- Chapter VII of the Negotiable Instruments Act, 1881 (NIA) deals with discharge from liability on notes, bills and cheques. It contains Section 82 to Section 90.
- Section 82 deals with the methods of discharge of liability. As per this Section, the maker, acceptor or endorser of a negotiable instrument can be discharged from liability through cancellation, release or payment.
- Sections 72 and 84 provide protection to the drawer from any damage which may be suffered by him due to inordinate delays in the presentation of cheque
- Material alteration of a negotiable instrument renders the instrument void and discharges all such parties, which did not consent to such change, of their liability.
The Negotiable Instruments Act was passed in the year 1881. The purpose of this British era law was to facilitate the commercial transaction through statutory legalization of negotiable instruments. A negotiable instrument is primarily a written and signed document meant to transfer some money or title to a specific person. This instrument is a promise to pay the specified sum of money on demand or on a prescribed future date.Examples of negotiable instrument are cheques, promissory notes, etc.
Chapter VII of the Negotiable Instruments Act, 1881 (NIA) deals with discharge from liability on notes, bills and cheques. It contains Section 82 to Section 90.
Section 82 deals with the methods of discharge of liability. As per this Section, the maker, acceptor or endorser of a negotiable instrument can be discharged from liability through cancellation, release or payment.
When the holder of the negotiable instrument or his agent cancels the name of a party from the instrument to discharge the party of his liability, then it is known as discharge by cancellation.
Furthermore, other than discharge by cancellation, where the holder or his agent releases any party to the instrument, then such party is also discharged from liability.
Lastly, when the payment of an instrument is made, then the parties to the instrument are discharged and it is known as discharge by payment.
However, it is pertinent to note that where there is no agreement, the payment of an instrument is always conditional, that is, if the payment is dishonored when presented, then it would not amount to discharge by payment. The Supreme Court, in the case ofCommissioner of Income-Tax, v Messrs Ogale Glass Works Ltd.1954 AIR 429, pointed that payment made through the medium of negotiable instruments is a conditional payment and if the instrument is dishonored, then the “creditor may consider it as waste paper and resort to his original demand”. Similarly, the Supreme Court in the case of Deddappa & Ors v.the Branch Manager, National Insurance Company Limited 2007 SCC OnLine SC 1519, held that while cheque is considered as a valid tender and can be used for payments such as insurance premium, its discharge of liability is subjected to the encashment of the cheque. The Court also cited its earlier judgment of Damadilal & Ors. v. Parashram & Ors. (1976) 4 SCC 855, where the Court had held that where “a cheque sent in payment of a debt on the request of the creditor, unless dishonoured, operates as valid discharge of the debt”.
Under this Section, if the holder of a bill of exchange allows more than 48 hours (excluding public holidays) to the drawee to consider the acceptance of the bill, then all the parties who did not consent to such extension will be discharged of their liability. This Section applies only to those instruments where the drawee is required to communicate his acceptance. Thus, this section is not applicable in the case of all the negotiable instruments. For example, there is no question of such acceptance in case of a cheque.
This Section provides that where a cheque is not presented for payment by the holder within a reasonable time, and subsequently the drawer suffers damage due to the failure of the bank, then to the extent of the damage suffered by the drawer, the drawer is discharged of his liability against the holder. However, the holder can still prove against the bank for this amount. The concept of reasonable time is a subjective one and has to be decided on the basis of the facts and circumstances of the case.
While understanding Section 84, one must also take note of Section 72 of the Act. Section 72 provides that a cheque must be presented for payment before the relation between the bank and drawer is altered to the drawer’s prejudice.
These sections provide protection to the drawer from any damage which may be suffered by him due to inordinate delays in the presentation of cheque. The Delhi High Court in the case of Sumitra Baluja v. Bharat Chemical Industries and Others 1980 SCC OnLine Del 101, while highlighting the importance of these Section stated that they provide protection to the drawer to the degree to which“he has suffered prejudice or damage by the non-presentment of a cheque within a reasonable time”.
However, in the case of Abdul Majid v. Ganesh Das Kalooram Ltd.AIR 1954 Orissa 124, the Court held that the drawer must prove that he had either sufficient funds in his account or a working agreement with the bank to ensure that the cheque would have been honored had it been presented on the date when it was supposed to be presented.
Section 85 provides that where a cheque is endorsed by the payee or on behalf of the payee, then the drawee is discharged upon the payment.
