A material alteration of a negotiable instrument is any change that affects the legal character or validity of the instrument, such as the date, amount, payee, drawer, or signature. A material alteration renders the instrument void as against anyone who is a party to it at the time of making such alteration and does not consent to it unless it was made to carry out the common intention of the original parties.
Some examples of material alterations are:
- · Changing the amount payable
- · Changing the date of payment
- · Changing the place of payment
- · Adding or deleting a party to the instrument
- · Converting a blank endorsement into a special endorsement
Effects of material alteration:
The material alteration of a cheque renders such instrument void and the same cannot be enforced against any person who was a party to such instrument at the time of material alteration and did not give his/her approval to it.
RBI has prescribed the cheque format under CTS-2010. One of the mandatory features of the CTS-2010 cheque format, prescribed by RBI, is that No changes/corrections should be carried out on the cheques (other than for date validation purposes, if required). For any change in the payee’s name, courtesy amount (amount in figures) or legal amount (amount in words), etc., fresh cheque forms should be used by customers. This would help banks to identify and control fraudulent alterations.
Section 87 to 90 of NI Act deals with provisions regarding the Material Alteration of Negotiable Instruments.
Section 87: Any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties. Material alteration means any change that affects the legal character or validity of the instrument, such as the date, amount, place, payee, drawer, or signature. If an endorsee makes such an alteration, he discharges his endorser from all liability to him in respect of the consideration thereof.
1. Definition of Material Alteration:
- · Material alteration refers to any change made in a negotiable instrument that affects its validity or changes the rights and obligations of the parties involved.
- · Alterations may include changes in the date, amount, payee, or any other essential terms of the instrument.
2. Consequences of Material Alteration:
- · If a negotiable instrument is materially altered without the consent of all parties involved, the alteration is deemed ineffective.
- · The instrument is considered void as against anyone who has not given their consent to the alteration.
3. Effect on Parties and Liability:
- · Parties who have not consented to the alteration are discharged from their liability under the instrument.
- · Any subsequent party who has given consent to the alteration is bound by it.
4. Protection for Holders in Due Course:
- · Holders in due course are protected from the consequences of material alteration.
- · If an instrument is materially altered before it comes into the possession of a holder in due course, they may enforce payment according to the original terms of the instrument.
Some of the related provisions under NI Act 1881 are:
Section 88: Every party whose signature appears on a negotiable instrument is, in the absence of evidence to the contrary, deemed to have become a party thereto for value.
It means that a person who accepts or endorses a changed cheque, bill, or note is liable for it, unless he proves he did not know or agree to the change. This section safeguards the holder who got the instrument honestly and for value from being cheated by the change.
For example, if A draws a cheque for Rs. 10,000 in favour of B, and B alters it to Rs. 15,000 and indorses it to C, who takes it in good faith and for value, then A is liable to pay C Rs. 15,000 unless he can prove that he did not know about the alteration or that it was done with B’s consent. Similarly, if B accepts or indorses the altered cheque, he is also liable to C for Rs. 15,000, unless he can prove his ignorance or consent.
Section 89: Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not appear to be crossed at the time of presentation or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay, and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such a person or banker from all liability thereon, and such payment shall not be questioned because of the instrument having been altered, or the cheque crossed.
For example, if A draws a cheque for Rs. 10,000 in favour of B, and B alters it to Rs. 15,000 and presents it to C, who is A’s banker, and C pays it without noticing the alteration, then C is discharged from all liability to A and B cannot claim Rs. 15,000 from A or C. Similarly, if A draws a cheque payable to order and crosses it generally, and B forges A’s signature and makes it payable to bearer and erases the crossing, and C pays it to B without noticing the forgery or the obliteration, then C is also discharged from all liability to A and B cannot claim the amount from A or C.
Section 90: If a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished.
Where the bill of exchange comes back, through negotiation, to the acceptor and the acceptor is thereby made the holder of the bill, then this concept is known as negotiable back. When such an instance happens at or after maturity, then the liability is discharged.
For example, if A agrees to pay a bill of exchange drawn by B in favour of C, and C transfers it to D, and D transfers it back to A, then A cannot claim any money from B or C or D on the bill. This section prevents the person who has to pay the bill from taking advantage of his own delay or default in payment,
The following are not considered as material alteration under NI Act:
1. Filling up of incomplete instrument (sec 20)
2. Conversion of blank endorsement into a special endorsement (section 49).
3. Qualifying or limiting an acceptance (section 86)
4. Crossing of a cheque by holder (section 125)
There are many law cases related to material alteration in India. Here are some of them:
Veera Exports vs. T. Kalavathy: The Supreme Court held that an invalid cheque can be re-validated voluntarily by altering the dates, so as to give fresh life to cheques for another six months.
Ramchandran vs. K. Dineshan and Others: The Kerala High Court held that any change in a written instrument that changes the legal identity or business character of the instrument, either in its terms or in the legal relationship of the parties to it, is a material alteration and such a change invalidates the instrument against the person not consenting to the change.
Bhaskaran Chandrasekharan vs V. Radhakrishnan: The Supreme Court ruled that a material alteration of a cheque would render the cheque void and the holder of the cheque would lose the right to prosecute the drawer under Section 138 of the Negotiable Instruments Act 1881.
Lakshmanan Chettiar vs. C. Kandasamy Chettiar: In this case, the Madras High Court considered the issue of material alteration in a promissory note. The court held that a material alteration to the date of a promissory note without the consent of the parties involved would render the instrument void.
Indian Overseas Bank vs. Mannai Narayanan: This case involved a promissory note where alterations were made to the rate of interest without the consent of the parties. The court emphasized that material alterations that change the character of the instrument require the consent of all parties, and if made without such consent, the instrument becomes void.
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