Negotiable Instrument Act, 1881

 Definition and characteristic of Negotiable Instruments,

 Types of Negotiable Instruments,
 Definition and Essentials of Promissory Note, Bill of Exchange and Cheque,
 Liabilities and Capacity of Parties of Negotiable Instrument,
 Holder and Holder in due course, Transfer and Negotiation of Negotiable Instrument.
 Cheques -Crossing of Cheques and payment, Dishonour of Cheques,
 Presentment and Payment, Dishonour,
 Noting and Protest of Negotiable Instrument,
 Endorsement: Definition, Essential of a valid endorsement and its kinds,
 Rules of evidence and compensation.

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Negotiable Instrument

MEANING OF NEGOTIABLE INSTRUMENTS

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer, whether the word “order” or “ bearer” appear
on the instrument or not.”

In the words of Justice, Willis, “A negotiable instrument is one, the property in which is acquired by
anyone who takes it bonafide and for value notwithstanding any defects of the title in the person from
whom he took it”.

Thus, the term, negotiable instrument means a written document which creates a right in favour of
some person and which is freely transferable. Although the Act mentions only these three instruments
(such as a promissory note, a bill of exchange and cheque), it does not exclude the possibility of
adding any other instrument which satisfies the

Following two conditions of negotiability:

1. The instrument should be freely transferable (by delivery or by endorsement. and delivery) by the
custom of the trade; and

2. The person who obtains it in good faith and for value should get it free from all defects, and be
entitled to recover the money of the instrument in his own name.

As such, documents like share warrants payable to bearer, debentures payable to bearer and dividend
warrants are negotiable instruments. But the money orders and postal orders, deposit receipts, share
certificates, bill of lading, dock warrant, etc. are not negotiable instruments. Although they are
transferable by delivery and endorsements, yet they are not able to give better title to the bonafide
transferee for value than what the transferor has.

An instrument must have the following characteristics:

1. The instrument must be in writing which includes typing, printing and engraving.
2. The drawer or the maker must sign the instrument.
3. If the instrument is a promissory note, it must contain an unconditional promise to pay, if it is a
bill of Exchange or cheque, it must contain an unconditional order to pay. In case of the order or
promise to pay being conditional, the instrument will lose its characteristic of negotiability.
4. In order to be negotiable the order or promise must call for payment in money, otherwise the
instrument will not be negotiable. The promise or order must be for payment of a certain amount of
money.

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5. The instrument should be made payable either on demand, or at a fixed time or at a determinable
future time.
6. The instrument in order to be negotiable must be made payable to order or bearer. If it has been
made payable to a particular person only e.g. pay to X, it will not be negotiable.
7. In case of a bill of exchange or cheque the name of the drawee (party liable for payment) must be
given.

Features of Negotiable Instruments

The various types of negotiable instruments let us sum up their features as under

i.A negotiable instrument is freely transferable. Usually, when we transfer any property to
somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc.
But, such formalities are not required while transferring a negotiable instrument. The ownership is
changed by mere delivery (when payable to the bearer) or by valid endorsement and delivery (when
payable to order). Further, while transferring it is also not required to give a notice to the previous
holder.

ii. Negotiability confers absolute and good title on the transferee. It means that a person who
receives a negotiable instrument has a clear and undisputable title to the instrument. However,
the title of the receiver will be absolute, only if he has got the instrument in good faith and for
a consideration. Also the receiver should have no knowledge of the previous holder having
any defect in his title. Such a person is known as holder in due course. For example, suppose Rajiv
issued a bearer cheque payable to Sanjay. It was stolen from Sanjay by a person, who passed it on to
Girish. If Girish received it in good faith and for value and without knowledge of cheque having been
stolen, he will be entitled to receive the amount of the cheque. Here Girish will be regarded as ‘holder
in due course’.

iii. A negotiable instrument must be in writing. This includes handwriting, typing, and computer
print out and engraving, etc.

iv. In every negotiable instrument there must be an unconditional order or promise for payment.

v. The instrument must involve payment of a certain sum of money only and nothing else. For
example, one cannot make a promissory note on assets, securities, or goods.

vi. The time of payment must be certain. It means that the instrument must be payable at a time
which is certain to arrive. If the time is mentioned as ‘when convenient’ it is not a negotiable
instrument. However, if the time of payment is linked to the death of a person, it is nevertheless
a negotiable instrument as death is certain, though the time thereof is not.

vii. The payee must be a certain person. It means that the person in whose favour the instrument
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is made must be named or described with reasonable certainty. The term ‘person’ includes
individual, body corporate, trade unions, even secretary, director or chairman of an institution.
The payee can also be more than one person.

viii. A negotiable instrument must bear the signature of its maker. Without the signature of the
drawer or the maker, the instrument shall not be a valid one.

ix. Delivery of the instrument is essential. Any negotiable instrument like a cheque or a
promissory note is not complete till it is delivered to its payee. For example, you may issue
a cheque in your brother’s name but it is not a negotiable instrument till it is given to your
brother.

x. Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per
the Indian Stamp Act, 1899. The value of stamp depends upon the value of the pronote or
bill and the time of their payment.

In order to facilitate the free passing of the instrument from one person to another, S. 118 of the
Act provides for the following presumptions, in case of an instrument, unless proved otherwise.
1. That every instrument was made, drawn, accepted, or endorsed for consideration.
2. That it bears the date on which it was drawn.
3. That all transfers of the instrument were made before maturity.
4. That the endorsement on the instrument were made in the same order in which they appear on the
instrument.
5. That a lost or destroyed instrument was stamped and the stamp was duly cancelled.
6. That every accepted bills was accepted within a reasonable time after its date and prior to maturity.
7. The every holder of an instrument is a holder in due course.
The negotiable instruments can be of three types, namely Promissory Note, Bill of Exchange, and
Cheque.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

A negotiable instrument has the following characteristics:

1. Property: The possessor of the negotiable instrument is presumed to be the owner of the property
contained therein. A negotiable instrument does not merely give possession of the instrument but
right to property also. The property in a negotiable instrument can be transferred without any
formality. In the case of bearer instrument, the property passes by mere delivery to the transferee. In
the case of an order instrument, endorsement and delivery are required for the transfer of property.

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2. Title: The transferee of a negotiable instrument is known as ‘holder in due course.’ A bona fide
transferee for value is not affected by any defect of title on the part of the transferor or of any of the
previous holders of the instrument.

3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonour.
A negotiable instrument can be transferred any number of times till it is at maturity. The holder of the
instrument need not give notice of transfer to the party liable on the instrument to pay.

4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption that
consideration has been paid under it. It is not necessary to write in a promissory note the words ‘for
value received’ or similar expressions because the payment of consideration is presumed. The words
are usually included to create additional evidence of consideration.

5. Prompt payment: A negotiable instrument enables the holder to expect prompt payment because
dishonour means the ruin of the credit of all persons who are parties to the instrument.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the
court presumes in regard to negotiable instruments. In other words these presumptions need not be
proved as they are presumed to exist in every negotiable instrument. Until the contrary is proved the
following presumptions shall be made in case of all negotiable instruments:

1. Consideration: It shall be presumed that every negotiable instrument was made drawn, accepted
or endorsed for consideration. It is presumed that, consideration is present in every negotiable
instrument until the contrary is presumed. The presumption of consideration, however may be
rebutted by proof that the instrument had been obtained from, its lawful owner by means of fraud or
undue influence.

2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or drawn
on such date, unless the contrary is proved.

3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is presumed to
have been accepted within a reasonable time after its issue and before its maturity. This presumption
only applies when the acceptance is not dated; if the acceptance bears a date, it will prima facie be
taken as evidence of the date on which it was made.

4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of a
negotiable instrument was made before its maturity.

5. Order of endorsement: Until the contrary is proved it shall be presumed that the endorsements
appearing upon a negotiable instrument were made in the order in which they appear thereon.

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6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of
exchange or cheque was duly stamped.

7. Holder in due course: Until the contrary is proved, it shall be presumed that the holder of a
negotiable instrument is the holder in due course. Every holder of a negotiable instrument is
presumed to have paid consideration for it and to have taken it in good faith. But if the instrument
was obtained from its lawful owner by means of an offence or fraud, the holder has to prove that he is
a holder in due course.

8. Proof of protest: Section 119 lays down that in a suit upon an instrument which has been
dishonored, the court shall on proof of the protest, presume the fact of dishonour, unless and until
such fact is disproved.

Promissory Notes

Section 4 of the Act defines a promissory note as 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 in the instrument.

Example: X signs an instrument in the following manner:

(a) I promise to pay P or order Rs. 500/-

(b) Mr. P, I acknowledge the debt of Rs. 500/- given by you to me.

(c) I promise to pay P Rs. 500/- whenever I will have sufficient amount of money.

(d) Mr. P.I.O.U. Rs. 500/- and promise to pay the same for value received.

The instrument, marker (a) and (d) are promissory notes. Instrument market (b) is a mere
acknowledgement of debt and contains no promise to pay, thus not a negotiable instrument. In case of
instrument marker (c) time of payment has not been specified with certainty thus it cannot be a valid
promissory note.

Thus we can say that a promissory note or Pro Note as it is popularly called is a document under
which a person makes an unconditional promise to pay a certainity sum of money to another person
or to his order or to the bearer of the instrument.

Specimen of a Promissory Note

Rs. 10,000/- New Delhi September 25, 2002

On demand, I promise to pay Ramesh, s/o RamLal of Meerut or order a sum of Rs 10,000/- (Rupees
Ten Thousand only), for value received.
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To , Ramesh Sd/ Sanjeev Address…….. Stamp

Parties to a Promissory Note -There are primarily two parties involved in a promissory note. They
are-

i. The Maker or Drawer – the person who makes the note and promises to pay the amount stated
therein. In the above specimen, Sanjeev is the maker or drawer.

ii. The Payee – the person to whom the amount is payable. In the above specimen it is Ramesh. In
course of transfer of a promissory note by payee and others, the parties involved may be –

a. The Endorser – the person who endorses the note in favour of another person. In the above
specimen if Ramesh endorses it in favour of Ranjan and Ranjan also endorses it in favour of Puneet,
then Ramesh and Ranjan both are endorsers.

b. The Endorsee – the person in whose favour the note is negotiated by endorsement. In the above, it
is Ranjan and then Puneet.

Essentials of a Valid Promissory Note

1. It must always, be in writing which includes typing, printing engraving also.

2. It must contain a promise to pay.

The use of the word promise is not necessary. Where intention to pay can be gathered either by
express words or by necessary implication the instrument will amount to a promissory note.

A mere acknowledgement of debt does not constitute a Promissory Note, but acknowledgement
coupled with promise to pay will be a promissory note e.g. I.O.U. Rs. 1000, will not be a promissory
note, but I.O.U. Rs. 1000, and promise to pay this amount on demand will constitute a promissory
note.

The undertaking to pay must be an express one, implied undertaking would not suffice (Mohomed
Akbar Khan v. Attar Singh).

A mere acknowledgement of debt, although will not be a promissory note, but it will be valid as an
agreement and can be sued upon as such.

3. The promise to pay must always be unconditional. In case of any condition being attached
regarding ability to pay, or the payment being conditional upon the happening or the non- happening
of some uncertain event, the instrument will not be negotiable, e.g. ‘I promise to pay Rs. 1000, one

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month after my marriage with X’ or ‘I promise to pay Rs. 500, whenever I have enough money’ are
conditional instruments thus not negotiable.

4. It must be signed by the maker in case the maker cannot write, he can mark it, but his mind must
accompany the signature. In case the hand and the mind are not in tune with each other, the
instrument will not be considered to be signed at all. (Foster v. Nackman).

5. The maker or the person signing the note must be a certain person. In case an instrument is signed
by two or more persons, they will be jointly or jointly and severally liable to pay.

6. The promise must be to pay a certain sum of money e.g. I promise to pay whatever sum I.O.U. or I
promise to pay between Rs. 400 to Rs. 600, will not be valid-notes within the meaning of S.4,
because of uncertainty, regarding sum of money to be paid.

In case the words and figures are indicating different amounts, the sum expressed in words, will be
considered to be correct.

7. It must be a promise to pay money only and not anything else. e.g. ‘I promise to give you two
cows in lieu of the loan of Rs. 1000/- given by you to me’ will not be a valid note.

8. The note must be made payable to a certain person or a person who is capable of being ascertained
e.g. a note payable to the manager of a particular bank is valid, as by description he is capable of
being ascertained (Mahant Damodar Dass v. Banaras Bank Ltd.)

The presence of consideration need not necessarily be mentioned in the instrument for its validity as
it is presumed in case of every note as per the provisions of Sec. 118, but it is usual to mention in a
note, that it is for value received. Although S. 4 of the Act permits a note being made payable to the
bearer, as S. 31(2) of the Reserve Bank of India Act, 1934 no person can issue a pronote payable on
demand to the bearer.

As per article 49 of the Indian Stamp Act, Stamp duty of an amount, depending upon the value of
the note, and whether it is payable to demand or at some future date, must be affixed on the note at or
before the time of its execution.

An unstamped pronote is not admissible as evidence and no suit can be brought on it.

Specimen of Promissory Note

Delhi 1 March, 1977.

Rs. 2000/-
I promise to pay Rs. Two thousand to Ram or order on demand.
Stamp/Shyam

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 Delhi, 1 January, 1978.
Rs. 5000/-
Three months after date I promise to pay Kishan or order Rs. Five thousand with 6% interest per
annum for value received.
Stamp. Sd/- NKA.

Bills of Exchange (BOE)

Specimen of a Bills of exchange

A written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum,
either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or services
received. The drawee accepts the bill by signing it, thus converting it into a post-dated check and a
binding contract.
A bill of exchange is also called a draft but, while all drafts are negotiable instruments, only "to
order" bills of exchange can be negotiated. According to the 1930 Convention Providing a Uniform
Law for Bills of Exchange and Promissory Notes held in Geneva (also called Geneva Convention) a
bill of exchange contains:
(1) The term bill of exchange inserted in the body of the instrument and expressed in the language
employed in drawing up the instrument.
(2) An unconditional order to pay a determinate sum of money.
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(3) The name of the person who is to pay (drawee).
(4) A statement of the time of payment.
(5) A statement of the place where payment is to be made.
(6) The name of the person to whom or to whose order payment is to be made.
(7) A statement of the date and of the place where the bill is issued.
(8) The signature of the person who issues the bill (drawer).

A bill of exchange is the most often used form of payment in local and international trade, and has a
long history- as long as that of writing.

A bill of exchange, according to Section 5 of NI Act, is an instrument that is:

1. in writing;
2. containing an unconditional order;
3. ordering a certain person called drawee;
4. to pay certain money only;
5. ordering payment to certain person or to the order of certain person or to the bearer of the
instrument.

A bill of exchange has three parties:

1. the drawer or maker,
2. the drawee, and
3. the payee.

The drawer gives an unconditional order, directing a certain person obviously other than himself – the
drawee – to pay a certain sum. The drawee becomes liable upon his accepting the bill. If the drawee
refuses to accept the bill, the holder of the bill can proceed against the drawer as a surety.

Different Types of Bills

Inland Bill: Drawn in India on a person residing in India whether payable in or outside India.

Example:
· Bill is drawn by a merchant in Delhi on a merchant in Kolkata. It is payable in Mumbai.
· Bill is drawn by a merchant in Kolkata on a merchant residing in Delhi. It is accepted
for payment in Japan.
· Bill is drawn in India on a person residing outside India payable in India.
· Bill is drawn by a merchant in Delhi on a person in London but is made payable in India.

Foreign Bill: A bill that is not an inland bill is a foreign bill.

A bill which is not an inland bill is a foreign bill. The following are the foreign bills:
1. A bill drawn outside India and made payable in India.
2. A bill drawn outside India on any person residing outside India.

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3. A bill drawn in India on a person residing outside India and made payable outside India.
4. A bill drawn outside India on a person residing in India.
5. A bill drawn outside India and made payable outside India.

Demand Bill: Payable ‘on demand’, ‘at sight’, ‘on presentment’, or ‘when no time for payment is
specified in bill’. Technically, a demand bill need not be presented for payment but banks usually
present them for payment as a matter of practice.

Usance Bill: Contains an expression making it payable on the expiration of a certain period ‘after
date’ or ‘after sight’. Here the word ‘date’ in the ‘after date’ refers to the date of the bill. ‘After sight’
means ‘after acceptance’, ‘noting for non-acceptance’, or ‘protest for non-acceptance’. ‘After sight’
or ‘on presentment’ bills must be presented before payment can be demanded.

Trade Bill: Drawn and accepted for a genuine trade transaction.

Accommodation Bill: Drawn and accepted, but not backed by genuine trade transactions. A bill
drawn and accepted not for a genuine trade transaction but only to provide financial help to some
party is termed as an “accommodation bill”.
Example: A, is need of money for three months. He induces his friend B to accept a bill of exchange
drawn on him for Rs. 1,000 for three months. The bill is drawn and accepted. The bill is an
“accommodation bill”. A may get the bill discounted from his bankers immediately, paying
a small sum as discount. Thus, he can use the funds for three months and then just before maturity he
may remit the money to B, who will meet the bill on maturity.
In the above example A is the “accommodated party” while B is the “accommodating party”.
It is to be noted that an recommendation bill may be for accommodation of both the drawer arid
acceptor. In such a case, they share the proceeds of the discounted bill.

Rules regarding accommodation bills are:

(i) In case the party accommodated continues to hold the bill till maturity, the accommodating party
shall not be liable to him for payment of, the bill since the contract between them is not based on any
consideration (Section 43).
(ii) But the accommodating party shall be liable to any subsequent holder for value who may be
knowing the exact position that the bill is an accommodation bill and that the full consideration has
not been received by the acceptor. The accommodating party can, in turn, claim compensation from
the accommodated party for the amount it has been asked to pay the holder for value.
(iii) An accommodation bill may be negotiated after maturity. The holder or such a bill after maturity
is in the same position as a holder before maturity, provided he takes it in good faith
and for value (Sec. 59)
In form and all other respects an accommodation bill is quite similar to an ordinary bill of exchange.
There is nothing on the face of the accommodation bill to distinguish it from an ordinary trade bill.

