. C. 234].
Example 65.3: A ship was insured for the voyage from Lyons to Galatz. During the voyage, the
ship had to pass under a number of low bridges on a river on the way. In order to pass under
these bridges, the ship sailed with a river crew and captain. But the ship left her masts, anchors
and other heavy articles as it was not possible for her to cany them on the river voyage. After
completing the river voyage upto Marseilles, the ship took her sea captain and sea crew, and was
fitted with masts etc. and was otherwise prepared for the voyage to Galatz. However the ship was lost
by storm on her way to Galatz. The insurance company refused to pay the amount on the ground that
the ship was not seaworthy for the whole voyage when it left Lyons. It was held that the ship took
the voyage by stages and she was seaworthy at the commencement of each stage. When the ship
left Lyons she was seaworthy for voyage on the river, and when left Marseilles, she was
seaworthy for voyage to Galatz.
[Bouillon v. Lupton (1863) 15 CBNS 1 13; Thin v. Richards & Co. (1892) 2 Q. B. 141 (CA)].
Example 65.4: A ship was insured for a round voyage from England to South America, and back again
to England. During the voyage, the ship stopped at a port, but the master of the ship left the port without
sufficient coal to bring the ship to the next port. In consequence, some of the goods and fittings of the
ship had to be burnt as a fuel to enable the ship to reach at the next port. It was held that the ship was
taking the voyage by stages, and it was not seaworthy as to her coaling equipment when she left a port
without sufficient coal. And, thus, the insurance company was not liable for the loss incurred by burning
the goods and fittings. [Greenock Steamship Co. v. Marine Ins, Co. (1903) 2 K. B. 657 (CA)].

Notes: 1. The warranty as to seaworthiness must be strictly complied with. Even ignorance or
innocence on the part of assured will not be an excuse. Any defect, whether patent or latent, which
makes the ship unseaworthy, will deprive the assured from recovering the loss from the insurance
company.
2. Sometimes, the ship is not seaworthy for a particular cargo e.g. has no special freezing
provision for the cargo of frozen meat. In such cases, the ship it not seaworthy as between the
shipowner and cargo owner, though it may be seaworthy as between the shipowner and the insurance
company with which the ship is insured. And if any damage is caused to the cargo due to
unseaworthiness of the ship, the cargo owner may claim compensation from the ship owner.
2. Legality of the adventure [Section 43]: It is the second important implied warranty in every
marine policy that the adventure of insurance is lawful, and it shall be carried out in a lawful
manner so far as the assured can control the matter. If there is a breach of this warranty, the
insurance company will not be liable under the policy, e.g. where the voyage is illegal, an
insurance upon such a voyage is also illegal and void, and the insurance company will not be
liable under the policy as there is breach of this warranty. It may be noted that the ship should
undertake voyage to a friendly country, and should carry only the lawful goods. Thus, the voyage
of the ship is undertaken for smuggling the banned goods shall be illegal. Similarly, if the master
of a ship engaged in smuggling with the connivance of the owner of the ship, there is a breach
of warranty of legality and the insurance company will not be liable.
Example 65.5: A ship was insured for twelve months. The master of the ship, with the connivance of
the owner, engaged in smuggling the goods. The ship was seized in England. It was held that the insurance
company was not liable for the loss so suffered. [Pipon v. Cope (1808) 1 Camp. 434].
Sometimes, the master (captain) of the ship indulges in smuggling on his own account without
any connivance of the owner. In such cases, there is no breach of the implied warranty of legality,
and the insurance company cannot escape liability on this ground. Such an act on the part of
the master amounts to barratry. [Cory v. Burr (1883) 8 App. Cas. 399].

However, there is no implied warranty as to the nationality of a ship, or that the nationality of the
ship shall not be changed during the risk insured. Thus, the change of nationality of the ship will not
amount to breach of the above stated implied warranty [Section 39].
3. Non-deviation from the prescribed voyage: It is the third implied warranty in every marine
policy. According to this warranty, it is implied in every marine policy that the ship shall not
deviate from its prescribed or the usual costomery route. And if the ship so deviates without any
lawful excuse, the insurance company is discharged from its liability under the policy from the
time of deviation. This point will be discussed in detail in Art. 65.10.
65.6. EFFECTS OF THE BREACH OF A WARRANTY
We have discussed in Art. 65.2 that a warranty in a contract of marine insurance is the condition of the
contract, and must be strictly complied with. If there is breach of any warranty i.e. if the warranty is not
strictly complied with, the insurance company is discharged from its liability as from the date of the
breach of warranty. This provision is contained in Section 35(3) of the Marine Insurance Act. According
to this section the breach of a warranty discharges the insurance company from liability from the
date of its breach. It is immaterial whether the warranty is material for the risk or not. (i.e. whether or
not its breach has increased the risk). It is important to note that it does not make any difference even
if the breach of warranty has occurred without

