NEGOTIABLE INSTRUMENTS ACT

INTRODUCTION
Negotiable instrument: There are certain documents which are freely used in commercial
transactions and monetary dealings. These documents, if they satisfy certain conditions, are
known as negotiable Instruments. The word negotiable means transferable from one
person to another in return for consideration and instrument means a written document
by which a right is created in favour of some person.Thus, a negotiable instrument is a
document which entitles a person to a sum of money and which is freely transferable from
one person to another by mere delivery or by endorsement and delivery.
Negotiable Instruments Act, 1881: The law relating to negotiable instruments is contained in
the Negotiable Instruments Act, 1881. The Indian Negotiable Instruments Act is based on
English law then prevailing, with some minor modifcations.
Scope & Extent of NI Act: The Act does not afect any local usage relating to any instrument
in vernacular language. However, local usage can be excluded by any words in the body of
the instrument.
Applicability of act: The Negotiable Instruments Act specifes only 3 types of instruments
as negotiable Instruments i.e. Bill of Exchange, Promissory Note and Cheque. In case of any
other documents the protection available under the Act (i.e. transferee can get title better
than that of transferor) is not available.
Document of title to goods: Document of title to goods has some characteristics of
negotiable instruments. For example, according to Sec.27 of Sale of Goods Act, if mercantile
agent is in possession of document of title with the consent of owner, even unauthorized sale
made by him is valid if buyer acts in good faith. However, these documents of title to goods
are not negotiable instruments.
1. The act does not apply to:
a. Indian Paper Currency Act, 1871.
b. The local usage relating to any instrument in an oriental language (for e.g. hundies).
But where no custom is established, the act will apply to hundies also.
CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT
The term Negotiable instrument consists of two parts - negotiable and instrument. The
word negotiable means transferable by delivery and the word instrument means a written
document by which a right is created in favour of some other person. Following are some of
the features of a negotiable instrument:
a. In writing: A negotiable instrument must be in writing. Under the Contract Law, it is
true that an oral promise to pay money is valid. However, in commercial world, where
large numbers of promises are made daily, the promises must be made in written form.
b. Unconditional promise or order: A promise to pay money in a note, or an order to pay
money in a bill of exchange, or a cheque must be unconditional.
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c. The signature: A negotiable instrument must be authenticated by the signature of the maker.
d. A sum certain in money: A negotiable instrument must represent certain sum of money and
money only i.e. in legal tender money. An agreement to do something in addition to or
other than the payment in money cannot constitute a promissory note.
e. Freehand transferability: In case of bearer instruments the property in a negotiable
instrument passes from one person to another by delivery. In case of order instruments,
the property in the instrument transfers by endorsement and delivery. The transfer of
property means transfer of ownership and not mere possession.
f. The holder in due course: On transfer of a negotiable instrument, the transferee who
receives it in good faith and for value is known as holder in due course. The holder in
due course is not afected by any defects in the title of the transferor.
g. Recovery: The holder of a negotiable instrument can sue in his own name for the
recovery of the amount represented by the instrument.
An instrument consisting of all the above features is a negotiable instrument. Otherwise it is
non-negotiable. The Negotiable Instruments Act specifes only three types of instruments as
Negotiable Instruments i.e. Bill of exchange, promissory note and cheque. There are some
other instruments where property can be passed by delivery of documents e.g. transport
documents, warehouse receipts etc. However, since these are not covered in the Act, the
protection available under the Act is not available. In some cases, an instrument can be
assigned (For e.g. Insurance Policy can be assigned). However, it is not negotiable.
Following instruments are treated as negotiable instruments either by statute or by
mercantile usage or custom of trade - Bills of Exchange, Promissory Note, Cheque,
Government Promissory Note, Dividend Warrant, Bearer Debentures, Hundi, etc.
TYPES OF NEGOTIABLE INSTRUMENTS?
Bearer Instruments: A negotiable Instrument is payable to bearer when:
a. it is expressed to be so payable or
b. the only or last endorsement on the instrument is an endorsement in blank.
Any person who is in lawful possession of a bearer instrument can lawfully collect money due
on it. In such a case, he is required to acknowledge receipt of money on the instrument by
signing on it.
A promissory note or bill of exchange cant be made payable to bearer on demand due to
restrictions imposed by RBI.
E.g.: Pay to R or bearer
Order instruments: A negotiable Instrument is payable to order when:
a. When it is expressed to be payable to order. E.g., Pay to A or order or Pay to the order of A.
In both the cases, the bill is payable to A or his order at his option.
b. When it is expressed to be payable to a particular person and does not contain any words
prohibiting or restricting its transfer. E.g. Pay A one hundred rupees.
E.g: Pay to R or Order, pay to the order of R, Pay to R.
Inland and foreign Instruments:
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a. Inland Instruments:
A promissory note, bill of exchange or cheque which is both drawn or made in India
and made payable in India or
drawn upon any person resident in India
is deemed to be an Inland instrument (Sec.11).
A bill of exchange drawn upon a resident in India is an Inland bill irrespective of the
place where it was drawn.
Examples:
A bill is drawn in Delhi on a merchant in Bombay and accepted payable in Calcutta.
A bill is drawn in Delhi on a merchant in London and accepted payable in Calcutta.
b. Foreign instruments: An instrument which is not an inland instrument is deemed to be
foreign instrument.
Instruments payable on demand:
a. A cheque is always payable on demand and it cannot be expressed to be payable
otherwise than on demand.
b. A promissory note or bill is payable on demand when
no time for payment is specifed in it or
When it is expressed to be payable on demand or at sight or on presentment.
The words on demand are usually used in a promissory note. The words at sight are
usually used in a bill. In a promissory note or bill the expression at sight and on
presentment mean on demand.
E.g.: I promise to pay B ` 500.
I promise to pay B ` 500 on demand.
Pay B ` 500 at sight.
Pay B ` 500 on presentment.
Time Instruments: A bill or note which is payable:
a. after a fxed period or
b. after sight or
c. on a specifed day or
d. on the happening of an event which is certain to happen is known as time instrument.
Note:
If the event is such as is bound to happen, even though the actual time of its happening
is uncertain (for example, the death of a certain person) then the bill or note is valid. But
if the event is probable but not certain to happen, the instrument does not become valid.
Similarly an order to pay on or before a specifed date is not a bill.
The expression after sight in a promissory note means after presentment for sight. This
means that payment cannot be demanded on a note till it has been shown to the maker.
The expression after sight in a bill of exchange means after acceptance.
E.g.: I Promise to pay B ` 500 after 3 months.
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I promise to pay ` 500 on 1
st
June 2006.
I promise to pay B ` 500 after sight.
I promise to pay B ` 500 after Cs death.
PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS
Section 118 and 119 of the Negotiable instruments act states the following presumptions as
to negotiable instruments, unless the contrary is proved. In other words following things are
presumed by the court of law unless otherwise proved.
a. Consideration: The presumption is that every negotiable instrument was made or drawn
for consideration, and that every such instrument has been accepted, indorsed,
negotiated, or transferred for consideration. In case of ordinary contracts, consideration
must be proved by the party seeking to enforce it. But in case of negotiable instruments,
consideration need not be proved. It is presumed to be there. The person who challenges
the instrument has to prove the absence of consideration.
b. Date: The presumption is that every negotiable instrument bearing a date was made or
drawn on such date.
c. Time of acceptance: The presumption is that every accepted bill of exchange was
accepted within a reasonable time after its date and before maturity. But there is no
presumption as to the exact date of acceptance.
d. Time of transfer: Law presumes that every transfer of negotiable instrument was made
before its maturity. But there is no presumption as to the exact date of negotiation.
e. Order of endorsement: The endorsements appearing upon a negotiable instrument are
presumed to be made in order in which they appear on it.
f. Stamp: The presumption is that a lost promissory note, bill of exchange or cheque was
duly stamped.
g. Every holder is a holder in due course: This is a very important presumption. Holder of a
negotiable instrument is presumed to be a holder in due course.
h. Protest: In a suit upon a dishonoured instrument, the Court shall, on the proof of
protest, presume the fact of dishonour, unless and until such fact is disproved.
PROMISSORY NOTE
The term promissory note denotes that it is a note containing certain promise.
Defnition: Sec.4 of the Act reads - A promissory note is an instrument in writing
containing an unconditional undertaking signed by the maker, to pay a certain sum of
money only to, or to the order of a certain person, or to the bearer of the instrument. Thus a
promissory note is a written and signed promise to pay a certain sum of money to some
person or to his order.
Bank notes and currency notes are not treated as promissory notes. The words or to the
bearer of the instrument in the defnition of the promissory note are inoperative as they are
overruled by the provisions of RBI Act. They prohibit the issue of promissory note, payable
to bearer, by anybody other than the RBI and Central Government of India.
Parties to a Promissory note:
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a. Maker: The person who makes the promissory note and promises to pay the money stated
therein is called maker of the instrument.
b. Payee: The person to whom the amount of promissory note is payable i.e. to whom the
promise of payment is made is called payee of the instrument.
c. Endorser & Endorsee: The above two parties are original parties to the note. In the course
of negotiation, payee may indorse (i.e., transfer) the note to some other person and that
other may indorse the note to some other person and so on. The party endorsing the
instrument is known as endorser and the party to whom the instrument has been
endorsed is known as endorsee.
Essentials of a valid promissory note:
1. It must be in writing: An oral agreement is not a valid promise. The writing may be on
any paper or book. It may be in pencil or in ink. Writing includes printing, photography,
etc. No particular form of words is necessary.
E.g.: A promises to pay B a sum of ` 500 on telephone. This promise will not make a
promissory note because it is not in writing (Of course it may be a valid contract under the
contract act)
2. It must contain an express promise to pay:
a. The promise must be an express promise to pay.
E.g.: I promise to pay X a sum of ` 10,000. It is a valid promissory note.
b. An implied promise to pay does not constitute a promissory note.
E.g.: I am liable to pay X ` 10,000 - it is not a promissory note.
c. A mere acknowledgement of debt does not constitute a promissory note.
E.g.: I owe X ` 10,000 - it is not a promissory note.
d. However, an acknowledgement of debt accompanied by a promise to pay constitutes
a Promissory note.
E.g.: I owe X ` 10,000, and I promise to pay X the same on demand - it is a valid promissory
note.
e. Mere receipt of money is not a promissory note. Generally receipts are not intended
to be negotiable instruments.
E.g.: Received from X ` 10,000 - it is not a promissory note.
3. The promise to pay must be unconditional: A promise to pay must be an unconditional
because certainty is absolutely necessary in commercial transactions.
Examples:
a. Z made a note - I promise to pay X ` 10,000 seven days after my marriage with Y. It is an
uncertain promissory note because Z may never marry Y.
b. I promise to pay Y ` 10,000 as soon as possible. Here it is difcult to ascertain possibility of
making payment.
4. It must contain a promise to pay in terms of money only: The promise must be to pay
money and money only - that is in legal tender money. An agreement to do something in
addition to or other than the payment in money cannot constitute a promissory note.
E.g.: Following notes made by Z do not constitute promissory notes:
- I promise to pay money and paddy to X within a month.
- I promise to deliver X 100 tons of iron.
- I promise to pay ` 10,000 and to deliver up a wharf to X.
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5. It must contain a promise to pay a defnite sum of money: The sum expressed to be
payable by the note must be certain and there should not be any chance of additions and
subtractions.
A negotiable instrument may be a cash instrument or a credit instrument. When it is
expressed in currency, there is no ambiguity about the sum.
When it is used as a credit instrument, it may include (i) installments, or (ii) discount,
or (iii) rate of interest which may difer before or after due date.
According to Section 5, the sum payable under a promissory note is certain, although
it is required to be paid with interest, provided the rate of interest is stated.
E.g.: A promissory note expressed a promise to pay the sum mentioned therein with interest at
10% p.a. with quarterly rests. The court held that the note was for a certain sum.
When no rate of interest is specifed in the instrument, interest on the amount due
thereon shall be calculated @ 18% per annum...
E.g.: Z makes a note - I promise to pay X ` 10,000 and interest thereon after a year. It is a valid
promissory note as the interest will be computed @ 18% in the absence of the specifc rate.
6. The maker of the note must be certain: It is of utmost importance that the note itself must
clearly point out the person who undertakes to pay. He may be described by his name or
designation (i.e. description of his status). A promissory note may be made payable
singularly, jointly or jointly and severally.
a. A note signed by one person and beginning I promise.. is a singular note.
b. A note signed by more than one person may be a joint note or a joint and several
note.
Examples:
A promissory note contain the words - We promise to pay..and is signed by two
persons. In this case both of them are jointly liable on the note.
A promissory note contains the words - I promise to pay. but is signed by two
persons. In this case both of them are jointly and severally liable on the note.
7. The payee of the note must be a certain person: An instrument must clearly point out the
party who is to receive the money. To make a promissory note there must be a payee
ascertained by the name or designation.
Where an instrument fulfls other requirements of a note, except that the payee is not
mentioned, it cannot be treated as a promissory note.
E.g.: A debtor made an entry of receipt of money in his creditors book and stated that the money
borrowed by him would be repaid on a certain date, without specifying the payee. The court held
that such an entry did not amount to promissory note.
A promissory note cannot be made payable to the maker himself. Such a note is
nullity. The reason being that the same person is both promisor and promisee. But if it is
endorsed by the maker to some other person or indorsed in blank, it becomes a valid
promissory note.
8. It must be signed by the maker: A promissory note must be signed by the maker. The
makers signature is usually found at the foot of the instrument, but it is sufcient if he
signs anywhere on the instrument. Generally signatures are made by writing name or
initial of the maker using a pen. A valid signature may be made in pencil also. An
illiterate person or any other person may sign by using mark.
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The purpose of signature is to authenticate the instrument. The signature can be made
on any part of the instrument.
9. Must be delivered to the payee: According to Sec.46 of the Act, a promissory note is
incomplete until it is delivered to the payee. If a person signs a promissory note in his
home and keeps it there, he does not become liable to anyone even if somebodys name is
written on it. The maker becomes liable to pay only when the duly signed note is
voluntarily delivered to the payee.
10. Requirements under the Indian stamp Act 1899: A promissory note must be stamped
with adhesive stamp or engrossed on stamp paper of proper value. This requires the
cancellation of such stamp or initials with the date of his writing or in any other efectual
manner.
