Holding

A pay order is a cheque within the meaning of Section 138 of the Negotiable Instruments Act, and the holder is presumed to be a holder in due course unless the presumption is rebutted, thereby having locus standi to prosecute under Section 138.

Summary

Punjab and Sindh Bank filed a criminal complaint under Section 138 of the Negotiable Instruments Act against Vinkar Sahakari Bank Ltd. and others after a pay order drawn by the latter was dishonoured. The Bombay High Court had quashed the complaint on the ground that the pay order was not a cheque and that the bank was not a holder in due course. On appeal, the Supreme Court examined the nature of a pay order, interpreting Sections 4, 5, 6, 17, 50, 118(g), 131A and 138 of the Act, and held that a pay order is a cheque because it contains an unconditional order to pay, making it a bill of exchange. The Court further held that the holder of such an instrument enjoys a statutory presumption of being a holder in due course until the contrary is proved, giving the bank locus standi to prosecute. Consequently, the appeal was allowed and the High Court’s order set aside, allowing the criminal proceedings to continue.

Issues considered

The question whether a pay order falls within the definition of a cheque under Section 138 of the Negotiable Instruments Act, 1881.
Whether the holder of the pay order can be deemed a holder in due course for the purpose of filing a complaint under Section 138.
Whether the crossing of the instrument affects the holder’s right to institute criminal proceedings.

Legislation cited

Indian Evidence Act, 1872s. 114
Negotiable Instruments Act, 1881s. 118(g), s. 131A, s. 138, s. 142, s. 17, s. 4, s. 5, s. 50, s. 6, s. 8, s. 85A, s. 9

Subjects

Negotiable Instruments ActChequePay OrderHolder in due courseSection 138Banking lawInstrument classification

Judgment

A PUNJAB AND SINDH BANK
v.
VINKAR SAHAKARI BANK LTD. AND ORS.

SEPTEMBER 17, 2001

B [K.T. THOMAS AND S.N. VARIAVA, JJ.]

. Negotiable Instruments Act, 1881-Sections 4, 5, 6, 17, 50, 118(g),
131A and 138-Pay order whether a cheque-Held pay order is a cheque
since it is closer to a Bill of Exchange because of the unconditional order of
C the maker to pay a certain sum to the person concerned.

Banking Practice :

Holder in due course-Holder of pay order could be holder in due course
unless the presumption is rebutted-Evidence Act, 1872, Section 114.
D
Certain pay order was dishonoured by the drawer bank. The holder
of the pay order filed a complaint under section 138 of the Negotiable
Instruments Act, 1881. Single Judge of the High Court quashed the
complaint on the premises that the pay order was not a cheque· and that
the complainant bank was not the holder in due course and therefore the
E complainant has no locus standi to file complaint. Hence the present appeal.

Respondents contended that the 'Pay Order' is only a draft issued by
the bank and it may at best be a promissory note and not a cheque.

Allowing the appeal, the Court
F
HELD : 1. Pay order is a cheque. within the meaning of section 138 of
the Negotiable Instruments Act, 1881. [107-E]

2.1. A cheque is a Bill of exchange drawn on a specified banker and
not expressed to be payable otherwise than on demand. Under the Bill of
G
Exchange, the maker or the drawer of a Bill of Exchange must direct a
'certain person' to pay a particular sum of money, whereas the essential
postulate for a promissory note is that there should be an unconditional
undertaking to pay a certain sum by the drawer. [107-F; 108-A; CJ

H 2.2. In the instant case, the draft or a pay order dishonoured by the
104
PUNJAB AND SINDH BANK v. VINKAR SAHAKARI BANK LTD. 105
drawer bank cannot be brought within the purview of the definition of A
promissory note in section 4 of the Negotiable Instruments Act, 1881. An
unconditional undertaking to pay a certain sum by the drawer cannot be
read out from the instrument. The instrument is closer to a Bill of Exchange
because of the unconditional order of the maker to pay a certain sum to
the person concerned. [108-C; DJ
B
3. The postulate in section 5 of the Act that the Bill of exchange shall
contain an unconditional order directing "a certain person to pay" need
not necessarily refer to third person. Such "a certain person" could as well
be the bank which has drawn the Bill of Exchange. So long as the instrument
is in the possession of a holder or a holder in due course such instrument
would operate as a Bill of Exchange even if the drawer and the drawee
c
happened to be the same person or banking institution. [108-D; El

4. Section 131 of the Act is intended to widen the scope of crossed
drafts as to contain all incidences of a crossed cheque which is for the
purpose of foreclosing a possibility of holding the view that draft cannot be D
crossed. Therefore, it cannot be said that section 131A is intended to limit
the operation of the draft as a cheque only for crossing purposes. Under
section 17 of the Act even if it is possible to construe the draft either as a
promissory note or as a Bill of Exchange, Law has given the option to the
holder to treat it as he chooses. Therefore, in the instant case since the
complainant-bank who is the holder has elected to treat the instrument as E
a cheque it cannot but be treated as a cheque thereafter. This is an
irretrievable corollary of exercising such an election by the holder himself.
[109-A-D]