the fault7 or knowledge" of the assured, or due to the fault of someone else 1'. Moreover, it aiso does not
matter if the loss is totally unconnected with the breach of warranty, and it would have happened in any
event, i.e. even otherwise 1". Thus, in all these cases, the insurance company is discharged from its
liability. It may, however, be noted that the insurance company remains liable for any loss that has
occurred, before the date of the breach of warranty.
65.7. CIRCUMSTANCES IN 'WHICH BREACH OF WARRANTY IS EXCUSED (OR
JUSTIFIED BREACH OF WARRANTY)
In certain circumstances the breach of warranty (i.e. non-comh'ancL, w.m a warranty) is excused and the
insurance company cannot escape liability on the ground of breach of warranty. Such circumstances are
provided in Section 36 of the Marine Insurance Act. According to this section the breach of a warranty is
excused in the following cases:
1. When due to change of circumstances, the warranty ceases to be applicable to the
circumstances of the contract.
2. When compliance with the warranty is rendered unlawful by any subsequent law.
Sometimes, the breach of warranty is waived by the insurer. In such cases, also, the breach
of warranty is excused. And then the insurance company is not discharged from liability on the ground of
breach of warranty [Section 36(3)].
65.8. VOYAGE
The term 'voyage' may be defined as the journey be water, i.e. a sea journey. We know that a voyage
marine policy must specify the voyage to be performed by the ship. And the ship must follow the course of
voyage specified in the policy. If the course of voyage is not specified in the policy, then the ship must
follow the usual and customary course of voyage. Generally, the place of departure (i.e. the place from
which the voyage is to commence), and the place of destination (i.e. the place where the voyage is to
terminate) are also stated in the marine policy. The place of departure is know as a 'terminus a qua', and
the place of destination is known as a 'terminus ad quern'. It may be noted that where the place of
departure is specified in the policy, the ship must sail from that place. If the ship sails from any other place,
the risk does not attach to the policy i.e. the policy is void and the insurance company is completely
discharged from its liability under such a policy [Section 45]. Similarly, where the destination is specified
in the policy, the ship must sail for that destination. If the ship, instead of sailing for that destination, sails
for any other destination, the risk does not attach to the policy [Section 46]. However, in this case, the
insurance company will be completely discharged from its liability only if the ship sails for any other
destination from the very beginning (i.e. if the destination is changed before the commencement of the
voyage). If the ship, afterwards, changes the destination, then the insurance company is discharged from its
liability only from the time of change. This will be discussed in detail in Articles 65.9 and 65.10.
Example 65.6: A ship was insured from London to New York. The ship sailed from Liverpool. In this
case, the risk does not attach to the policy as the ship sailed from a different -port.
Example 65.7: A ship was insured from \Tersy to any port West of Gibraltar. The ship sailed from
Liverpool for Cartagena, which is east of Gibraltar. In this case, the risk does not attach to the policy as
the ship sailed for a different destination. [Simon Israel & Co. v. Sedgwick (1893)1 Q. B. 303 (CA)].
We know that the subject-matter of insurance may be insured by a voyage policy 'at and from' a port, or
'from' a port. In case of 'at and from' insurance, the policy protects the subject-matter insured while the
ship is at the port of departure previous to the sailing, and also from the time of sailing, and on the
voyage. But in case of 'from' insurance (e.g. an insurance from Bombay to New York), the policy
protects the subject-matter only when the ship has sailed from that particular port on her voyage to the
destination. It will be interesting to know that in cases where a ship is insured 'at and from' or 'from' a
particular port, it is not necessary that the ship should be at that place when the contract of insurance
is concluded. The ship may arrive at that port even after the conclusion of the contract. However, in
such cases, there is an implied condition that the adventure shall be commenced within a reasonable
time. And if it is not so commenced, the insurance company may put an end to the contract of insurance
[Section 44(1)]. The term 'reasonable time' is a question of fact in each case. However, in the following
two circumstances, the insurance company may not put an end to the contract of insurance on the
ground of breach of this condition [Section 44(2)]:
(a) Where it is proved that the delay in commencement of the adventure was caused by the
circumstances known to the insurer before the conclusion of the contract, or
(a) Where it is proved that the insurer had waived the condition.
 Example 65.8: A ship was insured from Tyne to Lulea on 2nd August. But the ship did not sail on
the insured voyage till 25th September. And after the ship commenced voyage, she was lost with cargo
on 2nd October. It was held that, the insurance company was not liabale on the policy as the voyage was
not commenced within a reasonable time, and the dealy altered the risk from a summer risk to a winter
one. [Maritime Insurance Co. v. Steams (1901) 2 K.B. 912].
The following are the three important points in connection with the voyage to be performed by the
ship:
1. Change of voyage.
2. Deviation of voyage.
3. Delay in voyage.
65.9. CHANGE OF VOYAGE
Sometimes the destination is specified in the marine policy, and the ship voluntarily changes the
destination after the commencement of the voyage. It is known as a change of voyage. The term 'change
of voyage' is defined in Section 47(1) of the Marine Insurance Act. As per this section, the following
are the essential features of a change of voyage:
1. The destination of the ship must be changed voluntarily from that specified in the policy.
2. The destination of the ship must be changed after the commencement of the risk. i.e. after
the ship sails from the port of departure as per the terms of contract of insurance.
The change of voyage is also known as 'abandonment of voyage'. The effect of the change of
voyage is that, the insurance company is discharged from liability as from the time of change of
destination. However, the insurance company is discharged from liability only if the marine policy
does not provide for its liability in such cases [Section 47(2)].
Example 65.9: A ship was insured at and from Cadiz to Liverpool. After sailing from port Cadiz, the
destination of the ship was changed to Newfoundland, without the consent of the insurance company. The
ship was stranded and burnt in the Bay of Cadiz. It was held that the insurance company was discharged
from liability [Tasker v. Cunningham (1819)1 Bligh H. L. 87, 102].
Note: The 'change of voyage' is different from the case when the ship 'sails for a different destination' than
that specified in the policy. In the former, the ship changes the destination after the commencement of the
voyage. In this case, the insurer is discharged from liability from the lime of change of destination. Whereas,
in the latter case, the ship changes the destination before the commencement of the voyage, and sails for a
different destination from the very beginning. In this case, the risk does not attach to the policy i.e. the
insurance company is altogether discharged form liability
65.10. DEVIATION OF VOYAGE
The deviation of voyage takes place when the shio chances her route of voyage it may be that in case
of deviation of voyage, there is neigher a change in the port of departure nor in the port of destination.
Only the route of voyage is changed while sailing from a port of departur* to the port of destination.
Thus, when a ship proceeds from a port of departure to the port of destination, but takes an
unauthorised route, there takes place a deviation of voyage. The deviation of voyage takes place in any
one of the following circumstances:
1. Sometimes, the course of voyage (i.e. route) is specified in the marine policy, and that
route is departed from. In such cases, there is a deviation of voyage [Section 48].
2. Sometimes, the route of voyage is not specified in the marine policy, but the usual and
customary route is departed from. In such cases, there is a deviation of voyage [Section
48].
3. Sometimes, several ports of discharge are specified in the marine policy. In such cases
the ship need not visit to all ports. She may visit any one of them or more than one. But
if the ship visits more than one, then she must proceed to them in the order designated
by the marine policy. If this order is not followed, then there is a deviation of voyage
[Section 49].
4. Sometimes, the marine policy is from one port to the 'ports of discharge' within a given
area, but the ports of discharge are not named in the policy. In such cases also, the ship
may visit any one of them or more than one. But, if she visit more than one, then she
 must proceed to them in their geographical order. If this order is not followed, there is
a deviation of voyage [Section 49].
The effect of deviation of voyage is that the insurance company is discharged from liability as
from the time of deviation. It may be noted that the intention to deviate is immaterial. The deviation
must in fact be made, and mere determination to deviate is not sufficient. It will be interesting to know
that the insurance company is discharged from liability even if the ship regains her route before any loss
occurs. However, the insurance company is discharged from liability only if the deviation is made
without any lawful excuse [Section 48(1), (3)].
Example 65.10: A ship was insured from a port 'L' to T. There were two routes for going to port 'J'.
Sometimes, one and sometimes the other route was better, and the master of the ship ought to have
exercised his own discretion in each case. The route to be followed by the ship was specified in the policy.
But the ship took the other route and was lost in storm. In this cases, there is devition of voyage, and
the insurance company is discharged from liability.
Example 65.11: A ship was insured from River Plate to any port or ports in France and/or United
Kingdom the final port. The ship discharged her cargo at St. Nazair and Le Havre. Thereafter, the ship
sailed for Barry and was lost. It was held that Le Havre was a final port of discharge, and when the ship
left this port after discharging her cargo she was no longer covered by the insurance policy, and thus the
insurance company was not liable. [Marten v. Vestey Brothers (1920) A. C. 307 (HL)].
Usually, a marine policy contains a 'touch and stay' clause. Such a clause mentions the ports at which
the ship can stop during her voyage, and the period of time for which the ship can stay at each port. In
such cases, the ship must not touch and stay at any other port. Sometimes, the liberty is given to the
ship to touch and stay at "any port whatsoever". This does not authorise the ship to depart from her
route of voyage. She can touch and stay only at such ports which are usual in the ordinary and
customary course of the voyage [Schedule I, Rule 6 of the Marine Insurance Act, 1963].

11. COMPARISON BETWEEN CHANGE OF VOYAGE AND DEVIATION OF VOYAGE

The following table gives the comparison between a change of voyage and a deviation of voyage:

S. No Change of Voyage Derivation of Voyage

1. In this case, there is a voluntary change of the point of

destination, after the commencement of the voyage In this case, ther is no change of the port of destination.
Only the route of voyage is changed after the
2. In this case, the insurance company is discharged from commencement of voyage
liability from the time when the determination to change In this case, the insurance company is discharged from
the destination is manifested (i.e. becomes clear). There liability from the time when the voyage is, in fact,
need not be the actual departure of voyage. deviated. The mere determination to deviate is not
3. In this case, the insurance company is discharged from sufficient i.e. there must be actual departure of voyage.
liability even if, infact, there is no change of route of In the case, the insurance company is discharged from
voyage at the time of loss. liability even if the ship regains her route before any loss
4. In this case, the insurance company remains liable for occurs.
all losses occurring before the change of voyage. In this case also, the insurance company remains liable for
all losses occurring before the deviation of voyage.

65.12. DELAY IN VOYAGE

In case of voyage policy, the voyage must be commenced and completed without unreasonable delay,
i.e. within a reasonable time. If it is not so done, then the insurance company is discharged from its
liability from the time when the dealy becomes unreasonable. The reasonable time is a question of
fact in each case. It may be noted that the unreasonable delay should not occur at any stage
throughout the course of voyage, i.e. there should be no unreasonable delay (a) at the port of
departure, (b) during the course of voyage, (c) at the port of destination. However, the insurance
company is discharged from liability on the ground of unreasonable delay only when it is without
any lawful excuse [Section 50].
Example 65.12: A ship was insured from England to the coast of West Africa, and back to the port of
discharge in England. The ship was also insured during her stay and trade at coast of West Africa. The ship
arrived at the coast of West Africa, discharged her outward cargo there, and then loaded her cargo for the
homeward voyage. Instead of sailing on the homeward voyage, the ship stayed there for a month in order to
help salving of the cargo of another ship which had been wrecked there. Thereafter, the ship sailed for the
homeward voyage and was lost by heavy storm. In this case, the insurance company was discharged from
liability as there was unreasonable delay in 'voyage.
[Company of African Merchants v. British Insurance Co. (1873) L. R. B. Ex. 154].
Note: The unjustified delay in voyage is usually classed under the category of 'deviation of voyage'.
65.13. CIRCUMSTANCES IN WHICH THE DEVIATION OR DELAY IN VOYAGE IS
EXCUSED (OR JUSTIFIED DEVIATION OR DELAY IN VOYAGE)
In certain circumstances, the 'deviation of voyage' or 'delay in voyage' is excused, and the insurance
company cannot escape liability on the ground of deviation or delay in voyage. Such circumstances are
porvided in Section 51 of the Marine Insurance Act, which may be summed up as\under:
1. Where it is authorised by any special terms is the marine policy.
2. Where it is caused by circumstances beyond the control of the master of the ship and
his employer, e.g. necessity of repair, mutiny among the crew or forcible detention by
warship etc.
Where it is reasonably necessary in order to comply with an express or implied warranty,
e.g. to make the ship seaworthy.
4. Were it is reasonably necessary for the safety of the ship or subject-matter insured e.g
saving a ship from the perils of seas.
4. Where it is necessary for the purpose of saving human life, or aiding a ship in distress
where human life may be in danger.
6. Where it is reasonably necessary for the purpose of obtaining medical or surgical aid for
any person on board the ship.
7. Where it is caused by barratrous conduct (wrongful conduct wilfully committed to the
prejudice of the owner) of the master or crew, if barratry is one of the perils insured against.
It may, however, be noted that when the causes excusing deviation or delay cease to operate, the ship
must resume her course and complete her voyage within a reasonable time.