11. Other formalities: It is usual and proper to state in a promissory note, the place where it
is made and the date on which it is made. However, their omission does not render an
instrument invalid. For example, if an instrument is not dated, it is deemed to have been
dated on the date of delivery. If the words value received are not written on a
promissory note, it does not make any diference, since consideration is presumed to
exist in every negotiable instrument, until the contrary is proved.
Note:
1. The omission of consideration received, place and date will not invalidate the
instrument.
2. An undated instrument will be deemed to be made on the date of delivery.
3. An ante-dated or post-dated instrument is not invalid.
4. A promissory note may be payable on demand or after a defnite period of time.
5. The words or to the bearer of the instrument have become inoperative in view of the
provision contained in Section 31(2) of the Reserve Bank of India Act, which provides
that no person in India other than Reserve Bank of India and The Central Government
can make or issue promissory note payable to the bearer of the instrument.
6. A bank note or currency note is not a promissory note because it is money itself.
7. Absence of the words or order in a promissory note does not afect its validity. In fact,
Explanation (i) to sec.13 of the Negotiable Instruments Act provides that unless a promissory
note, bill of exchange or cheque contains words prohibiting transfer or indicating an
intention that it shall not be transferable (e.g., Pay A only), instrument payable to a specifed
person shall also be payable to his order. Thus, if promise is to pay A it also implies promise
to pay at the order of A to any other person specifed by A.
BILL OF EXCHANGE
Def: Sec.5 of the Negotiable Instruments Act reads as A bill of exchange is an instrument in
writing containing 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 or to the bearer of the
instrument.
Parties to a bill of exchange: A bill of exchange is a 3 party instrument.
a. Drawer: The person who creates an instrument and orders the third party to pay is called a
drawer.
b. Drawee: The person on whom the bill is drawn i.e. the person who is directed to pay the
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amount stated in the bill. When a drawee accepts the bill (i.e. he gives his consent to pay
the amount due on the bill) he is called acceptor.
c. Payee: The person to whom the amount of a bill of exchange is payable is called payee.
Notes: Sometimes same person flls the position of two of these three parties:
Drawer and payee may be same person. For example, when A signs a bill of exchange
addressed to B - pay to me or my order, he is directing B to make payment to himself.
Drawer and drawee may be the same person. For example, where a bill of exchange is
issued by one branch of a frm on the other branch, the frm is acting as both - drawer and
drawee.
Drawee and payee may be the same person. For example, when a bill is subsequently
endorsed to the drawee in the course of negotiation, the drawee becomes the payee of the
instrument.
d. Drawee in case of need: The law gives an option to the drawer of the bill to name an
additional drawee in the bill, who may accept it, in case it is not accepted by the original
drawee. This additional drawee is called drawee in case of need. When the original
drawee refuses to accept the bill, it has to be presented to drawee in case of need. If he
accepts it, it is a good bill and if he does not accept it, the holder may treat the bill
dishonoured because of non-acceptance.
e. Acceptor for honour: When a drawee of a bill of exchange refuses to accept it, or he
becomes insolvent, the holder of the instrument gets the bill noted or protested for non-
acceptance or for better security. Under these circumstances, if any person accepts the bill
for honour of the drawer, such person is called acceptor for honour.
Essentials of a valid bill of exchange: The defnition of bill of exchange is very similar to that of a
promissory note. Thus the essential requirements of the bill are more or less same as that of a
promissory note. The essentials discussed under promissory note are not elaborated below.
a. It must be in writing.
b. It must contain an order to pay: It is the essence of a bill of exchange. Here the drawer
orders the drawee to pay money to the payee. The word order means direction. Mere
request does not constitute an order.
Ex: A document was drawn in this form - Mr. Little, please let the bearer have seven pounds and
place it to my account. The court held that it was not a bill of exchange.
c. The order to pay must be unconditional.
d. The order to pay must be in terms of money only.
e. Parties to the bill must be certain.
f. It must be signed by the drawer.
g. It must be delivered.
h. Other formalities: Like a promissory note, a bill should be dated and should mention
the place where it is drawn. But mere absence of these things do not invalidate the bill.
However, adequate stamping is must to maintain a suit upon a bill of exchange.
DIFFERENT TYPES OF BILLS OF EXCHANGE
Documentary bill and clean bill: When documents of title to goods and other documents,
such as invoices, marine Insurance policies, etc. are annexed to a bill, the bill is called
documentary bill. Such documents are delivered to the buyer only on acceptance or payment
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of the bill. When no documents relating to goods represented by the bill are attached, it is
called clean bill.
Escrow: When a negotiable instrument is delivered conditionally or for a special purpose as a
collateral security or for safe custody only, and not for the purpose of transferring property
therein, it is called an escrow. The liability to pay in case of an escrow arise if the conditions
agreed upon are not fulflled, or the purpose for which the instrument was delivered is not
satisfed.
Ambiguous Instrument: When an Instrument, because of its fault drafting, may be
interpreted either as a promissory note or a bill of exchange, it is called an ambiguous
instrument. In other words, an instrument which is vague and cannot be clearly identifed
either as a bill of exchange or as a promissory note is an Ambiguous instrument. Once for all
its holder has to elect, whether he wants to treat it as a promissory note or a bill of exchange.
Ex: A bill is drawn by A an agent, acting within the scope of his authority, upon his principal P. The
holder may at his option, treat it as a note or bill because the drawer (A) and the drawee (P) are the
same person.
If the amount is stated diferently in fgures and in words, the amount stated in words is the
amount undertaken or ordered to be paid (Sec. 18).
Inchoate Instrument (Sec.20): An Inchoate instrument is an incomplete Instrument in some
respect. When a person signs and delivers blank or incomplete stamped paper to another,
such other is authorised to complete it for any amount not exceeding the amount covered by
the stamp. The person so signing is liable upon such instrument, to any holder in due course
for any amount. But any other person cant claim more than the amount intended by the
drawer of the instrument.
E.g.: A bill of exchange upto the value of ` 1,000 requires stamps worth 50 paise. A bill with a stamp
of 50 paise on it is duly signed but the amount is not flled in. It is agreed that the payee will not fll in
more than ` 500. Suppose, the payee flls in ` 900, the person so singing shall be liable to any holder
in due course for the full amount of the bill i.e. ` 900, being the amount covered by the stamp.
However, an ordinary holder cannot claim more than ` 500 the amount intended by the drawee.
Undated bills and notes: A negotiable instrument is not invalid by reason that it is undated. If all
legal requirements are fulflled, the date of its execution can be proved by oral or other evidence.
However, A holder in due course may, insert the true date of issue or acceptance and the
instrument shall be payable accordingly. Such an insertion is not treated as material alteration.
Fictitious bill: When the name of the drawer or the payee or both is fctitious in a bill, it is a
fctitious bill. The word fctitious denotes (i) non-existing person or (ii) pretended person.
Generally, a fctitious bill is issued when:
1. a dishonest employee deceives the employer (i.e. drawer of the bill) to sign an instrument,
payable to a party, who has no right to receive the payment or
2. the dishonest employee or agent has the authority to issue the instrument on behalf of the
drawer.
Bill in sets: A bill of exchange drawn in parts is known as bill in sets. When the drawer and
drawee are at distant places, there is a possibility that a bill of exchange send by post may be
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lost during the course of transmission. In order to avoid inconvenience and delay and ensure
safe transmission, law has provided an option to draw bill in several parts. All such parts
together constitute one set and the whole set is considered as one bill. Generally, each part is
sent by separate post so that in case any part is lost in transit, at least the other one can reach.