Documentary Bill: A bill to which documents relating to goods are attached.

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Hundi: It is a bill of exchange written in Hindustani languages. Incidentally, all the provisions
applicable to the Negotiable Instruments Act apply to hundis, unless there is a local usage to the
contrary. The difference between a bill of exchange and hundi is that a bill of exchange may include a
hundi, but a hundi does not include a bill of exchange. Hundis are not accompanied by documents of
title.

Bank Draft
A demand draft is a bill of exchange drawn by a bank on another bank, or by itself on its own
branch, and is a negotiable instrument. It is like a cheque but differs in certain respects. First, it can be
drawn only by a bank on another bank and not by a private individual as in the case of cheques. As
against a cheque, it cannot be countermanded easily either by its purchaser or by the bank to which it
is presented. Finally, it cannot be made payable to bearer. These days it is a popular mode of making
payments. Banks charge a nominal amount of commission for this service.

Parties to Bill of Exchange (Sec. 7 of NI Act, 1881)

The following are the parties to a bill of exchange:

· Drawer: The maker of the bill of exchange

· Drawee: The person on whom the bill is drawn

· Acceptor: The person who accepts the bill, usually drawee but sometimes a stranger may
accept on behalf of the drawee

· Payee: The person to whom the sum stated is payable. It could be the drawer or any other
person

· Holder: Either the original payee or any other person to whom the payee has endorsed the bill.
In case of a bearer bill, the bearer is the holder

· Endorser: The holder, who endorses the bill to anyone else

· Endorsee: The person to whom the bill is endorsed

· Drawer in case of need: The person who may be resorted to in case of need

· Acceptor for Honour: A person who, on refusal by the original drawee to accept or to furnish
better security when demanded by the Notary, accepts the bill in order to safeguard the honour
of the drawer or any endorser.

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Common Rules regarding Bills of Exchange (Sections 132 and 133)

1. The bill of exchange is drawn in sets or parts; all the parts put together make a set and the
whole set constitutes only one bill.
2. The payment made on one part extinguishes the whole bill.
3. Each part of the bill in a set shall be numbered and contains a provision that it shall continue
to be payable only so long as the other parts remain unpaid.
4. The drawer has to sign each part of the bill and deliver all the parts.
5. Only one part needs to be stamped. Similarly, one part only needs to be accepted.
6. In case a person accepts or endorses different parts of the bill in favour of different persons, he
and the subsequent endorsers of each part are liable for such parts as if it were a separate bill.

Bill in sets: Foreign bills are generally drawn in set of 3 each and each set is called vice. In order to
avoid miscarriage during transit, they are drawn in different parts and each part is transmitted
separately. All these parts, as a whole constitute a complete bill.

The drawer must sign and deliver all of them to the payee. Stamp is affixed only on one part and only
on one part is to be accepted out of the whole set once the payment of the accepted parts has been
made, other remaining parts will become redundant.

As per S. 133 if different parts, of a bill are separately accepted and indorsed by a person to different
parties then he and the subsequent indorses will be liable on each one of them as separate bill, to the
holders.

As per S. 133 as between the holders in due course of the different parts, the holder who acquired
little to a part first of all will be entitled to receive other parts as well as payment on maturity.

Duplicate Bill: In case a bill of exchange has been lost the holder can ask for a duplicate bill by
furnishing security to the drawer to indemnity him against loss in case the lost bill is found again
(S.45A). In case of refusal by the drawer, he can compel him by legal action.

This right to ask for a duplicate is available in case of a holder of a note as well as a cheque also,
duplicate bill can be asked even where a bills has been destroyed and destruction is proved, however
here no indemnity is required.
Rights to Duplicate Bill
Where the bill is not overdue but has been lost, the person who was holder of it may apply to the
drawer, to give him another bill of the same tenor, giving security to the drawer if required, to
indemnify him against all persons whatever in case the bill alleged to have been lost shall be found
again. If the drawer refuses to give such duplicate bill may be compelled to do so by means of a suit.
Holder is the person who can ask for a duplicate.

Acceptance

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Acceptance of a bill is an indication by the drawee of his assent to pay to the order of the drawer. Oral
acceptance is not considered an acceptance.

The Essentials of Acceptance

Acceptance must be written across the face or on the back of the bill and signed by the drawee. The
process of acceptance is completed only when the accepted bill is delivered to the holder.

Who can accept (Section 33)

Any of the following can accept a bill:

· The drawee of a bill
· All or some of the several drawees, if the bill is addressed to more than one drawee
· A person named in the bill as drawee in case of need
· An acceptor for honour
· An agent of the persons listed above.

Presentment

Presentment refers to the showing of an instrument to the drawee, acceptor, or maker for acceptance,
sight, or payment.

Presentment of Bill of Exchange for Acceptance (Section 61)

Presentment for acceptance is necessary in the following types of bills:

· A bill of exchange payable after sight
· A bill where there is an explicit stipulation that it shall be presented for acceptance.

Bill of Exchange – Implications for Banks

A drawee may be permitted two full working days for acceptance of the bill. Bills should be
presented at the drawee’s address during business hours on working days.

While advancing funds against bills, the banks should bear in mind the rules governing presentment,
calculation of due dates/grace period, and stamping requirements under the provisions of the Stamp
Act.

Every bill of exchange, which is not expressed to be payable on demand, at sight, or on presentation,
is at maturity on the third day on which it is expressed to be payable. However, grace period need not
be given if the drawer and the drawee so agree, but it should be indicated in the Bill.

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The rules for calculation of due dates are:
A usance bill is payable at maturity. As per Section 22 of the Negotiable Instruments Act, a usance
bill is at maturity on the third day on which it is expressed to be payable.

Sections 23 to 25 of the Negotiable Instruments Act provides the rules to calculate the ‘due date’ of
a usance bill. It must be remembered that these rules must be meticulously observed. Or else, in case
of dishonour of the bill, the banks may face problems due to legal disabilities.

There are two types of usance bills:

1. Bills which are payable a certain number of months after date or sight. In this type, the period of
usance will terminate on the corresponding day of the month, and if the month does not have the
corresponding day, on the last day of the month. The grace period will be calculated thereafter.

Example 1: Presume a bill dated 20th March, 2016, payable two months after date. Therefore, the
usance period will terminate on 20th May, 2016. Adding grace period, the bill becomes due for
payment on 23rd May, 1999.

Example 2: Presume a bill dated 31st March,2017, payable one month after date. Therefore, the
usance period expires on 30th April, 2017. Adding grace period, its due date will be 3rd May, 1999.

Example 3: Presume a bill dated 20th September,2016, payable two months after sight. The said bill
is accepted on say 10th October, 2016. The usance will terminate on 10th December, 2016. Adding
grace period, the due date will be 13th December, 1999.

2. Bills which are payable a certain number of days after date or sight. In this type, the usance
period will be calculated according to the actual number of days stated in the bill by excluding the
date of the bill or the date of presentment (sight), as the case may be.
Example 1: Presume a bill is dated 10th June, 2016 payable 30 days ‘after date’. Therefore, the
usance terminates on 10th July, 2016. Adding grace period of three days, it will fall due on the 3rd
day after 10th July, 1999 i.e., 13th July, 2016.

In the case of any type of usance bill, if the due date calculated as above falls on a public holiday, the
bill will be deemed to fall due on the previous working day.

Banks have to meticulously observe these regulations, particularly, in cases where such bills have
been discounted/ purchased.

Presentment: By Whom and To Whom

A bill must be presented by a holder or his authorized agent. And it must be presented to:
· The drawee;
· His authorized agent;

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· His legal representative, if the drawee is dead;
· His official receiver or assignee, if he has been adjudged an insolvent; and
· All the drawees, if there are several drawees.

Drawee’s Time for Deliberation (Section 63)

The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance,
allow the drawee 48 hours exclusive of public holidays to consider whether he will accept it.

Consequences of Non-presentment

No party to the bill will be liable to the holder, if default is made in presentment.

Presentment for Payment

Practically necessary for every instrument, since no holder may proceed against an acceptor in a court
of law, unless he has demanded payment of the bill and the same has been refused. Secondly, in order
to charge the other party to a bill in the event of its non-payment, presentment for payment of the bill
and notice of dishonour to the parties concerned are necessary.
Presentment for Payment should be made to the acceptor himself or to his authorized agent. It should
be made during business hours on a working day.

Noting
It means recording of the fact of dishonour by a Notary Public on the bill, or paper, or on both. Such
noting must be made within a reasonable time after dishonour and must specify the date of dishonour,
the reason, if any, assigned for such dishonour, and the notary’s charges. It is, in fact, an
authentication by the Notary Public that the bill has, in fact, been dishonored.

Omission to get the instrument noted does not in any way affect the rights of the holder thereon.

Protest

When a bill of exchange has been dishonored by non-acceptance or non-payment, the holder may,
within a reasonable time, cause such dishonour to be noted and certified by a +. Such a certificate
issued by the Notary is called the Protest (Section 100).

When a bill of exchange is required by law to be protested, notice of such protest must be given
instead of notice of dishonour, preferably by the Notary Public, who makes the protest.

Foreign bills of exchange must be protested for dishonour, when such protest is required by the law
of the place where they are drawn (Section 104).

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Contents of Protest
The contents of the protest include:
· The instrument itself
· The name of the person for whom and against whom the instrument has been protested
· The fact and the reason for dishonour
· The place and time of dishonour
· The signature of the Notary Public.

Advantages of Protest
· Protest provides an authentic evidence of dishonour to the drawer or endorsers
· The same is also upheld in courts unless and until such fact is disproved.

Bank’s Lending against Bills – Precautions

Banks do purchase/discount bills, i.e., they lend money against bills. In such cases, it becomes
essential to comply with the provisions under the Negotiable Instruments Act for protecting their
interests.

 Whenever a demand bill is returned unpaid, the banks must immediately recover the amount
from the drawer with overdue interest.

 Whenever a usance bill is dishonored by non-acceptance/nonpayment, the discounting bank

must send notice of dishonor within a reasonable time to all other liable parties.

 The drawer’s liability arises only when there is dishonour either by non-acceptance or non-
payment and the banker has taken the necessary steps to obtain acceptance/payment.
Therefore, the instructions given by the drawer regarding the procedure to be followed upon
non-acceptance/non-payment must be scrupulously implemented.

 Wherever there is a ‘drawee in case of need’ to a bill, it should be presented to him for
acceptance/payment if the drawee has dishonored the bill. A bill cannot be said to be
dishonored till the drawee in case of need (of course, wherever available) also dishonors’ it.

 A dishonoured bill may have to be noted or protested for non-acceptance or non-payment

unless there are contra instructions by the drawer. Notice of noting or protest has also to be
sent to all the parties to the bill (Sections 99-104).

 Once a bill is dishonoured the bank must initiate prompt action to recover the funds from the
drawer or by disposing of the goods under the bill/documents and appropriate the proceeds.

Advantages of Bills:
The following are the advantages of bills:
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(i) Presumption of consideration:
In a bill, consideration is presumed. In other words the Court presumes that the acceptor of the bills
of exchange or maker of the promissory note is indebted to the drawer of the bill or payee of the
promissory note. It is a big advantage. In the absence of the bill, the seller of goods and services or
the lender of the money has to prove the indebtedness of the purchaser or borrower in case of a
default.

(ii) No locking of money:

A bill provides the payee an option either to wait for money till the date of maturity of the bill or to
get cash at any time by getting the bill discounted with the bank at a reasonable rate of interest. The
bill can also be used to discharge the liability to a creditor by endorsing the bill in the creditor’s
favour. Thus, the seller need not keep the money locked up for the period of credit allowed by him to
the customer.

(iii) Source of finance:

Accommodation bills enable the businessmen to obtain funds at a low rate of interest to meet their
temporary financial requirements.

(iv) Safe and convenient means of transmitting money:

Bill is a safe and convenient means of transmitting money by one person to the other; one can avoid
the risk of carrying currency by using a bill.

(v) Planning by creditors:

A bill fixes the exact date of payment. The creditor knows when he is required to make payment and
can make arrangements accordingly.

Negotiability:
Promissory notes, bills of exchange and cheques are negotiable instruments. This means that the
holder can claim payment on them.

However, this is subject to the conditions that the holder takes them:
(1) Without notice of defect in the title of the transferor, i.e., in good faith
(2) For consideration
(3) Before maturity. If these conditions are fulfilled, it does not matter if the title of the transferor was
defective.
Thus, if A steals a bill of exchange and passes it on to B who is not aware of A s mode of acquiring
the bill and who takes it for value and before the due date of the bill, B will be entitled to get payment
on the bill. Here B is a holder in due course. A holder in due course always gets good title except in
case of forgery. Moreover, whoever gets the bill (or promissory note) after the holder in due course,
will also get a good title to it; it has been purged of all defects
The instrument is passed on from one person to another by endorsement and delivery. Endorsements
on bills of exchange and promissory notes are done in exactly the same manner as those on cheques.
The liability of the endorser to subsequent parties is also the same. Thus, if a bill of exchange is dis-
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honoured, that is, if payment is not made on the due date by the promisor (drawer in case of bill of
exchange), money can be claimed from any of the previous endorsers, the payee and the maker of the
instrument.

Negotiability plus this liability of the endorsers make a bill of exchange or promissory note an
excellent security. Bills of exchange or promissory notes are, therefore, quite willingly purchased by
banks. The bank is sure that within a short time the money advanced on the bill will be returned. Bills
of exchange are, therefore, excellent ways of granting or receiving credit. A purchaser of goods may
not be able to pay immediately, but the seller may not be able to wait.

A bill of exchange or a promissory note will admirably solve the difficulty. The purchaser promises,
in writing, to pay the seller or his order the sum due and hands it over to the seller. The seller goes to
die bank and gets the note discounted. The seller thus gets the payment immediately, while the
purchaser is not compelled to find money immediately. Bills of exchange or promissory notes,
therefore, are excellent lubricating oils to the wheel of commerce.

Although a bill of exchange or a promissory note really amounts to nothing more than a promise that
the money will be paid on such and such date or on demand, the willingness of banks to advance
money (technically called discounting) makes it a special type of asset only one degree removed from
balance at bank, Hence, in business houses, a person is deemed to have cleared his debt when a bill of
exchange (duly accepted) or a promissory notes is received from him.

The person who gives a bill of exchange or a promissory note considers that the money due has been
paid and debits the creditor’s account accordingly. A person who receives a bill of exchange or
promissory note can adopt any one of the three courses.

He can:
(1) Keep it till the date of maturity
(2) Pass it on to one of his creditors
(3) Get it discounted with a bank
Date of Maturity is always calculated by adding three days of grace. Thus, if a bill, dated 8th January
is for 2 months after date, the date of maturity will be 11th March. If the due date falls on a holiday,
the due date will be the previous day. A bill falling due for payment on August 15 will have to be
paid on August 14.

Differences between a promissory note and a bill of exchange

The points of distinction between a promissory note and a bill of exchange are as follows:

1. Number of parties:

In a promissory note there are two parties the maker of the note and the payee. In a bill of exchange
there are three parties the drawer, the drawee and the payee.

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2. The maker of a note cannot be the payee.

In the case of a promissory note the maker cannot be the payee for the simple reason that the same
person cannot be both the promisor and the promisee. But in a bill of exchange the drawer and the
payee may be one and the same person as where a bill is drawn “Pay to me or my order.”

3. Promise and order:

In a promissory note there is a promise to make the payment whereas in a bill of exchange there is an
order for making the payment.

4. Acceptance:

A promissory note requires no acceptance as it is signed by the person who is liable to pay. The
drawer of a bill of exchange is generally the creditor of the drawee and therefore it must be accepted
by the drawee before it can be presented for payment.

5. Nature of liability:

The liability of the maker of a pro-note is primary and absolute but the liability of a drawer of a bill of
exchange is secondary and conditional. It is only when the acceptor does not honour the bill that the
liability of the drawer arises as a surety. (Sees. 30 and 32).

6. Maker’s position:

The maker of a promissory note stands in immediate relation with the payee, while the maker or
drawer of an accepted bill stands in immediate relation with the acceptor and not the payee
(Explanation to Sec. 44).

The position of the maker of a pro-note also differs from the position of the acceptor of a bill. A
promissory note must contain an unconditional promise to pay and therefore the maker, who himself
is the originator of a note, cannot make it conditional.

In the case of a bill of exchange although the drawer, who is the originator of a bill, has to make an
unconditional order to pay but under Section 86 the acceptor may accept the bill conditionally.

7. Payable to bearer:

A promissory note cannot be drawn ‘payable to bearer,’ while a bill of exchange can be so drawn
provided it is not drawn ‘payable to bearer on demand.’

8. Notice of dishonour:

In case of dishonour of a bill of exchange, notice of dishonour must be given by the ‘holder’ to all
prior parties who are liable to pay (including the drawer and endorsers), whereas in case of dishonour
of a promissory note, no notice is necessary to the maker.

9. Applicability of certain provisions:

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The provisions relating to presentment for acceptance, acceptance, acceptance supra protest and
drawing of bills in sets are applicable only to a bill of exchange, they are not applicable to a
promissory note.

Cheque

Sections covered- Sec. 6, 13,123- 131A, 138-147, 118.

Section 6 of the Act defines “A cheque is a bill of exchange drawn on a specified banker, and not
expressed to be payable otherwise than on demand”.

A cheque is bill of exchange with two more qualifications, namely,

(i) it is always drawn on a specified banker, and

(ii) it is always payable on demand. Consequently, all cheque are bill of exchange, but all
bills are not cheque. A cheque must satisfy all the requirements of a bill of exchange; that
is, it must be signed by the drawer, and must contain an unconditional order on a specified
banker to pay a certain sum of money to or to the order of a certain person or to the bearer
of the cheque. It does not require acceptance.