The provisions of Section 85 can be invoked by a bank that made payment to an employee of a Firm and the said employee absconded with the money. The Supreme Court while dealing with a similar issue in the case of Bank of Bihar v. Mahabir LalAIR 1964 SC 377, held that the provisions of Section 85 can help the bank provided that the bank is able to prove that the payment was made to the Firm or any person acting on behalf of the firm. Where the payment was made to a person who has no relation with the firm, the Bank cannot take the assistance of Section 85.
Similarly, in the case of S.B. Panchal and Co. vs Saraswat Co-Operative Bank Ltd.2007 (5) MhLj 496, the Court held that where money was withdrawn from the bank through forged signatured which closely resembled the signature of the account holder and also had the stamp of the firm, the bank can seek protection under Section 85 as such loss is due to the negligence of the account holder.
Under this Section, where a qualified acceptance is agreed to by the holder of a bill, then all the parties whose consent was not obtained for such acceptance are discharge of their liability. Furthermore, the explanation of the Section provides that an acceptance is considered to be qualified where the contingent is contingent upon the happening of a specified event or where it undertakes only a part of the sum to be paid, or where the payment takes place in a specified place even when no such place was specified in the order or where the payment takes place somewhere other than the one specified in the order or where the payment takes place at a time other than when it was legally due.
Under this Section, material alteration of a negotiable instrument renders the instrument void and discharges all such parties, which did not consent to such change, of their liability. However, where the alteration was made with regards to the common intention of all the concerned parties, then in such an instance, the instrument will notbe void. Section 87 provides that if the indorsee makes a material alteration to an instrument, then the indorser is discharged of his liability with respect to consideration.
The Madras High Court, in the case ofP. Jayamadha v. L. Kumar2017 SCC OnLine Mad 21784, drew the distinction between any change and a material change. The Court stated that “that every unsubstantial alteration is not a material alteration. But, it is only such alteration(s) as would adversely affect the interests of the other side which can be called material”.
Where the contents of a cheque are materially altered, the cheque becomes void. In the case of BPDL Investments (Pvt) Ltd v. Maple Leaf Trading International (P) Ltd 2006 SCC OnLine Del 217, the Court explained the two conditions under which the material change will not render the instrument void. The Court stated that where the material change is made in furtherance of common intention or where the concerned parties have consented to the change, then in such cases, the material change will not render the instrument void. Furthermore, the Court, while referring to the case of Mysore State Road Transport Corporation v. Somashankar reported in AIR 1982 Karnataka 226 (D.B.)., stated that filling the rate of interest in a promissory note, which was left blank to be filled later, without the consent of the promisor would amount to material change and hence would render the instrument void. However, where the alteration takes place through the consent of the concerned parties, then such parties are disentitled from complaining against such alteration.
This Section provides that irrespective of any previous alteration, the indorser or acceptor of an instrument is bound by such indorsement or acceptance.
This Section provides that if an instrument does not appear to have been altered at the time when it is presented for payment, then subsequent payment by the concerned person or bank will discharge the person or bank of its liability. Furthermore, when the bank or a clearing house receives the electronic image of a truncated cheque, it is the duty of the bank or clearing house to verify that the exactness of the image. The bank or clearing house must verify the person who sent the image and the exactness of the transmitted and received.
However, where a party is found to have permitted forgery or material allegation of the instrument through its negligent conduct, then such a party is disentitled from claiming the benefit of Section 89. In the case ofthe Hong Kong and Shanghai Banking Corporation Ltd.v. Canara Bank and Anr2010 SCC OnLine Del 4523, the Court found that the Bank’s employee had acted negligently due to which the draft could be forged. Hence the Bank was ineligible to claim the benefits of Section 89. Similarly, the Court in the case ofNew Bank of Indiav.Singla Industries1992 SCC OnLine P&H 495, held that in order to claim protection under Section 89, it is “necessary that the alteration should not be apparent and that payment must be made in due course, i.e., according to the apparent tenor of the instrument in good faith and without negligence to a person in possession of the instrument under the circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment”.
This section provides that “If a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished.” Where the bill of exchange comes back, through negotiation, to the acceptor and the acceptor is thereby made the holder of the bill, then this concept is known as negotiable back. When such instance happens at or after maturity, then the liability is discharged.
Thus, we see that the provisions of Chapter VII have significantly facilitated the banking transactions by legally recognizing discharge of liability in certain circumstances. The banks have, in several instances, taken the protection of this Chapter for escaping liability when the money was fraudulently withdrawn due to negligence of the account holders. Furthermore, this Chapter also provides protection to a drawer who suffers damage due to late presentation of checks.