When payment is made on one part, the whole bill gets satisfed.
Essentials of such bills are:
a. Each part must be numbered.
b. Each part must contain a reference to the others; otherwise each part will constitute a
separate bill.
c. Each part must provide that it shall be payable only as long as the other parts remain
unpaid.
Accommodation bill:
a. A bill which is drawn, accepted or endorsed without any consideration is called an
Accommodation bill. Such bills are not supported by genuine trade transactions and are
generally created to accommodate friends who are in immediate need of money.
b. The party who accommodates is termed as accommodating party and the party who is
accommodated is termed as accommodated party.
Ex: A was in need of ` 15,000. He approached his friend B for the purpose. But B was not in a
position to lend money. However, B suggested that A can draw a bill upon him which he will accept
and B being a person of good reputation, the bill can be discounted with Bs banker. Thus A will be
able to raise money. This is an accommodation bill where B is an accommodating party & A is an
accommodated party.
c. In general, accommodating parties are liable on the bill to the same extent as that of an
ordinary bill. However, they are not liable to the accommodated party - the person for whose
beneft they signed the instrument.
d. An accommodation bill may also be drawn for accommodation of both drawer and acceptor.
In such a case both the parties share the proceeds of the accepted bill.
E.g.: A and B, both were in the need of ` 15,000 each. B drew a bill of exchange for ` 31,000 On A
which he accepted. They got the bill discounted with the banker of A for ` 30,000 (banker charges some
money for discounting a bill of exchange) and divided the proceeds among themselves. On maturity of
the bill, A paid ` 31,000 to the banker, whereby B paid ` 15,500 to A for the money used by him.
It is to be noted that issue of such bills is not prohibited under the Negotiable Instruments
Act, but as per RBI instructions, Bankers are not permitted to discount such Accommodation
Bills. (Of course bogus invoices, bogus deliveries and bogus dispatches are made to get over
the restriction, but then technically and on the face of it, they will not be considered as
accommodation bills.
Bank draft: A bank draft is a bill of exchange drawn by one bank on another bank or on its
own branch, instructing the latter to pay a specifed sum of money to a specifed person or his
order. It is a negotiable instrument and is very much like cheque. It is also known as demand
draft.
BILL OF EXCHANGE VS. PROMISSORY NOTE.
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No. Diference Bill of Exchange Promissory Note
1.No.of Parties There will be 3 parties drawer,
drawee and payee.
There are two parties maker and
payee.
2.Promise/Order It contains an unconditional order
given by a creditor to a debtor.
It contains an unconditional promise
given by a debtor to a creditor.
3.Nature of liability The liability of the drawer is
secondary and conditional.
The liability of the maker is primary
and absolute.
4.Acceptance It requires acceptance to become a
valuable instrument.
It does not require any acceptance since
it is a valuable instrument right from
the beginning.
5.Same identity of
payor and Payee
The drawer and payee may be the
same person.
The maker and payee cannot be the
same person.
6.Payable to bearer It can be payable to bearer. It
cannot be drawn as payable to
bearer on demand.
It cannot be payable to bearer.
7.Protest for
dishonour
It requires protesting on
dishonour.
It does not require any protesting.
8.Notice of dishonourNotice of dishonour must be
given to all persons (including
drawer) liable to pay.
Such notice is not required to be given
to the maker.
CHEQUE
Cheques are the most common form of payment through banks.
Def: Sec.6 of the Act reads as A cheque is a bill of exchange drawn on a specifed banker
and not expressed to be payable otherwise than on demand.
Section 6 of the negotiable instruments Act, as amended by the negotiable instrument Act,
2002 (w.e.f. 6.2.2002) defnes a cheque as a bill of exchange drawn on a specifed banker and
not expressed to be payable otherwise than on demand. Further, the expression includes the
electronic image of a truncated cheque and cheque in the electronic form.
This defnition is very brief to give the full meaning of cheque, although it is clear that it is a
variant of bill of exchange, and to be valid it must be drawn on a banker. Taking the defnition of
a bill of exchange and a cheque together, the cheque in law is an unconditional written order to a
bank (signed by the drawer) to pay a named person (or bearer) a specifc sum of money on
demand.
Parties to a cheque:
a. Drawer: The person who issues a cheque.
b. Drawee: The banker on whom cheque is drawn. In case of cheque, drawee is always
banker.
c. Payee: The person to whom cheque is payable.
d. The person endorsing the cheque is endorser & the person to whom cheque is endorsed
is endorsee.
11
Essentials of a valid cheque:
1. It must have all the essentials of a bill of exchange: Since cheque is primarily a bill of
exchange drawn on a banker, it must fulfll all the essentials of a bill of exchange
discussed earlier. These may be summed up as follows:
a. It must be in writing.
b. It must contain an unconditional order to pay.
c. The order to pay must be in terms of money only.
d. The order to pay must mention a defnite sum of money.
e. The parties must be certain.
f. It must be signed by the drawer.
2. It must be drawn on a specifed banker: A cheque has to be drawn on a banker only. Thus
it can be treated as a bill of exchange where the drawee must be a banker.
3. It mush be payable on demand: A cheque should always be payable on demand i.e. it
should be payable whenever the holder chooses to present it to the drawee (the banker).
Note: These two additional features distinguish a cheque from bill. That is why it is often
said that all cheques are bills while all bills are not cheques.
Notes:
(a) A cheque in the electronic form means a cheque which contains the exact mirror image
of a paper cheque, and is generated, written and signed by a secure system ensuring the
minimum safety standards with the use of digital signature (with or without biometrics
signature) and asymmetric crypto system
(b) A truncated cheque means a cheque which is truncated during the clearing cycle, either
by the clearing house during the course of a clearing cycle, or by the bank whether paying or
receiving, immediately on generation of an electronic image for transmission, substituting
the further physical movement of the cheque in writing.
Explanation II: For the purposes of this section. Clearing house means the house managed
by the Reserve Bank of India or a Clearing house recognized as such by the RBI [Sec.6].
CROSSING OF CHEQUE - DIFFERENT TYPES OF CROSSING
A cheque is said to be crossed when 2 parallel transverse lines, with or without any words, are
drawn across the face of a cheque. They can be drawn anywhere on the face of the cheque but
usually they are drawn on the left hand top corner of the cheque. The purpose of crossing is to
give a direction to the banker not to pay the cheque across the counter but to pay it only to a
banker.
Meaning of Crossing: The Crossing of a cheque is an instance of an alteration which is
authorized by act. A cheque is said to be crossed when it bears across its face 2 parallel
transverse lines which are usually drawn on the left hand top corner of the cheque.
