CMA Inter – Syllabus 2022 LAW-CHA - LAW & ETHICS CHART BOOK CA HEMANGI KOTHARI

Chapter 5 – Negotiable iNstrumeNts aCt, 1881

Meaning Essential Features Presumptions w.r.t Negotiable instrument [Sec 118]

❖ In common parlance a negotiable ❖ It must be in writing & signed by the ❖ Every NI was made or drawn for consideration, and that
instrument can be understood as a piece maker or drawer. every such instrument when it was accepted, indorsed,
of paper which entitles to a sum of money ❖ There must be a promise or order to pay negotiated or transferred for consideration.
& which is transferable from one person and it should be unconditional ❖ Every NI bearing a date was made or drawn on such date.
to another merely by delivery or by
❖ It must call for payment in money and ❖ Every accepted bill of exchange was accepted within a
endorsement & delivery.
money only of a certain sum reasonable time after its date and before its maturity
❖ Negotiability is a feature that is distinct
❖ The property in the instrument may be ❖ That every transfer of the NI was made before its
from the concept of transferability.
passed in two ways - by mere delivery; maturity
❖ Sec 13 defines the terms ‘negotiable and by indorsement and delivery. ❖ The indorsements were made in the order in which they
instrument’ as a promissory note, bill of
❖ The consideration is also presumed to appear thereon.
exchange or either payable either to
have been passed ❖ An instrument is duly signed and stamped.
order or to bearer

Classification of Negotiable Instrument

Bearer Instrument: NI expressed to be payable to beared & only or Genuine Instrument: If bill is drawn, accepted, or endorsed for
last endorsement is a blank endorsement consideration
Order instrument: NI expressed to be payable on order & expressed Accommodation Instrument: When it is drawn, accepted, or endorsed
to be payable to a particular person with restricting its transferability. without consideration
Demand Instrument: Instruments payable on demand Ambiguous Instrument: When an instrument due to faulty drafting may
Time Instrument: Instruments that have fixed due date or maturity be interpreted either as bill or note

Inland Instrument: NI drawn & payable in India or drawn on a person Inchoate Instrument: Instruments lack certain essential requirements of
resident in India typical negotiable instruments. In such cases, the holder of the instrument
Foreign Instrument: NI not drawn made or made payable in India has the authority to complete it up to the amount mentioned therein.

Fictitious Instrument: When drawer or payee or both are fictitious Escrow Instrument: Instrument drawn conditionally or for a special
purpose as a collateral security & not for the purpose of transferring
property

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Negotiable Instruments specified in Sec 13 of Negotiable Instrument Act, 1881

Promissory Note Bills of exchange Cheque

Definition: Definition: Definition:
“A Promissory note is an instrument in writing A bill of exchange is an instrument in writing “A cheque is a bill of exchange drawn upon a
containing an unconditional undertaking, signed by containing an unconditional order, signed by the specified banker and payable on demand and it
the maker, to pay a certain sum of money only to, maker, directing a certain person to pay a certain includes the electronic image of a truncated
or to the order of, a certain person, or to the sum of money only to, or to the order of, a certain cheque and a cheque in the electronic form
bearer of the instrument”. person or to the bearer of the instrument”. Essential Elements:
Essential elements: Essential Elements: (As Cheque is a specie of Bills of Exchange all the
❖ Unconditional undertaking to pay; ❖ It must be drawn unconditionally essential elements of BOE shall be applicable to
❖ The sum should in money and certain; ❖ Consideration should be certain & should be Cheque)
❖ Maker & Payee to be certain; paid only by way of money only. Parties:

❖ The maker should sign it ❖ The time of payment must be indicated in the Drawer: Person who signs the cheque
bill with certainty. Drawee: Bank on whom the cheque is drawn
❖ A promise to pay a certain sum of money to a
certain person or on his order or to bearer; ❖ Order to pay. (Order = request /direction.) Payee: Person to whom the payment is to be made
❖ The promissory note must be in writing ❖ Party to contract should be certain Electronic cheque: Cheque which contains the
❖ Stamped. An unstamped promissory note is ❖ The sign of the drawer is necessary exact mirror image of a proper cheque, & is
not admissible in evidence and no suit can be ❖ Indicate the name of the drawee generated, written and signed in a secure system
maintained. ensuring the minimum safety standards with the
❖ Specifically mention the date and place the
use of digital signature and asymmetric crypto
❖ It must contain date payment or the place where it is drawn.
system.
❖ The limitation period to file a suit is 3 years ❖ Stamped as per Indian Stamp Act, 1899.
Truncated (short in duration) Cheque: Cheque
from the date of execution or from the date Parties:
which is truncated during the course of a clearing
of acknowledgement
Drawer: who gives the order to pay or who makes cycle, either by the clearing house or by the bank
Parties: the bill whether paying or receiving payment,
Maker: Who promise to pay Drawee: who is directed to pay & when he immediately on generation of an electronic image
Payee: To whom payment is made accepts the bill, he is called the acceptor for transmission, substituting the further
Payee: who gives the order to pay or who makes physical movement of the cheque in writing.
the bill Clearing House: Manage and Recognized by RBI

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Difference between Promissory Note, Bills of Exchange and Cheque

Points Promissory Note Bills of Exchange Cheque

Nature Contains an unconditional promise by Contains an unconditional order to Drawn on specified banker to pay on
maker to pay the payee the drawee to pay the payee demand.

Acceptance Not necessary Necessary if bill is payable Not necessary.

after sight.

Drawer’s Liability Primary and absolute. Conditional and secondary upon non- Conditional and secondary upon non-
payment by drawee. payment by drawee.

Notice of dishonor Not necessary Necessary Not necessary

On demand or after a specified time. On demand or after a specified time. On demand even to bearer if so made.
Payable Cannot be made payable to bearer on Cannot be made payable to bearer on
demand or even after certain period. demand.

Crossing Not possible Not possible Can be crossed.

Noting & Protesting Not required Required to establish the fact Not required

Grace period Available if payable after specified time Available if payable after specified time Not available.

Some Other Points relating to Cheque

Crossing of Cheque
General Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof, between two parallel transverse
Crossing: lines, or of two parallel transverse lines simply, either with or without the words ‘not negotiable’ that addition shall be deemed
Payment: the banker, on whom it is drawn, shall not pay it otherwise than to a banker

Special Where a cheque bears across its face an addition of the name of a banker, either with or without the words ‘not negotiable’ that addition
Crossing: shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker
Payment: Only when crossed to an agent for the purpose of collect, the banker on whom it is drawn shall make the payment

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What are the options available with holder if cheque is not crossed?
 The holder may cross it generally or specially
 Where a cheque is crossed generally, the holder may cross it specially;
 Where a cheque is crossed generally or specially, the holder may add the word ‘not negotiable’
 Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially
to another banker, his agent, for collection.

Whether Bank Draft and Cheque are same?

No, When a bill of exchange drawn by one bank on another bank, or by itself on its own branch, and is a negotiable instrument then it is called
as bank draft.
Bank Draft Cheque
A bank draft can be drawn only by a bank on another bank Cheque can be drawn by any person
It cannot so easily be counter-manded (Cancelled) It can be counter-manded (Cancelled)
It cannot be made payable to bearer. It can be made payable to bearer

What is the meaning of Cheque Bearing Not Negotiable:

Cheque Bearing Nit Negotiable means that a person taking a cheque crossed generally or specially, bearing in ‘not negotiable’, do not have, and
will not be capable of giving, a better title to the cheque than which the person from whom he took it had
Non Liability of Banker:
❖ A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to
himself shall not, in case the title of the cheque proves defective, incur any liability to the true owner of the cheque by reason only of
having received such payment
❖ A banker receives payment of a crossed cheque for a customer within the meaning of this Sec notwithstanding that he credits his
customer’s account with the amount of the cheque before receiving payment thereof.
❖ It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque, to verify the prima facie
genuineness of the cheque and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due
diligence