5. In the instant case in view of sections 8, 9 and 142 of the Act,
complainant bank was within its right to possess the cheque and to receive F
or recover the amount covered by the instrument. The complainant is the
holder of the instrument on its own right by virtue of section 118(g) the
complainant could be a holder in dne conrse until the concerned party
adduces evidence to rebut the presumption. It is open to the respondents to
rebut the presumption in the trial but till then the High Court can not say G
that the complainant is not a holder in due course at all. [111-D; F]

Capital and Countries Bank v. Gordon, (1903) AC 240; Bibi Kazmi
Begum v. Lachman Lal Sao and Ors., AIR (1930) Patna 239; Birbhum Central
Co-operative Bank Ltd. v. Pioneer Bank Ltd., AIR (1956) Calcutta 615 and In
the matter of the Palai Central Bank Ltd., AIR (1962) Kerala 210, relied on. H
106 SUPREME COURT REPORTS [2001] SUPP. 3 S.C.R.
A Maturi Sanyasilingam v. The Exchange Bank of India and Africa Ltd.,
AIR (1948) Bombay 1, overruled.

CRIMINAL APPELLATE JURISDICTION : Criminal Appeal No. 949
of 2001.

B From the Judgment and Order dated 3.4.2000 of the Bombay High Court
in Crl. W.P. No. 369 of 2000.

N.S. Sistani, G.S. Sistani, Arun K. Sinha and Rakesh Singh for the
Appellant.

C Shree Prakash and Surya Kant for the Respondent No.l.

Shekar Naphde, Mahesh Agarwal, E.C. Agrawala and Rishi Agarwal for
the Respondent No. 4.

The Judgment of the Court was delivered by
D
THOMAS, J. Leave granted.

This case involves a queer situation when a "Pay Order" was dishonoured
by the drawer bank. The holder thereof (Punjab and Sindh Bank) filed a
complaint under Section 138 of the Negotiable Instruments Act,1881 (for short
E 'the Act'). The drawer bank and its officials have been arraigned as accused
in the complaint. But a single Judge of the High Court of Bombay quashed the
complaint mainly on the premise that the instrument (described as the "pay
order") is not a cheque. The Punjab & Sindh Bank has filed this appeal in
challenge of the aforesaid order of the High Court. Besides the premise stated
F above learned single Judge of the High Court adopted two more grounds for
quashing the complaint. One among them is that even assuming that the
instrument is a cheque it was crossed and hence the complainant-bank should
only have collected the amount and remitted the same to the account of the
person shown as payee in the instrument. The other is, the complainant was not
a 'holder in due course' inasmuch as no endorsement was made on the instrument
G
in the manner prescribed under Section 50 of the Act and hence the complainant
has no locus standi to file the complaint. -

The short facts lea.Jing to the filing of the complaint are these:

H The first accused in the complaint is a co-operative bank. It drew the Pay
PUNJAB AND SINDH BANK v. VINKAR SAHAKARI BANK LTD. rrnoMAS, J.] 107
Order on 18.12.1992 in a sum of Rs.48.40 lacs, the relevant inscriptions of A
which are the following: "Payee's account only - To pay Punjab & Sindh Bank-
M/s. Poise Leasing and Finance Company Ltd. or order". According to the
appellant the said Pay Order was got assigned to the complainant-bank from
Mis. Poise Leasing and Finance Company Ltd. When the instrument was
presented for clearance before the first accused bank on 18.12.1992 it was
B
returned with the remarks "funds uncleared". It was again presented on 6.1.1993
and then it was returned dishonoured with the remarks "drawee bank's funds
with our bank i.e. sponsoring bank, are insufficient". This was followed b~
sending a notice to the first accused bank as contemplated in Section 138 of
the Act. Since the amount was not paid within the statutory period a complaint
was filed on 9.3.1993. c
On process being served on the respondents a writ petition was filed by
them before the High Court of Bombay for quashing_the criminal proceedings.
But the High Court dismissed the writ petition on 1.7.1999 without prejudice
to the rights of the accused to make a plea before the trial court for discharging
the accused. Thereafter the accused moved the trial magistrate for recalling the D
process on the ground, inter alia, that the instrument is not a cheque as per
Section 138 of the Act. The magistrate dismissed the aforesaid plea as per his
order dated 29.1.2000. When the accused tiled a second writ petition in the
High Court in challenge of the aforesaid order of the magistrate the learned
single Judge allowing the said writ petition passed the impugned order. E
The first question raised is whether the instrument which is described by
both sides as a "Pay Order" is a cheque within the meaning of Section 138 of
the Act. Mr. Shekar Naphde, learned senior counsel who argued for some of
the respondents contended that the "Pay Order" is only a draft issued by the
bank and it may at best be a promissory note and is not a cheque. F