Purpose of Crossing: Purpose of crossing a cheque is to provide security to the system of
cheque payment. It is very easy to trace the payee if amount is deposited in his account
because a banker is expected to check details of person before opening an account. Provision
12
of crossing a cheque is only in respect of cheques and not in respect of Bills of exchange or
Promissory notes. Broadly, crossing can be categorised as follows:

General crossing:
a. General crossing with two parallel lines: This is made by drawing 2 parallel
transverse lines on the face of the cheque. The payee has to deposit it with his banker
in order to get payment thereon. He can also endorse it to any other person, who will
get better title than that of endorser.
b. General crossing containing words & co. within two parallel lines: This requires
writing of words & Co, between the two parallel lines. The
efect of this crossing is similar to that of crossing mentioned
above.
c. General crossing containing words not negotiable along
with two parallel lines: This requires writing of words not
negotiable in addition to the two parallel lines. These words
may be written inside or outside these lines. The only
diference is that the endorsee does not get a better title than that
of the endorser.
d. General crossing containing the words not negotiable & co.
within two parallel lines: This requires writing of words not
negotiable & co. between the two parallel lines. The efect of this
crossing is same as that of the not negotiable crossing.
Special crossing:
a. Special crossing containing the name of a banker: This requires
writing the name of banker across the face of the cheque. Drawing 2
parallel lines is not compulsory. The special efect of this crossing is
that cheque is payable through that banker only whose name appears
on the face of the cheque. For example, if the name of Canara Bank appears on the face of
the cheque, it can be deposited in the Canara bank only for the
purpose of collection.
b. Special crossing containing the words not negotiable in
addition to the name of banker: This requires writing
of the words not negotiable in addition to the name of the
collecting banker. The only diference from the above types of
crossing is that when a holder endorses this cheque, the
endorsee does not get a better title than that of transferor. A
special crossing makes the cheque safer than general crossing
because a wrongful holder has to deposit it into the account of a particular bank which is
comparatively difcult task.
13
As per Sec.127 - Where a cheque is crossed specially to more than one banker, the
banker on whom it is drawn shall refuse the payment thereon.
However, two crossings with the names of two branches of the same bank are allowed. For
example, if a cheque is double crossed with the names of two diferent banks, namely The
Bank of India, and Canara Bank, it is not payable. But if the two crossings are Canara
Bank, Gole Market branch, and Canara Bank, Karol Bagh branch, the cheque remains
valid instrument and the payment can be obtained by depositing it into any of the given
branches.
But a Banker in whose favour a crossing is made, can once again cross it in favour of his
agent for collection.
Not negotiable crossing: The word not negotiable has no statutory efect. They are used
along with general crossing or special crossing resulting into not negotiable crossing.
The efect of not negotiable is that it cant give to its transferee a better title than that of its
transferor. Even when the transferee of a not negotiable cheque is a holder in due course,
he cannot acquire any better title than its transferor.
Note: Generally it is misunderstood that not negotiable crossing makes a cheque non
transferable. It can very well be endorsed and transferred from person to person. If the
holder has a good title, he can still transfer the cheque with a good title. But if the transferor
has defective title, the transferee is efected by such defects.
Restrictive crossing: When the words A/C payee or A/C payee
only are added to a general or special crossing, it is called
restrictive crossing.
The efect of Account payee crossing is that the banker is supposed to collect the cheque on
behalf of that payee only whose name appears on the face of the cheque. If banker collects
this cheque for an endorsee (i.e. person other than named payee), he can be held responsible
in case that endorsee turns out to be a wrongful holder of cheque. Thus liability of a banker
enhances to a great extent.
It does not mean that the payee cannot transfer such cheque to anybody else. Legally a cheque
with Account payee crossing is negotiable like any other cheque but practically the banker
refuses to collect such cheques on behalf of any person other than
the named payee of the cheque.
An Account payee crossing can be combined with not
negotiable crossing resulting into a Not negotiable A/C
payee crossing. The A/C payee crossing is a
14
direction to the collecting banker to collect it for the payee only and a warning that if he
collects for somebody else, he may be liable for damages.
Opening or cancellation of a crossing:
Sometimes drawer crosses a cheque while payee may be interested in taking the payment
over the counter of the bank. The crossing can be uncrossed to make the cheque an open
cheque again. But it can be done by the drawer only. He may do so either before the
cheque is delivered to payee or at the request of the payee after delivery.
The cheque is said to be opened by writing please pay cash within the cross lines,
and adding to it the signature of the drawer. This practice received sanction from the
decision in the case of Smith v. Union Bank of London.
In the same way, drawer may also cancel crossing on the cheque. For example, he may
convert special crossing into general crossing or he may strike out the words not
negotiable from the face of the cheque.
Opening or cancellation of crossing by any person other than the drawer is considered as
a material alteration of the cheque and the instrument gets discharged.
WHO CAN CROSS A CHEQUE
Crossing by the drawer: Since drawer is the person who issues a cheque, it is his choice to
cross or not to cross the cheque. He may or may not cross the cheque.
Crossing by the holder: Sec.125 of the Act says that a holder can cross a cheque in the
following ways:
When a cheque is uncrossed, the holder may cross it generally or specially,
Where a cheque is crossed generally, the holder may cross it specially,
Where a cheque is crossed generally or specially, the holder may add the words not
negotiable.
Crossing by the banker: Where a cheque is crossed specially, the banker to whom it is
crossed may again cross it specially to another banker, his agent for collection. In addition to
it, like any other holder, he may cross it generally or specially to another banker, or to make it
non-negotiable. The above stated facts can be tabulated as follows:
Case Right to cross
Where a cheque is uncrossed.
Where a cheque is crossed generally.
Where a cheque is crossed generally or specially.
Where a cheque is crossed specially.
The holder may cross it generally or specially.
The holder may cross it specially by adding the
name of some banker.
The holder may add the word Not Negotiable.
The banker to whom it is crossed may again cross
it specially to another banker (his agent) for
collection.
15
BILL OF EXCHANGE VS. CHEQUE.
Sec.4 of the Act reads as A promissory note is an instrument in writing containing an
unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to
the order of a certain person, or to the bearer of the instrument. Thus a promissory note is a
written and signed promise to pay a certain sum of money to some person or to his order.
Sec.5 of the Negotiable Instruments Act reads as A bill of exchange is an instrument in writing
containing 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 or to the bearer of the instrument.
Following table highlights the fundamental diferences between cheque and bill of exchange:
Cheque Bill of Exchange
Cheque must be drawn on a specifed Banker. Bill of exchange may or may not be addressed to
banker. Drawee can be any person.
Cheque is required to be paid immediately. There
is no grace period.
If Bill of Exchange is not payable on demand, at
sight or on presentment; grace period of three
days is available.
Cheque can be crossed. There is no provision for crossing bill of exchange.
Presentment of cheque for acceptance is never
required.
Presentment for acceptance is compulsory.
Cheque is not required to be stamped. Bill of Exchange is required to be stamped.
In case of cheque, liability of drawer is primary.
Bank is not liable to holder of a cheque for
payment (Bank will pay only if there is balance in
the account of drawer and cheque is in order)
In Bill of Exchange, liability of acceptor is
primary.
There is no 'due date' for presentation of cheque.
If not presented within a reasonable period,
drawer is discharged only to the extent of damage
sufered by him.
Bill of Exchange is required to be presented by
holder for payment on due date. Otherwise,
parties other than those who are primarily liable,
get discharged.
Drawer can countermand cheque i.e. can issue
stop payment instructions after issue of cheque.
Maker of a Bill of exchange cannot countermand
the Bill.
Banker has to stop payment of cheque if drawer is
dead or insolvent or become insane and "Bank
has notice of the same.
There is no provision to stop payment if party to
instrument is dead or insolvent or becomes insane
after signature.
Notice of Dishonour is not required, unless holder
intends to take criminal action u/s 138.