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 Parties to Instrument
Drawer The Maker of a Promissory Note, Bill of Exchange or Cheque.
Drawee The person on whom the instrument is drawn and thereby directed to pay.
The person whose name is given in the bill or on any Endorsement in addition to the
name of the Drawee, who should be resorted to in case of need.
Drawee in case
In this case the B/E is not dishonoured, unless it has been dishonoured by such
of need
Drawee. He may accept and pay the B/E, without previous protest.
When the Drawee signs his assent upon the Bill, and delivers the same to the holder
Acceptor
or some other person on his behalf, he becomes the “Acceptor”.
Acceptor for Person accepting a B/E (which has been protested for non-acceptance or for better
honour security) supra protest for honour of the Drawer or of any one of endorsers
Payee Payee is the person to whom the amount is payable
An endorser is a person who is authorized to sign a negotiable security in order to
Endorser transfer ownership from one party to another or to approve the terms and conditions
of a contract.
Endorsee Endorsee is the person to whom the Bill is negotiated by endorsement.
The "holder" means any person entitled in his own name –
• to the possession thereof; and
• to receive or recover the amount due thereon from the parties thereto.
• His rights and title are dependent on the transferor.
• He has a right to demand and receive but does not have a right to sue.
Holder Note –
(Sec 8) It is not every person in possession of the instrument who is called a holder.
To be a holder, he must be named in instrument as payee / endorsee /the bearer
A person who has obtained possession of an instrument by theft, or under a forged
endorsement, is not a holder, as he is not entitled to recover the instrument
An agent holding an instrument for his principal is not a holder although he may receive
its payment.
A holder in due course is one who receives the instrument:
• for consideration;
Holder in Due • without notice as to the defect in the title of the transferor; i.e. in good faith;
Course • before maturity.
Note –
(Sec 9)
• His rights and title are independent on the transferor.
• He has a right to demand and receive and also have a right to sue.
Holder Holder in due course
Holder is entitled in his own name to possess Holder in due course possesses the instrument for
the instrument and the amount thereon from consideration before maturity and in good faith.
parties involved.
Title of the holder is subject to title of the Holder in due course gets a better title than
transferor. transferor.
Holder may receive the instrument without Holder in due course always receives the instrument
consideration. for consideration.
Holder does not get certain privileges available to Holder in due course always gets privileges not
the holder in due course. available to holder.
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Acceptance Maturity
❖ A bill is said to be accepted when the drawee after putting his signature ❖ Meaning: The maturity of a promissory note or bill of exchange is the
on it, either delivers it or gives notice of such acceptance to the holder date at which it falls due.
of the bill or to some person on his behalf ❖ Days of Grace: All instruments except for the instrument payable on
❖ Essentials of Valid Acceptance: demand are entitled for 3 days grace period.

→ Must be written on the face of the bill, ❖ Which instruments do not consist of Grace Days;

→ The bill must be signed by drawee or his authorized agent. → A cheque

→ The accepted bill is required to be delivered to the holder → A bill or note payable ‘at sight’ or ‘on presentment’ or ‘on demand’, in
which no time is mentioned
❖ When presentation for acceptance is necessary
❖ Instrument payable in installment: Each installment is entitled for 3
→ Bill is payable at a given time after acceptance or after sight.
days grace period.
→ Bill expressly stipulates that it shall be presented for acceptance. ❖ Calculation of days of maturity: Where a negotiable instrument is
→ Bill is payable at place which is not residence or business of the drawee. payable on specified date then it shall become payable on that specified
❖ When Presentation for acceptance may be excused date + 3 days of grace