Similarity Between Bills of Exchange and Cheque – essentials

Distinction Between Bills of Exchange and Cheque

1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn on a
bank.

2. It is essential that a bill of exchange must be accepted before its payment can be claimed A cheque
does not require any such acceptance.

3. A cheque can only be drawn payable on demand, a bill may be also drawn payable on demand, or
on the expiry of a certain period after date or sight.

4. A grace of three days is allowed in the case of time bills while no grace is given in the case of a
cheque.

5. The drawer of the bill is discharged from his liability, if it is not presented for payment, but the
drawer of a cheque is discharged only if he suffers any damage by delay in presenting the cheque for
payment.

6. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of cheque.

7. A cheque may be crossed, but not needed in the case of bill.

8. A bill of exchange must be properly stamped, while a cheque does not require any stamp.

9. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand can never
be drawn to bearer.

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10. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

Section 6 - Cheque
A cheque is bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand and it includes the electronic image of a truncated cheque and a cheque in the
electronic form.
Explanation: I. - For the purposes of this section, the expressions-
(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 in 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 course of a clearing cycle, either
by the clearing house or by the bank whether paying or receiving payment, 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, the expression clearing house means the clearing
house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve
Bank of India.
Section 13 - Negotiable Instruments
(1) Negotiable instrument. A Negotiable Instrument means a promissory note, bill of exchange or
cheque payable either to order or to bearer.
Explanation (i).-A promissory note, bill of exchange or cheque is payable to order which is expressed
to be so payable or which is expressed to be payable to a particular person, and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable.
Explanation (ii).-A promissory note, bill of exchange or cheque is payable to bearer which is
expressed to be so payable or on which the only or last endorsement is an endorsement in blank.
Explanation (iii).-Where a promissory note, bill of exchange or cheque, either originally or by
endorsement, is expressed to be payable to the order of a specified person, and not to him or his order,
it is nevertheless payable to him or his order at his option.
(2) A negotiable instrument may be made payable to two or more payees jointly, or it may be made
payable in the alternative to one of two, or one or -some of several payees.
Section 123 - Cheque Crossed Generally
Where a cheque bears across its face an addition of the words and company or any abbreviation
thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or
without the words, not negotiable, that addition shall be deemed a crossing, and the cheque shall be
deemed to be crossed generally.
Section 124 - Cheque crossed specially
Where a cheque bears across its face an addition of the name of a banker, either with or without the
words not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be
crossed specially, and to be crossed to that banker.
22 | P a g e
Section 126 Cheque crossed specially
Where a cheque is crossed generally, the banker, on whom it is drawn shall not pay it otherwise than
to a banker.
Payment of cheque crossed specially. - Where a cheque is crossed specially, the banker on whom it is
drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent, for collection.
Section 130 Cheque bearing Not Negotiable
A person taking a cheque crossed generally or specially, bearing in either case the words not
negotiable, shall not have, and shall not be capable of giving, a better title to the cheque than that
which the person from whom he took it had.

Dishonour of certain cheques for insufficiency of funds

Provided that nothing contained in this section shall apply unless-
(a) the cheque has been presented to the bank within a period of three months from the date on which
it is drawn or within the period of its validity, whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the
payment of the said amount of money by giving a notice in writing, to the drawer of the cheque within
thirty days of the receipt of information by him from the bank regarding the return of the cheque as
unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or
as the case may be, to the holder in due course of the cheque within 15 days of the receipt of the said
notice.
Explanation - For the purposes of this section, debt or other liability means a legally enforceable debt
or other liability.
Another very important section is presumptions as to Negotiable Instruments under Section 118
of the Act.
Section 118 - Presumptions as to Negotiable Instruments
Until the contrary is proved, the following presumptions shall be made:
(a) of consideration. - that every negotiable instrument was made or drawn for consideration, and that
every such instrument, when it has been accepted, indorsed, negotiated or transferred, was accepted,
indorsed, negotiated or transferred for consideration;
(b) as to date. - that every negotiable instrument bearing a date was made or drawn on such date;
(c) as to time of acceptance. - that every accepted bill of exchange was accepted within a reasonable
time after its date and before its maturity;
(d) as to time of transfer. - that every transfer of a negotiable instrument was made before its maturity;
(e) as to order of indorsements. - that the indorsements appearing upon a negotiable instrument were
made in the order in which they appear thereon;
(f) as to stamp. - that a lost promissory note, bill of exchange or cheque was duly stamped;
(g) that holder is a holder in due course. - that the holder of a negotiable instrument is a holder in due
course;

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Provided that, where the instrument has been obtained from its lawful owner, or from any person in
lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or
acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving
that the holder is a holder in due course lies upon him.

Types of Crossing

General Crossing- Section 123: Where a cheque bears across its face an addition of words 'and
company' or any abbreviation thereof, between two parallel transverse lines or of two pair parallel
lines simply, either, with or without the words 'Not Negotiable' that addition shall be deemed a
crossing and the cheque shall be deemed to be crossed generally.

What constitutes a crossing

 It is an addition
 The addition is of two transverse parallel lines in cross direction
 The words "&Co." may or may not be enclosed in between the parallel lines.
 The effect of general crossing is that the cheque must be presented to the paying banker
through any banker and not by payee himself at the counter. The collecting banker credits the
proceeds to the account of the payee or the holder of the cheque. It is a direction to the paying
banker.

Special crossing - According to Section 124:- Where a cheque bears across its face an addition of the
name of a banker either with or without the words 'not negotiable', that addition shall be deemed a
crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker.

It should be noted that in addition to these minimum statutory requirements for two types of crossing
addition of words or lines may also be 'A/c payee', "Not Negotiable".

What does Not Constitute Crossing

 When a cheque bears the words 'Not Negotiable' or A/c payee without two parallel lines or the
name of the bank it not treated as crossed.
 If a cheque bears single line across is face or simply an 'X' mark, the cheque is not treated as
crossed cheque.

Note- that the inclusion of any other word/words within two parallel lines is irrelevant and the cheque
is still deemed to be a crossed cheque.

Under Rupees One hundred % Co., Pune

Specimen of
General crossing Specimen of special Crossing
1. and Co. 1.Punjab National Bank
2. A/c Payee 2.State Bank of India
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Persons who can cross the cheque

Crossing is a direction to the paying banker regarding the mode of payment.

i. The Drawer can cross

ii. The holder can cross

iii.The banker to whom the cheque is crossed specially may again cross it specially to another
banker as his agent or collection only.

Liability of the Paying Banker (Section 126)

Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than
to a banker. And where a cheque is crossed specially, the banker on whom it is drawn shall not pay it
otherwise than to the banker to whom it is crossed or his agent for collection.

Any banker paying a cheque crossed generally, otherwise than to a banker, or a cheque crossed
specially, otherwise than to the banker to whom the same is crossed, or his agent for collection being
banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the
cheque having been so paid.[Sec.129]

1. Liability to the True Owner of the cheque.

2. Liability to the Drawer

Not Negotiable crossing

A person taking a cheque crossed generally or specially bearing in either case the words 'not
negotiable' shall not have and shall not be capable of giving a better title to the cheque than that
which the person from whom he took it had.[Sec.130]

The effect of the words 'not negotiable' in the crossing will be clear from the following examples:

(1) A draws a crossed cheque on his banker in favour of 'B' without the words not negotiable therein
C steals it from the house of B and endorses it to D who receives it for value and in good faith from C
(i.e. without the knowledge of the fact that C had no title to the cheque). D will be its holder in due
course and will have valid title, though his transferor (endorser) had no title thereto.

(2) In the above, example if the cheque bears the words "NOT NEGOTABLE" then 'D' will not have
a valid title even if all the above circumstances are satisfied.

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Collection of 3rd Party Crossed bearer cheques

In trade circles particularly in Mumbai in textile trade it was observed that as per practice the crossed
bearer cheques were circulated exchanged freely for trade transactions and were in the past collected
by bank through the instrument was issued in the name of third parties and were presented by the
customers of the bank for credit to their account without endorsement on the reverse of the
instrument. The issue whether collecting banker can get protection under Section 131 of NI Act 1881
in such cases had been examined and it is opined that the negotiability of a bearer cheque is not
affected by the crossing. Under section 47 of the Act ibid a cheque payable to bearer is negotiable
even by a mere delivery and section 47 does not exempt (forbid) crossed cheques. As such it is
permissible to negotiate crossed bearer cheques by delivery thereof without endorsement.

Case laws on liability of the paying bankers

When customer's signature is forged there is no mandate to the bank to pay. As such the bank is not
entitled to debit customers account on such forged note cheque. [Canara Bank vs. Canara Sales
Corporation & others 1987, SC]

In a joint account if one of the signatures is forged then there is no mandate and banker cannot make
payment. [Bihta Coop. Development and Cane Marketing Union Ltd. vs. Bank of Bihar, SC]

Payment should be made in due course to seek protection under Sec. 85 [Bank of Bihar vs. Mahabir
Lal 1964, SC]

Where there are no circumstances which afforded any reasonable ground for believing that the payee
was not entitled to receive payment of the cheques, the bank is deemed to have made payment in due
course. [Bhutoria Trading Co. vs. Allahabad Bank 1977, Calcutta HC]

Payment made to a liquidator against the cheques presented across the counter was not payment in
due course. [Madras Provincial Coop. Bank Ltd. vs. Official Liquidator, South Indian Match factory
Ltd. 1945, Madras HC]

Bank is protected if payment was made in good faith without negligence of a cheque on which
alteration was not apparent. [Bank of Maharashtra vs. M/s Automotive Engineering Co. 1993, SC]

The bank is liable where payment was made on cheques on which alterations were authenticated by
not all but some of the drawers. [Brahma Shumshere Jung Bahadur vs. Chartered Bank of India,
Australia & China 1956 Calcutta HC]

Case laws on liability of the paying bankers

Under Section 131 a collecting bank is protected if following conditions are met.

 The collecting banker should have acted in good faith

 He should have acted without negligence
 He should receive payment for customer
 The check should have been crossed generally or specially to the bank.
26 | P a g e
 It is the duty of the bank to open account with references. [Syndicate Bank vs. Jaishree Industries &
others, 1994 Karnataka HC, Indian Bank vs. Catholic Syrian Bank, 1981, Madras HC]

Duty to ensure crossing in favour of the bank. [Crumpling vs. London Joint Stock Bank Ltd. 1911]

Duty to verify instruments or any apparent defect in instruments [Underwood Ltd. vs. Bank of
Liverpool Martin Ltd. 1924, Savory Co. vs. Lloyds Bank 1932, ANZ Bank vs. Ateliers de
Constructions Electriques Cherleroi, 1967 etc.]

Offence under Section 138

It is manifest that to constitute an offence under Section 138 of the Act, the following ingredients are
required to be fulfilled:

1. a must have drawn a cheque on an account maintained by him in a bank for payment of a certain
amount of money to another person from out of that account
2. the cheque should have been issued for the discharge, in whole or in part, of any debt or other liability;
3. that cheque has been presented to bank within a period of three months from the date on which it is
drawn or within the period of its validity whichever is earlier;
4. that cheque is returned by the bank unpaid, either because of the amount of money standing to the
credit of the account is insufficient to honour the cheque or that it exceeds the amount arranged to be
paid from that account by an agreement made with the bank;
5. the payee or the holder in due course of the cheque makes a demand for the payment of the said
amount of money by giving a notice in writing, to the drawer of the cheque, within 30 days of the
receipt of information by him from the bank regarding the return of the cheque as unpaid;
6. the drawer of such cheque fails to make payment of the said amount of money to the payee or the
holder in due course of the cheque within 15 days of the receipt of the said notice;

Section 138of Negotiable Instruments Act, 1881 - An In Depth Analysis

In the case of Dalmia Cement(Bharat) Ltd. V Galaxy Traders and Agencies Ltd.( (2001) 6 SCC
463), the Apex Court referred to the object of Section 138 of the Act. The court observed that the Act
was enacted and section 138 thereof incorporated with a specified object of making a special
provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned.
The law relating to the negotiable instruments is the law of commercial world legislated to facilitate
the activities in trade and commerce making provision of giving sanctity to the instruments of credit
which could be deemed to be convertible into money and easily passable from one person to another.

The offence under section 138 is not a natural crime like hurt or murder. It is an offence created by a
legal fiction in the statute. It is a civil liability transformed into a criminal liability, under restricted
conditions by way of an amendment to the Act, which is brought into force only in 1989. Till then,
the offending acts referred to in section 138 constituted only a pure civil liability. Legitimately, the

27 | P a g e
legislature thought it fit to provide for adequate safeguards in the Act to protect honest drawers from
unnecessary harassment.

However, the sections 138 to 142 of the said Act were found deficient in dealing with dishonour of
cheques. Thereby, the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002, inter alia, amended sections 138, 141 and 142 and inserted new sections 143 to 147 in the
said Act. These sections aimed at speedy disposal of cases relating to dishonour of cheque through
their summary trial as well as making them compoundable. Punishment provided under section 138
too was enhanced from one year to two years. These legislative reforms aimed at encouraging the
usage of cheque and enhancing the credibility of the instrument so that the normal business
transactions and settlement of liabilities could be ensured.6

What came into the forefront of all the disputed regarding section 138, was essentially with regard to
the appropriate court in which the complaint could be filed by the payee in case a cheque has been
dishonoured. This jurisdiction issue has been interpreted by the courts from time to time and the law
has witnessed a considerable number of changes throughout. The developments in the law relating to
the dishonor of cheques have been traced further in the paper.

PROCEDURE FOR FILING A COMPLAINT UNDER SECTION 138

The Section 143 of the Negotiable Act, post amendment by the legislature in the year 2001,
specifically provides for all offences under the Chapter are to be tried by Judicial Magistrate of
First Class or Metropolitan Magistrate (hereinafter "MM") in accordance with the Summary
Trial provisions of sections 262 to 265 of CrPC. It has been provided for that in a case under the
section 138 of the Act, the Magistrate is empowered to pass a sentence of imprisonment upto one
year and fine exceeding Rs. 5000/-. It further provides that if at the commencement or during the
course of summary trial, MM finds that nature of case was such that a sentence of imprisonment
exceeding one year may have to be passed or for some other reason MM comes to conclusion that
case should not be tried summarily, the Magistrate has to pass an order after hearing the parties,
giving reasons as to why he would like to try the case not in a summarily manner but as a summon
trial and he could recall witnesses who may have been examined and proceed with the case to hear it
as a summon trial case.2 However, the procedure so prescribed could not resolve the issues arising
from the adversities to adopt the summary procedure. The absence of the parties for the hearing or the
absence of the respective advocates, were highly detrimental to the objective behind prescribing a
summary procedure to be followed in cases of dishonour of cheques.

Subsequently, in the case of Rajesh Agarwal v. State and Others3, the Hon'ble Delhi High Court
prescribed certain guidelines with respect to the summary trial procedure which would be followed
with respect to offences under section 138. The summary trial procedure to be followed for offences
under section 138, would thus be as under:

Step I: On the day complaint is presented, if the complaint is accompanied by affidavit of

complainant, the concerned MM shall scrutinize the complaint & documents and if commission of
28 | P a g e
offence is made out, take cognizance & direct issuance of summons of accused, against whom case is
made out.

Step II: If the accused appears, the MM shall ask him to furnish bail bond to ensure his appearance
during trial and ask him to take notice u/s 251 Cr. P.C. and enter his plea of defence and fix the case
for defense evidence, unless an application is made by an accused under section 145(2) of NI Act for
recalling a witness for cross examination on plea of defence.

Step III: If there is an application u/s 145(2) of NI Act for recalling a witness of complainant, the
court shall decide the same, otherwise, it shall proceed to take defence evidence on record and allow
cross examination of defence witnesses by complainant.

Step IV: To hear arguments of both sides.

Step V: To pass order/judgment.

JURISDICTIONAL DEVELOPMENT UNDER SECTION 138

The Act is silent on the matter pertaining to the relevant jurisdiction with respect to filing of criminal
complaint in case the offence of Dishonour of the cheque is committed under Section 138. Since the
Criminal courts are approached, the issue needs to be examined from the point of view of the
Criminal Procedure Code, 1973. Section 177 of CrPC provides that "Every offence shall ordinarily be
inquired into and tried by a Court within whose local jurisdiction it was committed". Section 178
provides that "(a) When it is uncertain in which of several local areas an offence was committed, or
(b) Where an offence is committed partly in one local area and partly in another, or (c) Where an
offence is a continuing one, and continues to be committed in more local area has one, or (d) Where it
consists of several acts done in different local areas, It may be inquired to or tried by a court having
jurisdiction over any of such local areas."

Thus, in all the above situations, the court having jurisdiction over any of such local areas may try the
offence.

The jurisdiction is explained with reference to the Landmark cases of

4
K.BhaskaranVs.SankaranVaidhyanBalan and Anr and the later case of DashrathRupsinghRathod v.
State of Maharashtra& Anr5, while assessing the position before and after these judgements.

Position Before "K.BHASKARAN" Case

Jugal Kishore Arun v. V.A. Neelakandan6

Bellie, J. observed, that a prosecution for issuing of a cheque without sufficient funds in the Bank,
will have to be instituted before the Court within whose jurisdiction the cheque was issued.

In P.K. Muraleedharan v/s C.K.Pareed and Anr7

Kerala High court held thatthe place where the creditors resides or the place where the debtor resides
cannot be said to be the place of payment unless there is any indication to that effect either expressly

29 | P a g e
or impliedly. The cause of action as contemplated in S. 142 of the Act arises at the place where the
drawer of the cheque fails to make payment of the money. That can be the place where the Bank to
which the cheque was issued is located. It can also be the place where the cheque was issued or
delivered. The Court within whose jurisdiction any of the above mentioned places falls has therefore
got jurisdiction to try the offence under Section 138 of the Act.