For deciding the said question we have to know what is a cheque. Section
6 of the Act defines a cheque as this: "A cheque is a bill of exchange drawn
on a specified banker and not expressed to be payable otherwise than on
demand". Now we have to look at the definition of Bill of exchange. It is
contained in Section 5 of the Act. The first paragraph of this section is enough G
for the purpose of this case and hence it is extracted below:

"A bill of exchange is an instrument in writing contarnrng 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
H
108 SUPREME COURT REPORTS [2001] SUPP. 3 S.C.R.
A or to the bearer of the instrument."

The maker or the drawer of a Bill of Exchange must direct a "certain
person" to pay a particular sum of money. This is the quintessence of a Bill
of Exchange. Learned senior counsel for the respondent contended that in
every Bill of exchange there must necessarily be three parties, the maker, the
B payee and the person to whom direction is given to pay. As a draft or a pay
order contains only two persons, i.e. the drawer and the payee, it is only an
instrument promising to pay a certain sum of money, according to the learned
counsel. He made an endeavour to show that a draft may at best be a promissory
note but the bid made by him did not succeed as it is a difficult task to bring
the draft or a pay order, as in this case, within the purview of the definition
c of promissory note in Section 4 of the Act. The indispensable postulate for a
promissory note is that there should be an unconditional undertaking to pay a
certain sum by the drawer. Such an undertaking cannot be read out from the
impugned instrument. At any rate the instrument involved in this case is closer
to a bill of exchange because of the unconditional order of its maker to the
person concerned "to pay a certain sum".
D
The postulate in Section 5 of the Act that the Bill of Exchange shall
contain an unconditional order directing "a certain person to pay" need not
necessarily refer to a third person. Such "a certain person" could as well be the
bank which has drawn the bill of exchange. So long as the instrument is in the
possession of a holder or a holder in due course such instrument would operate
E as a bill of exchange even if the drawer and the drawee happened to be the same
person or banking institution.

In this context a reference to Section 85A of the Act is of advantage. We
may point out that the said section falls within Chapter VII under the title "Of
Discharge from liability on notes, bills and cheques". Section 85A deals with
F drafts drawn by one branch of a bank on another branch of the same bank. The
section says that "where any draft, that is an order to pay money, drawn by one
office of a bank upon another office of the same bank for a sum of money
payable to order on demand, purports to be indorsed by or on behalf of the
payee, the bank is discharged by payment in due course." It is evident that the
G section renders such draft a negotiable instrument.

Section 1'31A, which was introduced in the statute by Act 33 of 1947,
makes all the provisions for crossing of cheques applicable to the drafts also.
That section says: "The provisions of this Chapter shall apply to any draft, as
defined in section 85A, as if the draft were a cheque." Learned counsel for the
H first respondent contended that the said section is more in favour of the position·
PUNJAB AND SINDH BANK v. VINKAR SAHAKARI BANK LTD. [fHOMAS, J.] 109
that a draft is otherwise not a cheque and it is declared to be a cheque only for A
the limited purpose of Chapter XIV which deals with "crossed cheques". We
are unable to agree with the said contention that Section 131A is intended to
limit the operation of a draft as a cheque only for crossing purposes. In our
view, the said section is intended to widen the scope of crossed drafts as to
contain all incidences of a crossed cheque. This is for the purpose of foreclosing
a possibility of holding the view that draft cannot be crossed. B

Even if it is possible to construe the draft either as a promissory note or
as a Bill of Exchange, law has given the option to the holder to treat it as he
chooses. This can be discerned from Section 17 of the Act which says "where
an instrument may be construed either as a promissory note or bill of exchange,
the holder may at his election treat it as either and the instrument shall be
c.
thenceforward treated accordingly." This means once the holder, which in this
case is the complainant-bank, has elected to treat the instrument as a cheque
it cannot but be treated as a cheque thereafter. This is an irretrievable corollary
of exercising such an election by the holdc:r himself.

House of Lords had to consider whether a banker's draft payable to order D
on demand addressed by one branch of a bank to another branch of the same
bank, in the wake of Section 82 of the Bills of Exchange Act, 1882. While
holding that such a draft is not a cheque within the meaning of Sections 60 and
82 of the said Act Lord Lindley made the following observations in Capital
and Counties Bank v. Gordon, (1903 AC 240): E
"But I agree with the Court of Appeal in thinking that the bank, which
is both drawer and drawee of these instruments, is not entitled to treat
them as bills of exchange as defined in s.3 of the Bills of exchange Act,
although a holder may sue the bank upon them, and treat them either
as bills of exchange or as promissory notes." F
The said observation was followed by a Division Bench of the Patna
High Court in Bibi Kavni Begum v. Lachman Lal Sao and Ors., AIR (1930)
Patna 239. In that case, the trial court took the view that when the drawer and
the drawee are the same person the instrument drawn would not become a Bill
of Exchange. The Patna High Court held that even though such an instrument G
1 might not become a bill of exchange between the drawer and the drawee when
both were the same person "it is well established that the holder of the instrument
may treat it as a bill of exchange".