→ Drawee is dead or insolvent/fictitious person / incapable of contracting ❖ Last day of Grace Period = Public Holiday: Instrument will be due on
preceding business day
→ Drawee cannot be found with reasonable efforts.
❖ Day of Maturity = Unforeseen Emergency: Maturity day will be the
→ Acceptance has been refused on some other grounds.
following business day.
❖ Types of Acceptance:
→ General Acceptance: Drawee accepts the bill without qualification
Payment in Due Course
❖ A payment will be regarded as a payment in due course if:
→ Qualified Acceptance: Drawee accepts the bill subject to qualification.
❖ Payment is done as per apparent tenor of instrument
❖ Effect of Qualified Acceptance
❖ It is made in good faith & without negligence
→ The holder = treat bill as dishonoured due to non-acceptance and after
giving due notice of dishonour, sue the drawer and prior endorsers. ❖ It is made to the person who possesses the instrument who is entitled as
holder to obtain payment;
→ If he accepts a qualified acceptance all prior parties whose consent is
not obtained are discharged as against ❖ Payment is made in money & money only.

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→ When the instrument is transferred from one person to another with a view to make the other person as holder then the instrument is deemed to
have been negotiated.
→ Every sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payees or indorsees, may, indorse and negotiate the same if the
negotiability of such instrument has not been restricted or excluded as mentioned in Sec 50 (Restrictive Endorsement)
→ A negotiable instrument may be negotiated, until payment or satisfaction by the maker, drawee or acceptor at or after maturity

→ Assignment takes place where the holder of an instrument transfers it to another so as to confer a right on the transferee to receive the payment
of the instrument. Assignment of a negotiable instrument is effected by writing without endorsement
→ The main feature of assignment is that the assignee obtains the right of the assignor. Therefore, if the assignor’s title is defective assignee’s title
will also be defective.

Negotiation Assignment
Consideration is presumed until contrary is proved. Consideration must be proved
It transferee is a holder in due course he takes the instrument free from any Assignee’s title is always subject to defenses and equities between
defects. the original debtor and assignor.
Notice of transfer is not necessary. Notice of assignment must be given.
Negotiation is effected by delivery in case of instruments payable to bearer Assignment is effected only by writing
and by delivery and endorsement in case of instrument payable to order.
Transferee can sue the third party in his own name. Assignee cannot do so.
There are a number of presumptions in favor of holder in due courses. There are no such presumptions.

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Definition Meaning Essentials of valid endorsement

When the maker or holder of a negotiable → Endorsement means signing at the back of the → It must be on the instrument itself or on a
instrument signs the same, otherwise than as instrument for the purpose of negotiation. separate slip of paper attached thereto.
such maker, for the purpose of negotiation on the → The act of the signing a cheque, for the → It must be signed by the endorser. [May
back or face thereof or on a slip of paper annexed purpose of transferring to the someone else, contain name also]
(attached) thereto, or so signs for the same is called the endorsement of Cheque. → No particular form of words is necessary
purpose a stamped paper intended to be
→ If no space is left on the instrument then the → Endorsement is complete on delivery to
completed as a negotiable instrument, he is said
Endorsement may be made on a separate slip endorsee with the intention of passing the
to endorse the same, and is called the “endorser”.
to be attached to the instrument. property in it to the endorsee.
Types of Endorsement
Blank Endorsement Blank endorsement is a kind of signature on a financial instrument.
Full Endorsement Endorser puts his sign on instrument as well as writes the name of a person to whom order the payment is to be made.
Conversion of Blank Endorsement to Full Endorsement
The holder of endorsed NI may write above the endorser’s signature a direction to pay to any other person as endorsee convert the endorsement in full
Crossed Cheque: A negotiable instrument indorsed in blank is payable to the bearer thereof even although originally payable to order.
Conditional The endorser by express words, exclude his own liability or make such liability or right of endorsee to receive amount
Endorsement: depending upon the happening of a specified event, although such event may never happen
Partial Endorsement: Instrument which transfers the amount mentioned in the instrument partially and not fully is called as partial endorsement.
Restrictive It puts an end the principal characteristics of a Negotiable Instrument and seals its further negotiability.
Endorsement This prevents the risk of unauthorized person obtaining payment through fraud or forgery and the drawer losing his money.
Facultative Here, the endorser abandoned some rights or increases his liability as endorser
Sans recourse This can be done by adding the words’ Sans recourse (Without recourse) to the endorsement Here if the instrument is
endorsement dishonoured, the subsequent holder or the endorsee cannot look to the endorser for the payment of the same
Where an endorser excludes or limits his liability in this manner and afterwards becomes the holder of the same instrument,
all intermediate endorsers continue to be liable to him.
Sans Frais It may be understood that where the endorser does not want that the endorsee or any other holder to incur any expense on
endorsement his account. This is called without expense endorsement also.