M/s. Essbee Food Specialties and Ors. v. M/s. Kapoor Brother8

High Court of Punjab and Haryana on the question of jurisdiction stated as under: As to the question
of jurisdiction, it is to be considered that the issuance of the cheques and their dishonoring are only a
part of cause of action; the offence was complete only when the petitioner failed to discharge their
liability to the respondent-firm. For discharging a debt, it is the debtor who has to find out his creditor
and since in the present case, the respondent, who is the creditor, has its office at Panchkula, the
Court at Ambala had the territorial jurisdiction.

Rakesh NemkumarPorwal v/s Narayan DhonduJoglekar and anr.9

The anatomy of S. 138 comprises certain necessary components before the offence can be said to be
complete, the last of them being the act of non-payment inspite of 10 days having elapsed after receipt
of the final notice. It is true that the cheques may have been issued by the accused at his place of
residence or business, the Bank on which it is drawn being often located at a second spot and
inevitably the complainant or the payee has his place of residence or business at yet another location.
It was for this reason that the Kerala High Court in the case of P.K.Muralendharanv.C.KPareed 10,
took the view that any of the three Courts could exercise jurisdiction. In our considered view, where
undoubtedly each of the components constitute a stage in the commission of the offence, the final
non-payment being the ultimate one, S. 178 Cr.P.C. would clearly apply to an offence of this type."

Gautham T. V. Centre v. Apex Agencies11

High Court of Andhra Pradesh held that the Court within whose jurisdiction the cheque is given, or
where the information of dishonour is received or where the office of the payee is situate, will have
jurisdiction to try the offence.

Canbank Financial Services Ltd. v/s Gitanjali Motors and Ors12

Delhi High Court held that the place where the cheque was given or handed over is relevant and the
Courts within that area will have territorial jurisdiction. Also held, "Then as per Section 179 when an
act is an offence by reason of anything which has been done and of a consequence which has ensued.
The offence may be inquired into or tried by a court within those legal jurisdiction such thing has
been done or such consequence has ensued. Payment of cheque against an account having sufficient
funds to meet the liability under the cheque is one act while dishonor of the cheque is a consequence
of such an act. Therefore as per Section 179 also the place where the cheque was given or handed
over will have jurisdiction and the courts of that place will have jurisdiction to try the offence.
Likewise for purposes of Section 178(b) payment of cheque may be one part of an offence and

30 | P a g e
dishonor of the cheque may be another part and, therefore, both places i.e. place where the cheque
was handed over and the place where it was dishonored will have jurisdiction."

SanjaiMakkar and Ors.Vs.Saraswati Industrial Syndicate Limited and Ors.13

The High Court of Allahabad held "...so far as territorial jurisdiction is concerned, the cause of action
arises at a place where the cheque was drawn, or a place where the cheque was presented, or a place
where the payee made a demand for payment of the money by giving a notice in writing to the drawer
within the stipulated period and at a place where the drawer failed to make the payment within 15
days of the receipt of notice."

Position Of and After 'K.BHASKARAN' Case

K.BhaskaranVs.SankaranVaidhyanBalan and Anr14

It was held in paragraph 12 of the judgment that "Under Section 177 of the Code "every offence shall
ordinarily be inquired into and tried in a court within whose jurisdiction it was committed.

"The locality where the bank (which dishonored the cheque) is situated cannot be regarded as the sole
criteria to determine the place of offence........Aplace, for that purpose, would depend upon a variety
of factors. It can either be at the place where the drawer resides or at the place where the payee
resides or at the place where either of them carries on business. Hence, the difficulty to fix up any
particular locality as the place of occurrence for the offence under Section 138 of the Act."

Considering and reproducing the constituents of section 138 of NI Act and section 178(d) of the
Code, held: "(1) Drawing of the cheque, (2) Presentation of the cheque to the bank, (3) Returning the
cheque unpaid by the drawee bank, (4) Giving notice in writing to the drawer of the cheque
demanding payment of the cheque amount, (5) failure of the drawer to make payment within 15 days
of the receipt of the notice... It is not necessary that all the above five acts should have been
perpetrated at the same locality. It is possible that each of those five acts could be done at 5 different
localities. But concatenation of all the above five is a sine qua non for the completion of the offence
under Section 138 of the Code. In this context a reference to Section 178(d) of the Code is
useful......Thus it is clear, if the five different acts were done in five different localities any one of the
courts exercising jurisdiction in one of the five local areas can become the place of trial for the
offence under Section 138 of the Act. In other words, the complainant can choose any one of
those courts having jurisdiction over any one of the local areas within the territorial limits of
which any one of those five acts was done".

Sunil SrivastavaVs.Shri Ashok Kalra15

It is manifest from the law laid down in the aforementioned judgment that the cause of action for
filing a complaint under Section 138 of the Act may also be at a place where the drawer of the cheque
resided or the place where the payee resided for the place where either of them carried on business or
the place where payment was to be made. The complaint can be filed before the court which has
jurisdiction over any of these places. In the cited case a complaint under Section 138 was filed before
a Magistrate at Adoor in Pathanamthitta District in Kerala. The accused challenged the territorial
31 | P a g e
jurisdiction of the court of try the case. His contention was that the cheque was dishonoured at the
bank of the Branch at Kayamkulam, situated in another District. he also denied the issue of cheque
and also receipt of notice of demand. The later two objections were decided against the accused. On
the first question the Supreme Court enunciated the law as reproduced above.

Shri Ishar Alloy Steels Ltd. v. JayaswalsNeco Ltd.16

The dishonoured cheque had been presented for encashment by the Complainant/holder in his bank
within the statutory period of six months but by the time it reached the drawer's bank the
aforementioned period of limitation had expired. The question before the Court was whether the bank
within the postulation of Section 138 read with Sections 3 and 72 of the NI Act was the drawee bank
or the collecting bank and this Court held that it was the former. It was observed that "non-
presentation of the cheque to the drawee bank within the period specified in the Section would
absolve the person issuing the cheque of his criminal liability under Section 138 of the NI Act, who
otherwise may be liable to pay the cheque Page 8 8 amount to the payee in a civil action initiated
under the law. This decision clarifies that the place where a complainant may present the cheque for
encashment would not confer or create territorial jurisdiction

Prem Chand Vijay Kumar v. Yashpal Singh17

Held that upon a notice under Section 138 of the NI Act being issued, a subsequent presentation of a
cheque and its dishonour would not create another 'cause of action' which could set the Section 138
machinery in motion. Instead of the five Bhaskaran concomitants, only four have been spelt out in the
subsequent judgment in Prem Chand.

A slightly new face to law existing post K. Bhaskaran case was given in Harman Electronics
Pvt. Ltd. v. National Panasonic India Pvt. Ltd.18

In this case Hon'ble Supreme Court examined the question of jurisdiction yet again under Section 138
of the Act. Appellant, was from Chandigarh and had issued a cheque which was returned dishonored,
the cheque was issued in Chandigarh to the complainant where he had a branch and was actually
present. Notice of payment for the dishonored cheque was issued from the head office of the
complainant in Delhi to the accused office in Chandigarh. Due to failure on the part of the drawer a
complaint was filed in Delhi. When the case came before the lower courts as well as high court,
emphasis and reliance was laid down on 'K. Bhaskaran Case' and finally coming to a conclusion so as
to that Delhi Court also have the 'jurisdiction'. The appellant/respondent contended that Chandigarh
court had the jurisdiction to try the case but his contention was dismissed, finally, leading to an
appeal to Supreme Court. Court held that the court derives its jurisdiction when a cause of action
arises and jurisdiction can't be conferred on or for any act of omission on the part of the accused.
Also, held, issuance wont but communication will give rise to cause of action. Hence, Delhi Court
will not have jurisdiction to try the case. The court adjudged on 'whether a Delhi court would have
jurisdiction merely on the ground that the- statutory notice under section 138 was issued from Delhi'.
The Hon'ble Supreme Court held that:
32 | P a g e
A cause of action will not be triggered by issue of statutory notice but only receipt/acceptance of
notice does.

Solely, the specific provisions of Section 138 will make or build an offence and the proviso is merely
a condition required for taking cognizance.

A sole issue of notice or presentation of cheque can't give or provide the court with territorial
jurisdiction to try offences under section 138 or it will unreasonably harass the drawer.

Distinction between K.Bhaskaran's Case and Harman's Case- A Slight Dilution.

There exists conflict between the two decisions inasmuch as in Bhaskaran's case (supra) it was held
that the expression "giving of notice" occurring in proviso (b) to Section 138 of the NI Act means
"sending of notice" whereas in Harman's case (supra) it was held that the said expression means
"receipt of notice". The Harman case has adopted a strict approach towards territorial jurisdictions of
court. It thus correctly addressed the rampant misuse of the liberal interpretation in Bhaskaran's case.

Nishant Aggarwal v. Kailash Kumar Sharma19

Court was once again dealing with a case where the complaint had been filed in Court at Bhiwani in
Haryana within whose territorial jurisdiction the complainant had presented the cheque for
encashment, although the cheque was drawn on a bank at Gauhati in Assam. Relying upon the view
taken in Bhaskaran this Court held that the Bhiwani Court had jurisdiction to deal with the matter.
While saying so, the Court tried to distinguish the three-Judge Bench decision in Ishar Alloy Steels
(supra) and that rendered in Harman Electronics case (supra) to hold that the ratio of those decisions
did not dilute the principle stated in Bhaskaran case.

Impact of K. Bhaskaran Case

The aforesaid Bhaskaran case had many unintended consequences. As per the case, the cheque
bouncing case can be registered either at locations, at the convenience of the payee as the cheque may
be drawn at Location A, presented for payment and consequently dishonoured at Location B, and
legal notice may be issued to the drawer of the cheque for payment of the cheque amount from his
branch office located in Location C, as he may have several bank accounts in various places. This
causes suffering to the drawer of the cheque, although gives flexibility to the payee of the cheque to
choose the place where he was to file the cheque bouncing case. Sometimes, several cheques are
issued at the same time by a person to the same payee, which are deliberately presented in different
banks located at different places, and thereafter, cheque bouncing cases are filed at different places
against the drawer of those cheques.

New Dimensions To Law- Dashrath Rupsingh Rathod v. State of Maharashtra &Anr20

After the K. Bhaskaran judgement it was felt at large that the law in its wide expansive amplitude
allowed the complainant to rather rampantly abuse and misuse the law to result in hardship and
adversity to the drawer, with relative ease. It gave the payee unrestricted power to the payee to
singlehandedly confer jurisdiction on a place of his convenience, consequently, leading to harassment
33 | P a g e
as the payer had, at times, no concern or relation with the distant places where the cheque was issued
or which had no link to the transaction or drawer. The alteration in the law was thus welcomed as a
much required change in prevalent laws as laid down by K.Bhaskaran. The leniency thus, was the
cause of much upheaval. Thus, the new judgement by means of a strict approach sought to discourage
the payer from misusing or carelessly issuing cheques. Due sympathy was thus shown or given to the
drawer.

In fact the Supreme Court in DashratRathod case has observed rightly that "Courts are enjoined to
interpret the law so as to eradicate ambiguity or nebulousness, and to ensure that legal proceedings
are not used as a device for harassment, even of an apparent transgressor of the law. Law's endeavour
is to bring the culprit to book and to provide succor for the aggrieved party but not to harass the
former through vexatious proceedings."

The court held that, the territorial jurisdiction acc. to section 138 or under the act should exclusively
be determined and considered by place/location of the offence. The return of the cheque by the
drawer bank only constitutes commission of offence under section 138. Hence, the courts within
which drawer bank is located will only have the jurisdiction to try the case.

An offence under section 138 of the Act, will be considered committed as soon as the cheque drawn
by the accused on an account maintained by him for the discharge of debt or liability is returned
without honored, either due to insufficiency of funds of the said drawer's account or the amount
exceeds the drawer's arrangement with the bank. But, the the cause of action could be derived or
triggered only when:

if the dishonored cheque is presented to the drawee bank within 6 months from its issue.

if the complainant demands for the questioned amount within 30 days of receipt of his intimation
from the concerned bank.(bank which dishonored)

if the drawer or the payer of the cheque has failed to pay the amount in question within 15 days of
notice given by the complainant, payee or due holder of cheque.

The general rule stipulated under Section 177 of Cr.P.C applies to cases under Section 138 of the
Negotiable Instruments Act. Prosecution in such cases can, therefore, be launched against the drawer
of the cheque only before the Court within whose jurisdiction the dishonour takes place except in
situations where the offence of dishonour of the cheque punishable under Section 138 is committed
along with other offences in a single transaction within the meaning of Section 220(1) read with
Section 184 of the Code of Criminal Procedure or is covered by the provisions of Section 182(1) read
with Sections 184 and 220 thereof.

The court clearly addressed the term 'cause of action' and held that the facts constituting cause of
action do not constitute the ingredients of the offence under Section 138 of the Act. And, once the
cause of action is triggered in favor of the complainant, the jurisdiction of the court to try the case
will be determined by the place where the cheque was returned dishonored.

34 | P a g e
In respect of pending cases it distinguished them into following categories and suggested actions as
follows:

a. Cases in which trial has commenced: Cases in which summoning and appearance of the accused
has taken place and recording of evidence has commenced will continue at the same court. These
cases will be deemed to have been transferred from the court which had jurisdiction to the
court where they are tried, as per the relaxation provided in public interest.

b. Cases pending at the pre summoning stage: All other complaints including those where the
accused/respondent has not been properly served, cases in which summons have not been issued will
be maintainable only at the place where the cheque stands dishonored.

Position after DasrathRathod Case

Vinay Kumar Shailendra v Delhi High Court Legal Services Committee and Anr.21

Supreme Court observed "The issue of a notice from Delhi or deposit of the cheque in a Delhi bank
by the payee or receipt of the notice by the accused demanding payment in Delhi would not confer
jurisdiction upon the Courts in Delhi. What is important is whether the drawee bank who dishonoured
the cheque is situate within the jurisdiction of the Court taking cognizance."

RamanbhaiMathurbhai Patel v. State of Maharashtra22

In a case before the Bombay High Court, two cheques were issued, one before the Gandhinagar
branch of the State Bank of India and one before the Bank of Maharashtra. The cheques being 'At
par',i.e. multi-city cheques payable at par in all branches of the bank, were payable at all branches the
abovementioned banks. Factually, the cheque deposited by the complainant in the branches of the
banks at Kurla, Mumbai, the nearest available branch of the banks and were dishonored. So, the isse
raised was that whether the complaint should be filed at Kurla or at Gandhinagar, as the cheques were
payable at par across all the branches. It was held that by issuing cheques payable at all branches, the
drawer is giving an option to get the cheques cleared from the nearest available branch of the bank
and therefore the cause of action has arisen in the jurisdiction of the Metropolitan Magistrate, Kurla
Court. The courts in Mumbai will have the jurisdiction to try the offence as the cheques were
dishonoured in Mumbai. However, the above decision of the Bombay High Court was challenged in
the Supreme Court vide SLP (Criminal) No. 7251 of 2014. This SLP was dismissed by the Supreme
Court as withdrawn on 20 March 2015.

New Negotiable Instruments (Amendment) Act, 2015

It may be noted that the Apex Court ruling in DashrathRathod case only takes care of traditional
method of cheque clearance. As per this method the cheque physically travels from the bank branch
where it is presented to the drawee bank branch. The decision thus posed difficulties in the modern
day cheque truncation system, where the cheque does not travel to drawee bank. Financial institutions
and banks pronounced difficulty in coping with the situation.

35 | P a g e
It has been opined, in view of the rationale for changing the law with respect to jurisdiction under
section 138 of the negotiable instruments act, 1881 that:

"The amendments to the Negotiable Instruments Act, 1881 ("The NI Act") are focused on clarifying
the jurisdiction related issues for filing cases for offence committed under section 138 of the NI Act.
The clarification of jurisdictional issues desirable from the equity point of view as this would be in
the interests of the complainant and would also ensure a fair trial. The clarity on jurisdictional issue
for trying the cases of cheque bouncing would increase the credibility of the cheque as a financial
instrument. This would help the trade and commerce in general and allow the lending institution,
including banks, to continue to extend financing to the economy, without the apprehension of the loan
default on account of bouncing of a cheque." 24

Concerns had been raised by various stakeholders (creditors, industry associations, financial
institutions, etc) expressing apprehensions that the DasrathRathod decision will offer undue
protection to defaulters at the expense of the aggrieved complainant; and would ignore the current
realities of cheque clearing with the introduction of CTS (Cheque Truncation System). In CTS
cheque clearance happens only through scanned image in electronic form and cheques are not
physically required to be presented to the issuing branch (drawee bank branch) but are settled
between the service branches of the drawee and payee banks.

The inserted Section 142(2) in the Principal Act. It reads as follows:

"(2) The offence under Section 138 shall be inquired into and tried only by a court within whose local
jurisdiction –

(a) If the cheque is delivered for collection through an account, the branch of the bank where the
payee or holder in due course, as the case may be, maintains the account, is situated; or

(b) If the cheque is presented for payment by the payee or holder in due course otherwise through his
account, the branch of the drawee bank where the drawer maintains the account, is situate.

Explanation – For the purpose of clause (a), where the cheque is delivered for collection at any
branch of the bank of the payee or holder in due course, then, the cheque shall be deemed to have
been delivered to the branch of the bank in which the payee or holder in due course, as the case may
be, maintains the account."

It also inserts a new Clause 142A, which provides that notwithstanding anything contained in the
Code of Criminal Procedure, 1973 or any judgment, decree, order or directions of any court, all cases
arising out of Section 138 of the Act which were pending in any court, whether filed before it, or
transferred to it, before the commencement of the Negotiable Instruments (Amendment) Act, 2015,
shall be transferred to the court having jurisdiction under sub-section (2) of section 142 as if that sub-
section had been in force at all material times. Where one and the same person has filed cases, in
different jurisdictions , against one and the same drawer of cheque , then all such cases have to be
transferred to the jurisdiction court of the bank branch of the payee, in which he has presented the
cheque for payment, is situated .

36 | P a g e
All complaints between the same parties are to be tried at one place irrespective of where the payee
deposits the cheques.