TEST QUESTIONS
1. Define the term 'warranty' as used in marine insurance. What are the different types of
warranties?
Discuss in detail the implied warranties in a contract of marine insurance.
2. What is the effect of breach of warranty in marine insurance? State the circumstances in which
breach
of warranty is excused.
3. Define the term 'voyage'. What do you understand by 'change of voyage' and 'deviation of
voyage',
and state the comparison between the two.
4. What do you understand by delay in voyage? State the circumstance in which deviation or
delay
of voyage is excused.
1. Write notes on the following

(a) Seaworthiness of a ship

(b) Deviation of voyage.
66. LOSSES & INDEMNITY IN MARINE INSURANCE
66.1. INTRODUCTION
We know that the marine insurance covers the losses which are caused by the perils of seas Such losses
are known as marine losses. The assured (i.e. insured person) is entitled to recover compensation from the
insurance company in respect of the marine losses. The compensation recoverable by the assured in known
as 'indemnity'. In this chapter we shall discuss the legal provisions relating to the marine loses and
indeminty.

66.2. MARINE LOSSES

The term 'marine loss' may be defined as the loss which results from the perils of seas, and is
recoverable under the marine policy. It may be noted that only such losses can be recovered by the
assured (insured person) which are caused by the peril insured against, and such peril must be the proximate
(i.e. immediate, dominant and effective) cause of the loss. This is based on the rule of cause proximo
(i.e. proximate cause) which has already been discussed in detatil in Art. 61.11. And when the peril
insured against is not the proximate cause of loss, such losses cannot be recovered by the assured. Thus,
the insurer (insurance company) is liable for such losses which are proximately caused by a peril insured
against i.e. which are directly cause by the insured event. And it is not liable for the losses which are not
proximately caused by the peril insured against, i.e. which are remotely caused by the insured event
[Section 55].
Example 66.1: A insured certain hides and tobacco which were shipped in the same ship. During a
storm in the sea, the hides were wetted by water, and they became putrid (i.e. in a state of foul decay
or decomposition). The fumes from these hides spoiled the flavour of the tobacco. It was held that the
damage to the tobacco was proximately caused by perils of the seas, and thus A was entitled to recover
the amount of loss from the insurance company. [Montoye v. London Assc. (1851) 6 Exch. 451].
Example 66.2: A ship was insured against the perils of the seas, but not against the loss from capture.
The ship was captured during the Russo-Japanese war, and was wrecked (destroyed) while it was in the
charge of a prize crew. It was held that the loss was by the capture of the ship and not by the perils of
the seas. And thus, the insurance company was not liable. [Anderson v. Marten, (1908) AC 334 H. L.j.
Some more examples have also been discussed in Art. 61.11 under the heading 'causa proxima'.
Thus, the insurance company is not liable for the losses which are not proximtely caused by the perils
insured against. Section 55(2) of the Marine Insurance Act specifically provides that the insurance
company is also not liable in the following cases:
1. Where the loss is attributable to the wilful misconduct of the assured, (i.e. insured) himself.
However, unless the policy otherwise provides, the insurance company is liable for any
loss proximately caused by a peril insured against, even the loss would not have happened
but for the misconduct or negligence of the master or crew.
2. Where the loss is proximately caused by delay although the.delay is caused by a peril
insured against.
3.Where the loss is caused due to ordinary wear and tear, ordinary leakage and breakage, inherent vice
or nature of the subject-matter insured.
4. Where the loss is proximately caused by rats or vermins (i.e. insects etc.). But if the
proximate cause of loss is a peril insured against, and not the rats or vermins, then the
insurance company will be liable for the loss.
5. Where the Ios>s is caused due to any injury to machinery not proximately caused by
maritime perils.
Example 663: A ship was insured against the perils of sea including the fire at sea. The captain of
the ship set fire to the ship in order to prevent it from falling into the hands of enemies. It was held that
the loss fell within the fire cover provided by the policy, and the insurance company was liable.
[Gordon v. Remington (1807) 1 Camp 123; Richards v. Forestal (1942) AC 50].
 Example 66.4: A cargo (goods) in a ship was insured against the perils of seas including other
perils of a like kind. The insurance was effected "at and from port X to Y". While the ship was
being loaded to port X, the weight of the cargo brought the discharge pipe below water level. In
consequence of a value being negligently left open, the water got into the hold of the ship from the
discharge pipe, and damaged the cargo. It was held that a loss was proximately caused bj' perils of
the seas included in "other perils of a like kind" and the insurance company was liable. [Davidson
v. Burnand (1868) L R 4 CP 117].
Example 66.5: A cargo of fruit was insured against the perils of seas including damages due to collision.
The ship was involved in a collision with another ship and had to go into a port for repairs. The cargo
had to be landed and reshipped, and it was damaged partly by mishandling and partly by delay. It was
held that the proximate cause of loss was mishandling and delay, but not the collision. Thus, the insurance
company was not liable. , [Pink v. Fleming (1890) 25 Q. B. D. 396].

Example 66.6: A cargo-of rice was insured against the perils of seas. The rats made a hole in the pipe
which was passing through the cargo. In consequence of this, the sea water entered through the hole and
damaged the rice. It was held that the sea water was the proximate cause of loss, and not the rats. Thus,
the insurance company was liable for the loss. [Hamilton v. Pandrof (1887) 12 App Cas. 518].
Example 66.7: A ship was insured against the perils of seas. While in dock, the ship met with an
accident with the floating crane which caused a heavy boiler to drop into the hold of the ship and
therby damaging its hull. It was held that the loss was a non-marine loss and was not covered by
the policy.
[Stott (Baltic) Steamers v. Marten (1916) 1 AC 304 H. L.].
66.3. KINDS OF MARINE LOSSES
The marine losses may be classified into two categories, namely:
1. Total loss, and
2. Partial loss.
66.4. TOTAL LOSS
The term 'total loss' may be defined as the loss of the whole of the subject-matter of insurance. The
total loss is again of two kinds, namely:
1. Actual total loss, and
2. Constructive total loss.
66.5. ACTUAL TOTAL LOSS
It is the loss of the subject-matter of insurance in such a way that the subject-matter is totally destroyed
or damaged, or the assured is totally deprived of the subject-matter. The term 'actual total loss' is
defined in Section 57(1) of the Marine Insurance Act. As per this section, the actual total loss occurs
in any one of the following ways:
1. Where the subject-matter insured is totally destroyed.
2. Where the subject-matter insured is so damaged that it has entirely changed its nature
i.e. when it ceases to exist in specie e.g. cement converted into stone by sea water.
Where the assured is irretrievably (i.e. irrecoverably) deprived of the subject-matter of
insurance i.e. where the assured is permanently deprived of the subject-matter, and ther
is no hope or possibility of ever recovering its possession, e.g. where the ship is sinking in the
mid-ocean and there are no chances of raising her, and where the ship is captured and seized
by the enemy and there is no chance of getting back the same.
Example 66.8: A cargo of hides was insured from port P, to P2. During the voyage the hides were
damaged by sea-water. It was found that they were in a state of incipient putridity, and if carried to the
destination they would become entirely putrid and valueless as hides. Consequently, they were sold at a
port on the way. It was held that there was an actual total loss, and the insurance company was liable for
the same. [Based on Roux v. Salvador (1836)3 Bing NC 266 (Ex. Ch)l
Example 66.9: A cargo of 'steel injection moulds' was insured from Australia to England. During the
voyage, a pipe in the hold of ship fractured, and water entered therein. On arrival at the destination, the
injection moulds were found to be damaged by rust due to being immersed in water. It was held that there
was an actual total loss of the goods (steel injection moulds) because they had no value in their damaged
condition. [Based on Bergers Light Diffusers Ltd. v. Pollock (1973)2 Lloyd's Rep. 442 Q. B.].
Example 66.10: A ship was insured against the perils of seas. During the voyage, the ship was so
damaged that it was not possible for the ship to sail without repairs. And for the purpose of repairs, the
ship could not be taken to the port. It was held that there was an actual total IOSF of the ship, as she had
ceased to be a ship and could never be used for the purpose of a ship. [Moss v. Smith (1850)9 CB 94]'
Sometimes, the ship insured is missing, and after a reasonable time no news of the same has been
received. In such cases there is a presumption of the actual total loss [Section 58]. The term 'reasonable
time' is a question of fact and has to be decided upon the facts and circumstances of each case. It may
be noted that if the insurance company pays for a missing ship treating it as lost and afterwards the ship
turns up, then the ship belongs to the insurance company and not to the assured
[Houstman v. Thornton (1816) Hold N. P. 242; 17 RR 632].
Note: In case of actual total loss, ther is no need to give a notice of abandonment to the insurance
company or underwriter [Section 57(2)]. The term 'abandonment' and its effects will be discussed in Art.
66.11 and 66.13.
66.6. CONSTRUCTIVE TOTAL LOSS
It is the loss of subject-matter of insurance in such a way that the subject-matter though not really lost,
but from the point of view of the assured, it is considered to be lost for all practical purposes. The term
'constructive total loss'is defined in general terms in Section 60(1) of the Marine Insurance Act. As per
this section, there is a constructive total loss in any one of the following cases:
1. Where the subject-matter of insurance is reasonably abandoned because of its actual total
loss appearing to be unavoidable.
2. Where the subject-matter of insurance is reasonably abandoned because the expenditure
to prevent the actual total loss would exceed the value of subject-matter when saved.
As a mater of face, in these two cases, the assured is justified in abandoning (surrendering or giving
up) the subject-matter, and the subject-matter is treated as totally destroyed by a law. It may be noted,
that the above given is the general definition of the term 'constructive total loss'. In particular, there is
a constructive total loss in the following cases [Section 60(2)]:
(a) Where the assured is deprived of the possession of his ship or goods by a peril insured
against, and:
(i) it is unlikely that he can recover the ship or the goods, or
(ii) the cost of recovering the ship or the goods would exceed their value when recovered.
(b) Where the ship is so damaged by a peril insured against that the cost of repairing the
damage would exceed the value of the ship when repaired.
(c) Where the goods are so damaged that the cost of repairing the damage and forwarding
the goods to their destination would exceed their value on arrival.