Later, a Division Bench of the Calcutta High Court in Birbhum Central
Co-operative Bank Ltd. v. Pioneer Bank Ltd., AIR (1956) Calcutta 615, even H
110 SUPREME COURT REPORTS [2001) SUPP. 3 S.C.R.
A without reference to the aforementioned observations, adopted the same view.
Chakravartti, C.J., speaking for the Division Bench has stated thus:

"It is well settled that a banker's draft is a bill of exchange and as such
it is a negotiable instrument. The issue of a draft is regarded in banking
practice as amatter of purchase and ordinarily the relationship between
B the holder of a Demand Draft and the bank issuing it is that of debtor
and creditor. The ht>lder of the draft is a creditor and his remedy is on
the draft."

In the matter ofthe Palai Central Bank Ltd., AIR (1962) Kerala 210, P.T.
Raman Nayar, J. (as the learned Chief Justice then was) made a survey of the
c relevant provisions and the case Jaw and then made the following observations:

"However that might be, there is no denying that a demand draft is
nothing more or less than a negotiable instrument governed by the
provisions of the Negotiable Instruments Act; and on the face of it, the
D obligations it creates are nothing more than ordinary debts."

We are of the opinion that the High Courts have taken the correct view
in the above decisions. However, Mr. Shekar Naphde, learned senior counsel
for the respondents, invited our attention to the decision of a single Judge of
the Bombay High Court in Maturi Sanyasilingam v. The Exchange Bank of
E India and Africa Ltd., AIR (1948) Bombay 1, wherein it was held that the
demand draft issued by the branch of a bank to its head office or vice-versa
is not a cheque nor a bill of excliange ..But learned single Judge expressed the
opinion that a demand draft may be a bill of exchange if it is issued by one
bank drawn on another. The said observation was made in the wake of the
contention that the collecting bank could claim protection under Section 131
F
of the Act. The said decision of the Bombay High Court cannot hold good
because the Negotiable Instruments Act was amended by incorporating Section
13 lA in the said Act.

That apart, learned single Judge while relying on the decisions of the
G House of Lords in Capital and Counties Bank v. Gordon (supra) restricted
himself to the former limb of the observation therein. It is in the latter limb that
the House of Lords said that when the draft is in possession of a holder the
instrument can be treated as bill of exchange.

We therefore dissent from the view adopted by the learned single Judge
H in the. impugned judgment that the pay order is not a cheque.
PUNJAB AND SINDH BANK v. VINKAR SAHAKARI BANK LTD. ffHOMAS, J.] 111
The second premise of the learned single Judge that since the pay order A
was a crossed instrument the complainant-bank could have only collected the
amount and remitted the proceeds to the account of the payee. The said view
could not be supported by the learned counsel for the respondents. Hence it is
unnecessary for us to dwell into that.

The third ground for quashing the complaint is that the complainant was B
not "a holder in due course" in the absence of an endorsement made on the
instrument in the manner prescribed under section 50 of the Act. This ground
was adopted by the learned single Judge without regard to certain relevant
provisions of the Act.

Section 142 of the Act envisages a complaint to be made in writing
c
"either by the payee or the holder in due course of the cheque, as the case may
be". Section 8 of the Act defines "holder" as any person entitled in his own
name to the possession of the cheque and to receive or recover the amount due
thereon from the parties thereto. We have no doubt that complainant-bank was
well within its right to possess the cheque and to receive or recover the amount D
covered by the instrument. "Holder in due course" means a person who for
consideration became the possessor of a cheque if payable to bearer before the
amount became payable. (vide Sec.9).

In this context reference has to be made to Section 118(g) of the Act
which contains a mandate that until the contrary is proved the holder of a E
negotiable instrument shall be presumed to be a holder in due course. Thus
there is no escape for the court from drawing such presumption.

It is undisputed that the complainant-company is the holder of the
instrument on its own right. As such it could be a holder in due course also
until the concerned party adduces evidence to rebut the presumption. It is of
F
course open to the respondents to rebut the presumption in the trial but till then
the High Court could not say that the complainant is not a holder in due course
at all.

For the aforesaid reasons we allow this appeal and set aside the impugned G
judgment. The trial shall now proceed to reach the final judgment without any
more delay.

NJ. Appeal allowed.