Citing the earlier law to be unfair in as much as it required the creditor to go the debtor, creditors and
stakeholders have welcomed the change.

CONCLUSION

According to the history and establishment of the Negotiable Instruments Act,1881 and focus on the
jurisdictional debate under Section 138, which deals with dishonor of cheques, analyse the necessities
which forced the Courts and the Government to adopt landmark changes in the law. The latest
change and the present prevalent law being the 2015 Act, has the effect of nullifying the law as
laid down by the Supreme Court in 2014, DasratRathod case. The legal effect of the Act is that,
so as to institute a complaint under Section 138, the same must be instituted as per :

If the cheque is delivered for collection through an account, the branch of the bank where the payee
or holder, maintains the account, is situated; or

If the cheque is presented for payment by the payee or holder otherwise through his account, the
branch of the drawee bank where the drawer maintains the account, is situated.

This law comes with a promise to solve and aid in not only the speedy disposal of the pending cases
pertaining to complaints under 138, but also to bring a sanctity to the system by seeking to clamp
down on defaults in payments. It clarifies the legal position as to jurisdiction and also seeks to keep
up with the modern banking system.

REFERENCES

Case Laws

1. Canbank Financial Services Ltd. v/s Gitanjali Motors and Ors 1995 Cri.L.J. 1272

2. Dalmia Cement (Bharat) Ltd. V Galaxy Traders and Agencies Ltd (2001) 6 SCC 463

3. DashrathRupsinghRathod v. State of Maharashtra &Anr AIR 2014 SC 3519

4. Gautham T. V. Centre v. Apex Agencies (1993) 1 Crimes 723

5. Jugal Kishore Arun v. V.A. Neelakandan 1990 L.W. (Cri.) 492

6. K. Bhaskaran Vs. SankaranVaidhyanBalan and Anr (1999) 7 SCC 510

7. M/s. Essbee Food Specialties and Ors. v. M/s. Kapoor Brother 1992 (Suppl) MWN (Cri. 132)

8. Nishant Aggarwal v. Kailash Kumar Sharma (2013) 10 SCC 72

37 | P a g e
9. P.K. Muraleedharan v/s C.K.Pareed and Anr 1993(1)ALT(Cri)424

10. Prem Chand Vijay Kumar v. Yashpal Singh (2005) 4 SCC 417

11. Rajesh Agarwal v. State and Others (2010) ILR 6 Del 610

12. Rakesh NemkumarPorwal v/s Narayan DhonduJoglekar and anr (1993 Cri.L.J. 680)

13. RamanbhaiMathurbhai Patel v. State of Maharashtra 2014(4)BomCR(Cri)126

14. Rangachari(N.) v Bharat Sanchar Nigam Ltd. 2007 (3) Supreme 626

15. SanjaiMakkar and Ors. Vs. Saraswati Industrial Syndicate Limited and Ors1999CriLJ1958

16. Shri Ishar Alloy Steels Ltd. v. JayaswalsNeco Ltd (2001) 3 SCC 609

17. Sunil Srivastava Vs. Shri Ashok Kalra 101(2002)DLT245

18. Vinay Kumar Shailendra v Delhi High Court Legal Services Committee and Anr
(2014)10SCC708

Footnotes

1. The Negotiable Instruments (Amendment) Bill, 2015.

2.Section 143, The Negotiable Instrument Act, 1881

3.Rajesh Agarwal v. State and Others (2010) ILR 6 Del 610

4. K. Bhaskaran Vs. SankaranVaidhyanBalan and Anr (1999) 7 SCC 510

5.DashrathRupsinghRathod v. State of Maharashtra &Anr AIR 2014 SC 3519

6. Jugal Kishore Arun v. V.A. Neelakandan 1990 L.W. (Cri.) 492

7. P.K. Muraleedharan v/s C.K.Pareed and Anr1993(1)ALT(Cri)424

8. M/s. Essbee Food Specialties and Ors. v. M/s. Kapoor Brother 1992 (Suppl) MWN (Cri. 132)

9. Rakesh NemkumarPorwal v/s Narayan DhonduJoglekar and anr(1993 Cri.L.J. 680)

10.Supra 7

38 | P a g e
11. Gautham T. V. Centre v. Apex Agencies (1993) 1 Crimes 723 (AndhPra)

12. Canbank Financial Services Ltd. v/s Gitanjali Motors and Ors 1995 Cri.L.J. 1272

13. SanjaiMakkar and Ors. Vs. Saraswati Industrial Syndicate Limited and Ors1999CriLJ1958

14. K. Bhaskaran Vs. SankaranVaidhyanBalan and Anr (1999) 7 SCC 510

15. Sunil Srivastava Vs. Shri Ashok Kalra101(2002)DLT245

16. Shri Ishar Alloy Steels Ltd. v. JayaswalsNeco Ltd (2001) 3 SCC 609

17. Prem Chand Vijay Kumar v. Yashpal Singh (2005) 4 SCC 417

18. Harman Electronics Pvt. Ltd. v. National Panasonic India Pvt. Ltd. (2009) 1 SCC 720

19. Nishant Aggarwal v. Kailash Kumar Sharma (2013) 10 SCC 72

20. DashrathRupsinghRathod v. State of Maharashtra &Anr AIR 2014 SC 3519

21. Vinay Kumar Shailendra v Delhi High Court Legal Services Committee and Anr
(2014)10SCC708

22. RamanbhaiMathurbhai Patel v. State of Maharashtra 2014(4)BomCR(Cri)126

23. http://pib.nic.in/newsite/PrintRelease.aspx?relid=122425

24. http://bombayhighcourt.nic.in/libweb/ordinc/2015/2015.06.pdf

Liabilities and Capacity of Parties of Negotiable Instrument

Parties to bill of exchange
1. Drawer: The maker of a bill of exchange is called the ‘drawer’.
2. Drawee: The person directed to pay the money by the drawer is called the ‘drawee’,
3. Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more parts than
one, upon one of such pares and delivered the same, or given notice of such signing to the holder or
to some person on his behalf, he is called the ‘ acceptor’
4. Payee: The person named in the instrument, to whom or to whose order the money is directed to be
paid by the instrument is called the ‘payee’. He is the real beneficiary under the instrument. Where he
signs his name and makes the instrument payable to some other person, that other person does not
become the payee.

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5. Indorser: When the holder transfers or indorses the instrument to anyone else, the holder becomes
the ‘indorser’.
6. Indorsee: The person to whom the bill is indorsed is called an ‘indorsee’.
7. Holder: A person who is legally entitled to the possession of the negotiable instrument in his own
name and to receive the amount thereof, is called a ‘holder’. He is either the original payee, or the
indorsee. In case the bill is payable to the bearer, the person in possession of the negotiable
instrument is called the ‘holder’.
8. Drawee in case of need: When in the bill or in any endorsement, the name of any person is given,
in addition to the drawee, to be resorted to in case of need, such a person is called ‘drawee in case of
need’. In such a case it is obligatory on the part of the holder to present the bill to such a drawee in
case the original drawee refuses to accept the bill. The bill is taken to be dishonoured by non-
acceptance or for nonpayment, only when such a drawee refuses to accept or pay the bill.
9. Acceptor for honour: In case the original drawee refuses to accept the bill or to furnish better
security when demanded by the notary, any person who is not liable on the bill, may accept it with the
consent of the holder, for the honour of any party liable on the bill. Such an acceptor is called
‘acceptor for honour’.
Parties to a Promissory Note
1. Maker. He is the person who promises to pay the amount stated in the note. He is the debtor. 2.
Payee. He is the person to whom the amount is payable i.e. the creditor.
3. Holder. He is the payee or the person to whom the note might have been indorsed. 4. The indorser
and indorsee (the same as in the case of a bill).
Parties to a Cheque
1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank.
2. Drawee. It is the drawer’s banker on whom the cheque has been drawn.
3. Payee. He is the person who is entitled to receive the payment of the cheque.
4. The holder, indorser and indorsee (the same as in the case of a bill or note)
CAPACITY OF PARTIES
“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” (Sec. 26). This Section thus declares that capacity to
incur liability on negotiable instruments is coextensive with the capacity to contract.
If a party is not competent to contract (say, if he is a minor), the agreement is absolutely void and
inoperative as against him but he can derive benefit under it. Thus, a person incompetent to contract
cannot make himself liable as a party to negotiable instrument, but he may make the other parties
competent to contract liable, because he can be a promise or payee as per the Indian Contract Act. It
follows, therefore, that if some of the parties to negotiable instrument are not capable of contracting,
the instrument is void only as against such parties and the other competent parties remain bound
under it. If, however, all the parties are incapable to contract, then the negotiable instrument is a
nullity and does not have any legal value whatsoever.
The different cases of incapacity to incur liability as a party to negotiable instrument are
discussed below:

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Minor. Section 26 declares that a minor may draw, indorse, deliver and negotiate a negotiable
instrument so as to bind all parties except himself. Accordingly, a minor can be a party to negotiable
instrument but he does not incur any liability himself although other adult parties to the instrument
remain liable thereon. Thus, though the minor cannot originate title or liability he can well serve as a
channel or conduit pipe to pass it on to others. When an instrument is signed by a minor and adult
jointly, the minor is not liable but the adult is.
As in the case of every other contract, so in the case of a negotiable instrument, the minor is in a
privileged position. For, although he cannot incur liability under a negotiable instrument, he can
acquire rights under it. He can be a promisee and therefore an instrument can be drawn or made in his
favour as payee. He can also become an indorsee by subsequent transfer of the instrument in his
name. He can thus be a holder ‘entitled to sue’, through his guardian, all parties liable under the
instrument.
Insolvent. An insolvent is not competent to draw, make, accept or indorse a negotiable instrument so
as to bind his estate which now stands vested in the Official Receiver. But if he indorses an
instrument of which he is the payee or indorsee to a holder in due course, the indorsement is valid as
against all prior parties liable except himself (i.e., the insolvent).
Joint stock company. A company being an artificial person is competent of doing only such acts as
are expressly or impliedy allowed by its Memorandum of Association. Hence if a company executes
(i.e., draws, accepts or negotiates) a negotiable instrument without being authorised to do so by its
Memorandum of Association, the instrument is void and even a holder in due course cannot enforce
the same against the company. A trading company has an implied power to execute negotiable
instruments, but a non-trading company has no such power unless expressly authorised by its
Memorandum of Association.
Although a company cannot incur liability under a negotiable instrument unless expressly or
impliedly (as being incidental or ancillary to the attainment of its main objects) permitted by its
Memorandum of Association, but it can always acquire rights under it. It can be a payee, or indorsee
or holder and can enforce payment of the amount of the instrument. The position of the company as
regards rights under a negotiable instrument is similar to the case of a minor.

Agent. Every person who has the capacity to incur liability as a party to negotiable instrument (i.e.,
who can himself make, draw, accept or negotiate an instrument) may draw, make, accept or negotiate
so as to become a party to a negotiable instrument through a duly authorised agent acting in his name.
But a general authority to transact business and to receive and discharge debts does not confer upon
an agent the power of accepting or indorsing bills of exchange so as to bind his principal. Further, an
authority to draw bills of exchange does not of itself import an authority to indorse. (Sec. 27) Thus,
an agent can execute negotiable instruments so as to bind his principal in that capacity (i.e., as a
drawer, maker, acceptor or indorser) only for which he is expressly authorised by the principal in
very clear terms.
Further, while signing an instrument, the agent must make it clear that he is signing as an agent by
using words like ‘for and on behalf of’ or ‘per pro,’ otherwise he will be personally liable, except to
those who induced him to sign upon the belief that the principal only would be held liable. (Sec. 28)

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Legal representative. A legal representative of a deceased person who signs his name to a negotiable
instrument (either as a maker or drawer or acceptor or indorser) is liable personally thereon unless he
expressly limits his liability to the extent of the assets inherited by him from the said deceased (Sec.
29). Thus, in order to avoid personal liability a legal representative must, while signing an instrument,
use words to indicate that he is not personally liable, e.g., he may add words like ‘without recourse to
me personally’ or ‘with recourse against the estate of the deceased only.’

Liability of Parties to Negotiable Instruments

The provisions of law regarding the liability of parties to negotiable instruments are as follows:
Liability of drawer. “The drawer of a bill of exchange or cheque is bound, in case of dishonour by
the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been
given to, or received by, the drawer as hereinafter provided” (Section 30).
Thus, the drawer of a bill or cheque is liable to the holder only if
(i) the instrument has been dishonoured, and
(ii) (ii) due notice of dishonour has been given to him. In the case of an ‘accommodation bill,’
however, no notice of dishonour to the drawer is required (Sec. 98).

It is to be noted that the liability of a drawer of a bill of exchange is secondary like a surety (i.e., he is
liable to pay only if the acceptor fails to pay and on dishonour the holder can sue the acceptor or
approach the drawer for payment), except in a case where the bill has been dishonoured by non-
acceptance by the drawee, in which case he is primarily liable like a principal debtor to the holder.
The liability of a drawer of a cheque, though arises only when the drawee bank fails or refuses to pay,
is not secondary like the drawer of a bill because on dishonour while the holder of a cheque cannot
sue the banker, the holder of a bill can sue the acceptor. Once the banker dishonours a cheque, its
holder’s remedy is only against the drawer. In this sense it may be said that the liability of the drawer
of a cheque is primary (Punjab National Bank vs Bank of Baroda).
Liability of drawee of cheque (Sec. 31). The drawee of a cheque (i.e., paying banker) must pay the
cheque when duly presented for payment provided he has sufficient funds of the drawer applicable to
the payment of such cheque. If the drawee banker wrongfully dishonours the cheque he can be made
liable to pay exemplary damages to the drawer.
Notice that when the banker makes a default he is liable not towards the payee or the holder but
towards the drawer. This is so because there is no privity of contract between the holder and the
banker. The holder has a remedy against the drawer and not against the banker.
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 the principal debtors and hence they are primarily liable for the
amount due on the instrument according to its apparent tenor, in the absence of a contract to the
contrary. There may be a contract to the contrary, for instance, in the case of an ‘accommodation bill’
the acceptor may be exempt from liability as per contract. Remember that the maker of a note or the
acceptor of a bill must make the payment thereof according to the apparent tenor of the note or bill
respectively at or after maturity to the holder. For, if he makes payment of a premature bill or note, as
the case may be, and the same is subsequently endorsed over, it is valid in the hands of a holder in
due course and the acceptor or maker will be liable to pay again on the instrument.

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Liability of Endorser (Sec. 35). When an indorser indorses and delivers a negotiable instrument
before maturity he impliedly undertakes to be liable to every subsequent holder for the loss caused to
him if the instrument is dishonoured by the party primarily liable thereon. Thus the indorser stands in
the position of a “drawer” to all the subsequent holders.
Like a drawer, the indorsee’s liability is secondary and conditional. He is liable to every subsequent
holder only if the following conditions are fulfilled:
(i) the instrument must have been dishonoured by the party primarily liable to pay the instrument on
its maturity, i.e., by the drawee, acceptor or maker,
(ii) due notice of dishonour must have been given to or received by such indorser,
(iii) he must not have excluded his own liability by “sans recourse” indorsement, and
(iv) the holder must not have destroyed his remedy against prior parties, e.g., cancellation of prior
indorsements without his consent.4
Nature of liability of various prior parties. Every prior party, namely, the maker or drawer, the
acceptor, and all the intervening indorsers; to a negotiable instrument is liable thereon to a holder in
due course until the instrument is duly satisfied by payment or otherwise gets discharged (Sec. 36).
Accordingly, the liability of prior parties to a holder in due course is joint and several. He may hold
any or all the prior parties liable for the amount of the dishonoured instrument.

Illustration. A bill drawn by P on Q in favour of R is made payable three months after date. It is
indorsed by R in favour of X, by X in favour of Y, and by Y in favour of Z. The bill has been
accepted by Q, and Z presents it on maturity for payment to Q who duly pays the amount and
indorses the fact of payment of the bill. On payment by Q the bill is duly satisfied. But if payment
had not been made, Z could sue P, Q, R, X, Y—all or any of them; Y could sue P, Q, R, X; X could
sue P, Q, R and so on.

Liability Inter se. Though various parties to a negotiable instrument could be liable thereon but the
nature of liability of each one of them is not similar. Some of them are primarily liable like a
principal debtor while the others are secondarily liable like a surety. Section 37 provides in this
connection 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 principal debtors. The parties other than those stated above (i.e., the drawer of a bill after
acceptance and the indorser on instrument being indorsed) are liable as sureties for those who are
liable as principal debtors, that is, they are liable only in case the principal debtors fail to perform
their contracts.
Section 38 deals with the nature of the liability between successive parties. It provides that “as
between the parties so liable as sureties, each prior party is, in the absence of a contract to the
contrary, also liable thereon as a principal debtor in respect of each subsequent party.” As such each
prior party is liable as a principal debtor to succeeding party and hence can claim payment from his
preceding party only.