Notice of dishonour is usually required.
Noting and protesting of Cheque is not required.Bill of exchange can be noted and protested.
Statutory protection is available to drawee-banker
in certain cases U/S 85 (cheque payable to order)
and section 128 (payment of crossed cheque in
due course). Protection is available to collecting
banker U/S 131 (if he receives payment in good
faith).
No statutory protection is available to drawee or
acceptor in Bill of Exchange for payment in due
course.
Criminal liability is provided if cheque isThere is no criminally liability for dishonour of
16
dishonoured. bill of exchange.
Q.NO.13. WRITE DOWN THE PROVISIONS RELATING TO MATURITY AND DAYS OF
GRACE FOR NEGOTIABLE INSTRUMENTS?
A promissory note or bill of exchange may be payable:
a. On demand or
b. On a specifed day or
c. After a specifed period.
In case 1 the amount is payable on demand and in case 2, 3 date of maturity has to be calculated.
Date of Maturity: Date of maturity of a promissory note or bill of exchange is the date on
which it falls due. Every instrument payable otherwise than on demand is entitled to 3
grace days. These grace days were originally allowed as a gratuitous favour to the debtor.
But now the custom of merchants has made it a legal right.
The instruments which are not entitled to days of grace are:
a cheque (as it is intended for immediate payment),
a bill or note payable at sight or on presentment or on demand and
a bill or note in which no time is mentioned.
The instruments which are entitled to days of grace are:
a bill or note payable on a specifed day,
a bill or note payable after sight,
a bill or note payable at a certain period after date, and
a bill or note payable at a certain period after the happening of a certain event.
All those instruments which are entitled to grace days must be presented for payment on the
last day of grace. Where an instrument is payable by installments, each installment is payable
3 days after the day fxed for the payment of each installment.
Rules for fnding out date of maturity:
a. If the instrument is payable after stated number of months after date or after sight or
after certain event, it becomes payable 3 days after the stated number of months.
E.g.: A bill of exchange, dated 30
th
August 1999, is made payable 3 months after date. The
instrument will mature on 3
rd
December 1999.
b. If the month in which the period would terminate has no corresponding day the period
is held to terminate on the last day of such month.
17
E.g.: A bill, dated 30
th
January, 1991, is made payable one month after date. The date of maturity
falls on 3
rd
March, 1991.
E.g.: An instrument dated January 30, 1999 is payable one month after date. It falls due on 3
rd
day after February 28, 1999 (the last day of month) i.e. on 3
rd
day of March 1999.
c. In the above cases, the day on which the instrument is drawn or presented for acceptance
or sight, or the day on which the event happens is to be excluded.
Ex: A bill payable thirty days after sight is presented for sight on 1
st
March, 1991. It falls due on
3
rd
April, 1991.
E.g.: A bill of exchange dated 1
st
November is made payable 15 days after date. The period of 15
days will be counted from 2
nd
November and the bill will be at maturity on 20
th
November.
d. If the maturity date is a public holiday, the instrument is deemed to be due on the next
preceding business day. The expression public holiday includes Sundays and any other
day declared by the Central Government, by notifcation in the ofcial gazette to be public
holiday.
E.g.: A bill, dated 11
th
January, 1991, is payable three months after date. It falls due on 14
th
April,
1991, which happens to be a Sunday. As such it will fall due on 13
th
April, 1991 i.e. the preceding
business day.
e. However, if the instrument matures on a day which is declared as an emergency holiday,
the instrument shall be deemed to be due on the next succeeding business day.
E.g.: An instrument matures for payment on 24
th
December. The Government declares the day as
holiday on account of the death of a political leader. The instrument shall fall due for payment on
26
th
December (25
th
December is Christmas day, being a public holiday)
Q.NO.14. WHO IS A HOLDER? STATE THE CONDITIONS TO BE SATISFIED TO BECOME A
HOLDER?
Holder of a negotiable instrument is the person who is capable of receiving the amount due
upon it.
Def: Sec.8 of the Act reads as - the holder of a promissory note, bill of exchange or cheque
means any person, entitled in his own name, to the possession thereof and to receive or
recover the amount due thereon from the parties thereto.
Thus a person is a holder when he satisfes two conditions:
1. He is entitled to possess the instrument in his own name. Such person may be-
a. Payee: The person to whose order the instrument is payable. If an instrument reads -
pay to the order of Ram, Ram is the holder when he is in possession of the
instrument.
b. Endorsee: The person to whom the instrument has been endorsed. In the above
example, if Ram endorses the instrument to Sachin, then Sachin will become holder
of the instrument.
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c. Bearer: If the instrument is payable to Bearer then bearer of the instrument becomes
holder.
d. The legal heir of a deceased holder (entitled by operation of law) is a holder although
he is not the payee or endorsee or bearer thereof.
Note: Sometimes, a negotiable instrument is lost or destroyed. In such cases, the holder is
the person who was entitled to the instrument, in his own name, at the time of such loss
or destruction.
2. He is entitled to receive or recover the amount due thereon: The holder must have the right
to receive or recover the amount of the instrument and give a valid discharge to the payer.
Status of holder: A holder has the legal power to transfer the instrument to another person,
to enforce the payment of the instrument, or to discharge the instrument, which means to
release the maker or drawer from obligation of paying the instrument.
Who is not a holder? Sometimes a person may be in possession of a negotiable instrument,
still the law does not consider him a holder. Such instances are given below:
a. A person who fnds or steals a bearer instrument or takes an instrument under forged
endorsement is not holder: The reason is that holder of a negotiable instrument must
have right to receive or recover the money thereon from the parties thereto.
b. A benefcial holder claiming through BENAMIDAR is not a holder:
E.g.: A advanced ` 500 to B, B executed a promissory note in the name of C, a benamidar, for
the repayment of the same. On maturity, B failed to pay the amount due on the promissory note.
A brought an action against B for its recovery. Court held that A could not recover the money
because he was not a holder of the instrument.
c. An agent holding an instrument for his principal is not a holder: The reason being that,
although agent can receive payment of the instrument, he has no right to sue on the
instrument in his own name.
d. A payee prohibited by an order of court from receiving the amount of the instrument is not a
holder:
Thus holder means the bearer of the bearer instrument and the endorsee or payee of the
order instrument. He must be the owner thereof at law. It may be noted that under English
law, actual possession of the instrument is essential to be a Holder but such physical
possession is not necessary under the Negotiable Instrument Act.
E.g.: X advanced ` 10,000 to Y who executed a promissory note in the name of Z a benamidar. On
maturity Y failed to pay the amount due and X brought an action against Y. It was held that X could
not recover the amount because he was not entitled to the promissory note in his own name. [Sarjoo
Prasad v. Ramayapathi Debi]
Note: Only a holder can bring a legal action to recover the amount due on the instrument.
19
Q.NO.15. WHO IS A HOLDER IN DUE COURSE? STATE THE PRIVILEGES AVAILABLE TO A
HOLDER IN DUE COURSE?
A holder in due course is a holder who satisfes certain conditions. They are:
Def: Sec.9 of the Act reads as - Holder in due course means any person who, for
consideration, became the possessor of a promissory note, bill of exchange or cheque, if
payable to the bearer, or the payee or endorsee thereof, if payable to the order, before the
amount mentioned in it became payable, and without having sufcient cause to believe that
any defect existed in the title of the person from whom he derived his title.
