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THE

NEGOTIABLE
INSTRUMENT
S ACT 1881

NATURE AND KINDS OF


NEGOTIABLE INSTRUMENTS

Meaning of Negotiable
Instruments
o According to the Section 13 of the
Act, a negotiable instrument
means, a promissory note, bill of
exchange or cheque payable
either to order or bearer, whether
the words order or bearer
appear on the instrument or not

It

must be transferable by
delivery or by endorsement and
delivery.
The property in it must pass to a
bona fide transferee for value,
free from any defect in the title of
the transferor.
The holder must be able to sue
upon it in his own name

ESSENTIAL CHARACTERISTICS OF A NEGOTIABLE


INSTRUMENT
(i)
(ii)
(iii)
(iv)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)

Free transferability
Holders title free from defects
Recovery
Presumptions of Sections 118 and 119
Date
Time of acceptance
Time of transfer
Order of endorsements
Stamp
Holder in due course
Consideration
Proof of protest

KINDS OF NEGOTIABLE
Negotiable

instruments by statute:
Promissory notes, Bills of exchange
and cheques.

Negotiable

instruments by usage:
Share warrants, Dock warrants, Bearer
bonds, Exchequer bills, Dividend
warrants, Circular notes, Bank
notes/drafts, Debentures, Government
Promissory notes, Railway receipts.

The

following are not negotiable


instruments:
(a) Bill of Lading is not a negotiable
instrument in the strictest sense.
(b) Share certificate
(c) I.O.U.
(d) Money orders
(e) Postal orders

PROMISSORY NOTE
Section

4 defines a Promissory
note as an instrument in writing
(not being a bank note or a
currency note) containing an
unconditional undertaking, signed
by the maker, to pay a sum of
money only to, or the order of, a
certain person, or to the bearer of
the instrument.

CHARACTERISTICS OF A
PROMISSORY NOTE
Instrument in writing
Promise to pay
The promise to pay must be unconditional
Signed by the maker
Certainty of the parties
Certain sum of money
The promise must relate to the payment of money
only
Other formalities like stamp, date place,
consideration
It may be payable on demand or after a definite
period of time
It cannot be made payable to bearer on demand

SPECIMEN OF A PROMISSORY NOTE


Rs. 5000

Bombay
July 11, 2006

Three months after date, I promise to pay Dr. S.P.


Narang or order the sum of Rupees Five
Thousand, for value received.
To,
Dr. S.P. Narang
3, Lodi Road
N. Delhi 110003

(Stamp)
Ram Gupta

PARTIES TO A PROMISSORY NOTE


Maker
Payee
Holder
Endorser
Endorsee

BILL OF EXCHANGE
Section

5 defines a bill of
exchange as, an instrument in
writing containing an
unconditional order, signed by the
maker, directing a certain person
to pay a certain sum of money
only to, or to the order of a
certain person or to the bearer of
the instrument.

PARTIES TO A BILL EXCHANGE


1.
2.
3.
4.
5.
6.

Drawer
Drawee
Drawee in - case - of need
Acceptor for honour
The payee
The holder

ESSENTIAL CHARACTERISTICS OF A
BILL OF EXCHANGE
It

must be in writing.
It must contain an order to pay.
The order must be unconditional.
The order must be to pay money only.
The sum payable must be certain.
It must be signed by the drawer, and
dated.
The drawer, drawee, and payee must
be certain.
It must be properly stamped.

SPECIMEN OF A BILL EXCHANGE


[PAYABLE ON DEMAND
Rs. 5000 Bombay
July 11, 2006
On demand, pay Dr. S. P. Narang or order the
sum of Rupees Five Thousand only, for value
received.
To

Accepted
(Stamp)
Ram Gupta
Dr. S.P. Narang
3, Lodi Road
N. Delhi 110003

QUALIFIED ACCEPTANCE
If

acceptance is made dependent on


the happening of an event.
If no place of payment has been
specified, it undertakes to make the
payment at a specified place. Where a
place of payment has been specified,
if the acceptor undertakes to pay at
some other place.
If the acceptor undertakes to pay at a
time other than that at which it would
be legally due.

DISTINCTION BETWEEN A
PROMISSORY NOTE AND A BILL OF
EXCHANGE
Sl. Basis
No of
.
differe
nce
1. Numbe
r of
parties

Promissory note

Bill of exchange

There are two


parties, viz., the
maker and the
payee.

2.

It contains an
unconditional
promise by the

There are three


parties, viz., the
drawer, the drawee
and the payee. The
drawer and the
payee maybe the
same person.
It contains an
unconditional order
to the drawee to

Parties
vs.
Order

3. Acceptanc
e

It does not
need any
acceptance

4. Nature of
liability

The liability of
the maker is
primary.