Illustration. A, draws a bill payable to his own order on B, who accepts. A, afterwards indorses the
bill to C, C to D, and D to E. As between E and B, B is the principal debtor, and A, C and D are his

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sureties. As between E and A, A is the principal debtor, and C and D are his sureties. As between E
and C, C is the principal debtor and D is his surety.
Thus if the acceptor B does not pay on maturity, the holder in due course E can claim payment from
any prior party and if he claims it from C, D is the principal debtor and D is C’s surety. C can now
claim the amount from B or A and not from D. If B and A are insolvent, C will suffer the loss.
In case the holder of a negotiable instrument agrees to grant release to the party primarily liable
thereon from his liability or to grant him extension of time, all the intervening parties shall be
discharged from liability, except when the holder has expressely, by a special contract, reserved his
right against them (Sec. 39). Further, if the holder, without the consent of the indorser, destroys or
impairs the indorser’s remedy against prior party, e.g., by cancellation of a prior indorsement or by
destruction or release of securities held by him, the indorser is discharged from liability to the holder
to the same extent as if the instrument had been paid at maturity. (Sec. 40)

Holder and Holder in due course

Section 9 of the Act defines ‘holder in due course’ as any person who-
(i) for valuable consideration,
(ii) becomes the possessor of a negotiable instrument payable to bearer or the indorsee or
payee thereof,
(iii) before the amount mentioned in the document becomes payable, and
(iv) without having sufficient cause to believe that any defect existed in the title of the person
from whom he derives his title. (English law does not regard payee as a holder in due
course).
The essential qualification of a holder in due course may, therefore, be summed up as
follows:
1. He must be a holder for valuable consideration. Consideration must not be void or illegal, e.g. a
debt due on a wagering agreement. It may, however, be inadequate. A donee, who acquired title
to the instrument by way of gift, is not a holder in due course, since there is no consideration to
the contract. He cannot maintain any action against the debtor on the instrument. Similarly,
money due on a promissory note executed in consideration of the balance of the security deposit
for the lease of a house taken for immoral purposes cannot be recovered by a suit.
2. He must have become a holder (passessor) before the date of maturity of the negotiable
instrument. Therefore, a person who takes a bill or promissory note on the day on which it
becomes payable cannot claim rights of a holder in due course because he takes it after it becomes
payable, as the bill or note can be discharged at any time on that day.
3. He must have become holder of the negotiable instrument in good faith. Good faith implies that
he should not have accepted the negotiable instrument after knowing about any defect in the title
to the instrument. But, notice of defect in the title received subsequent to the acquisition of the
title will not affect the rights of a holder in due course. Besides good faith, the Indian Law also
requires reasonable care on the part of the holder before he acquires title of the negotiable
instrument. He should take the instrument without any negligence on his part. Reasonable care

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and due caution will be the proper test of his bona fides. It will not be enough to show that the
holder acquired the instrument honestly, if in fact, he was negligent or careless. Under conditions
of sufficient indications showing the existence of a defect in the title of the transferor, the holder
will not become a holder in due course even though he might have taken the instrument without
any suspicion or knowledge.
Example: (i) A bill made out by pasting together pieces of a tom bill taken without enquiry will
not make the holder, a holder in due course. It was sufficient to show the intention to cancel the
bill. A bill should not be taken without enquiry if suspicion has been aroused. (ii) A post-dated
cheque is not irregular. It will not preclude a bonafide purchase instrument from claiming the
rights of a holder in due course. It is to be noted that it is the notice of the defect in the title of his
immediate transferor which deprives a person from claiming the right of a holder in due course.
Notice of defect in the title of any prior party does not affect the title of the holder.
4. A holder in due course must take the negotiable instrument complete and regular on the face of
it.
Privileges of a holder in due course
1. Instrument purged of all defects: A holder in due course who gets the instrument in good faith
in the course of its currency is not only himself protected against all defects of title of the person
from whom he has received it, but also serves, as a channel to protect all subsequent holders. A
holder in due course can recover the amount of the instrument from all previous parties although,
as a matter of fact, no consideration was paid by some of the previous parties to instrument or
there was a defect of title in the party from whom he took it. Once an instrument passes through
the hands of a holder in due course, it is purged of all defects. It is like a current coin. Who-so-
ever takes it can recover the amount from all parties previous to such holder (Sec. 53). It is to be
noted that a holder in due course can purify a defective title but cannot create any title unless the
instrument happens to be a bearer one.
Examples: (i) A obtains Bs acceptance to a bill by fraud. A indorses it to C who takes it as a
holder in due course. The instrument is purged of its defects and C gets a good title to it. In case C
indorses it to some other person he will also get a good title to it except when he is also a party to
the fraud played by A.
(ii) A bill is payable to “A or order”. It is stolen from A and the thief forges A’s signatures and
indorses it to B who takes it as a holder in due course. B cannot recover the money. It is not a case
of defective title but a case where title is absolutely absent. The thief does not get any title
therefore, cannot transfer any title to it.
(iii) A bill of exchange payable to bearer is stolen. The thief delivers it to B, a holder in due
course. B can recover the money of the bill.
2. Rights not affected in case of an inchoate instrument: Right of a holder in due course to recover
money is not at all affected even though the instrument was originally an inchoate stamped
instrument and the transferor completed the instrument for a sum greater than what was intended
by the maker. (Sec. 20)
3. All prior parties liable: All prior parties to the instrument (the maker or drawer, acceptor and
intervening indorers) continue to remain liable to the holder in due course until the instrument is

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 duty satisfied. The holder in due course can file a suit against the parties liable to pay, in his own
name (Sec. 36)
4. Can enforce payment of a fictitious bill: Where both drawer and payee of a bill are fictitious
persons, the acceptor is liable on the bill to a holder in due course. If the latter can show that the
signature of the supposed drawer and the first indorser are in the same hand, for the bill being
payable to the drawer’s order the fictitious drawer must indorse the bill before he can negotiate it.
(Sec. 42).
5. No effect of conditional delivery: Where negotiable instrument is delivered conditionally or for
a special purpose and is negotiated to a holder in due course, a valid delivery of it is conclusively
presumed and he acquired good title to it. (Sec. 46).
Example: A, the holder of a bill indorses it “B or order” for the express purpose that B may get it
discounted. B does not do so and negotiates it to C, a holder in due course. D acquires a good title
to the bill and can sue all the parties on it.
6. No effect of absence of consideration or presence of an unlawful consideration: The plea of
absence of or unlawful consideration is not available against the holder in due course. The party
responsible will have to make payment (Sec. 58).
7. Estoppel against denying original validity of instrument: The plea of original invalidity of the
instrument cannot be put forth, against the holder in due course by the drawer of a bill of
exchange or cheque or by an acceptor for the honour of the drawer. But where the instrument is
void on the face of it e.g. promissory note made payable to “bearer”, even the holder in due
course cannot recover the money. Similarly, a minor cannot be prevented from taking the defence
of minority. Also, there is no liability if the signatures are forged. (Sec. 120).
8. Estoppel against denying capacity of the payee to indorsee: No maker of promissory note and
no acceptor of a bill of exchange payable to order shall, in a suit therein by a holder in due course,
be permitted to resist the claim of the holder in due course on the plea that the payee had not the
capacity to indorse the instrument on the date of the note as he was a minor or insane or that he
had no legal existence (Sec 121) .
9. Estoppel against indorser to deny capacity of parties: An indorser of the bill by his endorsement
guarantees that all previous endorsements are genuine and that all prior parties had capacity to
enter into valid contracts. Therefore, he on a suit thereon by the subsequent holder, cannot deny
the signature or capacity to contract of any prior party to the instrument

Negotiation of Negotiable Instrument.

NEGOTIATION
Negotiation may be defined as the process by which a third party is constituted the holder of the
instrument so as to entitle him to the possession of the same and to receive the amount due thereon in
his own name. According to section 14 of the Act, ‘when a promissory note, bill of
exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the
instrument is said to be negotiated.’ The main purpose and essence of negotiation is to make the

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transferee of a promissory note, a bill of exchange or a cheque the holder there of Negotiation thus
requires two conditions to be fulfilled, namely:
1. There must be a transfer of the instrument to another person; and
2. The transfer must be made in such a manner as to constitute the transferee the holder of the
instrument.
Handing over a negotiable instrument to a servant for safe custody is not negotiation; there must be a
transfer with an intention to pass title.
Modes of negotiation
Negotiation may be effected in the following two ways:
1. Negotiation by delivery (Sec. 47): Where a promissory note or a bill of exchange or a cheque is
payable to a bearer, it may be negotiated by delivery thereof.
Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep
it for B. The instrument has been negotiated.
2. Negotiation by endorsement and delivery (Sec. 48): A promissory note, a cheque or a bill of
exchange payable to order can be negotiated only be endorsement and delivery.
Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not
become a holder. If there are more payees than one, all must endorse it.

In other words Negotiation of an instrument is the process by which the ownership of an instrument
is transferred from one person to another. According to Section 14 of the Act, when a note, bill or
cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument
is said to be negotiated .A negotiable instrument can also be transferred (by a separate deed of
assignment); but in that case, the privileges of negotiation will not be available to the assignee, i.e., he
will not enjoy the rights of a holder in due course.
ASSIGNMENT
Bills, notes and cheques represent debts and as such have been held to be assignable without
endorsement. Transfer by assignment takes place when the holder of a negotiable instrument sells his
right to another person without endorsing it. The assignee is entitled to get possession and can
recover the amount due on the instrument from the parties thereto.
Of the two methods of transfer of negotiable instruments discussed, transfer by negotiation is
recognised by the Negotiable Instrument Act.
The object of negotiation of instruments and their assignment is the same, i.e., the transfer of
ownership from one person to another but there are some points of distinction between the two which
are as under :
Negotiation and Assignment Distinguished

Negotiation Assignment

Mere delivery in case of bearer instrument and

endorsement and delivery in case of an order A separate deed of assignment is essential.
instrument are sufficient to transfer title.

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Notice of transfer is not required to debtor. Notice of assignment must be given to the
debtor.

Consideration is presumed incase of negotiable Consideration must be proved by the assignee.

instrument.
The transferee, as holder in due course may get The assignee gets only the right of transferor.
a better title than his transferee.

The Negotiable instrument Act deal with The Negotiable instrument Act does not deal
transfer of instrument by negotiation. with transfer of negotiable instruments by
negotiation.

How Negotiation is Effected

A negotiable instrument payable to bearer can be negotiated by mere delivery i.e., by merely handing
over theinstrument to the transferee, and no writing is necessary. When a negotiable instrument is
payable to order, it isnegotiated by the holder by indorsement and delivery. Endorsement or
Indorsement means signature of the holdermade with the object of transferring the insturment.
Endorsement may be made on the back or face of the instrument. If there is no space on the
instrument the endorsement may be made on a slip of paper attached to it. Such a slipa called
Allonge.It will be noticed that delivery of the instrument to the transferee or his agent is essential of
boththe bearer and order instruments. Thus, where A endorses a bill in favour of B and puts it in his
desk-drawer, there isno negotiation as the bill has not been delivered to B. If A dies and the bill is
found by B in the drawer, B cannot sueon it, because the bill was never delivered by A to B.Delivery
of the instrument must be voluntary on the part of theholder and must be made with the intention of
passing property in the instrument to the person to whom it is delivered. So that a thief cannot get a
good title to the instrument, nor can a finder of a lost instrument.A negotiable instrumentcan be
negotiated till payment or satisfaction. After payment or satisfaction it cannot be negotiated.

Importance of delivery in negotiation

Delivery is a voluntary transfer of possession from one person to another. Delivery is essential to
complete any contract on a negotiable instrument whether it be contract of making endorsement or
acceptance.
The property in the instrument does not pass unless the delivery is fully completed. Section 46 of the
Act provides that a negotiable instrument isnot made or accepted or endorsed unless it is delivered to
a proper person. For instance, if a person signs a promissory note and keeps it with himself, he cannot
be said to have made a promissory note; only when it is delivered to the payee that the promissory
note is made.
Delivery may be actual or constructive. Delivery is actual when it is accompanied by actual change of
possession of the instrument. Constructive delivery is effected without any change of actual
possession.

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Presentment and Payment of Negotiable Instrument
(Sec. 61-77)
What is presentment • The Act requires presentment of negotiable instruments. Presentment is simply
a demand by which holder of the instruments is required to do as per direction of the instruments.
Direction may be either acceptance in case of bill of exchange or payment in case of all instruments.
Name of Institution Kinds of Presentment
The scheme of the Act as to presentment may be classified as following:
• (1) Presentment for acceptance (Section 61).
• (2) Presentment of promissory note for sight (Section 62)
• (3) Presentment for payment (Section 64)
• (4) Presentment of cheque to charge the drawee bank (Section 138).
a) To whom presented and by whom accepted • The person who can accept the bill are :-
(i) drawee of the bill of exchange; or
(ii) all or some of the several drawees; or
(iii) (iii) a person named in the bill as a drawee in case of need; or

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(iv) an acceptor for honour; or
(v) the duly authorised agent of the drawee; (Section 75)
(vi) In case of death, to his legal representative; and • (vii) In case insolvency of drawee, to his
assignee.
Time and place of acceptance
• If the bill is directed to the drawee at a particular place, it must be presented at that place and if at
the due date for presentment he cannot, after reasonable search, be found thereon, the bill is
dishonoured. (Sec-69)
• If no place is specified in the instrument for presentment for acceptance, such presentment may be
made to him in person wherever he' can be found and if the drawee after reasonable search, be found
thereon, the bill is dishonoured. (Sec. 71)
Presentment through post-office
• Where authorised by agreement or usage a presentment through the post office by means of a
registered letter is sufficient Within reasonable time
• It must be presented within reasonable time. Section 105 provides that in determining reasonable
time regard shall be had to the nature of the instrument and usual course of dealing Section 75-A
makes provision for exercising delay where such delay is caused by circumstances beyond the control
of the holder.
• It must be presented in business hours on a business day.
When presentment for acceptance is necessary
• A bill of exchange may have to be presented for acceptance before it is presented for payment. But
it is not every bill which has to be presented for acceptance. Presentment for acceptance is necessary
only where-
• (i) the bill is payable at a given time after acceptance, or
• (ii) the bill is payable after sight, or
• (iii) the bill expressly stipulates that it shall be presented for acceptance before it is presented for
payment, or
• (iv) the bill is made payable at a place other than the place of residence or business of the drawee.
Acceptance is not necessary
(1) Where the drawee is :
(i) a dead person, or
(ii) an adjudicated insolvent, or
(iii) a fictitious person, or
(iv) a person incompetent to contract, and
(2) Where drawee cannot, after reasonable search, be found, the bill is dishonoured.
Effects of non-presentment of acceptance
To establish legal relation between the parties to a bill of exchange or privity of contract acceptance
by drawee of the bill of exchange is required. If it is not presented the following consequences may
arise.
• (i) Drawee's liability under the bill will not arise.
• (ii) There will be no privity of the contract between the parties.
• (iii) The bill of exchange will be deemed to be dishonoured.

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• (iv) No party thereto liable thereon to the person making such default.
Presentment of promissory note for sight
Name of Institution • A promissory note, payable at a certain period after sight must be presented to
the maker thereof for sight (if he can after reasonable search be found) by a person entitled to demand
payment, within a reasonable time after it is made and in business hours on a business day. In default
of such presentment, no party thereto is liable thereon to the person making such default.

Presentment for payment

Name of Institution • Promissory notes, bills of exchange and cheques must be presented for payment
to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder as hereinafter
provided. In default of such presentment, the other parties thereto are not liable thereon to such
holder. • Where authorized by agreement or usage, a presentment through the post office by means of
a registered letter is sufficient. • Exception.-Where a promissory note is payable on demand and is not
payable at a specified place, no presentment is necessary in order to charge the maker thereof.

Presentment of cheque for payment • A cheque be also presented for payment to the drawee bank
within banking hours [any branch under C.B.S. scheme]
Presentment of Truncated Cheque [(Section 64(2)]:- where an electronic image of a truncated
cheque is presented for payment, the drawee bank is entitled to demand any further information
regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable
suspicion about the genuineness of the apparent tenor of instrument, it is entitled to further demand
the presentment of the truncated cheque itself for verification

Dishonour of Negotiable Instrument

When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to all the
previous parties in order to make them liable. A negotiable instrument can be dishonoured either by
non- acceptance or by non-payment. A cheque and a promissory note can only be dishonoured by
non-payment but a bill of exchange can be dishohoured either by non-acceptance or by non-payment.
Dishonour by non-acceptance (Section 91) A bill of exchange can be dishonoured by non-acceptance
in the following ways:
1.If a bill is presented to the drawee for acceptance and he does not accept it within 48 hours from the
time of presentment for acceptance. When there are several drawees even if one of them makes a
default in acceptance, the bill is deemed to be dishonoured unless these several drawees are partners.
Ordinarily when there are a number of drawees all of them must accept the same, but when the
drawees are partners acceptance by one of them means acceptance by all.
2. When the drawee is a fictitious person or if he cannot be traced after reasonable search.
3. When the drawee is incompetent to contract, the bill is treated as dishonoured.

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4. When a bill is accepted with a qualified acceptance, the holder may treat the bill of exchange
having been dishonoured.
5. When the drawee has either become insolvent or is dead.
6. When presentment for acceptance is excused and the bill is not accepted. Where a drawee in case
of need is named in a bill or in any indorsement thereon, the bill is not dishonoured until it has been
dishonoured by such drawee.
Dishonour by non-payment (Section 92)- A bill after being accepted has got to be presented for
payment on the date of its maturity. If the acceptor fails to make payment when it is due, the bill is
dishonoured by non-payment. In the case of a promissory note if the maker fails to make payment on
the due date the note is dishonoured by non-payment. A cheque is dishonoured by non-payment as
soon as a banker refuses to pay.
An instrument is also dishonoured by non-payment when presentment for payment is excused and the
instrument when overdue remains unpaid (Sec 76).
Effect of dishonour: When a negotiable instrument is dishonoured either by non acceptance or by
non-payment, the other parties thereto can be charged with liability. For example if the acceptor of a
bill dishonours the bill, the holder may bring an action against the drawer and the indorsers. There is
a duty cast upon the holder towards those whom he wants to make liable to give notice of dishonour
to them.
Notice of dishonour: Notice of dishonour means the actual notification of the dishonour of the
instrument by non-acceptance or by non-payment. When a negotiable instrument is refused
acceptance or payment notice of such refusal must immediately be given to parties to whom the
holder wishes to make liable. Failure to give notice of the dishonour by the holder would discharge
all parties other than the maker or the acceptor (Sec. 93).
Notice by whom: Where a negotiable instrument is dishonoured either by non- acceptance or by non-
payment, the holder of the instrument or some party to it who is liable thereon must give a notice of
dishonour to all the prior parties whom he wants to make liable on the instrument (Section 93). The
agent of any such party may also be given notice of dishonour. A notice given by a stranger is not
valid. Each party receiving notice of dishonour must, in order to render any prior party liable give
notice of dishonour to such party within a reasonable time after he has received it. (Sec. 95)
When an instrument is deposited with an agent for presentment and is dishonoured, he may either
himself give notice to the parties liable on the instrument or he may give notice to his principal. If he
gives notice to his principal, he must do so within the same time as if he were the holder. The
principal, too, in his turn has the same time for giving notice as if the agent is an independent holder.
(Sec. 96)
Notice to whom?: Notice of dishonour must be given to all parties to whom the holder seeks to make
liable. No notice need be given to a maker, acceptor or drawee, who are the principal debtors (Section
93).
Notice of dishonour may be given to an endorser. Notice of dishonour may be given to a duly
authorised agent of the person to whom it is required to be given. In case of the death of such a
person, it may be given to his legal representative. Where he has been declared insolvent the notice
may be given to him or to his official assignee (Section 94). Where a party entitled to a notice of
dishonour is dead, and notice is given to him in ignorance of his death, it is sufficient (Section 97).

