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PARTIES FOR NEGOTIABLE INSTRUMENT
QUESTION BANK
Q.1. Who are the persons capable to make, draw etc. of Promissory Note, Bill of Exchange?
SHORT NOTES
- Company and corporations.
SYNOPSIS.
- CAPACITY OF PARTIES TO MAKE, DRAW ETC. OF PROMISSORY NOTE, BILL OF EXCHANGE (S. 26):-
(1) A minor:-
(2) Persons of Unsound Mind:-
(3) Drunken person’s liability:-
(4) Company and Corporations:-
(5) Agent (Ss. 27, 28):-
(6) Legal Representatives (S. 29):-
(7) Partners:-
(8) Joint Family:-
I. CAPACITY OF PARTIES TO MAKE, DRAW ETC, OF PROMISSORY NOTE, BILL OF EXCHANGE (S. 26):-
Every person capable of contracting (according to the law to which he is subject) may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, Bill of Exchange or Cheque.
Every negotiable instrument, whether a note, Bill of Exchange, or cheque, contains a payment contract. Therefore, every contract should conform to the requirements of S. 10 of the Indian Contract Act of 1872 into the Negotiable Instrument Act of 1881. One of the requirements of S. 10 is that the parties contracting must be competent to contract. Therefore, S. 26 of the Negotiable Instrument Act states that every person capable of contracting may bind himself and be bound by making, drawing, accepting, endorsing or delivering a negotiable instrument. According to S. 11 of the Indian Contract Act, minors, persons of unsound mind, and those otherwise disqualified for contracting are not competent to contract.
We will discuss the capacity of the following parties to make, draw, etc. Promissory Notes, Bill of Exchange, Cheques etc.-
(1) A minor:-
It is well-settled law after Mohoribibi’s Case that a minor’s contract is void ab initio. A minor may draw, endorse, deliver and negotiate such an instrument to bind all parties except himself. Thus, an instrument executed by a minor can make other parties liable except the minor himself. However, a minor may be a beneficiary under a contract; therefore, he may enforce instruments executed in his favour.
(2) Persons of Unsound Mind:-
Persons of Unsound Mind are at par (i.e. at the same position) with the minor. They are also not capable of making a contract. The instrument can not be executed against him. However, other parties can be held liable if the instrument was executed in joint. However, a person with an unsound mind can become a party during an interval of sanity.
(3) Drunken person’s liability:-
Drunkenness is a good defence in the contract. However, such drunkenness should not be deliberate so as to avoid liability under the instrument.
(4) Company and Corporations:-
The law governing the liability of legal persons such as companies and corporations is laid down by S. 26 of the Negotiable Instrument Act 1881. It lays down that the liability of these legal persons depends upon the law from which they derive their authority to contract. Thus, the contractual capacity of the company depends upon the Companies Act and that of the Corporation, which depends upon the law under which it has been incorporated. The powers of the company are mentioned in the memorandum of association, and those of the Corporation are mentioned by the law under which it is incorporated. Any act beyond its powers is ultra-vires and, therefore, void. The company can not be held liable for such acts.
- 47 of the Company’s Act declares that- A bill of exchange, hundi or Promissory Note shall be deemed to have been made, accepted, drawn or endorsed on behalf of a company if drawn, accepted, made or endorsed in the name of or on behalf of, or on account of the company by any person acting under its authority, express or implied.
(5) Agent (Ss. 27, 28):-
According to S. 27, every person who is capable of becoming a party to a negotiable instrument may do so either under his personal signature or through a duly authorised agent acting in his name. A general authority to conduct business or to receive or pay money for the discharge of debts does not impliedly confer upon the agent the power of accepting or endorsing the Bill of Exchange to bind the principal. An authority to draw a bill of exchange does not confer an authority to endorse it.
If an agent signs without disclosing his agency or does not intend to incur personal liability, he would be personally liable. He intended to sign it on behalf of another, which would not be a defence (S. 28).
(6) Legal Representatives (S. 29):-
A person who gives an instrument in his capacity as the legal representative of a deceased person will incur personal liability on the instrument unless he expressly limits his liability to the extent of the assets of the deceased received by him.
(7) Partners:-
A firm (Principal) will be bound under a negotiable instrument only if the partner (agent) acts in the firm’s name. Such making of an instrument must be made in order to bind the firm in the name of the firm to be binding on it. The firm’s name must be clearly disclosed on the face of the instrument.
(8) Joint Family:-
The joint Hindu Family, for all business purposes, is represented by the Karta (Manager) of the family. He is usually a senior male member of the family like a grandfather, father etc.; he has the authority to contract debts for the benefit of the family and to accept and endorse negotiable instruments for that purpose. The other members of the family (coparceners) are liable to the extent of their share for the liability arising out of the execution of the negotiable instrument.
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