The Negotiable Instruments Act,

1881
 Introduction
 The law relating to negotiable instruments is
contained in the Negotiable Instruments
Act, 1881 which applies and extends to the
whole of India.
 Sec 13(1) For this Act Negotiable
instrument means Promissory note , bill of
exchange or cheque.
 The word negotiable means transferable
and instrument means document.
 Negotiable Instruments
 Definition:
The word negotiable means ‘transferable by delivery,’
and the word instrument means ‘a written document
by which a right is created in favour of some person.’

Thus, the term “negotiable instrument” literally

means ‘a written document which creates a right in
favour of somebody and is freely transferable by
delivery.’

A negotiable instrument is a piece of paper which

entitles a person to a certain sum of money and which
is transferable from one to another person by a delivery
or by endorsement and delivery.
 Ordinarily the transferor cant transfer a better title
than the one he already has.
 Maxim “NEMO DAT QUOD NON HABET".
 Negotiable instrument form an exception to above
rule.
 A bona fide transferee of a negotiable instrument for
value, acquires the instrument free from any defect
provided he has no notice of any defect in title of the
transferor. He acquires a good title even if the title of
the transferor is defective.
 A negotiable instrument entitles the holder to the
receipt of money. It gives him the right to transfer the
same by delivery and endorsement. Negotiable
Instrument can be negotiated till its maturity.
Characteristics of Negotiable Instruments

1. Free transferability or easy negotiability

• Negotiable instrument is freely transferable from one person
to another without any formality.
• The property (right of ownership) in these instruments passes
by either endorsement and delivery (in case it is payable to
order) or by delivery merely (in case it is payable to bearer)
and no further evidence of transfer is needed.

2. Title of holder is free from all defects

• A person who takes negotiable instrument bona-fide and for
value gets the instrument free from all defects in the title. The
holder in due course is not affected by defective title of the
transferor or of any other party.
3. (holder)Transferee can sue in his own name without
giving notice to the debtor:
• A bill, note or a cheque represents a debt, i.e., an
“actionable claim” and implies the right of the creditor
to recover something from his debtor

• The creditor can either recover this amount himself or

can transfer his right to another person

• In case he transfers his right, the transferee of a

negotiable instrument is entitled to sue on the
instrument in his own name in case of dishonour,
without giving notice to the debtor of the fact that he
has become holder
. It may be payable to two or more payees jointly, or
alternatively, to one or two , or some several payees.
 Creditore( drawer/maker)

drawee/debtor Holder/payee
4. Presumptions:
Certain presumptions apply to all negotiable instruments.

Section 118 and 119 lay down the following presumptions:

(a) For consideration : that every negotiable instrument, was made,

drawn, accepted, endorsed 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 bill of exchange was
accepted within a reasonable time after its date and before its
maturity.
(d) As to transfer: that every transfer of a negotiable instrument was
made before its maturity
(e) As to time of endorsements : that the endorsements appearing
upon a negotiable instrument were made in the order in which
they appear thereon.
(f) As to stamps : that a lost promissory-note, bill of exchange or
cheque was duly stamped.
(g) As to a holder in due course: that every holder of a negotiable
instrument is holder in due course (this presumption would not
arise where it is proved that the holder has obtained the instrument
from its lawful owner, or from any person in lawful custody
thereof, by means of an offence, fraud or for unlawful
consideration and in such a case the holder has to prove that he is
a holder in due course
(h) As to dishonour: that the instrument was dishonoured, in case a
suit upon a dishonoured instrument is filed with the court and the
fact of protest is proved
 Kinds of Negotiable instrument

1. Promissory Note

2. Bill Of Exchange

3. Cheques.
 Promissory Note

 Definition:

According to Section 4, “A promissory note is

an instrument in writing (not being a bank-
note or a currency-note) containing an
unconditional undertaking, signed by the
maker, to pay a certain sum of money only
to, or to the order of, a certain person, or to
the bearer of the instrument.”
 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.
(ii) The Payee – the person to whom the amount is
payable.