Example 66.11. A ship was insured from January 15 to July 15, 1966 under a time policy. The ship was
seized by Vietnamese Custom Authorities for carrying unmanifested goods, and was confiscated on the order
of Special Court. The assured made all attempts to obtain the release of the ship upto August 29, 1967 and a
long time afterwards. It was held that the recovery of the ship was unlikely, and there was a constructive total
loss.
[Panamanian Oriental S.S. Corpn. v. Wright (1970)2 Lloyd's Rep. 365 Q.B. (Commercial Court)]2
Example 66.12. A cargo of certain goods was insured. The ship carrying the goods became a constructive
total loss and the goods had to be landed in a damaged condition. The cost of landing, warehousing,
reconditioning and reshippining the goods, and forwarding them to their destination exceeded their value
on arrival. In this case, there is a constructive total loss of the goods.
[Based on Franworth v. Hyde(lS66) L.R. 2 C.P. 204 (Ex. Ch.)].
The following observations of JUSTICE MAUL in Moss v. Smith'(IMS) 2 (B94), are
worthnoting in connection with the constructive total loss:
"A man may be said to have lost a shilling when he has dropped it into deep water, though
it might be possible by some very expensive contrivance to recover it. The shilling exists and
it could be recovered at a price, but what man would be foolish enough to spend, say, two
 shillings in order to recover one? The safer course would be to abandon the shilling in the
deep water, in which case that shilling would be a constructive total loss."
It may be noted that where there is a constructive total loss, the assured may either treat the
loss as a partial loss, or abandon the subject-matter insured to the insurance company, and treat
the loss as if it where an actual total loss [Section61]. Thus, mere treating the loss as a constructive
total loss does not entitle the assured to claim the total loss from the insurance company. He
must give a notice of abandonment to the insurance company. Only then he becomes entitled
to recover the total loss from the insurance company. If he fails to give such notice, the loss
will be treated only as partial loss. The legal provisions relating to the abandonment will be
discussed in Arts. 66.11 to 66.13.
Note. Unless a different intention appears from the terms of the policy.an insurance against total loss includes
constructive as well as an actual total loss [Section 56].
66.7. PARTIAL LOSS
The term 'partial loss' may be defined as any loss other than a total loss as defined above. Thus, a
partial loss is any loss which is neither an actual total loss nor a constructive total loss.
Example 66.13. A cargo of rice valued at Rs. 2 lacs was insured against the perils of seas. The ship, carrying
the cargo, was sunk but subsequently raised. And the rice remained under water for two tides. Consequently, the
rice was damaged, and the consignee refused to accept the same. Afterwards, the rice was kiln-dried at a cost
of Rs. 25,000, and then sold for Rs. 60,000. It was held that the loss was only a partial loss as the rice still
remained rice in specie.
[Based on Francis v. Boulton (1895) 65, L.J.Q.B. 153].
Sometimes, the goods reach their destination in specie, but they are incapable of identification due to
obliteration of marks or otherwise. In such cases, if there is any loss, it will be treated as a partial
loss and not a total loss [Section 56(5)]. The partial loss is also of two kinds, namely:
1. General average loss, and
2. Particular average loss.