E.g.: A cheque sent by general postage was robbed by robber. The next day the same note was received by P.
He received it for full and valuable consideration and in the usual course of his business and without any
notice that the cheque was robbed. Court held him to be holder in due course.
Essentials to become holder in due course: The essential requirements for attaining the status
of a holder in due course are elaborated below:
a. He must be holder.
b. The holder must have paid valuable consideration: To become a holder in due course, a
person must obtain a negotiable instrument by paying valuable and lawful consideration
for it. One who takes an instrument without giving full value for it, for example, when
given as a gift or has been inherited, the transferee cannot be a holder in due course.
c. The holder must be possessor in case of bearer instrument: The word possessor here
means a person in actual possession of the instrument.
d. The holder must be payee or endorsee in case of order instrument: If a negotiable
instrument is payable to order, no person can become holder in due course of the same
unless he is a payee or endorsee of the same.
e. He must become holder before the amount of the instrument became payable: A
negotiable instrument becomes payable at the time of its maturity. A holder must acquire
the instrument before its maturity in order to attain the status of holder in due course.
Thus when a person becomes a holder of the instrument after it gets matured, he does
not acquire the status of a holder in due course.
f. The holder must have obtained the instrument without sufcient cause to believe that
any defect existed in the title of the person from whom he has derived his title: The law
requires a person to take due care and caution at the time of purchasing a negotiable
instrument. If a person has some suspicion about an instrument but has no actual
knowledge of irregularity, he must make an enquiry to confrm his suspicion. If he does
not enquire and accepts a bad instrument, he cannot be granted the status of a holder in
due course.
E.g.: A person purchases ` 5,000 bearer cheque issued by a big industrialist for ` 500 from a
stranger on street corner. He is not a holder in due course. The circumstances were suspicious to
call for enquiry.
20
g. The instrument must be complete and regular on the face of it. Here the term on the face
includes back also. It is the duty of the person acquiring the instrument to examine its form
and content thoroughly. If it contains any material defect, he will not become holder in due
course.
Privileges of being a holder in due course: The Negotiable Instruments Act presumes that
every holder is a holder in due course unless contrary is proved. It has given certain
privileges to a holder in due course. These special privileges are:
a. Better title than that of transferor: A holder in due course gets the negotiable
instrument free from all defects in the title of the transferor or any of the previous
holders of the instrument. The ordinary holder (not being a holder in due course) does
not get better title than that of transferor.
E.g.: X obtains an instrument payable to bearer by theft. He transfers the instrument to Y for
valuable consideration who buys it in good faith. Now Y has got a good title on the instrument,
being the holder in due course, and can recover the amount of the instrument from its maker or
drawer. The drawer can sue against X for theft but they cannot proceed against Y, the holder in
due course.
b. Instrument cured of all defects: When a negotiable instrument passes through the hands
of a holder in due course, it is cured of all defects.
E.g.: X obtained a bill by fraud from A, and endorsed it to Y, a holder in due course. Y endorsed
the bill to Z, an ordinary holder. Here Z can recover the amount of the bill from A.
Note: defect of title is diferent from absence of title. A holder in due course can purify
a defective title but cannot create a title. Thus a forged instrument which does not have
any title cannot have any validity, even if it passes through the hands of a holder in due
course.
c. Right to recover money covered by stamp in case of an inchoate instrument [Sec.20]: An
inchoate instrument is an incomplete instrument. When a person puts his signature on
a stamped paper and delivers it to the other without flling the amount on it, he gives
prima facie authority to the other person to fll the amount. If a person is an ordinary
holder, he cannot claim anything more than what the maker or drawer of the instrument
intended to pay. But a holder in due course can claim any amount covered by the stamp
on the instrument irrespective of the amount intended to be paid by the maker of the
instrument.
d. No efect of conditional delivery [Sec.46]: When a negotiable instrument is delivered to a
person on the condition that it will be efective on the happening of certain event, it
cannot be enforced until such event happens. But if such instrument is transferred to a
holder in due course, his rights are not afected by such condition. The parties to the
instrument cannot escape their liability, on the ground that delivery of the instrument
was conditional. Similar treatment for a negotiable instrument delivered for some special
purpose.
21
E.g.: X gives a promissory note to Y. It is agreed that the Y will demand the payment of the note
only at the time of the marriage of Ys son. Before the marriage of his son, Y indorses the note to Z,
a holder in due course. Z can recover the amount of note from X irrespective of the time of
marriage of Ys son.
e. Liability of prior parties [Sec.36]: Every prior party to a negotiable instrument (i.e. its
maker or drawer, acceptor, and intervening endorsers) is liable to a holder in due course
until the instrument is duly satisfed. These parties are liable jointly and severally on the
instrument. The holder in due course may enforce payment against any or all these
parties.
In the event of dishonour, the holder in due course is not bound to sue all the parties
liable to him under the instrument. He may, at his option, select the parties as per his
convenience, for recovery of money.
f. Estoppel against denying the original validity of the instrument [Sec.120]: The maker of
a promissory note and the drawer of a bill of exchange or cheque, and the acceptor of a
bill of exchange for honour are not permitted to deny the validity of the instrument as
originally made or drawn.
E.g.: A bought a car from B, and issued a promissory note worth ` 1,00,000 in consideration.
Later on he realised that B misrepresented the condition of the car. In the meantime the promissory
note reached the hands of a holder in due course who claimed payment upon it from A. Here A
cannot refuse payment to holder in due course.
g. Negotiable instrument made without consideration: A negotiable instrument made,
drawn, accepted, or transferred without consideration, creates no obligation of payment
between parties to the transaction. But if such instrument comes into the hands of a
holder in due course, he can recover the amount from any prior party.
h. Instrument obtained by unlawful means or for unlawful consideration [Sec.58]: When a
negotiable instrument has been lost or has been obtained from any maker, acceptor, or
holder thereof by means of an ofence or fraud, or for an unlawful consideration, it
cannot be enforced by an ordinary holder but once such instrument reaches a holder in
due course, it can be enforced by him or by any holder thereafter.
Q.NO.16. HOLDER VS. HOLDER IN DUE COURSE.
Diference Holder Holder in due course
Consideration.
Possession and maturity.
Instrument obtained by
unlawful means or
A holder need not necessarily become
a holder for consideration.
A holder may acquire the
instrument before or after its
maturity.
A holder cannot enforce such
A holder has to pay consideration
for becoming a holder in due
course.
To become a holder in due course,
an instrument has to be acquired
before its maturity.
A holder in due course can
22
consideration.
Instrument originally issued
to incompetent payee.
Instrument issued under
vitiated contract.
Instrument delivered
conditionally.
Fictitious Bill.
Inchoate instrument.
Title.
instrument.
A holder cant demand payment
against an instrument which has
been endorsed by a person
incompetent to contract.
If an instrument is issued under
circumstances which vitiate the
contract say under fraud or coercion
etc. it cant be enforced by a holder.
When an instrument is delivered with
the condition that it will be given afect
on the happening of a certain event or
for a specifc purpose, it cant be afected
by a holder before such event or
otherwise than the specifc purpose.
A holder cannot claim payment on
a fctitious bill.
When an inchoate instrument is
blank with respect of the amount, a
holder can fll and claim only that
much amount which the maker or
drawer intended to pay him.