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.
(b) The Endorsee – the person in whose favour the note
is negotiated by endorsement.
 Essentials of Promissory Note

1. There must be two parties :- Maker & Payee

2. It must be in writing:
• A promissory note has to be in writing
• An oral promise to pay does not become a
promissory note
• The writing may be on any paper or book
• Illustrations: A signs the instruments in the
following terms:
 “I promise to pay B or order Rs. 500”
 “I acknowledge myself to be indebted to B in Rs. 1, 000
to be paid on demand, for value received”
Both the above instruments are valid
promissory notes.
 Essentials of Promissory Note
3. It must contain a promise or undertaking to pay:
• There must be a promise or an undertaking to pay
• The undertaking to pay may be gathered either from express words
or by necessary implication
• A mere acknowledgement of indebtedness is not a promissory note,
although it is valid as an agreement and may be sued upon as such

• Illustrations: A signs the instruments in the following terms:

“Mr. B I owe you Rs. 1,000”
“I am liable to pay to B Rs. 500”
The above instruments are not promissory notes as there is no
undertaking or promise to pay. There is only an acknowledgement
of indebtedness.
• Where A signs the instrument in the following terms:
“I acknowledge myself to be indebted to B in Rs. 1, 000, to be paid
on demand, for value received,” there is a valid promissory note
 Essentials of Promissory Note
4. The promise to pay must be unconditional:
• A promissory note must contain an unconditional promise to pay
• The promise to pay must not depend upon the happening of some
uncertain event, i.e., a contingency or the fulfillment of a condition
• Illustrations: A signs the instruments in the following terms:
• “I promise to pay B Rs. 500 seven days after my marriage
with C”
 “I promise to pay B Rs. 500 as soon as I can”
• The above instruments are not valid promissory notes as the
payment is made depending upon the happening of an uncertain
event which may never happen and as a result the sum may never
become payable

5. It must be signed by the maker:

• It is imperative that the promissory note should be duly authenticated
by the ‘signature’ of the maker
• ‘Signature’ means the writing or otherwise affixing a person’s name
or a mark to represent his name, by himself or by his authority with
the intention of authenticating a document
 Essentials of Promissory Note
5. The maker must be a certain person
:The instrument must itself indicate with certainty who is the
person or are the persons engaging himself or themselves to pay
 Alternative promisors are not permitted in law because of the
general rule that “where liability lies no ambiguity must lie”

6. The payee must be certain:

 Like the maker the payee of a pronote must also be certain on
the face of the instrument
 A note in favour of fictitious person is illegal and void
 A pronote mad epayable to the maker himself is a nullity, the
reason being the same person is both the promisor and the
promisee
 Essentials of Promissory Note
7. The sum payable must be certain:
 For a valid pronote it is also essential that the sum of money promised
to be payable must be certain and definite
 The amount payable must not be capable of contingent additions or
subtractions
 Illustrations: A signs the instruments in the following terms:
• “I promise to pay B Rs. 500 and all other sums which shall be due
to him”
• “I promise to pay B Rs. 500, first deducting thereout any money
which he may owe me”
 The above instruments are invalid as promissory notes because the
exact amount to be paid by A is not certain

8. The amount payable must be in legal tender money of India:

 A document containing a promise to pay a certain amount of foreign
money or to deliver a certain quantity of goods is not a pronote it has
to be in Indian currency.
 9) It must be stamped as per the Indian
Stamp Act, 1899
 since promissory notes are chargeable with
his initials or signature. An unstamped or
insufficiently stamped note is not admissible
in evidence nor can a suit be maintained
upon it.
 Bill of Exchange
 Definition:

Section 5 of the Negotiable Instruments Act defines a Bill of Exchange

as follows:

“A bill of exchange is an instrument in writing containing an

unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument.”

Illustration:
Mr. X purchases goods from Mr. Y for Rs. 1000/-
Mr. Y buys goods from Mr. S for Rs. 1000/-
Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be
nothing but a bill of exchange.
Specimen of Bill of Exchange
 Parties to a Bill of Exchange
There are three parties involved in a bill of exchange
(i) The Drawer – The person who makes the order for
making payment.
(ii) The Drawee – The person to whom the order to pay
is made. He is generally a debtor of the drawer.
(iii) The Payee – The person to whom the payment is to
be made.