5. Need of
notice of
dishonour

In case of its
dishonour,
there is no
need to give
any notice of

It must be
accepted by the
drawee or his
authorized agent
before it is
presented for
payment.
The liability of the
drawer is
secondary and it
arises only when
the drawee does
not pay.
The notice of
dishonour must be
given by the
holder to the
drawer and the

7. Restrictio
ns

It cannot be
made payable to
bearer in view of
restriction of
Section 31 of RBI
Act 1934.
8. Protesting No protesting is
required in case
of its dishonour.

9. Relationsh The maker of


ip
note stands in
immediate

It can be made
payable to bearer
but not to
bearer on
demand.
Foreign bills must
be protested for
dishonour if such
protest is
required by the
law of the place
where they are
drawn. [Section
104]
The drawer of a
bill stands in
immediate

CHEQUE
Section

26 defines a cheque
as, a 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 electric
form.

ESSENTIAL
CHARACTERISTICS OF A
CHEQUE
It

is always drawn on a
specific banker.
It is always payable on
demand.

DISTINCTION BETWEEN CHEQUE


AND BILL OF EXCHANGE
Sl.
No.
1.

Basis of
differen
ce
Drawee

2.

Accepta
nce

3.

Payable
to
bearer
on
demand

Cheque

Bill of Exchange

It can be drawn
only on a
banker.
It does not
require any
acceptance.
It can be made
payable to
bearer on
demand.

It can be drawn on
any person
including a banker.
It needs
acceptance from
the drawee.
It cannot be drawn
payable to bearer
on demand.

5.

Presentme Delay in its process by


nt for
the holder does not
payment
discharge the drawer
unless he has
sustained damage due
to the failure of the
bank in the meantime.

It must be duly
presented to the
acceptor for
payment, else the
drawee will be
discharged from
liability.

6.

Crossing

It may be crossed.

There is no provision
of crossing.

7.

Stoppage
of
payment

Its payment maybe


countermanded by the
drawer.

Its payment cannot


be countermanded.

8.

Noting
and
protesting

There is no need of
noting or protesting in
case of its dishonour.

It must be noted or
protested for
dishonour.

9.

Stamping

It does not require any


stamp.

It needs stamping
except in certain
cases.

1
0.

Notice of
dishonour

No notice of dishonour
is required.

The holder is
required to give
notice to all the prior

Stale

cheque: The payment of a cheque can


be claimed within a period of six months
from the date appearing on its face. When
the payment is not claimed within six
months of its drawing, it becomes stale.
Open cheque: An open cheque is payable
across the counter of the bank.
Crossed cheque: Its payment can be
obtained only through a bank. The holder
or payee has to first deposit the cheque
with the bank who collects the proceeds.
Thereafter the payment of the cheque can
be obtained.

WHAT IS CROSSING OF CHEQUES?


Section

123 provides that, Where a


cheque bears across its face an
addition of the words and company or
any abbreviation thereof between two
parallel transverse lines, or two simply
parallel transverse lines either with or
without the words not negotiable,
that addition shall be deemed to be a
crossing and the cheque shall be
deemed to be crossed generally.

TYPES OF CROSSING
General
Special

crossing [Section 123]

crossing [Section 124]

Restrictive

crossing

crossing or account payee

NOT NEGOTIABLE CROSSING


The

general or special crossing as per


Section 123 and 124 respectively may
contain the words Not Negotiable.
Thus, Not Negotiable is not an
independent type of crossing
Effect: A person taking a cheque
crossed generally or specially and
bearing in either case the words not
negotiable shall not have, and shall
not be capable of giving a better title
than the transferor had.

obtained a cheque containing not


negotiable crossing by means of a
fraud with B. A got the cheque
encashed at a bank other than the
drawee bank. B sued the endorsee
bank for conversion. Since A had
obtained the cheque by fraud, he had
no title to it and could not give a
better title to the bank. Therefore, the
bank is liable on the cheque.

Who may cross a cheque?


(i) The drawer of the cheque
(ii) The holder
(iii) The banker
Who can open a crossing?
In respect of a cheque which has
been crossed by any of the parties
such as the holder, or banker

Liability

for payment of crossed cheque


across the Counter
According to Section 129, if a bank pays
a cheque crossed generally otherwise
than to a banker, or a cheque crossed
specially otherwise than to the bank to
whom the same has been crossed or his
agent for collection, it shall be liable to
compensate the rightful owner of the
cheque for the loss that he may sustain
due to such payment.

