Page 120 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 6: Law of Negotiable Instruments

Notes

P gives a cheque to L on 2 April and L goes to the bank on 25 June. By that
time the bank had gone into liquidation. L demands payment of the cheque
from P. Would he succeed? [Hint: L would not succeed. There has been an
unreasonable delay in the presentment of the cheque. L can participate in the
insolvency of the bank as an unsecured creditor.]

6.10 Paying Banker

The ‘paying banker’ is a term used to denote the position and duties of the drawee-banks in
paying the cheques of their customers. Thus, ‘paying banker’ is a banker upon whom a cheque
is drawn.

Payment in due Course

What is a payment in due course is defi ned in Sec.10 and has been given above. The following
conditions must be satisfied before a payment of a negotiable instrument can be called as a

payment in due course:
1. Payment must be in accordance with the apparent tenor of the instrument. It is necessary
that a payment to constitute a payment in due course should be made at or after maturity.
A payment before maturity is not a payment in due course.

Example: Payment of a post dated cheque is not a payment in due course.

2. Payment must be made in good faith and without negligence. When there exists suspicious
circumstances and the paying banker fails to make any enquiry as to them, the payment is
not in due course. So payment is not in due course, where a banker makes payment on a
cheque materially altered, without exercising due care.
3. Payment must be made to the person in possession of the instrument. A payment is not a
payment in due course if it is made to a person entitled to receive it. A thief is not said to
be in possession of the instrument.
4. Payment must be made under circumstances which do not afford a reasonable ground
for believing that a person is not entitled to receive payment of the amount mentioned
therein. So, where a peon of a company presents a cheque for a big amount on behalf of
the company, which is contrary to the past experience, the banker should conduct proper
enquiry before making payment on such a cheque.
5. Payment must be made in money only. Payment must be made in money only unless the
payee agrees to accept payment in some other form (e.g., bill of exchange or promissory
note). Money includes bank notes or currency notes but excludes cheque, bills of exchange,
promissory notes and goods.
Thus, under Sec.10, payment in due course means payment in accordance with the apparent
tenor of the instrument made in good faith and without negligence.

Consider the validity of the following documents as a promissory note:
“I promise to pay P or bearer a sum of ` 5000 less charges involved in
documentation of accounts’ signed M.

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