EFFECT OF ACCEPTANCE OF A BILL OF EXCHANGE UNDER NEGOTIABLE INSTRUMENTS ACT, 1881.

[Mr. M. GOVINDARAJAN]

In INDUS IND BANK LIMITED REP. BY ITS MANAGER VERSUS SIVAKUMAR S/O. BOOLOGAPANDIAN, SURYA EXPORTS AND IMPORTS A FIRM REP. BY ITS PROPRIETOR MR. N. SURYA SRINIVAS S/O. BHASKARA RAO, CHENNAI, INDIAN BANK REP. BY ITS ASSISTANT REGIONAL MANAGER, CHENNAI - 2024 (4) TMI 366 - MADRAS HIGH COURT, the plaintiff, in the original suit, is the first defendant in this case. The appellant is the second defendant. The Indian Bank, the banker of the plaintiff, was the third defendant. The plaintiff had supplied TMT bars to the tune of 2,55,540 kgs @ Rs. 38.20 to the first defendant, Sivakumar. The plaintiff issued an invoice on 22.05.2017 to the first defeneant. A bill of exchange was drawn by the plaintiff and the same was discounted with the plaintiff’s bank. The third defendant forwarded the said bill of exchange to the second defendant seeking acceptance for collection. The second defendant accepted the Bill of Exchange and sent its acceptance through SFMS (Structured Financial Managing Solution) requesting the third defendant to pay the bill on the maturity date i.e., 22.08.2017. The second defendant banker had confirmed the same by sending a SFMS message on 29.05.2017.

Contrary to the acceptance the second defendant bank came up with a reason that the goods were returned by the buyer for quality issues. Therefore the second defendant was not liable to pay the amount. The plaintiff filed a civil suit before the Court. The plaintiff was examined and also the officers of the third defendant. The second defendant neither appeared before the Court nor submitted written statement. The Trial Court considered the evidences on record and concluded that the transaction is one of bill discounting which would fall within the scope of Section 37 of the Negotiable Instruments Act. Therefore the collecting banker who had assured payment, the second defendant was jointly and severally liable along with the first defendant to pay the suit claim. The Trial Judge also noted that the second defendant neither filed written statement nor appear before the Trial Court. The Trial Judge also granted 6% interest on the suit claim. It was also ordered to pay the cost of the suit by the first and second plaintiff.

Against the said order the second defendant filed an appeal before the High Court. The

• The transaction was not a ‘Discounting of Bill’ but a ‘Document Collection Method’. The Trial Judge was not right in treating the transaction as a ‘Bill Discounting Transaction’ where the appellant assured payment.
• The transaction is only a ‘Document Collection Method’ which does not involve any liability on its part as a collecting bank.
• There is no indication in the documents to show that there was an undertaking to pay in order to create a financial liability on the part of the second defendant.
• The email dated 06.06.2017 will not amount to an acceptance.
• There was no underlying LC or BG or an OCC in favor of the first defendant to support these transactions.

The High Court considered the submissions of the appellant. The High Court did not agree with the contentions of the appellant. There is no neither a plea or evidence in support of the contentions of the appellant. The High Court analyzed the sequences of this case. The High Court observed the following-

• The message indicated that the due date is 22.08.2017.
• This message pertains to the suit transaction.
• SFMS messages between banks would shoe that the MT 754 amounts to advance of payment/acceptance/negotiation.
• The circular of RBI stipulates that SFMS messages are sent in MT 754 only when the transaction is secured by LC or BG or OCC limit.
• The arrangement made between the first and second defendants are exclusively within their knowledge and the presence of LC or BG or OCC will not affect the liability.

The High Court analyzed the provisions of Section 37 of the Negotiable Instruments Act. The said section provides that the maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance and the acceptor are, in the absence of a contract to the contrary, respectively liable thereon as sureties for the maker, drawer or acceptor, as the case may be. According to this section, the High Court observed that once the bill of Exchange is accepted by the bank the bank is liable as an accepted. Once the bill of exchange is accepted by a bank, it will be confirmed as a separate and independent contract.

The High Court relied on a Supreme Court judgment in ‘U.P. Cooperative Federation Limited v. Singh Consultants and Engineers Private Limited’ - 1987 (11) TMI 375 - SUPREME COURT. In this case the Supreme Court held that in any transaction the seller receives payment from issuing bank when he presents a demand as per the terms of the document. The bank must pay the amount if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether goods conformed to the requirements of the contract. Any dispute between the seller and the buyer must be settled between themselves. The Courts, however, carved out an exception to this rule of absolute independence. If there is a fraud in the transaction the bank could dishonor beneficiary’s demand for payment. The Courts have generally permitted dishonor only on the fraud or the beneficiary and not the fraud of somebody else.

The High Court held that once an acceptance is issued, the Bank cannot go back and contended that the acceptances were not backed by proper documentation. The High Court did not interfere with the Judgment of the Single Judge and dismissed the appeal.