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Mode of notice: The notice of dishonour may be oral or written or partly oral and partly written. It
may be sent by post. It may be in any form but it must inform the party to whom it is given either in
express terms or by reasonable intendment that the instrument has been dishonoured and in what way
it has been dishonoured and that the person served with the notice will be held liable thereon.
What is reasonable time?: It is not possible to lay down any hard and fast rule for determining what
is reasonable time. In determining what reasonable time is, regard shall be had to the nature of the
instrument, the usual course the dealings with respect to similar instrument, the distance between the
parties and the nature of communication between them. In calculating reasonable time, public
holidays shall be excluded (Section 105).
Section 106 lays down two different rules for determining reasonable time in connection with the
notice of disnonour (a) when the holder and the party to whom notice is due carry on business or live
in different places, (b) when the parties live or carry on business in the same place.
In the first case the notice of dishonour must be dispatched by the next post or on the day next after
the day of dishonour. In the second case the notice of dishonour should reach its destination on the
day next after dishonour.
Place of notice: The place of business or (in case such party has no place of business) at the
residence of the party for whom it is intended, is the place where the notice is to given. If the person
who is to give the notice does not know the address of the person to whom the notice is to be given,
he must make reasonable efforts to find the latter’s address. But if the party entitled to the notice
cannot after due search be found, notice of dishonour is dispensed with.
Duties of the holder upon dishonour
(1) Notice of dishonour. When a promissory note, bill of exchange or cheque is dishonoured by non-
acceptance or non-payment the holder must give notice of dishonour to all the parties to the
instrument whom he seeks to make liable thereon. (Sec. 93).
(2) Noting and protesting. When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon
the instrument or upon a paper attached thereto or partly upon each (Sec. 99). The holder may also
within a reasonable time of the dishonour of the note or bill, get the instrument protested by notary
public (Sec. 100)
(3) Suit for money. After the formality of noting and protesting is gone through, the holder may bring
a suit against the parties liable for the recovery of the amount due on the instrument.
Instrument acquired after dishonour: The holder for value of a negotiable instrument as a rule, is
not affected by the defect of title in his transferor. But this rule is subject to two important exceptions
(i) when the holder acquires it after maturity and (ii) when he acquires it with notice of dishonour.
The holder of a negotiable instrument who acquired it after dishonour, whether by non-acceptance or
non-payment, with notice thereof, or after maturity, has only, as against the other parties, the rights
thereon of his transfer. (Sec. 59).

Noting and Protest of Negotiable Instrument

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Noting and Protesting ¾ When a promissory note or bill of exchange has been dishonoured due to
non acceptance or non payment, the holder of such instrument may cause such dishonour to be noted
by notary public which is called as “Noting” .
Noting must be made within reasonable time after dishonour. Noting not necessary for cheques and
optional for inland bills.
Advantages of Noting –
• Wherever protest within particular time is compulsory under law, it is sufficient if at least noting
has been made within such time
• A bill of exchange may be accepted for honour after it has been noted
• A bill of exchange may be paid for honour after it has been noted
When promissory note or bill of exchange has been dishonoured due to non acceptance or non
payment the holder may within reasonable time cause such dishonour noted and certified by notary
public such certificate is called as “Protest’
Contents of Protest –
• The instrument or literal transcript
• Name of the parties – name of the persons for whom & against whom instrument has been protested
• Statement that payment or acceptance has been demanded by notary public & answer received or
statement that no answer received or that maker, drawer, acceptor could not be found
• Place & time of dishonour
• Signature of notary
When acceptor of bill of exchange has become insolvent or his credit has been publicly impeached
before the maturity of the bill the holder within reasonable time cause notary public to demand better
security & on its refusal may within reasonable time cause such facts to be noted and certified

When a negotiable instrument is dishonoured the holder may sue his prior parties i.e the drawer and
the indorsers after he has given a notice of dishonour to them. The holder may need an authentic
evidence of the fact that a negotiable instrument has been dishonoured. When a cheque is
dishonoured general1y the bank who refuses payment returns back the cheque giving reasons in
writing for the dishonour of the cheque. Sections 99 and l00 provide convenient methods of
authenticating the fact of dishonour of a bill of exchange and a promissory note by means of ‘noting’
and ‘protest’.
Noting
As soon as a bill of exchange or a promissory note is dishonored, the holder can after giving the
parties due notice of dishonour, sue the parties liable thereon. Section 99 provides a mode of
authenticating the fact of the bill having been dishonoured. Such mode is by noting the instrument.
Noting is a minute recorded by a notary public on the dishonoured instrument or on a paper attached
to such instrument. When a bill is to be noted, the bill is taken to a notary public who represents it for
acceptance or payment as the case may be and if the drawee or acceptor still refuses to accept or pay
the bill, the bill is noted as stated above.

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Noting should specify in the instrument, (a) the fact of dishonour, (b) the date of dishonour, (c) the
reason for such dishonour, if any (d) the notary’s charges, (e) a reference to the notary’s register and
(f) the notary’s initials.
Noting should be made by the notary within a reasonable time after dishonour. Noting and protesting
is not compulsory but foreign bills must be protested for dishonour when such protest is required by
the law of the place where they are drawn. Cheques do not require noting and protesting. Noting by
itself has no legal effect. Still it has some advantages. If noting is done within a reasonable time
protest may be drawn later on. Noting without protest is sufficient to allow a bill to be accepted for
honour.
Protest
Protest is a formal certificate of the notary public attesting the dishonour of the bill by non-
acceptance or by non-payment. After noting, the next step for notary is to draw a certificate of protest,
which is a formal declaration on the bill or a copy thereof. The chief advantage of protest is that the
court on proof of the protest shall presume the fact of dishonour.
Besides the protest for non-acceptance and for non-payment the holder may protest the bill for better
security. When the acceptor of a bill becomes insolvent or suspends payment before the date of
maturity, or when he absconds the holder may protest it in order to obtain better security for the
amount due. For this purpose the holder may employ a notary public to make the demand on the
acceptor and if refused, protest may be made. Notice of protest may be given to prior parties. When
promissory notes and bills of exchange are required to be protested, notice of protest must be given
instead of notice of dishonour. (Sec. 102)
Inland bills may or may not be protested. But foreign bills must be protested for dishonour when such
protest is required by the law of the place where they are drawn (Sec. 104).
Where a bill is required to be protested under the Act within a specified time, it is sufficient if it is
‘noted for protest’ within such time. The formal protest may be given at anytime after the noting (Sec.
104A).
Contents of protest
Section 101 of the Act lays down the contents of a regular and perfect protest which are as follows:
1. The instrument itself or a literal transcript of the instrument; and of everything written or printed
thereupon.
2. The name of the person for whom and against whom the instrument has been protested.
3. The fact of and reasons for dishonour i.e. a statement that payment or acceptance or better security,
as the case may be, has been demanded of such person by the notary public from the person
concerned and he refused to give it or did not answer or that he could not be found.
4. The time and place of demand and dishonour.
5. The signature of the notary public.
6. In the case of acceptance for honour or payment for honour the person by whom or for whom such
acceptance or payment was offered and effected.

ENDORSEMENT

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The word ‘endorsement’ in its literal sense means, a writing on the back of an instrument. In the
words of Section 15, of the Negotiable Instruments Act, 1881 endorsement is defined as follows:

“When the maker or the holder of a negotiable instrument signs the same otherwise than as such
maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed
thereto, he is said to endorse the same and is called the endorser and the person to whom the
instrument is endorsed is called the endorsee.”

When the maker or holder of a negotiable instrument signs the same otherwise than as such make for
the purpose of negotiation, on the face or back thereof, or a slip of paper annexed thereto called along
or so sign for the same purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to endorsethe same and is called as endorser. (Sec.15).
Classes of Endorsement
An endorsement may be (i) General or blank, (ii) Special or Full (iii) Restrictive, (iv) Partial,
or (v) Conditional or qualified.
1. An endorsement is blank or general where the endorser merely writes his signature on the back of
the instrument, e.g., a bill payable to “Ram or order” and he writes on back of its back “Ram”, it is
endorsement in blank and the bill has become payable to bearer.
Blank or general endorsement (Sections 16 and 54). It is an endorsement when the endorser merely
signs on the instrument without mentioning the name of the person in whose favour the endorsement
is made. Endorsement in blank specifies no endorsee. It simply consists of the signature of the
endorser on the endorsement. A negotiable instrument even though payable to order becomes a bearer
instrument if endorsed in blank. Then it is transferable by mere delivery. An endorsement in blank
may be followed by an endorsement in full.

Example: A bill is payable to X. X endorses the bill by simply affixing his signature. This is an
endorsement in blank by X. In this case the bill becomes payable to bearer. There is no difference
between a bill or note indorsed in blank and one payable to bearer. They can both be negotiated by
delivery.

2. An endorsement is full or special where the endorser mentions the name of the person to whom
the money due on the instrument is to be paid. Where a bill is payable to “Ram or order” and Ram
writes on the back of the in strument ‘Pay to Sham’ or ‘Pay to Sham or order’, and signs, it is a full
endorsement.

Special or full endorsement (Section 16) When the endorsement contains not only the signature of the
endorser but also the name of the person in whose favour the endorsement is made, then it is an
endorsement in full. Thus, when endorsement is made by writing the words “Pay to A or A’s order,”
followed by the signature of the endorser, it is an endorsement in full. In such an endorsement, it is
only the endorsee who can transfer the instrument.
Conversion of endorsement in blank into endorsement in full: When a person receives a
negotiable instrument in blank, he may without signing his own name, convert the blank endorsement
into an endorsement in full by writing above the endorser’s signature a direction to pay to or to the

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order of himself or some other person. In such a case the person is not liable as the endorser on the
bill. In other words, the person transferring such an instrument does not incur all the liabilities of an
endorser. (Section 49).
Example: A is the holder of a bill endorsed by B in blank. A writes over B’s signature the words “Pay
to C or order.” A is not liable as endorser but the writing operates as an endorsement in full from B to
C.
Where a bill is endorsed in blank, or is payable to bearer and is afterwards endorsed by another in
full, the bill remains transferable by delivery with regard to all parties prior to such endorser in full.
But such endorser in full cannot be sued by anyone except the person in whose favour the
endorsement in full is made. (Section 55).
Example: C the payee of a bill endorses it in blank and delivers it to D, who specially endorses it to E
or order. E without endorsement transfers the bill to F. F as the bearer is entitled to receive payment
or to sue the drawer, the acceptor, or C who endorsed the bill in blank but he cannot sue D or E

3. An endorsement is restrictive if it restricts further negotiation of an instrument, e.g.,‘Pay Sham

only’, or ‘Pay Sham for my use’ or ‘Pay Sham on account of Radha’.

Restrictive endorsement (Section 50)- The endorsement of an instrument may contain terms making it
restrictive. Restrictive endorsement is one which either by express words restricts or prohibits the
further negotiation of a bill or which expresses that it is not a complete and unconditional transfer of
the instrument but is a mere authority to the endorsee to deal with bill as directed by such
endorsement.
“Pay C,” “Pay C for my use,” “Pay C for the account of B” are instances of restrictive endorsement.
The endorsee under a restrictive endorsement acquires all the rights of the endoser except the right of
negotiation.

4. An endorsement is Partial which purports to transfer to the indorsee a part only of the amount
payable on the instrument; but a partial endorsement does not operate as a negotiation of the
instrument; e.g. , A sells a bill forRs.1000 endorses it thus: ‘Pay B or order Rs.500’ or ‘Pay Rs.500 to
Band Rs.500 to C’, the endorsement is partial and invalid.

Partial endorsement (Section 56) A partial endorsement is one which purports to transfer to the
endorsee a part only of the amount payable on the instrument. Such an endorsement does not operate
as a negotiation of the instrument.
Example: A is the holder of a bill for Rs.1000. He endorses it “pay to B or order Rs.500.” This is a
partial endorsement and invalid for the purpose of negotiation
5. An endorsement is conditional or qualified which limits or negatives the liability of the endorser.
For example, where the indorser makes it clear that he does not incur the liability of an endorser
towards theindorsee or subsequent holders he makes a ‘Sans Recourse’ or‘Without Recourse’
endorsement. He mayendorse thus: ‘Pay Sham or order Sans Recourse’, or ‘Pay Sham or order
without recourse to me’. In thesecases, if the instrument is dishonoured he cannot be called upon to
pay.

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When the endorser by express words abandons some right or increase his liability under a negotiable
instrument is called Faculative : e.g., ‘Pay Sham or order. Notice of dishonour not required’.
It is open to the endorser to annex some condition to his owner liability on the endorsement. An
endorsement where the endorsee limits or negatives his liability by putting some condition in the
instrument is called a conditional endorsement. A condition imposed by the endorser may be a
condition precedent or a condition subsequent. An endorsement which says that the amount will
become payable if the endorsee attains majority embodies a condition precedent. A conditional
endorsement unlike the restrictive endorsement does not affect the negotiability of the instrument. It
is also some times called qualified endorsement. An endorsement may be made conditional or
qualified in any of the following forms:
(i) ‘Sans recourse’ endorsement: An endorser may be express word exclude his own liability
thereon to the endorser or any subsequent holder in case of dishonour of the instrument.
Such an endorsement is called an endorsement sans recourse (without recourse). Thus
‘Pay to A or order sans recourse, ‘pay to A or order without recourse to me,’ are instances
of this type of endorsement. Here if the instrument is dishonoured, the subsequent holder
or the indorsee cannot look to the indorser for payment of the same. An agent signing a
negotiable instrument may exclude his personal liability by using words to indicate that he
is signing as agent only. The same rule applies to directors of a company signing
instruments on behalf of a company. The intention to exclude personal liability must be
clear. Where an endorser so excludes his liability and afterwards becomes the holder of
the instrument, all intermediate endorsers are liable to him.
Example: A is the holder of a negotiable instrument. Excluding personal liability by an
endorsement without recourse, he transfers the instrument to B, and B endorses it to C,
who endorses it to A. A can recover the amount of the bill from B and C.
(ii) Facultative endorsement: An endorsement where the endorser extends his liability or
abandons some right under a negotiable instrument, is called a facultative endorsement.
“Pay A or order, Notice of dishonour waived” is an example of facultative endorsement.
(iii) ‘Sans frais’ endorsement: Where the endorser does not want the endorsee or any
subsequent holder, to incur any expense on his account on the instrument, the endorsement
is ‘sans frais’.
(iv) Liability dependent upon a contingency: Where an endorser makes his liability depend
upon the happening of a contingent event, or makes the rights of the endorsee to receive
the amount depend upon any contingent event, in such a case the liability of the endorser
will arise only on the happening of that contingent event. Thus, an endorser may write
‘Pay A or order on his marriage with B’. In such a case, the endorser will not be liable
until the marriage takes place and if the marriage becomes impossible, the liability of the
endorser comes to an end.
Effects of endorsement The legal effect of negotiation by endorsement and delivery is:
(i) to transfer property in the instrument from the endorser to the endorsee.
(ii) to vest in the latter the right of further negotiation, and
(iii) a right to sue on the instrument in his own name against all the other parties (Section 50)

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Negotiation back ‘Negotiation back’ is a process under which an endorsee comes again into
possession of the instrument in his own right. Where a bill is re-endorsed to a previous endorser, he
has no remedy against the intermediate parties to whom he was previously liable though he may
further negotiate the bill.

Requisites of valid endorsement

1. It should be done on the instrument or allonge.
2. It must be done by the maker/drawer/payee/holder/indorser of the instrument.
3. It must be signed.
4. Though no specific words are prescribed for endorsement yet the words used must clear
the intention of the indorser to transfer the ownership of the instrument.
5. It must be completed by subsequent delivery of the instrument to the endorsee.

According to Section 40 of the Act, where the holder of a negotiable instrument, without the consent
of the endorser, destroys or impairs the endorsers remedy against a prior party, the endorser is
discharged from his liability to the holder to the same extent as if the instrument had been paid at
maturity.
Thus, if the endorsement of ‘D’ and ‘C’ are struck out without the knowledge of ‘E’, A will not be
entitled to recover anything from ‘E’ the reason being that as between D and E. D is the principal
debtor and E is surety.

If D is released by the holder then under Section 39 of the Act, E being surety will be discharged. In
this problem the rule followed will thus be stated as. When the holder without the knowledge of the
endorser impairs the endorser’s remedy against a prior party, the endorser is discharged from liability
to the holder.