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Destruction or Lost of Instruments:
Destruction: The endorser is discharged from liability as if the instrument had been paid at maturity.
Lost of Instrument: Holder has right to claim a duplicate copy of the lost bill by giving security to the drawer to indemnify him against the loss
Cheque payable by order:
Where a cheque payable to order is endorsed the drawee is discharge by the payment in due course.
Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by notwithstanding any indorsement whether in full or in blank

Presentment is a type of demand by which a negotiable instrument's holder can do something based on the directives of the same. It is a form of showing
the instrument to the drawee, maker, or acceptor for acceptance and sight or payment

Presentment for acceptance must always and in every case precede presentment for payment.
When Presentment is not necessary: Delay in Presentation of Cheque

If the maker, drawee or acceptor: Where a cheque is not presented for payment within a reasonable time and
→ intentionally prevents the presentment of the instrument the drawer at the time when presentment ought to suffers actual damage
through the delay, he discharged to the extent of such damage
→ If instrument is payable at:
A drawer of a cheque who wants to take advantage has to prove 2
❖ his place of business - he closes such place during usual business hours
facts:
❖ at some other specified place – he does not attends at such place during
→ He had sufficient money in deposit in the bank in his account to honor the
the usual business hours OR he cannot after due search be found
cheque; and
→ he has engaged to pay notwithstanding non presentment;
→ He had suffered actual damage on account of non-presentment of the
→ after maturity he makes a part payment on account of the amount due on
cheque
the instrument

→ The payment should be made to the holder or his accredited agent

→ Interest is payable on the amount which has been paid after the due date i.e from the date of due to the date of realization
→ When no interest rate has been specified in the instrument then the interest shall be calculated at the rate of 18% per annum from the date of
due to the date of realization of the amount

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Meaning Examples Not an alteration

Any alteration which changes the → Alteration of an order cheque to a bearer cheque → Alteration before the completion of the instrument.
legal character of the instrument → Alteration by tearing material part of the → Crossing of an open cheque or conversion of general
or alters the liabilities of the instrument. crossing into a special crossing.
parties, whether change is
→ Alteration by erasing account payee crossing → Making qualified acceptance.
prejudicial or beneficial is a
→ Alteration by affixing stamps without the → Completion of inchoate instrument.
material alteration.
promisor’s knowledge to a note. → Making a blank endorsement into full endorsement.
When at the time of making
→ Alteration of the date of payment → Conversion of a bearer cheque into an order cheque
alteration any party to NI do not
consent the same, alteration is said → Alteration of the time of payment. → Alteration with the consent of the party liable on the
to be void → Alteration of the place of payment instrument.
Material alteration discharges the → Alteration of the sum payable → Alteration made for the purpose of correcting mistake.
endorser → Tearing a material part of the instrument. → Making a blank instrument into a full endorsement.
→ Alteration of the rate of interest

Payment of Instrument where alteration is not apparent:

Where NI has been materially altered but does not appear, then payment thereof by a person liable to pay & who is paying the same according to the
apparent tenor shall discharge such person from all liability thereon, and such payment shall not be questioned by reasons of the instrument having been
altered

Alteration in electronic or truncated cheque:

Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenorx shall be a material alteration and it shall be the duty
of the bank or the clearing house to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and
transmitting the image
Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the
image to it, that the image so transmitted to it and received by it, is exactly the same