66.8. GENERAL AVERAGE LOSS

It is the loss which arises in consequence of extra-ordinary sacrifices made, or expenses incurred for the
preservation of the ship and cargo. The term 'general average loss' is defined in Section 66(1) of the
Marine Insurance Act. As per this section, a partial loss which is the direct consequence of a general
average act is known as the general average loss. The 'general average act' is the act which is done for the
purpose of preserving and saving the common property. There is said to be a 'general average act' where any
extraordinary sacrifice or expenditure is voluntarily and reasonaly made or incurred in time of peril for the
purpose of preserving the property of common adventure [Section 66(2)]. Thus, the general average act
means the sacrifice made or expenses incurred for the purpose of saving the whole of the property involved
in a common adventure. Following are the essential features of a general average loss:
1. The common adventure must be in real and actual danger, and there must be a reasonable
necessity to make the sacrifice or incur expenditure for the safety of the whole subject-
matter. Only a reasonable belief that the danger exist, is not sufficient.
2. The sacrifice or expenditure must be voluntary, and must have been made to avoid a real
danger which is common to all interests, e.g. where a cargo is thrown out of the ship
(i.e. jettisoned) in order to lighten the ship in a bad weather, it is a voluntary and reasonable
sacrifice.
3. The sacrifice or expenditure must be real and extraordinary, e.g. throwing away of useless
rotton articles will not amount to a real sacrifice.
4. The object of the sacrifice or expenditure must be to preserve the property of the common
adventure.
5. The danger must not have arisen due to the fault of the person claiming contribution i.e.
the party on whom the loss falls.
It may be noted that the general average loss also includes the 'general average sacrifice' and 'general
average expenditure'. These terms may be explained as under:
1. General average sacrifice: It means the extraordinary sacrifice of some parts of the ship or goods
for the purpose of saving and preserving the property of common adventure i.e. for common safety.
Sometimes, the ship is involved in dangers (perils) in such a way that the property of common adventure
(including the ship) can be saved by destroying or damaging some of the parts of the ship or goods on
board the ship. Voluntarily destroying such parts or goods for the purpose of saving and preserving the
common property is known as extraordinary sacrifice. Thus, the sacrifice may be of the ship or goods. The
sacrifice of the ship involves the (a) cutting away of masts, spares and sails of the ship for the purpose of
saving the ship e.g. constructing a rudder for changing ship's direction, (b) using some of the parts of a
ship for some purpose different from their ordinary use e.g. using sails and cardage for stopping a leak,
(c) scuttling of a ship (i.e. deliberately sinking the ship by opening seacocks) in order to amit water to
enter in the ship to exstinguish fire. The sacrifice of the goods involves the (a) throwing overboard the
cargo in order to lighten the ship for the purpose of safety of the ship and cargo (This is called jettison), (b)
damaging the cargo by pouring water on it in order to extinguish fire, (c) buring of the cargo as fuel for
the engines to avoid loss of the ship and cargo.
2. General average expenditure: It means the extraordinary expenditure incurred for the purpose of
saving and preserving the property of common adventure, i.e. for common safety. The intances of
extraordinary expenditure are (a) the remunerations paid to the salvors (persons who save the ship or
cargo), if at the time of perils (risks) they were employed at a remuneration to salve (i.e. save) the
whole of the property at risk, (b) the money paid to the pirates (the persons who rob or commit illegal
voilence at sea) for the purpose of saving the ship and cargo, (c) the expenses for entering the port of refuge,
when the ship is put into a port of refuge for the purpose of its safety and the cargo on board the ship e.g.
to execute repairs, (d) charges for towage, unloading, warehousing and reloading the cargo, harbour
dues etc. as they are the direct consequence of general average act.
Note. Sometimes, the captain of the ship may need funds for repairing the ship etc. In such cases he
may either resort to the forced sale of cargo, or borrow money on a bottomry bond (i.e. on the security
of ship or ship and cargo), or on a respondentia bond (i.e. on the security of cargo alone). In case of forced
sale, there may be some loss if the goods realise less than they would have realised at the destination
Such a loss is considered as a general average loss. And if the sale at the port of refuge realise more, then
the owner of the goods is entitled to the actual proceeds at the port of refuge [Richardson v. Nourse
(1819) 3 B & Ad. 237]. The practice of loan and forced sale was common in olden days. But now-a-days,
one seldom hears of such instances as the cable and wireless usually enable such provisions to be arranged.
66.9. GENERAL AVERAGE CONTRIBUTION
We have discussed, in the last article, that the general average loss is the expenditure incurred or
sacrifice made for the safety and preservation of the property involded in a common adventure. It may be
noted, that several persons such as the owner of the ship, the owner of the cargo etc., have interest in the
common adventure, and all of them are benefitted by the safety of common property. It is, therefore, the duty
of all such persons (i.e. interested persons) to make proportionate contribution towards the general average
loss. Such contribution is called the general average contribution. It may be noted that the obligation to make
contribution towards the general average loss exists between all the parties to the adventure i.e. the parties
interested in the adventure whether they are insured or not. Thus, the party on whom the general average
loss falls, is entitled to claim rateable contribution from the other parties interested in the safety of the
common property [Section 66(3)]. This is, however, subject to the conditions imposed by maritime law.
If a party liable to make general average contribution is insured, then he can claim conpensation (indemnity)
from the insurance company for the contribution made by him. And if such party is not insured, then he
himself suffers the loss3. Thus, all the persons who are benefitted by the safety of the property of the comon
adventure, must share the general average loss. The following are the persons who are so benefitted, and
thus liable to share the general average loss:
(a) The owner of the ship in respect of his ship.
(b) The owner of the cargo in respect of his cargo.
(c) The charterer in respect of the freight payable to him.
However, the seamen who were interested in the safety of the ship for their wages, are not liable to
contribute any part of their wages towards the general average loss. In respect of general average loss, the
liability of an insurer (insurance company) may be discussed as under:
1. Where the assured has incurred a general average expenditure, he is entitled to recover
from the insurance company only that proportion of loss which falls upon him. And for
 the balance, the assured may claim contribution from the parties liable to contribute
[Section 66(4)].
2. Where the assured has suffered a general average sacrifice, he is entitled to recover from
the insurance company the whole amount of loss without claiming any contribution from
the other parties liable to contribute. However, on making the payment of whole loss,
the insurance company gets the rights of the assured to claim contribution from the parties
liable to contribute [Section 66(4).
3. Where the assured has paid or is liable to pay a general average contribution in respect
of the subject-matter insured, he may recover compensation for the same from the
insurance company [Section 66(5)]*.
4. Where the general average loss was not incurred for the purpose of avoiding or in
connection with the avoidance of a peril insured against, the insurance company is not liable for
the same. It may be noted that in such a case, the insurance company is not liable even for
general average contribution [Section 66(6)].
All the four rules stated above are subject to any express provision in the marine policy. Example
66.14. A cargo of goods was insured against the perils of seas. During the voyage, the ship was found
sinking. In order to lighten the ship and save it from sinking, certain goods were thrown overboard the ship. In
this case, the insurance company is liable to pay, to the assured, the va'ue of the goods so thrown out as an
ordinary loss under the policy. Thereafter, the insurance company stands in the place of assured, and can claim
contribution from the other parties liable to contribute
[Dickinson v. Jardine (1868) L.R. 3 C.P. 639].
Note: Where the ship, freight, and cargo, or any two of these interests are owned by the same assured the
liability of the insurance company in respect of general average loss or contributions is to be determined as if
those interests were owned by different persons [Section 66(7)].
66.10. PARTICULAR AVERAGE LOSS
It is a partial loss of the subject-matter insured, which arises in consequences of the peril insured
against. The term 'particular average loss' is defined in Section 64(1) of the Marine Insurance Act.
As per this section, a partial loss which is directly caused by a peril insured against and which is
not the general average loss, is known as the particular average loss. Thus, it is the loss of the
subject-matter insured by the perils insured against, and which is not suffered for the preservation of
the common property. The whole of it can be recovred from the insurance company, and it gives no
right of contribution from the other parties interested in the adventure. The particular average loss
concerns solely the person interest in the subject-matter insured, and the insurance company. The
following are the essential features of a particular average loss;
1. The loss must be of the subject-matter insured.
2. The loss must have been caused by a peril insured against.
3. The loss must arise accidently and proximately by a peril insured against. And it must
not be have been incurred voluntarily for the preservation of the whole property of the
adventure, i.e. the loss must have been caused and incurred independently of the
preservation of the whole adventure.
Thus, where a part of the goods are lost, or where a ship is damaged by a peril insured against, such
loss or damage is a particular average loss if the same is not caused by a general average act as
discussed in Art. 66.8.
Example 66.15. A cargo of 1000 bales of cotton was insured against the perils of seas. During the voyage, the
ship was caught in a heavy storm, and 100 bales of cotton were damaged by sea water. In this case, there is a
particular average loss.of the cargo.
Example 66.16. A ship was insured against the perils of seas. During the voyage, the ship was caught in
violent storm which damaged the ship seriously. In this case, there is a particular average loss of the ship.
Note: The main difference between a general average loss and a particular average loss is that, the former is
a partial loss voluntarily incurred for the safety and preservation of the common adventure, and is made good
by a proportionate contribution by all the parties interested in the adventure. The latter is a partial loss
accidently and proximately cause by a peril insured against, and which has to be borne by the party alone
upon whom it fall.
66.11. ABANDONMENT
The term 'abandonment' may be defined as the surrender or relinquishment of the insured
property, to the insurance company^ in order to claim total loss for the same. It may be noted that
the insured property is surrendered by the assured alongwith all pro;,,. <etary rights and remedies in
respect of the same.
We have discussed in Art, 66.6 that in case of constructive total loss, the assured (insured person)
may either treat the loss as a partial loss, or abandon the subject-matter, and treat the loss as an
actual total loss and recover the same from the insurance company. Where the assured treats the loss
as an actual total loss, he must give a notice of abandoment to the insurance company. A notice of
abandonment is a notice by the assured to the insurance company that he unconditionally abandons (i.e.
surrenders) to the insurance company all his interests in the subject matter of insurance. If the assured
fails to give a notice of abandonment, the loss can only be treated as a partial loss [Section 62(1)].
Thus, in order to avoid the loss being treated as partial, the assured must give a notice of abandonment
to the insurance company. Once the assured treats the loss as partial, the notice of abandonment
given after that will be ineffective.
Example 66.17. A ship was insured against the perils of seas. During the voyage, the ship was damaged
by a peril insured against and was put into a foreign port. The master of the ship got it repaired after
communicating with the owner, and the cost of repairs exceeded the value of the ship when repaired. After
the arrival of the ship at the destination, the owner gave a notice of abandonment to the insurance company.
In this case, the notice of abandonment is ineffective as the owner had already treated the loss as a partial
by allowing the repairs. [Flemming v. Smith (1848) 1 H.C. Cas. 513].
The notice of abandonment is necessary in order to entitle the insurance company to whatever
remains of the insured property, and if it so wishes, to enable it to take means for the protection of its
own interest. If the insurance company accepts the notice of abandonment, the total loss is paid by it
to the assured, and the insurance company can realise, whatever it can, from the sale of the
abandoned property. If the insurance company does not accept the notice of abandonment, then the
assured may bring a legal action against the insurance company for the recovery of the total loss. And
then it is for the court to decide whether or not a constructive total loss has occurred.
66.12. LEGAL RULES REGARDING THE NOTICE OF ABANDONMENT
The legal rules regarding the notice of abandonment are contained in Section 62 of the Marine
Insurance Act, which may be summed up as under:
1. The notice of abandonment must be given by the asured where he elects (decides) to
abandon the subject-matter to the insurance company, and treats the loss as an actual total
loss. If he fails to do so, the loss can only be treated as a partial loss.
2. The notice of abandonment may be given in writing or by words of mouth, or partly in
writing and partly by words of mouth. Thus, there is no special form of notice of
abandonment.
3. The notice of abandonment must be given with reasonable diligence after the receipt of
reliable information of the loss.
4. The notice of abandonment must be given within a reasonable time. If the assured is guilty
of delay in abandoning the subject-matter, then he is not entitled to claim for the total
loss.
5. The notice of abandonment may be accepted or refused by the insurance company.
6. Where the notice of abandonment is accepted, the abandonment becomes irrevocable i.e.
it cannot be revoked. Moreover, such acceptance admits the following two things:

(a) The liability of the insurance company for the total loss, and
(b) The sufficiency of the notice of abandonment.