The drawer can also draw a bill in his own name thereby
he himself becomes the payee. Here the words in the
bill would be Pay to us or order.
In a bill where a time period is mentioned, just like the
above specimen, is called a Time Bill.
But a bill may be made payable on demand also. This is
called a Demand Bill.
 Essentials of a Bill of Exchange
1. It must be in writing
2. It must be three parties , Drawer, Drawee, Payee
3. It must contain an order to pay. A mere request to pay
on account, will not amount to an order
4. The order to pay must be unconditional
5. It must be signed by the drawer
6. The drawer, drawee and payee must be certain. A bill
cannot be drawn on two or more drawees but may be
made payable in the alternative to one of two or more
payees
7. The sum payable must be certain
8. The bill must contain an order to pay money only
9. It must comply with the formalities as regards date,
consideration, stamps, etc
 Cheque
A cheque is the means by which a person who
has fund in the hand of a bank withdraws
the same or some part of it.
A cheque is a kind of bill of exchange but it
has additional qualification namely-

1- it is always drawn on a specified banker and

2-it is always payble on demand without any
days of grace.
 Definition Section 6:- cheque is a bill of exchange drawn
on a specified banker and not expressed to be payable
otherwise than on demand. Cheque includes the
electronic image of a truncated cheque in the electronic
form.
 A Cheque in the electronic form’ means a cheque which
contains the exact mirror image of a paper cheque and is
generated, written and signed by a secure system ensuring
the minimum safety standards with the use of a digital
signature.
 A Truncated cheque means a cheque which is truncated
during the clearing cycle, either by clearing house during
the course of clearing cycle or by bank whether paying or
receiving paymment, immediately on generation of an
electronic image of trasmission.
 “Clearing House”:- means the house managed by
the Reserve bank of India or a Clearing house
recognized as such by the Reserve Bank of India.
 Cheque is an unconditional order on the
specified banker to pay on demand, a certain sum
of money to the bearer of the cheque or to his
order. A bill of exchange is wider than a cheque.
 Cheque is a type of the bill of exchange and must
satisfy all the requirements of a bill of exchange.
 The validity period of the cheque is 3 months
from April 1 , 2012 .
 Parties
 Drawer:- Person who draws the cheque ( Maker).
 Drawee Bank:- Bank who pays the cheque.
 Payee: Person to whom the money is paid.

Essential elements of Cheque:-

1) All essentials of valid Bill of exchenge.
2) It must be drawn on specified Banker.
3) It must be payable on demand.
Promissory Note Bill of Exchenge

1) There are two parties 1) There are three parties-

drawer, drawee and payee.
maker and payee.
2) It Contains an unconditional 2) It contains an unconditional
promise to pay. order to pay.

3) It does not requires 3) It generally requires

acceptance since the maker acceptance since the drawer
himself promises to pay. and drawee are different
persons.

4) The makers liability is 4) The drawee is primarily liable

primary and absolute. and the drawer is Secondarily
liable.
5) Notice of dishonor is not 5)Notice of dishonor must be
required. given to all parties.

6) It cant be made payable to 6) The drawer and payee may

the banker. be one and the same person.

7)Noting and protest is not 7)The foreign bill must be noted

required . and protested for dishonor.

8)It can never be made payable 8)It can be made payable to the
to the bearer . bearer.

9)It cant be drawn in sets. 9)It can be so drawn.

Cheque
1) The drawee is aways a banker .
2) It does not Require acceptance.
3)It is payable on demand without any
grace days.
4)Non presentation of the cheque does not
discharge the drawer unless he suffers
injury or damage.
5) Notice of dishonor is not required.
6) A cheque must be Crossed.
7) It does not required stamp.
8) The drawer may canceled the cheque.
9) Noting and protest is not needed.
10) It can be payable to bearer on demand 10)It cant be drawn so.
.
Bill Of Exchenge
1) The drawee can be any person
including a banker.
2) It must be presented for acceptance.
3) A Bill normally carries 3 grace days,
except a demand bill.
4) The drawer is discharged if the bill is
not presented for payment.
5) Notice of dishonor must be given to all
the parties.
6) A bill can never be crossed.
7) It must be adequately stamped.
8) The bill can never be canceled
9) A bill may be noted and protested for
dishonour.
Bill in Sets :- A bill drawn in parts is known as bill
in sets. Sometimes the drawer and payee are in two
different places or different countries. In such cases, the
bill of exchange may be lost in transit which can causes
inconvenience and delay to the parties. To avoid this, It is
drawn in sets i.e. in parts and each part is posted on
different dates. All the parts together makes set and whole
set is considered as one bill.

Advantages :- 1) Prompt and easy presentation for

acceptance and payment.
2) It reduces the risk of loss in course of transit.
Illustration :- Three months after sight of this First Part of
the bill of exchange ( Second and third of the same tenor
and date being unpaid ), pay to B or to the order the sum of
rupees Five Thousand only, For value received.