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Capacities of the Parties
❖ Parties of NI must have contractual capacity
❖ They should be of Major Age, Sound Mind & not declared disqualified by making a contract
❖ Generally if the party do not have contractual capacity, he cannot be held liable to pay to the holder
❖ If one or more parties are not having contractual capacity, agreement remains void but does not reduce
liability of competent party
Minor Minor can bind all parties except himself. Minor can be payee or endorsee
Agent agent can bind his principal by the transactions on NI provided he has been given
that authority. General authority to transact business do not mean authority w.r.t
NI. If agent signs his name on NI without indicating that he is signing as agent
Then he will be personally liable to the NI
Liability of He is entitled to recover the amount of instrument due to the deceased & give a valid
Representative discharge A legal representative who signs the NI is personal liable except where he
expressly limits his liability to the extent of asset received by him.
He may also exclude himself from the liability by adding the words ‘without recourse’
on the instrument.
Liability of In case of dishonour of cheque or bill of exchange by the drawee or the acceptor, the
drawer drawer the holder such amount. But, the drawer needs to receive due notice of
dishonour.
Liability of the the drawee of a cheque having sufficient funds of the drawer must pay the cheque
drawee of when duly required so to do, and, in default must compensate the drawer for any loss
cheque or damage caused by such default
Liability of Liable to pay the amount thereof at maturity. The liability is absolute and unconditional
maker or but is subject to a contract to the contrary and may be excluded or modified by a
acceptor collateral agreement.
Liability of Liable to the parties that are subsequent to him. Also, he is bound thereby to every
Endorser subsequent holder in case of dishonour by the drawee, acceptor or maker, to
compensate such holder of any loss or damage caused to him by such dishonour.
Liability of Until the instrument is duly satisfied, every prior party to a negotiable instrument has
Prior Parties a liability (joint and several) towards the holder in due course.
By Cancellation of acceptor’s name will discharge the instrument and cancellation of any
cancellation: other party will discharge the party
By release Release of acceptor will discharge the instrument and release of any other party will
discharge the party.
By payment When the amount due on the instrument is paid by the party primarily liable on the
instrument, the instrument is discharged.
By allowing If the holder of a bill of exchange allows the drawee more than 48 hours, exclusive
more than 48 of public holiday(s) to consider whether he will accept the same, all previous parties
hours not consenting to such allowance are discharged from liability to such holder
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Dishonor of Negotiable Instrument

Dishonor of Bill or Promissory Note Dishonor of Cheque

Dishonor by Non-Acceptance: Dishonor by Non-Payment:

 When the drawee does not accept it within 48 hours, A promissory note, bill of exchange or
 When presentment for acceptance is excused and the cheque is said to be dishonoured by non-
bill remains unaccepted payment when the maker of the note,
 When the drawee is incompetent to contract. acceptor of the bill or drawee of the
cheque makes default in payment
 When the drawee is a fictitious person or after
reasonable search can not be found
 Where the acceptance is a qualified one.

Rules of Dishonor: Notice for Dishonour to be served

Who The holder thereof or some party thereto who remains liable thereon must give notice of dishonor.
To whom Drawer and the endorsers or to his agent. Legal representative on his death. Official assignee on his insolvency
Non-Service If a notice of dishonor is not sent to any prior party within a reasonable time, he is discharged from liability.
Mode of Notice The notice, if written, may be given by post at the place of business or at the residence of party for whom it is
intended.
Notice not ❖ When there is no intention to make prior party liable.
required ❖ When prior party is discharged or he is incompetent.
❖ When drawer and drawee are same
❖ When drawer is fictitious.
❖ When the prior party has signed the indorsement ‘without recourse’.
❖ When the party entitled to notice cannot, after reasonable search, be found.
❖ Where the party liable to give notice is unable, without any fault of its own to give it, e.g., death or serious illness
of the holder or his agent or any other accident.