7. The acceptance of notice of abandonment may be either express or implied from the
conduct of the insurance company. However, a mere silence of the insurance company
after receiving the notice, does not amount to acceptance.
8. Where the insurance company refuses to accept the notice of abandonment, the rights of
the assured are not prejudiced (i.e. not adversely affected) in any way by such refusal.
He remains liable to recover the loss from the insurance company through the Court of
Law. Moreover, the assured may also withdraw the notice if for any reason, he thinks
that a partial loss would be belter in the circumstance
9. The notice of abandonment is not necessary in the following cases:
(a) Where at the time when the assured receives information of the loss, there would
be no possibility of benefit to the insurance company if notice were given to it
(b) Where the insurance company has waived the notice of abandonment.
(c) Where the insurance company has re-insured its risk, no notice of abandonment need
be given by it to the re-insurer.
(d) Where there is an actual total loss [Section 57 (2)].
Example 66.18. A ship was insured against the perils of the seas, and it was sunk in deep water in
the harbour. The assured gave a notice of abandonment, but it was not acceped by the insurance company
However, the insurance company at its own initiative, and at a great expense, recovered the ship before
an action is brought by the assured. It was held that the notice of abandonment was valid, and the assured
could recover the total loss. In this, the subsequent conduct of the insurance company shows that it has
accepted the notice of abandonment. [Sailing Ship Blairmore v. Macredie (1898)A.C. 593]
Example 66.19. A freight was insured from New Zealand to San Fransisco. The ship stranded near
Honolulu, and the cargo, which consisted of coal, got wetted. The ship and cargo both were sold at
Honolulu. If the coal had been dried and sent on, the cost would have been more than its worth. In this
case, there is a total loss of freight and no notice of abandonment of the freight is necessary as there
would have been no possibility of benefit to the insurance company if the notice were given to it.
[Trinder v. Thames & Mersey Mar. Ins. Co. (1892) QB 119 (CA)].
66.13.EFFECTS OF A VALID ABANDONMENT
The effect of a valid abandonment is that insurance company becomes entitled to take over the interest of the
assured in the abandoned subject-matter, whatever it may be. Moreover, it also becomces entitled to all its
proprietary rights in respect of the same. In other words, once a notice of abandonment is validly given and
accepted, the assured ceases to be the owner of the abandoned subject-matter. And the insurance company becomes
the owner of such subject-matter and derives all the rights to deal with the same [Section 63]. In case of
abandonment of a ship, the insurance company also gets the following rights:
1. The right to receive any freight which is either in the course of being earned or which
is earned by the ship subsequent to the casualty (i.e. accident) causing the loss minus the
expenses of earning it incurred after the casualty.
2. The right to receive reasonable renumeration from the owner for carriage of the goods
subsequent to the casualty causing loss, where the ship is carrying the owner's goods.
It may, however, be noted that the insurance company, with which the ship is insured, is not entitled to the
freight paid in advance by a charterer. Moreover, it is also not entitled to the freight which is earned by a
subsequent ship.
Example 66.20. A ship was insured from London to Bombay. During the voyage, the ship was damaged
by an iceberg. It was again damaged while entering the dock at Bombay. The cargo was delivered and
freight was paid. At Bombay, the ship was found to be not repairable, and the owner abandoned it to the
insurance company. In this case, the freight earned after the casualty i.e. after the damage by iceberg,
belongs
to the insurance company. [Based on Stewart v. Greenock Ins Co.(1853) 1 Macq. H.L. 334].
Example 66.21. A ship was insured against the perils of the seas. During the voyage, the ship became
a total constructive loss, and was validly abandoned by the assured. However, the cargo was landed, and
was senf^by the master in another ship to its destination. In this case, the insurance company of the ship
is not entitled to the freight earned by the subsequent ship.
[Based on Hickie v. Rodocanachi (1859) 28 L.J. Ex. 273].
66.14. MEASURE OF INDEMNITY
We know that a contract of marine insurance is a contract of indemnity i.e. a contract to make good the loss
suffered by the assurd (insured person). However, in marine insurance, the amount of indemnity is a matter of
agreement between the parties (the assured and the insurance company). The amount which can be
recovered from the insurance company is known as the measure of indemnity. This term is
defined in Section 67(1) of the Marine Insurance Act. As per this section, the measure of
indemnity is the amount of loss for which the insurer (insurance company) is liably to the assured.
And the extent of the measure^ef ^indemnity i.e. the loss recoverable from the insurance
company is as under:
2. In case of unvalued policy, to the full extent of the insurable value.
3. In case of valued policy, to the full extent of the value fixed by the policy.
It may be noted that the above mentioned is the maximum extent (i.e. limit) upto which 'the
insurance company is liable to pay. Subject to this maximum limit, the liability of the insurance
company may be calculated as under:

The amount subscribed by the insurance

company (i.e. the amount insured
with it)
Liability of = × Total Amount of loss
Insurance
Company
The value fixed in the policy in case of valued policy, or
The insurable value in case of unvalued policy
If there are more than one insurance companies, the liability of each insurance company is
calculated as stated above.
Example 66.22: A cargo of cotton valued at Rs. 100,000 was insured with four insurance companies
for Rs. 25,000 each. The cotton was damaged, by perils insured against, upto the extent of Rs. 40,000.
In this case, each insurance company is liable for Rs. 10,000 (25,000 × 40,000)
100,000.
66.15. SALVAGE CHARGES
The term 'salvage' has various meanings. However, under the maritime law, it means the reward
payable to the salvor (i.e. who saves the property or life at sea) for saving or helping to save
property at sea, or property and life conjointly. And the term 'salvage charges' means the charges
recoverable under the maritime law by a salvor independently of the contract. Subject to any
express provision in the policy, the salvage charges incurred in preventing a loss by perils insured
against, may be recovered as a loss by those perils [Section 65].
The salvor who saves the property has a right of lien on such property for the reward of his
services. But if the property is not in possession of the salvor, he has a claim for his reward which
he can enforce by a legal action in the Court of Law, called the Court of Admiralty. This right
of the salvor is known as 'maritime lien'. When the court passes a judgment in his favour, the
remuneration awarded to him is called a 'salvage award'. It may be noted that the salvage is
awarded by the court only when the services of the salvor were materially necessary in salving
(i.e. saving) the ship. However, the services, must have been rendered by a third party i.e. who is
in no way connected with the contract of insurance.
The salvage charges are recoverable under the policy as loss by perils insured against and
not under the 'suing and labouring' clause 4. Thus, the salvage charges cannot be recovered in
addition to the sum insured, and the total liability of the insurance company is limited to the
sum insurred.
Example 66.23. A ship was insured for Rs/20 lacsJluring the voyage, the ship was caught in a bad
weather and it was rescued by a steamer with which no contract was made. Afterwards, the owner of the
steamer obtained a salvage award for Rs, 5 lacs. The owner of the ship got the ship repaired, and the
expenses of the ship came out to Rs. 20 lacs. In this case, the insurance company is liable upto the maximum
amount
of sum insured i.e. Rs. 20 lacs. And the salvage charges are not recoverable in addition to this amount
insured with the insurance company. [Based on Aitchison v. Lohre (1879) 4 App. Cas. 7551
66.16. RIGHTS OF THE INSURER (INSURANCE COMPANY) ON PAYMENT OF
INDEMNITY
On the payment of indemnity (i.e. the amount payable under the marine policy), the insurer (insurance
company) gets certain rights. These rights are contained in Section 79 to 81 of the Maririe Insurances
Act, which may be discussed under the following heads:
1. Right of subrogation [Section 79]. We know that the term 'subrogation' means the substitution
of one person for another. In insurance law, the subrogation means the substitution of the insurance
company for the assured in respect of all the rights and remedies which he (assured) has against the
third persons. According to this right, on the payment of the total loss, the insurance company is
subrogated in two ways, namely:
(a) It becomes entitled to take over the interest of the assured in respect of the subject-matter
for which the amount of loss is paid by it; and
(b) It gets all the rights and remedies of the assured in respect of that subject-matter.
It may be noted that the insurance company gets these rights only when it pays for the total loss
(either of the whole subject-matter or of any apportionable part of the subject-matter, as in case of
goods). But if it pays for a partial loss only, then it does not acquire any title to the subject-matter
insured. However, in such a case, it is subrogated to all the rights and remedies of the assured in the
subject-matter in so far as the assured been indemnified by the payment of such partial loss.
Example 66.24. A ship was insured against the perils of seas. The ship was missing and the assured
abandoned the ship to the insurance company. And the insurance company paid the total loss. In this case
if the ship, afterwards, arrives, it will belong to the insurance company.
[Based on Houstman v. Thornton (1816) Hold N.P. 242].
Example 66.25. A ship was insured against the perils of seas. The ship collided with another ship at
fault and was run down. The insurance company paid the total loss to the assured. Afterwards, the assured
recovered Rs. 50,000 as damage for the loss of the ship from the owner of the other ship at fault. In this
case, the insurance company is entitled to this amount of Rs 50,000.
[Based on North of England Iron S.S Ins Assn. v. Armstrong (1870) L.R. 5 Q.B. 244] 5.
Sometimes, the sum insured or the agreed valuation is less than the true value of the subject-matter
lost. In such cases, the insurance company is entitled to the proportionate damages received by the
assured from the third party at fault.
Example 66.26. A ship valued at Rs. 80 lacs was insured by its owner for Rs. 60 lacs. The ship collided with
another ship, and was run down. The assured recovered the total loss (i.e. Rs. 60 lacs) from the insurance
company. Afterwards, the assured also recovered Rs. 60 lacs from the owners of the other ship at fault in
collision. In this case the insurance company is entitled to 60/80th of the amount so recovered (i.e. of Rs. 60
lacs), and the assured to 20/80th of the amount recovered. [The Commonwealth, (1907) P. 216 C.A.].
Sometimes, the damages recovered by the assured from the third party are less than the agreed
valuation. And there is only a partial loss. In such cases, the insurance company is entitled to the
benefit of the whole of such damages.
Example 66.27. A ship valued at Rs 40 lacs was insured. The ship collided with another ship. But the
assured did not treat the loss as total, and Rs. 25 lacs was spent in repairing the damage caused to the ship.
The assured claimed Rs. 25 lacs from the owner of the other ship with whom his ship collided. In this case,
the liability of the insurance company is Rs. 40, lacs i.e. the value for which it was insured
However, the insurance company is entitled to the benefit of Rs. 25 lacs recovered by the assured and thus it is
liable for Rs. 15 lacs (40 - 25) only.
[Goole & Hull Steam Towing v. Ocean Marine Ins. Co. (1928) 1 K.B 589]
It may be noted that by the right of subrogation, the insurance company becomes entitled to those rights
only which could have been enforceable by the assured himself. Thus, if the assured himself cannot bring an
action, the insurance company has no right of subrogation thereto
Example 66.28. Two ships S, and S2 belonging to the same owner came into collision due to the fault
of ship Sr Consequently, ship S, was totally destroyed, and the owner recovered the total loss from the
insurance company. On the basis of subrogation, the insurance company wanted to recover the damages
from the owners of the ship S2 (i.e. from the same owner). In this case, the insurance company has no
right of action against the ship at fault as both the ships belong to the same owner, and one cannot have
a claim against himself.
 [Simpson v. Thompson (1877) 3 App. Cas. 279 H.L.].
Thus, we see that the insurance company is entitled to the right of subrogation on making payment of
total loss to the assured which completely indemnifies him (assured). It may be noted that under the doctrine
of subrogation, the insurance company cannot recover anything more than it had paid to the assured.
Example 66.29. A ship was insured for Rs. 72 lacs. The ship collided with another ship and became
a total loss. The insurance company paid the total loss Rs. 72 lacs, and claimed the damages of Rs. 100
lacs from the owner of a ship at fault. In this case, the insurance company can recover Rs. 72 lacs only,
and not Rs. 100 lacs, as under the doctrine of subrogation the insurance company cannot recover anything
more than it has actually paid to the assured.
[Yorkshire Ins. Co. Ltd. v. Nisbet Shippig Co. Ltd. (1962) 2 QB. 330, (1961) 2 All E.R.
487].
2. Right of contribution [Section 80]: We know that the term 'contribution' means the method of
distributing the loss among the different insurance companies whose policies attach the same risk i.e. which
are liable for the same risk. The principle of contribution applies only when there is over-insurance by
double insurance i.e. when there are two or more insurance policies on the same subject-matter, and the
total sum insured exceeds the value of the subject-matter.
According to the principle of contribtion, where assured is over-insured by double insurance, then the
insurance companies, as between themeselves, are bound to contribute to the loss in proportion to the
amount insured with each of them. And, if any insurance company pays more than its proportion, then it
is entitled to claim contribution from other insurance companies. However, the following conditions
must be satisfied for enforcing right of contribution:
(a) The assured must be the same in all the policies.
(a) The peril insured against must be the same in all policies, and the loss must be caused
by such a peril.
(b) The subject-matter of insurance must be the same in all the policies.
(b) The insurance policies must be with different insurance companies, and all the policies
must be in force (i.e. effective) at the time of loss.
(c) One of the insurance companies must have paid to the assured more than the share of
its loss.
Example 66.30. A ship valued at Rs. 60 lacs was insured with A, an insurance company, for Rs. 40
lacs, and with B, another insurance company, for Rs. 60 lacs. The ship was totally destroyed by a peril
insured against and the assured recovered the total (Rs. 60 lacs) from B, the second insurance company.
In this case, B is entitled to claim contribution from A, the other insurance company. A's contribution will
be calculated as under

= Suminsured with A = Total loss = 40 × 60 = Rs. 24lacs

Total suminsured 40 + 60
Note: This point has also been discussed in detail in 61.11.
3. Right in case of under-insurance [Section 81]: Sometimes, the insurance is effected for an amo".nt
less than the insurable value, or in case of a valued policy for an amount less than the

policy valuation. In such cases, the assured is considered to be his own insurer in respect of the
uninsured value. It is based on the hypothesis that the subject-matter is fully covered by insurance And
thus, the marine losses are accordingly adjusted upon this principle. Thus, the insurance company is
entitle to the benefit of the assured's share for loss.
Example 66.31. A cargo of certain goods valued at Rs. 50,000 was insured for Rs. 40,000. The goods
worth Rs. 25,000 were destroyed by a peril insured against. In this case, the insurance company is lible
for Rs. 20,000* and not for Rs. 25,000. And the loss of Rs. 5,000** is to be borne by the assured himself
as he is his own insurer for Rs. 10,000 (the uninsured balance).

TEST QUESTIONS
 1. What do you understand by 'marine losses'? Discuss the various kinds of marine losses.
2. What do you understand by 'abandonement' in marine insurance? What are the legal rules regarding
notice of abandonment? State the effects of valid abandonment.
3. Write a note on measure of 'indemnity'?
4. What are the rights of an insurer on payment of indemnity under a maritime policy?
5. Write notes on the following
(a) General average sacrifice (b) General average expenditure.
(c) General average contribution (d) Particular average loss.
(e) Salvage charges (/) Maritime lien