Types of Cheques:-
1) Bearer or open Cheques:- Bearer or open cheques are
payable at the counter of the drawee bank on presentation.
These are the cheques which are not crossed. The bearer
cheques are paid in cash across the counter of the bank.
The major disadvantage of such cheques is that if they are
lost or stolen, they may be encashed by the finder. The
advantage of a bearer cheque is that the bearer can get
immediate cash from the bank.
2) Crossed Cheques : Crossing of cheque is done by drawing
two transverse parallel lines across the top left hand corner of
the face of the cheque and or striking off the words or bearer
printed on the cheque.
Crossing makes the cheque more secure since the amount is
credited directly to the payee’s account.

Crossing is of different types:-

a) General crossing :- When two transverse parallel lines are
drawn cross the top left hand corner of the face of the
cheque with or without the words & Co. between them, it
is called a general crossing.
b) Special crossing :- When the name of the banker is
mentioned between the crossing, it is called a special
crossing. The banker on whom it drawn shall not pay such
cheque otherwise than to the banker to whom it is
crossed or his agent for collection.
C) A/c payee Crossing:- This means that the proceeds of the
cheque are to be credited to the account of the payee only. It
however, does not restrict its negotiability, but serves as good
protection to the drawer against loss or theft.

d) Not Negotiable crossing:- A cheque crossed generally or

specially may bear the additional words “Not Negotiable” Such
Crossing takes away main feature of negotiability. In this case
drawer is protected if cheque is loss or theft took place when
cheque is in transit.

The Following Persons are authorized to cross a cheque:-

a) Drawer
b) Holder:
c) Banker:
3) Post dated Cheque:- A cheque bearing a future date is
called a post –dated cheque. Such a cheque is fully valid,
but it cannot be presented for payment till such future
date. The Validity period for such cheques starts from the
future date mentioned.
4) Anti- dated Cheques:- A Cheque past dated is called anti
dated. Such a cheque is fully valid. The validity period of
such cheques starts from the past date mentioned .
5) Forged Cheques:- A Cheque in which the signature of
the drawer is forged is call forged cheque.

6)E- Cheque :- electronic form of cheque.

7) Truncated Cheque:-Cheque which is truncated during

clearing house.
Banker and Customers :- The relation between banker and
his customer is that of a debtor creditor. The banker holds the
funds of the drawer. His function is to receive and pay the
funds.
Protection given to collecting or Receiving Banker:- The
banker receives payment on behalf of the customer through a
crossed cheque. If customers title turns out to be defective
the banker while receiving payment on behalf of his
customer, against a crossed cheque must.
1) Act in good faith and without negligence.
2) Receives payment of the crossed cheque for a customer.
3) Act as a mere agent for collection and not in the capacity
of a holder.
4) Verify that the cheque has been crossed before it came
into his hands .
The Act also extends protection to receiving banker, where
the customers deposits a third party cheque in his account
and bankers credits the customers account with the proceeds
immediately, without actually receiving the payment . If the
cheque is dishonored, the banker is within his rights to debit
the customer’s account. Mere crediting of the customers
account does not deprive the banker of protection.

Protection given to paying Banker :- the drawee of a

cheque having sufficient funds of the drawer in his hand,
properly applicable to the payment of such cheque, must pay
the cheque when duly required to do so and, in default of
such payment must compensate the drawer for any loss or
damage caused by such default.
 The bankers responsibility and liability to pay the
amount from the customers funds is greater than
while receiving the funds in the customers
account.
 Safeguards while paying the different types of
cheque:-
 1) where a cheque is crossed generally, the
banker on whom it is drawn shall not pay it
otherwise than to a banker.
 2) 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 to his agent for collection.
3) when the banker makes the payment of a crossed
cheque in due course, the banker is discharged from
liability, if the endorsement of the payee or endorsee
subsequently turns out to be forged. However if the
banker pays the cheque where the signature of the
customer is forged, the banker is liable and it can’t debit
the amount to the customers account since the bank is
bound to know the signature of its customers. In such a
case the banker is not afforded any protection. Forgery is a
nullity.
4) Payment of bearer or open cheque in cash across the
counter of the bank on presentation dischargers banker
from liability
5) The banker is discharged from liability if the payment
of an order cheque is made in due course.
Payment in due course section 10:- Conditions to be fulfilled
1) Payment must be made at or after maturity. Eg. A post
dated cheque paid before date is not payment in due course.