Legal provisions regarding endorsements

The Negotiable Instrument Act contains many provisions regarding endorsement :
1. Effect of Endorsement. The endorsement of a negotiable instrument followed by delivery,
transfers to the endorsee the property therein with the rights of further negotiation. Thus the endorsee
acquires property or interest in the instrument as the holder. He can also negotiate further if not
restricted by are stricted endorsement by the endorser.
2. Who can endorse.
According to section 51 ‘Every sole maker, drawer, payee or endorsee or all of several joint makers,
drawers, payees or endorsees, of negotiable instrument may endorse and negotiate the same’. Thus, in
case the instrument is held jointly by a number of persons, endorsement by all of them is essential,
one can not present the other.
3. Time. A negotiable instrument may be negotiated until its payment has been made' by the maker
drawee or acceptor at or after maturity not after its payment.
4. Endorsement for a part of the amount. The instrument must be endorsed for its entire amount:
According to section 56 ‘no writing on a negotiable instrument is valid for the purpose of negotiation
if such writing purports to transfer only a part of the amount appearing to be due on the instrument’.
Thus an endorsement for a part of the amount of the instrument is invalid. But in cases where an
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instrument has been partly paid, it may be negotiated for the balance of the amount provided a note to
that effect is given on the instrument. If the endorser intends to transfer the document to two or more
endorses separately, it will not 21constitute a valid endorsement.
5. The legal representative of a deceased person cannot negotiate by delivery only a promissory note,
bill of exchange or cheque payable to order and endorsed by the deceased but not delivered. Thus if
the endorser dies after endorsing the instrument payable to order but without delivering the same to
the endorsee, the endorsement is not valid and his legal representative cannot complete the
negotiation by mere delivery thereof.
6. Unless the contrary is proved it is presumed under section 118 that ‘the endorsements appearing
upon a negotiable instrument were made in the order in which they appear thereon’. It means that the
endorsement which appears on the instrument first is presumed to have been made earlier to the
second one.
Once a Bearer Cheque, Always a Bearer Cheque
If a negotiable instrument is endorsed in blank or is payable to bearer, it is bearer instrument.
The holder may negotiate by mere delivery. But if the holder endorses it especially to a person and
makes it payable to the order of such person, then the endorser in full cannot be sued by any person
except the person in whose favour he endorsed it. But as regards all parties prior to the endorser in
full, the instrument remains transferable by mere delivery. A, the payee of a bill, endorses it in blank
and delivers it to B who endorses specially to C, or order C without any endorsement transfers it to
D. D as the bearer is entitled to receive payment. In case of dishonour D is entitled to sue the drawer
and the acceptor of the bill and also A and all indorses prior to A, if any. He cannot, however, sue B
or C. Where a cheque is originally drawn payable to bearer, the drawee (the paying banker) is
discharged by payment in due course to the bearer, even if there is any subsequent endorsement. The
rule is ‘once a bearer cheque always a bearer cheque’ which means that if a cheque is originally
drawn payable to bearer, it remains bearer, even though it is subsequently endorsed in full. This rule
is not applicable if a cheque originally made payable to order becomes payable to bearer by blank
endorsement. Where a, bearer negotiates an instrument by mere delivery, and does not put his
signature thereon, he is not liable to any party to the instrument in case it is dishonored as he has not
lent his credit to it.

Forged Instruments and Forged Endorsements

The general law is that forger, confers no title, so that the forged signature of the maker of a
promissory note, or of the bill or of the cheque does not give to the forger any title whatever, as the
forged instrument is a nullity from the very beginning. Nobody has any title to it and there is no
holder in due course. A’s signature is forged on a cheque as a drawer. A is not liable on the cheque,
nor does ally party acquire any right under it. If an instrument is payable to order or endorsed in full,
it cannot be negotiated except by an endorsement signed by the person to whom or to whose order the
instrument is payable, for the endorsee receives title only through his endorsement. Hence, if the
signature of transferor is forged no person claiming through that forged signature gets any title, even
if he obtained it for value and in good faith. A is the payee of a bill. It is stolen by B, who forges A’s
signature and transfers the bill to C for value. C is not a holder in due course, even if he obtains the

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bill without notice of the forged endorsement, and cannot recover the amount on the bill. And if the
acceptor of the bill pays to C on maturity, he is not discharged and A, as the holder in due course, can
recover the amount from the acceptor.

ACCEPTANCE
After a bill has been issued, the holder should present it to the drawer for acceptance to find out
whether the drawee is willing to carry out the order of the drawer. If the drawee agrees to obey the
drawer order he is said to accept the bill, which he does by signing his name on the bill and writing
the word “accepted”. Acceptance is defined as the indication by the drawee of his assent to the order
of the drawer. After acceptance the drawee is known as the acceptor. The drawee becomes liable on
the bill only after he has accepted it and delivered it over to the holder or has given notice of
acceptance to him. An acceptance may be either General or Qualified. An acceptance is general when
it is unconditional or unqualified. That is to say, when the drawee accepts liability to pay the amount
of the bill in full without any condition or limitation. An acceptance is said to be qualified when
(1) acceptor attaches some conditions to the acceptance e.g., “accepted payable when in funds” or
(2) it is partial i.e., for part only of the amount of the bill e.g., a bill, drawn for Rs.1,000 as “accepted
for Rs.500 only”,or
(3) is made local i.e., to pay at a particular place or
(4) is qualified as to time, e.g., a bill is drawn payable3 months after date is “accepted payable 6
months after date”. Acceptance for payments In installments or by some of the drawees only is also a
qualified acceptance. The holder of the bill may refuse to take a qualified acceptance and may treat
the bill as dishonored by non-acceptance, and sue the drawer for payment. It he accepts the
“qualified, acceptance, it binds him and the acceptor, but the drawer and endorsees are not bound or
are discharged unless they assent to it.
Who can accept a bill ?
1. The drawee of the bill.
2. All or some of the several drawees; but if all the drawees have to be liable all of them must
accept it.
3. A drawee in case of need.
4. The agent of any of the persons named above.
5. An acceptor for honour i.e., person who accepts for the, honour of any party already liable on
the bill.
6. The agent of the acceptor for honour.
An acceptor for honour: When a bill has been noted or protested for non-acceptance, any person who
is not already a party to the bill, may with the consent of the holder, accept it for the honour of any
party thereto. An acceptor for honour enjoys a slightly better position than an ordinary-acceptor. His
liability is conditional, because his acceptance is in the nature of a qua1ified acceptance. He
undertakes to pay only when the bill has been duly presented at maturity to the drawee for payment
and the drawee has refused to pay and the bill has been noted or protested for non payment. On
acceptance the rights and liabilities of the acceptor for honour are the same as those of the party for

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whose honour he accepts. He is liable to all parties subsequent to the party for whose honour he
accepts to pay in case the drawee fails to pay. On paying the bill for honour he acquires all the rights
of a holder for whom he pays and is entitled to all the remedies of the holder of the instrument. Those
remedies are available only against the party for whose honour he pays and all parties prior to such
persons and all parties subsequent to such person are discharged.
Presentment
Presentment is made for two purposes :
(i) Presentment for acceptance and,
(ii) Presentment for payment.
Only bill of exchange of certain kinds require presentment for acceptance. Bills payable demand or at
sight need not be presented. But the following bills must be presented for acceptance, otherwise the
parties to the bill will be liable on it.
1. A bill payable after sight. Presentment is necessary in order to fix maturity of the bill.
2. A bill in which there is an express stipulation that it shall be presented for acceptance before it is
presented for payment.
But even in cases where presentment is optional, it is desirable to get it accepted as soon as possible.
The bill must be presented for acceptance before the date of payment and within a reasonable time
after it is drawn. The drawee can take 48 hours to accept it, but after 48 hours are over he must return
the bill to the holder with or without acceptance. If the holder allows the drawee more than 48 hours
to decide whether to accept or not, all prior parties to the bill are discharged from their liabilities
under the bill. If the drawee, after a reasonable search, cannot be found, the bill can be treated
dishonored. If a bill is directed to the drawee at a particular place, it must be presented at that place. If
a bill, which requires acceptance, is not presented for acceptance; the drawer and all endorsees are
discharged from their liability to the holder.
When presentment for acceptance not necessary
1. When after a reasonable search the drawee cannot be found.
2. When the bill is drawn on a fictitious person or on a person who is incapable of entering into
contracts.
3. When the drawee is insolvent or dead.
4. Where, although the presentment is irregular, acceptance has been refused on some other
ground.
Presentment for payment
The negotiable instrument must be presented for payment. The rule regarding presentment for
payment are asfollows :
1. Promissory notes, bills of exchange and cheques must be presented for payment to the maker,
acceptor or draweethereof respectively, by or on behalf of the holder. If default in presentment is
made no party other than the maker,acceptor or drawee will be liable to the holder.
2. A pronote, payable at a certain period after sight, must be presented to the maker by a person who
isentitled to demand payment, within a reasonable time after it is made and during business hours on
abusiness day. If presentment is not made, no party there to is liable on it to the person failing to
present.

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3. Where a pronote is payable on demand and is not payable at a specified place, no presentment
isnecessary.
4. A pronote or bill made payable at a specified period after date or sight, must be presented for
payment atmaturity.
5. A note or bill made, drawn or accepted payable at a specified place must be presented for payment
atthat place otherwise the maker or the drawer will be liable on it.
6. A note, bill or cheque made, accepted or drawn payable at “Specified place and not elsewhere”
must bepresented at that place, otherwise no party to it will be liable.
7. A pronate payable by instalments must be presented for payment on the third day after the date
fixed foreach installment.
8. A note or bill not made payable at a specified place must be presented for payment at the place of
business, if anyor at the usual residence, of the maker, drawee or acceptor thereof, as the case may
be.
9. A cheque must be presented at the bank upon which it is drawn before the relation between the
drawerand his banker has been altered to the prejudice of the drawer. If default is made the drawer be
dischargedfrom liability.
10. If the cheque is not presented to the banker for payment within a reasonable time, then all parties
other thanthe drawer will be discharged.Delay in presentment for acceptance or payment is excused,
if it is caused bycircumstances beyond the control of the holder.
Presentment for payment not necessary: Presentment for payment is not necessary in the following
cases. In all such cases the instrument is deemed to be dishonored at the due date so presentment for
payment is not necessary:
1. If the maker, drawee or acceptor intentionally prevent presentment of the instrument.
2. If the instrument being payable at his place of business, he closes such place on a business day
during the usual business hours.
3. If the instrument being payable at some other specified place, neither he nor any other person
authorized to pay it attends at such place during the usual business hours.
4. If the instrument is not payable at a specified place and the drawer or acceptor, cannot, after due
search, be found.
5. Where there is no promise to pay notwithstanding non-presentment.
6. Where the presentment is waived by the party entitled to presentment becomes impossible
because of impossibility or illegality or performance.
7. Where the drawer could not possibly have suffered any damage by non-presentment.
8. Where the drawee is a fictitious person, or one incompetent to contract.
9. Where the bill has been dishonored by non-acceptance.
10. Where the terms of agreement do not require any presentment for the instrument. In all the
above cases no presentment for payment is necessary and the instrument is deemed to be dishonored
at the due date.

DISHONOUR

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A bill of exchange may be dishonored either by non-acceptance or by non-payment. A pronote or
cheque is dishonored by non-payment as acceptance is not required in their case.
When an instrument is dishonored the holder must give notice of dishonour to the drawer or maker or
his previous holders if he wants to make them liable.
Dishonour of a bill by non-acceptance (Sec.91) : A bill is said to be dishonored by not acceptance
when :
1. the drawee does not accept it within 48 hours from the time of presentment for acceptance;
2. Presentment for acceptance as excused and the bill remains unaccepted;
3. the drawee is incompetent to contract;
4. the drawee is a fictitious person;
5. the drawee, after a reasonable search, cannot be found; and
6. the acceptance is qualified and the holder opts to treat it as dishonored.
Dishonour of an instrument by non-payment (Sec. 92) : A promissory note, a bill of exchange or
cheque is said to be dishonored by non-payment when the maker of the note, acceptor of the bill or
drawee banker of the cheque makes default in payment on being duly required to pay the same. A
negotiable instrument is also deemed to be dishonored by non-payment when presentment for
payment is excused and the instrument remains unpaid on maturity; and instrument when overdue,
remains unpaid. Effect of Dishonour :The drawer and all the endorsers of the bill are liable to the
holder if the bill is dishonored either by then on-acceptance or by the non-payments provided the he
gives them notice of dishonour. The drawee is liable only when there is dishonour by nonpayment.
Consequence of failure to give notice: Any person to whom notice of dishonour is not given is
discharged from his obligations under the instrument. He is not liable to pay and no suit can be filed
against him.
When notice of dishonour is excused: It is not necessary to give notice of dishonour in the following
cases and to the following parties :
1. To the maker of a dishonored promissory note.
2. To the drawee or acceptor of a dishonored bill or cheque.
3. When it is dispensed with by the party entitled to it.
4. In order to charge the drawer of a cheque when he has countermanded payment.
5. When the party charged could not suffer damage for want of notice.
6. When the party entitled to notice cannot be found.
7. To charge the drawer when the acceptor is also the drawer.
8. When the promissory note is not negotiable.
9. Where the party entitled to notice promises to pay the amount after the dishonour.
10. When the omission to give notice is caused by unavoidable circumstances.
Mode of giving Notice of dishonour
1. A notice of dishonour may be given to a duly authorized agent of the person to whom it is
required to be given.
2. If the person on whom notice is to be served has died, it should be given to his legal
representative, or if he has been declared insolvent, to his assignee.
3. The notice may be oral or written. If it is written it may be sent by post.

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4. The notice may be in any form but the party to whom it is given must be informed, either in
express terms or by reasonable intendment, that the instrument has been dishonored and in what way
and that he will be held liable thereon.
5. It must be given within a reasonable time after dishonour.
6. The notice of dishonour must be given at the place of business, or if the party has no place of
business, at the residence of the party for whom it is intended.
7. If the notice is duly directed and sent by post but is miscarried, such miscarriage does not render
the notice invalid.
8. When the party to whom notice of dishonour is dispatched is dead but the sender is ignorant of
his death, the notice given will be sufficient.
9. When the instrument is deposited with an agent for presentment, the agent is entitled to the same
time to give notice to this principal as if he was the holder giving notice of dishonour and the
principal is entitled to a further like period to give notice of dishonour.
10. Any party receiving notice of dishonour, in order to render any party liable to himself, should
give notice of dishonour to such party within a reasonable time, unless such party otherwise receives
due notice. Noting (Sec. 99) : When a promissory note or a bill of exchange is dishonored. the holder
is entitled, after giving due notice of dishonour, to sue the drawer and the endorsers. In order to have
the fact of dishonour authenticated, the holder may get it recorded on the instrument, or on a paper
attached to it, by a Notary Public. Such recording or notice must be done within a reasonable time
after dishonour, and must contain the fact of the dishonour, the date Of dishonour, the reason if any,
assigned for such dishonour. If the instrument has not been expressly dishonored, the reason why the
holder treats it as dishonored should be noted as well as the notary’s charges. Noting is optional. It is
to the advantage of the holder to get the notice done because it is an evidence of dishonour. Protest
(Sec. 100) : When a pronote or bill has been dishonored, the holder may, within a reasonable time,
cause such dishonour to be noted and certified by a notary public, such certificate is called a protest.
The difference between noting and protest is that noting is merely a record of the fact of dishonour.
When the notary public issues a certificate stating the particulars regarding the dishonour, it is called
a protest. Noting and protest are not compulsory, in the case of an inland bill or note, but a foreign
bill must be protested, if so required by the law of the place where it is drawn. Protest for Better
Security. When the acceptor of a bill of exchange has become insolvent, or his credit has been
publicly impeached, before the maturity of the bill, the holder may within a reasonable time, employ
a notary public to demand better security of the acceptor and on its request, may cause facts to be
noted and certified within a reasonable time. Such certificate is called a “Protest for better security”.
Notary Public
The notary public is an officer appointed by the Government to exercise the functions of noting and
protest, etc.
Discharge of Parties from Liabilities
The liability of a party to a negotiable instrument may be discharged or terminated in any one of the
following ways -
1. By payment in due course of the amount due.
2. By the holder discharging or releasing the maker, acceptor or endorser.
3. By cancellation of a party’s name by the holder.

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4. By operation of law, e.g., by the insolvency of the debtor.
5. By the holder allowing the drawee more than 48 hours of accepting the bill.
6. By taking qualified acceptance all previous parties are discharged.
7. By non-presentment of a cheque for payment within a reasonable time of its issue, if the bank
fails, the drawer is discharged.
8. By endorsement of an order cheque by payee the banker is discharged by payment in due course,
even if the endorsement turns out to be a forgery.
9. By material alteration. Any material alternation of a negotiable instrument renders the same void
as against anyone who is a party thereto at the time of alternation and does not consent thereto. Some
examples of Material Alteration:
Alteration of
(1) the date of the instruments or endorsements
(2) the sum of payment,
(3) the time of payment,
(4) the place of payment,
(5) the rate of interest,
(6) the addition of a new party,
(7)the tearing of the instrument in a material part, are material alteration. A correction of a mistake, or
an alteration made to carry out the common intention of the parties made before the instrument is
issued or with the consent of the parties does not amount to a material alteration. It does not make the
instrument void. When a person accepts an altered instrument; he cannot afterwards raise objections
to those alterations which existed at the time of accepting the instrument. Where any material
alteration is made by an endorsee it discharges his endorser from all liability to him in respect of
consideration thereof (Sec. 87).

Rules of evidence and compensation

Sec.117. Rules as to compensation

The compensation payable in case of dishonor of promissory note, bill of exchange or cheque, by any
party liable to the holder or any endorsee, shall be determined by the following rules:

(a) the holder is entitled to the amount due upon the instrument together with the expense properly
incurred in presenting, noting and protesting it;

(b) when the person charged resides at a place different from that at which the instrument was
payable, the holder is entitled to receive such sum at the current rate of exchange between the two
places;

(c) an endorser who, being liable, has paid the amount due on the same is entitled to the amount so
paid with interest at 31[eighteen per centum] per annum from the date of payment until tender or
realization thereof, together with all expenses caused by the dishonor and payment;

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(d) when the person charged and such endorser reside at different places, the endorser is entitled to
receive such sum at the current rate of exchange between the two places;

(e) the party entitled to compensation may draw a bill upon the party liable to compensate him,
payable at sight or on demand, for the amount due to him, together with all expenses properly
incurred by him. Such bill must be accompanied by the instrument dishonored and the protest thereof
(if any). If such bill is dishonored, the party dishonoring the same is liable to make compensation
thereof in the same manner as in the case of the original bill.

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