67. MISCELLANEOUS INSURANCE

67.1. INTRODUCTION
11 the previous chapters, we have discussed certain specified insurance businesses, namely, life
insurance, fire insurance and marine insurance. It may be noted that this is not the end of insurance
business. Nowadays, the insurance business has advanced to such an extent that the risk against the
happening of any event may be insured such as. accidents, thefts, burglary, riots etc. As a matter of
fact, practically there is no risk which cannot be insured by taking an insurance policy. All other
insurances, except life, fire and marine insurance, are known as miscellaneous insurance. The
miscellaneous insurance business falls under the category of general insurance business which was
nationalised in 1972 by the General Insurance Business (Nationalisation) Act 1972. Under the
provisions of this Act, the General Insurance Corporation of India (a Government Company) was set up
to carry on this business. Since then it is carried on under the control and supervision of this
Corporation, and four other companies as discussed in Art. 61.1. The General Insurance Corporation of
India will be discussed in detail in Art. 67.7.
As already discussed in Art. 61.20, the exclusive privilege of the General Insurance Corporation of
India and its four subsidiary companies, to carry on the general insurance business has ceased to exist
on the passing of the Insurance Regulatory and Development Authority Act, 1999. By this Act, a new
section 24A has been inserted in the General Insurance Business (Nationalisation) Act, 1972, which
enables the other Indian insurance companies to carry on the general insurance business.
It may be noted that the list of insurance, falling under miscellaneous insurance, is endless. But in
this chapter, we shall discuss in brief only the important types of insurance. Following are some of
the important types of insurance:
1. Personal accident insurance
2. Property insurance
3. Fidelity insurance
4. Motor vehicle insurance
5. Workmen's compensation insurance.
67.2. PERSONAL ACCIDENT INSURANCE
It is the business of effecting contracts of insurance against the disablement or death of a person caused
by accident. In a contract of personal accident insurance, the insurer (insurance company) undertakes to
pay a specified amount of money to the assured (insured person) or his legal representatives (i.e.
heirs) in the event of his disablement or death by accident.
The term 'accident' is very important in personal accident insurance. Because the insurance company
becomes liable to pay the policy amount only if the disablement or death of the assured is caused by
accident. The term 'accident' means something unexpected and unforseen as opposed to something
natural. It is always an unintentional and unexpected happening of the event e.g the death of assured
or the loss of his legs by falling from a running train is accidental. But if he intentionally jumps from
the running train, then it will not be accidental. LORD MACNAUGHTEN1 defined the term accident in
the following words:
"An unlocked mishap, or an untoward event which is not expected or designed"
It may be noted that in case of personal accident insurance, the insurer (insurance company) is liable
only if the accident is the direct or immediate cause of disablement (injury) or death of the assured. If
there are some other intervening causes also such as disease etc., then in order to determine whether the
accident is the direct or immediate cause of disablement or death, the dotrine of causa proximo (i.e. of
proximate cause), as discussed in An. 61.11, is applied. Thus, if the disablement or death is caused by a
disease brought out by the accident, then the insurance company is liable 2. But if the disease had already
existed at the time of accident, and the accident merely exaggerated the effect of the desease, then the
disablement or death caused under these circumstances is not covered by the policy of personal accident
insurance1. Other fundamental principles of insurance such as insurable interest, good faith, as discussed in
Art. 61.11, are also applicable to this insurance.
A contract of personal accident insurance is made in the same way as other contracts of insurance i.e.
life, fire etc. It may be noted that a contract of personal accident insurance is similar to a contract of life
insurance and, like that, is not a contract of indemnity. Its nature is like that of a contingent contract. In
this case, the assured is not compensated for the loss suffered by him, but is paid the entire amount
mentioned in the policy. The reason for the same is that the loss of personal injury or death (by accident)
cannot be determined in terms of money. Thus, the insurance company is liable to pay the entire amount
as mentioned in the policy. Moreover, it cannot deduct from the amount payable to the assured any
money received by him (assured) from a third person responsible for the accident. The insurance
company is also not subrogated to the rights of claiming damages, which the assured may have against
the third party.
Note: A personal accident insurance policy may provide for certain exceptional circumstances in which the
insurance company may exclude its liability for disablement or death of the assured, e.g. the policy may contain a
clause providing that if, at the time of accident, the assured is under the influence of liquor (heavily drunken), or is
enaged in such a trade or business involving more danger to his safety of life etc., then the insurance company will
not be liable.
67.3. PROPERTY INSURANCE
It is the business of effecting contracts of insurance against the loss or damage to the property resulting
from burglary, house-breaking, theft, riots etc. In a contract of property insurance, the insurer (insurance
company) undertakes to indemnify (i.e. compensate) the assured (insured person) for the loss of his
property resulting from an event insured against i.e. theft etc. It may be noted that the policy of property
insurance, usually, provides its own definitions of the event insured against4. However, in the absence of
any such definition in the policy, the definitions as given in the Criminal Law are applied.
A contract of property insurance is a contract of indemnity. Thus, the insurance company is liable to
make good the loss suffered by the assured subject to the maximum amount mentioned in the policy. The
principle of subrogation is also applicable in this case i.e. after paying the amount of loss to assured, the
insurer (insurance company) gets those rights which the assured has against the third party liable for
the loss.
Note: The articles of special value are, usually, excluded from the scope of property insurance policy.

Moreover, the loss or damage, which may be covered by some other kind of insurant, e.g.
loss by theft following a fire etc.

67.4. FIDELITY INSURANCE

The term 'fidelity' may be defined as the loyalty, honesty or faithfulness. The fidelity insurance is the
business of effecting contracts of insurance against the losses resulting from the fraud or embezzlement
on the part of emplyees of the assured. In a contract of fidelity insurance, the insurer (insurance
company) undertakes to indemnify (i.e. compensate) the assured (insured person) for the loss which
may result due to dishonest conduct of his employee e.g. fraud or embezzlement on the part of his
employees. This kind of insurance is also known as 'fidelity guarantee insurance' because the
insurance company gives a sort of guarantee for the good conduct i.e. loyalty, honesty or faithfulness
of the employee of the assured. The fidelity insurance policy may be taken for a single employee, or
for all the employees collectively.
A contract of fidelity insurance is a contract of indemnity as, usually, the insurance company is
liable to make good the loss suffered by the assured, and not to pay a fixed amount of money. However,
the policy may also provide the payment of fixed amount of money irrespective of the loss suffered
by the assured.
67.5. MOTOR VEHICLE INSURANCE
It is the business of effecting contracts of insurance against the loss or liability arising in connection
with a motor vehicle. The motor vehicle insurance includes the following types of insurance:
1. The insurance against the loss of or damage to the motor vehicle itself^
2. The insurace against the injury to or death of any passenger including the owner himself.
3. The insurance against the injury to or death of third parties (i.e. persons other than those
travelling in the vehicle).
The owner of a motor vehicle may take a comprehensive insurance policy which will cover all
these risks. He may also take separate insurance policies in respect of these risks e.g. property insurance
for loss or damage to the motor vehicle itself, personal accident insurance for injury or death by
accident, or third party insurance for injury or death of third parties. It may be noted that the owner may
or may note take the first two types of insurance, but the third type of insurance is compulsory under the
Motor Vehicles Act 1988. Such an insurance is called the Insurance of Motor Vehicles Against Third
party Risks 5.
According to of the Motor Vehicles Act, a motor vehicle can be validly used in a public place only if
there is an effective insurance policy against any liability which a person may incur in respect of the
death or bodily injury to third parties arising out of the use of the motor vehicle in a public place.
The object of this provision is to ensure insurance of all motor vehicles which are to be used in public
places so that if a third party suffers any damage due to the use of said vehicle in a public place, he
would be able to get damages for the same directly from the insurance company. And the recoverability
for such damages would not depend upon the financial condkion of the driver or owner of the
vehicle 6.
Thus, the owner of a vehicle must take an insurance policy against any liability which he may incur to
the third parties by the use of his vehicle in a public place. This insurance policy enables the third party
to recover the damages from the insurer (insurance company) for any loss or injury caused to him by
the use of the said motor vehicle in a public place. It may be noted that the third party is entitled to
sue the insurance company even though there is no privity of contract
between him and the insurance company, i.e. even if the third is not a party to the contract of insurance
between the owner of the vehicle and insurance company. Thus, in case of insurance of a motor vehicle
against the third party risks, the insurance company becomes bound to pay the compensation to the third
party for any injury sustained by him through the use of vehicle in a public place.
It will be interesting to know that on the valid sale of a motor vehicle validly insured against third party
risks, the certificate of insurance and the insurance policy will be considered to have been transferred by
the owner to the buyer on the registration of the motor vehicle in buyer's name [Section 157, the Motor
Vehicles Act 1988]. Under Section 103 A of the old Motor Vehicles Act, 1939, the insured was required to
apply to the insurance company for the transfer of policy in favour of buyer. Under the new Act, there is
no such requirement. [Complete Insulation (P) Ltd. v. New India Assurance Co. Ltd., (1996) 1 SCC 221;
See also New India Assurance Co. Ltd. v. Sheela Rani, (1998) 5 SCALE 269].
Note: If the motor vehicle is not insured against third party risks, it is an offence punishable under
the Motor Vehicles Act. -""A

67.6. WORKMEN'S COMPENSATION INSURANCE

It is the business of effecting contracts of insurance against the liability of an employer towards his
workmen who sustain injuries during the course of their employment.
67.7. GENARAL INSURANCE CORPORATION OF INDIA
We have already discussed in Art. 61.1 that the general insurance business (i.e. fire, marine and general
insurance business) in India, was nationlised in 1972, and the General Insurance Business (Nationalisation)
Act 1972 was passed to carry on this business. Under Section 9 of this Act, the General Insurance
Corporation of India (a Government Company) was set up which came into existence on 1st January
1973. Since then the general insurance business is carried on under the control and supervision of this
Corporation and four other Indian Insurance Companies as discussed in Art. 61.1.
 The general Insurance Corporation of India is a Government Company which was set up under the
provisions of the above stated Nationalisation Act of 1972. On the formation of this Corporation, all
the shares of the Indian Insurance Companies stand automatically transferred to the Corporation, and
the existing four insurance companies, namely (a) the New India Assurance Company Limited, (b) the
United India Fire and General Insurance Company Limited, (c) the Oriental Fire and General Insurance
Company Limited, and (d) the National Insurance Company Limited have become the subsidiaries to the
said Corporation. The functions of the General Insurance Corporation of Indian may be summarised as
under:
1. To carry on the general insurance business in India if it thinks it desirable to do so.
2. To aid, assist and advise the Indian Insurance Companies in the matter of setting up
standards of conduct and sound pratiee in general insurance business, and also in the matter
of rendering efficient service to the \policy holders.
3. To advise the Indian Insurance Companies in the matter of controlling their expenses
including the payment of commission and other expenses.
4. To advise the Indian Insurance Companies in the matter of the investment of their funds.
5. To issue directions to the Indian Companies in relation to the conduct of general insurance
business.