2) Payment must be made in good faith and without

negligence. Banker paying a materially altered cheque without
taking the necessary precautions is not a payment in due
course.

3) Payment must be made to the person in possession of the

instrument.

4) Payment should have been made without any reasonable

grounds for believing that the person is not entitled to receive
the payment of the cheque.

5) Payment must be made in money only.

Effect of paying otherwise than in due course :-
The banker paying other then in due course are liable to
compensate the drawer for any loss or damage caused due to
the default. And banker is liable only to the drawer i.e. account
holder and not to the holder in due course Holder has remedy
only against the drawer of the cheque, except in the following
cases:
1) When banker makes payment out of due course,
2) When banker fails when the holder presents the cheque to
the bank for payment. In such a case, the holder becomes a
creditor of the bank to the extent of the discharge of the
drawer and is entitled to recover the amount from the bank.
When the banker is justified in Dishonoring a cheque :-
1) If funds are insufficient to honour the cheque.
2) If the funds are not properly applicable to the payment of the
cheque.
3) If the cheque is irregular or it is an ambiguous.
4) if the customer becomes insolvent.
5) Banker gets notice of customers death.
6) Cheque is presented beyond maturity.
7) If the drawers signature does not tally with the specimen
signature.
8) If the customer countermands payment. means directing the
banker to stop payment.
9) If the holders gives notice to the banker of the loss of the
cheque.
10)If the cheque is not presented during the usual business hours.
11)Cheque is drawn on another branch of same bank.
12) court has issued garnishee order.( attaching the customers
balance)
 Maturity of an Instrument
The Maturity of a promissory note or bill of exchange is on
the date on which it falls due.
Cheques are always payable on demand and there validity
period is three months from the date of issue of the cheque.

