LawPage

Notes and Articles for Law students

User Tools

Site Tools


negotiable-instruments:capacity

Capacity to make, draw, accept etc., of Negotiable Instruments

Section 26 of Negotiable Instruments Act, 1881

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, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.

Minor: A minor may draw, indorse, deliver and negotiate such instruments so as to bind all parties except himself.

Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered.

Meaning

This section deals with the question as to who are competent to be parties to notes, bills of exchange or cheques as makers, drawers, acceptors, endorsers, payees or holders thereof. The capacity to incur liability as a party to a bill is co-extensive with the capacity to contract. Section 11 ot the Indian Contract Act lays down that every person is competent to contract who is of the age of majority according to the law to which he is subject and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. It, therefore, follows that a contract entered into by a person not competent to contract under that section eg: by a minor, or by one of unsound mind, is void i.e, the contract is void against the disqualified party even with respect to a bona fide holder. There is no bar in the Contract Act preventing a disqualified person from becoming a promisee or a payee or an indorsee to negotiable instruments. Age of majority will be regulated by the law of his domicile. Under the Indian Majority Act all persons who have attained the age of 18 are major, but when a guardian has been appointed under Act VIII of 1890, or where only an order has been passed under that Act for the appointment of a guardian even though the certificate has not issued the minority of the person will extend to his 21st year. The position is not affected by the subsequent discharge of the guardian by the court.

Disqualified persons

The disqualification may be due to the provisions of the Contract Act or may arise from the provisions of any special enactment. The disqualified persons generally are

  1. minors,
  2. persons of unsound mind by reason of lunacy, idiocy, intoxication etc.,
  3. those disqualified under common law (alien enemies or married women under English law),
  4. persons disqualified in statute law (Insolvent under Insolvency laws)

Minor

The minority in each case must be specifically pleaded and proved and the onus ot proof lies on the defendant who sets up the plea of minority. What constitutes minority under the Indian law has been stated before. It has also been stated before that a contract by a minor is void and cannot he ratified by him after attainment of majority. Again a minor is not estopped from pleading minority even if he has falsely represented himself to be a major. And since the capacity to incur liability on a negotiable instrument is coexistence with the capacity to contract a minor is not liable in any way under a contract on a negotiable instrument nor is he liable even for damages for entering into a contrat by misrepresentation and fraud. According to some a promissory note made by a minor being void cannot form the consideration of a fresh note executed by him after his attainment og majority, while according to the Calcutta High Court there is nothing unlawful in an infant’s paying for the property he has received and promised to pay for and, therefore, such a note is enforceable in law. A note executed by the minor for necessaries of life supplied is not enforceable against him, nor a note executed by his guardian. In these cases while the note or bill is not enforceable against the minor it may be enforceable against other's Thus, in the case of a note, made by a minor and endorsed by another person, the latter cannot set up the plea of minority of the maker in a suit by a subsequent holder. A minor cannot be made liable for a bill drawn on him by a third party. But if the bill was drawn upon a minor and was accepted by him after attainment of majority he would be liable as an acceptor because his incapacity to contract had alieady ceased. A minor is not liable on a post-dated cheque drawn before coming of age but for which he received consideration after coming of age.

Although a minor cannot be a party to a negotiable instrument, an instrument executed by him and an adult jointly is binding against the adult and is not absolutely void. But the case will be different if the instrument is executed by the minor alone and the money is taken by both the adult and the minor. In that case the instrument cannot be enforced. Although a minor is not bound by an instrument his surety is.

From the above it would appear that a minor cannot be made liable under a negotiable instrument under any circumstances whether as a maker, drawer or acceptor etc. But the Act does not prohibit a minor from acquiring benefits under a negotiable instrument. Indeed, a minor can be a promisee or payee or holder and can enforce payment by a suit. He can endorse, without being bound by the indorsement, to enable the indorsee to make the maker, drawer, or acceptor liable.

A minor can issue cheques against a bank if he has funds there but a bank cannot recover the money from the minor if, by mistake, the minor overdrawn. A minor son, as agent of his father, can enter into a contract for his father , if duly authorised.

Lunatics

Section 12 of the Indian Contract Act defines what is sound mind for the purpose of entering into a contract. A lunatic or a drunken person or any other person who for the time being is incapable of understanding the effect and signature of a contract at the time of making it, is on the same footing of as a minor and a contract by a lunatic is absolutely void. The presumption is in favour of sanity. The party pleading lunacy or incapacity to understand the contract must prove this to have existed at the time of contract, and a plaintiff who challenges a deed on the ground of unsoundness of mind must sufficiently establish this inorder to get relief.

Insolvent and Ward of Court

A insolvent or a ward of court is also incompetent to contract under the special provisions of that law and the law that applies to minors applies to them But if an instrument is executed in favour of an insolvent atter adjudication he can sue on it if the receiver does not intervene.

Alien

Alien may enter into a contract and so even an alien living in India is in the same way as if he were Indian subject.

Married women

There is no bar in Indian law to a married woman entering into a contract. English women domiciled in India and married here are governed by the same rule.

Corporations

A corporation is not competent to make, indorse, or accept a promissory note, bill of exchange or cheque unless specific authority for the same has been given to it by the Articles of Association, or if no such specific authority is found, such power can be implied if it is necessary and incidental to the purpose for which it has been created. In the absence of such express or implied authority a corporation will not be bound by a note or a bill drawn by a managing agent of the company even to a holder in due course.

When such specific or implied authority exists it must be exercised by the officers duly authorised in this behalf and in the name of the company. The liability of the company should be made plain on the face of the instruments otherwise, it won't be liable with regard to third persons. Thus, when a hundi drawn in favour of X was endorsed twice by him 'X' and 'X' managing agent of Y and Co, it was held that expression 'managing agent' was merely decorative or descriptive and so the company was not liable.

Dissolution of a company determines its own power and necessarily its delegated power. When an instrument was executed by the director but not in the name of the company, the company was not held liable on the instrument even though the seal of the company was used. After liquidation, a liquidator cannot make or endorse notes. It is material to consider whether the corporation is a trading company or a non-trading company. The term trade is not co-extensive with business , it has a restricted meaning. A trading company may exercise such power, but a non-trading company cannot, unless such power is expressly conferred by the Articles of Association. Therefore, a Railway company, a gas company, a mining company which are not trading companies cannot bind themselves by promissory note unless the power is expressly conferred on them by their charter or Articles of Association.

In a trading partnership one partner has an implied authority to bind the others in signing or endorsing notes and bills.