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Noting
Protest
When a promissory note or bill of exchange has been
When a promissory note or bill of exchange has been dishonored by non-
dishonoured by non-acceptance or non-payment, the
acceptance or non-payment, the holder may, within a reasonable time,
holder may cause such dishonour to be noted by a
cause such dishonor to be noted and certified by a notary public. Such
notary public upon the instrument, or upon a paper
certificate is called a protest.
attached thereto, or partly upon each.
Protest for better security. When the acceptor of a bill of exchange has
Such note must be made within a reasonable time after
become insolvent, or his credit has been publicly impeached, before the
dishonour, and must specify the date of dishonour, the
maturity of the bill, the holder may, within a reasonable time, cause a
reason, if any, assigned for such dishonour, or, if the
notary public to demand better security of the acceptor, and on its being
instrument has not been expressly dishonoured, the
refused may, within a reasonable time, cause such facts to be noted and
reason why the holder treats it as dishonoured, and
certified as aforesaid. Such certificate is called a protest for better security.
the notary’s charges.

Dishonor of Cheque [Sec 138-143]

Dishonor of Cheque Dishonor of Cheque means:

❖ The cheque should have been dishonored due to insufficiency of funds in the account maintained by him with a banker for
payment of any amount of money to another person from out of that account. [Insufficiency includes Account Closed &
Payment stopped]
❖ The payment for which the cheque was issued should have been in discharge of a legally enforceable debt or liability in
whole or part of it.
❖ The cheque should have been presented within 3 months from the date on which it is drawn.
Liability ❖ Civil liability by imposing a fine twice the dishonoured cheques.
❖ Criminal liability by providing punishment of imprisonment of two years or offline or both.
Time frame of offense ❖ Cheque presented within 3 months of validity period whichever is earlier
❖ Demand for payment of the due amount by giving notice within 30 days from receipt of the memo from the bank
❖ Payment of debt, by the drawer, within 15 days from receipt of notice
❖ Filing complaint within 30 days from the expiry of the 15th day notice period
Presumption The holder of a cheque received the cheque for the discharge, in whole or in part, of any debt or other liability.
Unavailability of It shall not be a defense in a prosecution of an offence under section 138 that the drawer had no reason to believe when he
defence in issued the cheque that the cheque may be dishonored on presentment because of insufficiency of funds
prosecution

8888111034/8888111134 Revision is PRANAV

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CMA Inter – Syllabus 2022 LAW-CHA - LAW & ETHICS CHART BOOK CA HEMANGI KOTHARI
Offence committed If the person committing an offence is a company, every person, who was in charge of business at the time the offence
by company was committed and the company shall be jointly liable for the offence. [If person proves that the offense was committed
without his knowledge then he shall not be liable.
Prima Facie Evidence The Court shall on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been
dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved.
Cognizance of Filing case
Offense Court shall take cognizance of any offence punishable under section 138 only if it is in writing.
→ Time limit for filing the complaint is 1 month.
→ No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class shall try any offence
punishable under section 138.
Place of Jurisdiction of court for the trail of offence:
The offence shall be inquired into and tried only by a court within whose local jurisdiction -
→ if the cheque is delivered for collection through an account, the branch of the bank where the payee or holder in due
course, as the case may be, maintains the account, is situated; or
→ if the cheque is presented for payment by the payee or holder in due course, otherwise through an account, the branch
of the drawee bank where the drawer maintains the account, is situated.
Summary Trial All the offences under this Chapter shall be tried by a Judicial Magistrate of the I class or by a Metropolitan Magistrate
In case of any conviction in a summary trial it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term
Max 1 year and an amount of fine exceeding Rs. 5,000
Trial to be concluded within 6 months of filing of complaint.
Power of Court to The Court trying an offence under section 138 may order the drawer of the cheque to pay interim compensation to the
direct interim complainant in a summary trial or a summons case, where he pleads not guilty to the accusation made in the complaint; and in
compensation any other case, upon framing of charge.
The interim compensation shall not exceed 20% of the amount of the cheque.
The interim compensation shall be paid within 60 days from the date of the order or within such further period not exceeding
30 days as may be directed by the Court on sufficient cause being shown by the drawer of the cheque.

8888111034/8888111134 Revision is PRANAV

just another step towards
CHANDAK Perfection
ACADEMY (PCA)