Grace period of Three days in case of bill of exchange and

promissory note.
 Types of Negotiable instrument
1) Accommodation bill:- an bill which has been
signed by the drawer without any
consideration, with a view to oblige some other
person to provide him with funds.
2) Fictitious Bill:- when both the drawer and
payee are fictitious persons, it is called.
3) Documentary Bill and Clean :- when the seller
of goods draws a bill of exchange on the buyer
for the buyer fr the price of the goods and the
documents of title to the goods such as bill of
lading, railway receipt.
4) Escrow: A Bill delivered conditionally is
called an escrow.
5) Demand instruments:- No time is specified.
6) Bearer and order instrument:- when amount
is payable to the bearer.
7)Inchoate Instrument:- Incomplete
8) Ambiguous instrument:- Which is Vague
and cant be clearly identified.
9) Inland and foreign instruments:- In land
means with in India.
10) Foreign Instrument :- created out side
India but payable in Indian currency.
 Parties to the Negotiable instrument
1) Maker :- The person who makes a
promissory note .
2) Drawer:- The person who draws the bill
of exchange.
3) Drawee:- The person directed by the
drawer to pay the bill of exchange.
4) Payee:- The person to whom or to whose
order the money is directed to be paid by
the instrument. He is the real beneficiary
under the instrument.
5) Indorser :- when the holder transfers or
indorses the instrument to any other
person, the holder becomes the indorser.
6) Indosee:-The person to whom the bill is
endorsed is called the indorsee.
7) 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 person is called drawee in case of
need.
 8) Holder & Holder in due course
 Sec 8 Holder means any person entitled
in his own name to the possession a
promissory note bill of exchange or
cheque and to recover or receive the
amount due thereon from the parties
thereon.
 A holder must therefore have the
possession of the instrument, received
instrument in lawful manner and also the
right to recover the money in his own
name.
 Sec. 9 “Holder in due course means any
person who for consideration became the
possessor of a promissory note, bill of
exchange or cheque,
 if payable to the bearer or the payee or
endorsee there of ,
 if payable to the order before the amount
mentioned in it became payable , and without
having sufficient cause to believe that any
defect existed in the title of the person from
who he derived his title’
 Three important ingredient to become holder
in due course for consideration, before
maturity, good faith.
 Rights and privileges of a holder in due
course
1) He can file a suit in his own name against the
parties liable to pay. He is deemed prima facie
to be a holder in due course.
2) He gets a good title and his rights are not at all
affected even though it was originally an
inchoate stamped instrument and the transferor
completed the instrument for a sum greater
than what was intended by the maker.
3) Every prior party is liable to a holder in due
course until the instrument is duly satisfied.
4) An acceptor cannot plead against holder
in due course that the instrument is drawn
in fictitious name.
5) The other parties liable to pay cant plead
that the instrument was conditional or for
specific purpose only.
6) He gets good title even though the title
of the transferor is defective.
7) Even if instrument is made without
consideration, holder is entitled to receive
money from any of the prior parties.
8) The person liable cant plead against the
holder in due course.
9) The validity of the instrument as originally
made cannot denied by the maker or
drawer or acceptor for honor.
10) The maker of the note or an acceptor of a
bill cant deny the payees capacity.
11) The endorser cant deny the signature or
capacity to contract of any prior party to
the instrument.
 Difference between holder and
holder in due course
 Meaning-holder means any person entitled in his
own name possession of the instrument in other
hand holder in due course a holder who takes the
instrument in good faith for consideration before it
is overdue and without any notice of defect in the
title of the who transferred it to him.
 Consideration is not important in case of the holder
but for holder in due course it has to be for
consideration .
 Title- holder did not get good title if prior parties
title is defective but holder in due course gets
good title even if prior parties title is defective.
 Liability-Holder has no right if title is
defective but holder in due course can sue
to all the prior parties and recover the
money from the person who is liable to
make payment.
 Maturity- holder may acquire the
instrument even after maturity but holder
in due course is entitled before maturity.
 10) Sec. 10 Acceptor:
 After the drawee of bill has signed his
assent upon the bill, or if there are more
parts thereof than one, upon one of such
parts and delivered the same, or given of
such signing to the holder, or to some
person on his behalf, he is called an
acceptor.
 Who can accept the bill of exchange.
 Acceptance is required only in case of bill of
exchange. A person becomes liable and can
be sued for on it only after he accepts the
bill.
 Following persons can be acceptors of a bill.
1)Drawee of bill.
2)Drawee in case of need.
3)When there are more than one drawee all partners
if jointly liable then one persons acceptance is
equal to acceptance of other and if instrument is
endorsed one by one in parts then even
acceptance has to be done in that order.
4) An acceptor for honor.
5) A Stanger can accept the bill as acceptor
for honor.
Essentials of Valid acceptance :
1) Acceptance must be written on the bill.
2) It must be signed by the drawee.
3) He should deliver the accepted bill to the
drawer.
Specimen of Bill of Exchange
 Absolute and Qualified or conditional
Acceptance :-
 Acceptance is absolute when the drawee
accepts the bill without any conditions.
 Acceptance is qualified when the drawee
accepts bill with some conditions or
reservations or for lesser amount than the
amount mentioned in the bill or in
installments, or at place other than the
place mentioned in the bill and so on.
 Acceptance is qualified when
1) It is conditional i.e payment is dependent on the
happening of an event for eg. On production of a
railway receipt.
2) The drawee accepts payment of the bill in parts
only,
3) The drawee agrees to pay at a specified place
only where no place is specified, or when a place
is specified , at a place other than the place
mentioned in the bill,
4) The drawee agrees to pay at a time other than
that mentioned in the bill,
5) The bill is drawn on several drawees who are not
patners and only some of the drawees accept.
 Acceptance for honour
 When a bill of exchange is dishonored and
any person who is not party to the bill
accepted bill before it’s maturity it is
known as accepted for honour.
 Essentials of valid acceptance:-
1) The bill must have been noted and protested for
dishonour for non-acceptance or for better
security.
2) Acceptance for honour may be made by person
not already liable on the bill.
3) The holder must consent to such acceptance for
honour.
4) It must be maid by writing on the bill.
5) It must be for whole amount due on the
bill.
6) Acceptance must be made before the bill is
overdue.
7) Acceptance must be for the honour of any
party already liable on the bill.
8) The acceptor for honour must declare in
writing before the notary public the name
of the party for whose honour he is
accepting the bill.
 Rights and liabilities of the acceptor for
honour
 He becomes liable to all parties
subsequent to the party for whose honour
he accepts.
 The party for whose honour he accepts
the bill and all prior parties are liable to
compensate the acceptor.
 Negotiation
One of the essentials feature of a negotiable
instrument is its transferability. A
negotiable instrument may be transferred
from one person to another in either of
the followings way-
1-By negotiation
2-By assignment
 Assignment:- Sec 130
 Assignment may be define as the transfer
of ones right to recover the payment of a
debt. It is the sale of a person’s right to
receive the payment of a debt.
 Assignment takes place by means of a
written document signed by the person
who transfers his rights.
 Negotiation sec 14
The transfer of an instrument by one party to
another so as to constitute the transferee a
holder is called Negotiation.
Negotiation means as the process by which
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.
 Important is delivery in negotiation