A holder does not acquire a good
title to the instrument, if the tile of
any of the prior parties is defective.
enforce such instrument.
A holder in due course can
enforce such instrument.
A holder in due course can
enforce such instrument.
A holder in due course can
enforce such instrument
irrespective of the condition or
specifed purpose.
A holder in due course can claim
payment on a fctitious bill if he can
prove that the signature of drawer &
the frst endorsee are in same
handwriting.
A holder in due course can claim
any amount covered by the stamp
afxed on the instrument.
A holder in due course acquires a
good title to the instrument not
with standing any defect in the title
of any prior party.
Q.NO.17. DISCUSS THE CAPACITY OF PARTIES TO BE A PARTY OF NEGOTIABLE
INSTRUMENT?
a. Capacity: Capacity here means competence to enter into a legal contract.
b. Who can Bind and be bound [Sec.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,
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acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or
cheque.
c. Position of Minor [Sec.26]: A minor may draw, endorse, deliver and negotiate such
instrument so as to bind all parties, except himself. In order words, the instrument will
be valid and binding on all parties except minor.
Note: The estate of the minor is still liable for the debts arising out of the Necessaries
supplied to him.
d. Liability through an agent [Sec. 27]: Every person capable of binding himself or of being
bound, as mentioned in section 26, may bind himself or be bound by a duly authorised
agent acting on his behalf.
e. Agents General Authority does not include Authority to Accept or Endorse a Bill [Sec.27]:
General authority to enter into business transactions and to receive and discharge debts does
not give any power to accept or endorse bills of exchange so as to bind his principal.
f. Agents authority to draw a Bill does not include Authority to endorse [Sec.27]
g. Liability of an Agent [Sec.28] An agent who signs his name on a promissory note, bill of
exchange or cheque without indicating thereon that he signs as an agent, or that he does
not want to incur personal responsibility, is liable personally on the instrument.
Exception to the aforesaid rule: An agent is not personally liable to those who induced him
to sign upon the belief that the principal only will be liable.
Note: Mere signature of an agent in his own name with the word agent added does not
exempt him from personal liability [Liverpool Bank v. Walter]
Example of agents signature:
When a agent is personally liable When an agent is not personally liable
RAM
Partner
Ram & Co
For and on behalf of Ram & Co
Ram
Partner
Q.NO.18. WHAT IS MEANT BY PAYMENT IN DUE COURSE?
It is defned in section 10 of the NI Act, 1881.Payment in due course means payment in
accordance with the apparent tenor of the instrument, in good faith and without negligence
to any person in possession thereof under circumstances which do not aford a reasonable
ground for believing that he is not entitled to receive payment of the amount mentioned
therein.
Apparent tenor means the period of time, as expressed in the instrument, after which it is
payable. Further the circumstances should not create any doubt that the receiver is not
entitled to receive amount represented by the instrument. Analysis of section 10 reveals that
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the following conditions must be satisfed before payment of a negotiable instrument can be
called as a payment in due course.
1. Payment must be in accordance with the apparent tenor of the instrument. Thus, a
payment before maturity is not payment in due course.
2. Payment must be in good faith and without negligence.
3. Payment must be made to the person in possession of the instrument i.e. a person
entitled to receive payment. For example, A thief is not said to be in possession of the
instrument.
4. Payment must be made under circumstances which do not aford a reasonable ground
for belief that he is not entitled to receive payment of the amount mentioned therein.
5. Payment must be made in money only. Money includes bank notes or currency notes but
does not include cheque, bill of exchange, promissory note and goods.
Q.NO.19. STATE THE PROVISIONS RELATING TO LIBILITY OF INTEREST IN NEGOTIABLE
INSTRUMENTS.
Payment of Interest [Section 79 to 80]: The payment of interest shall be calculated as under:
Case Interest
1. When the rate of interest is specifed
[Section 79]
The interest shall be calculated at the rate
specifed on the amount due:
(i) from the date of instrument until tender
of realization of such amount, or
(ii) from the date of the instrument until such
date after the institution of suit to recover
such amount as the court directs.
2. When no rate of interest is specifed
[Section 80]
The interest shall be calculated at the rate of 18%
p.a. on the amount due from the date at which
the some ought to have been paid until tender or
realization of such amount or until such date as
the court directs.

Note: When the party charged is the endorser of an instrument, dishonoured by non-
payment, he is liable to pay interest only from the time that he receives notice of dishonour.
[Explanation to Section 80]
Q.NO.20. DISCUSS THE RULES REGARDING LIABILITY OF VARIOUS PARTIES TO A
NEGOTIABLE INSTRUMENT?
Liability of the drawer of the instrument [Sec.30]: The term drawer is used in the context of
a bill of exchange and cheque.
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a. Drawer of a bill of exchange; The drawer of a bill of exchange is bound to make payment
to the holder of the instrument, as per its apparent tenor, in case it gets dishonoured.
The liability of the drawer of a bill is secondary because the primary liability is that of
the acceptor. The drawer of the bill becomes liable to pay the amount only on default by
the acceptor. However, where a bill is dishonoured because of non-acceptance, the
liability of the drawer is primary.
Sec.30 of the Act provides that the notice of dishonour is absolutely necessary to make
the drawer liable. Omission to give notice would discharge the drawer from the liability
upon the instrument as well as from the original debt.
b. Drawer of a Cheque: The drawer of a cheque is bound to pay the holder in case it gets
dishonoured, provided the notice of dishonour had been given to him. The liability of the
drawer of a cheque is primary. The reason being that the holder of a cheque had no
remedy against the drawee i.e., the banker. His remedy is only against the drawer.
Liability of a banker as a drawee [Sec 31 & 77]: A cheque is a bill of exchange, drawn on a
specifed banker. Thus drawee of a cheque is always banker. The banker is required to make
payment on the cheque drawn upon it by its customer if it does not have sufcient cause to
reject the payment. If, however, banker wrongfully refuses to make payment on a customers
cheque, it is liable to compensate the drawer for any damage caused to him by such non-
payment [Sec.31].
Liability of maker of note and acceptor of bill [Sec 32]: The maker of a promissory note and
the acceptor of a bill of exchange are bound to pay the amount of the instrument (i.e., note or
bill) on its maturity, according to its tenure (i.e. terms of the instrument).
The liability of maker and acceptor is primary in nature. The maker becomes liable as soon
as he signs and delivers the note and an acceptor becomes liable as soon as he signs his
acceptance on the bill and delivers it.
In case the maker or acceptor defaults in making payment to the holder of the instrument, they are
liable to compensate the party to whom the loss is caused by the reason of dishonour of the
instrument.
Liability of endorser [Sec 35]: Where a negotiable instrument is dishonoured by maker,
drawee or acceptor thereof, any person who has indorsed this instrument (before maturity)
is liable to all the parties who are subsequent to him, provided due notice of dishonour had
been given to him. Thus endorser stands in the same position as the drawer to all the parties
subsequent to him.
Liability of prior parties [Sec 36]: Any person, who is a party to a negotiable instrument,
prior to the holder in due course, is liable to him until the amount due on the instrument is
paid. Prior parties may include maker or drawer, the acceptor, and all the intervening
endorsers to a negotiable instrument.
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The liability of the prior parties to a holder in due course is joint and several. The holder in
due course may hold all or any party liable to pay the amount on the instrument.
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