 Delivery is most important aspect of

negotiability.
 Negotiation will complete with delivery
whether it is actual or constructive.
 Kinds of delivery :-
1) Actual delivery
2)Constructive delivery:-agent, clerk, servant
3) Conditional delivery
 Modes of negotiation
 By delivery :- negotiable instrument which
is payable to bearer is negotiable by
delivery.
 Ex-A the holder of a negotiable instrument
payable to bearer , delivers it to B’s agent
to keep it for B. The instrument has
negotiated.
 By endorsement:- negotiable instrument
payable to the order is negotiable by
endorsement and delivery.
 Distinction between Negotiation and
Assignment
Negotiation Assignment

1) There is transfer of 1) There is no transfer of

ownership ownership
2) Consideration is presumed 2)Consideration must be
until the contrary is proved proved.

3) The holder in due course 3) The assignee’s title is

takes the instrument free always subject to the title of
from all defects. the assignor.
4) Notice of transfer is not 4) Notice of assignment
necessary. must be given.
5) Negotiation is effected 5) Assignment is effected
by delivery in case of only by writing..
bearer instruments and
by endorsement and
delivery in case of order
instrument.

6) The transferee can sue 6) An assignment cant do

the third party In his own so.
name .
7) There are number of 7) There is no such
presumptions in favour of presumption.
the Holder in due course
8) It is governed by The 8) It is governed by the
Negotiable Instrument Act Transfer of Property Act,
1881 1882.
 Endorsement sec. 15
 When the holder of the Negotiable
instrument signs the same, otherwise then
as such maker, for the purpose of
negotiation , on the back or face thereof
or on a slip of paper annexed thereto, or
so signs for the same purpose a stamp
paper intended to be completed as a
negotiable instrument, he is said to
indorse the same and is called an
indorser.
 Parties
1) Indorser:-
2) Indorsee:-
Essentials of valid Indorsement:-
Indorsement completes by delivery.
1) On the back or face of the instrument or on a
slip of paper called allonge or signs a stamped
paper;
2) The instrument is delivered to the indorsee.
3) The instrument is indorsed and delivered with
an intention to transfer the instrument and to
make the transferee the holder thereof.
 Who may indorse

 Maker
 Drawer
 Payee
 All the several joint maker
 A partner of a trading firm.
 By all payees or endorsee
 Effect of the Endorsement
 Effect of the Indorsement:-
 1) The ownership of the instrument is
transferred from the indorser to indorsee.
 2) The Endorsee gets the right of further
negotiation
 3) Endorsee gets right to bring action
against all prior parties.
 4) It assures that the instrument and all
prior endorsements are genuine.
 Kinds of the Endorsement
1) Blank or general indorsement- simple sign his name
2) Full or special :- Signs and mentions the name to
whom he want to endorsed.
3) Restrictive :- Signs and gives restrictive rights in
such cases endorsee cant further negotiate the
instrument.
4) Partial Endorsement:- Is in valid
5) Conditional or qualified indorsement:- endorser
limits his liability by putting some condition in the
instrument it is called conditional.
6) Facultative indorsement :- When by some express
words the indorser abandons some rights or
increases his own liablity . 7) Forged indorsement.
 Presentment Sec 61-76
 Two Types
 1) For Acceptance
 2) For Payment
For Acceptance :- this is required only in
case of the Bill of Exchange. Bill of
exchange must be presented for
acceptance before it can be presented for
payment. With in maturity period.
Effect of the Non – Presentment:-
All the parties are discharge and no action is
maintainable even for the original debt.
 Advantages of presenting a bill for
acceptance :-

 1) the holder gets additional security of

the acceptor besides the drawer.
 2) The holder can immediately hold the
drawer liable on failure to pay.
 Rules as to Presentment for acceptance
1) If the time and place as to payment are
not specified then it must be presented
within maturity period.
2) It must be presented by a person entitled
to demand acceptance.
3) Must be presented during business hours.
4) If the place is specified , it must be
presented at that place only.
5) If drawee cant be found then the bill is
dishonored.
 7) Drawee is entitled to 48 hours to
consider it.
 8) Presentment can be maid to dully
authorized person if the drawee is dead .

 Presentment is not necessary if the

drawee cant be found or if drawee is
fictitioes and when acceptance is refused.
 Presentment for Payment
Every instrument must be presented for
payment. It must be presented by holder
 Effect to non presentation makes drawer
discharge from his liablility and holder
cant claim back the momey on the
instrument.
 Rules as to presentment
1) Negotiable instrument must be presented for
payment
2) It may be presented by or on behalf of the holder.
3) If authorized by agreement presentment by post
or registered letter is sufficient.
4) Promissory note must be presented for payment
with in reasonable or with in specified time.
5) Presented during business hours.
6) Must be presented With in maturity period
7) A promissory not to e payable in installment must
be presented on third day after the date fixed for
payment of each of installment.
8) Must be presented at specified period.
9) Or at the place of business or residence
of the maker
10) A cheque must be presented in bank
with in three months
11) It can be done even through authorized
Agent.
 Exceptions to presentment
1) A demand promissory note need not be
presented for payment.
2) When it is not to be payable at specified
place.
3) If the maker drawee intentionally prevents
the presentment.
4) If the office of the maker or drawee is
closed were it was payable .
5) If payer cant be found.
6) After maturity
7) Were party waives its rights.
8) Were the bill is dishonored by non
acceptance.
9) Drawee or maker is fictitious.
10) Where presentment is impossible.
11) Drawee is not competent to contract.
12) Payee refuse to pay.
 Discharge
“Discharge means release from obligation of payment”
 By Payment:- all rights of the holder extinguished
when the maker acceptor or indorser makes
payment on negotiable instrument.
 By release : when holder realize or discharges the
maker acceptor or indorser.
 By default of the holder:-like if you don’t present in
business hours.
 By express waiver:- by holder himself.
 By cancellation:- holder or his agents strikes out the
name of drawee.
 By material alteration or lapse of time
 PRESUMTIONS AS TO Negotiable
instrument
 Special rue of evidence in which it is not
necessary to prove certain facts and such facts
are presumed, unless contrary is proved.
1) Presumption as to consideration.
2) Presumption as to date
3) Presumption as to time of acceptance
4) Presumption as to time of transfer should be
before maturity.
5) Presumption as to order of endorsement.
6) Presumption as to stamp
7)Presumption that holder is holder in due course.
Dishonor of Cheques Sec 138 -142
 It may be by non acceptance or non payment
 A bill of exchange can be dishonored by non
acceptance for various reasons discussed earlier.

Conditions to be fulfilled before a person is held

liable under sec.138
1) The Cheque should have been issued by the
drawer to the payee in the discharge of the
whole or in part of any legally enforceable debt
or other liability.
2)Cheque must be presented within validity period.
3)Cheque should be returned by the bank as
unpaid for reason of insufficient funds or it
exceed the amount arranged to be paid.
4)The payee or holder should have demanded the
payment of the cheque within 15 days of
dishonor.
5) The drawer failed to make payment within
15days of notice of dishonor.
However the complaint of dishonor of cheque has
to be filled with in one month starting from day
of receipt of notice by the drawer.
 Parties punishable for offence

1) The Company even partnership firm.

2) If it is company in charge responsible for
conducting its business shall be deemed
to be guilty along with the company.
3) They will be jointly liable.
Penalty
Imprisonment for term which may extend to
two years or with fine which may extend to
twice the amount of the cheque or with
both.
• PROBLEM
•‘A’ draws a bill of exchange payable to himself on ‘X’. Who accepts the
bill without consideration just to accommodate ‘A’. ‘A’ transfers the bill
to ‘P’ for good consideration. State the rights of ‘A’ and ‘P’. Would your
answer be different if ‘A’ transferred the bill to ‘P’ after maturity?
Solution :- The Problem is based on the provisions of section 43 and 59
of the Negotiable Instrument Act, 1881. Cannot recover from X because
it is an accommodation bill drawn by A and accepted by X without
consideration. According to section 43 an instrument without
consideration creates no obligation between the parties to the
transactions i.e. A and X in this case. Section 43 also provides that if
such a bill is transferred to the holder for consideration such holder my
recover the amount due on such instrument from the transferor for
consideration or any prior party there to.
Hence P in this case can recover the amount from X and
A. According to section 59 in the case of
accommodation bill a defect in the title of transferor
does not affect the title of holder acquiring after
maturity. Proceedings for recovery of money. And there
is no punishment provided for such offence in the
Negotiable instrument Act.