VARIOUS
KINDS OF
NEGOTIABLE
INSTRUMENT
S

BEARER AND ORDER INSTRUMENTS


Bearer

Instrument
According to Explanation (ii) to Section
13(1), a negotiable instrument is payable
to bearer if
(i) It is expressed o be so payable, or
(ii) It is one on which the only or the last
endorsement is an endorsement in blank
Eg. The instruments made in the following
words are bearer instruments: (a) Pay to
X or bearer (b) Pay the bearer

Order

instrument
It is an instrument which is expressed
to be payable to order or to a
particular person and does not contain
words prohibiting its transfer or
indicating an intention that it shall not
be transferrable.
Eg. Pay X or order Rs. 5000; Three
months after date, pay X are
instances of order instruments. But
the instrument containing the words,
Pay X only, is not an order
instrument. Rather such an

DEMAND AND TIME INSTRUMENTS


Instruments
(i)

(ii)

payable on demand:
A cheque is always payable on demand and it
cannot be expressed to be payable otherwise
than on demand [Section 6, and 19].
A promissory note and a bill is payable on
demand if:
(a) it is expressed to be payable on
demand, or at sight, or on presentment
[Section 21], or
(b) no time for its payment is specified
[Section 19].

Time

instrument: A bill or a pronote is


known as a time instrument if it is
payable
(a) After a fixed period, or
(b) After sight, i.e., after presentment of
sight, or
(c) On a specified day, or
(d) On the happening of an event which
is certain to happen.

Inland

Instrument [Sec. 11]


A promissory note, bill of exchange or
cheque which is: (i) both drawn and made
payable in India, or (ii) drawn upon any
person resident in India, is deemed to be
an inland instrument.
Eg. X of Delhi draws a bill of exchange on
Y, a trader of Delhi. Y accepts the bill as
payable in London. It is a bill drawn in
India on a person resident in India. It is an
inland bill of exchange notwithstanding
that the amount is payable in London.

Foreign

Instrument: An instrument which is


not an inland instrument, is deemed to be a
foreign instrument.
Foreign bill may require protesting for
dishonour if the law of the place where they
are drawn so requires.
The foreign bills are usually drawn in sets of
three to ensure safe transmission.
Eg. A bill of exchange drawn in London and
payable in London is a foreign bill. Similarly,
a bill of exchange drawn in London on a
person residing in India, is also a foreign bill.

SPECIMEN OF A BILL IN SET


$ 1000

New York
July 11, 2006

Three months after sight of exchange (second


and third of the same tenor and date unpaid) pay
to William of First Avenue, New York, the sum of
one thousand dollars only, for value received.
To,
M/s Soho International
(stamp)
Backbay Reclamation
Sd/ Miller Wright
Mumbai

Time Bill: A bill drawn and accepted for a genuine


trade transaction is termed a trade bill.

Accommodation bill: It is drawn by the parties to


provide financial help to some party.
(a) The accommodated party continues to hold the
bill till maturity but the accommodating party does
not incur any liability thereon.
(b) The accommodating party will be liable to a
subsequent holder for value even if he is aware of
its being an accommodation bill.
(c) Non-presentation of accommodation bill to the
acceptor for payment does not discharge the
drawer.
(d) Failure to give notice of dishonour does not
discharge the prior parties from liability.

Documentary

bill: When documents


relating to the goods represented by
the bill are attached to the bill, it is
called a documentary bill.

Clean

bill: When no documents


relating to the goods represented by
the bill are attached to it, the bill is
called a clean bill.

Ambiguous

instrument: An instrument which is


vague or worded in such a way that it cannot be
identified whether it is a promissory note or a
bill it is said to be ambiguous

Inchoate

stamped instrument: An instrument


which is incomplete in some respect is called
inchoate.
According to Section 20, when a person signs
and delivers to another an incomplete paper
stamped in accordance with the law relating to
negotiable instruments then in force in India, he
thereby gives the holder prima facie authority
to complete it for the amount specified therein.

Following are the conditions for the application of


Section 20:
(a) The instrument must be made or completed on a
stamped paper.
(b) It must be delivered to the other person.
(c) The instrument should have been filled strictly in
accordance with the authority conferred.

In Lloyds Bank vs. Cooke, a pronote signed by the


maker was given to Cooke for deposit in a bank as
security with the authority to Cooke to fill it up for $
250, Cooke fraudulently filled in the amount of $1000
covered by the stamp and obtained an advance from
the bank which had no knowledge of the fraud. Held,
the maker of pronote cannot deny the validity of the
note as between himself and the bank.

Fictitious

bill: When the name of the


drawer or payee, or both is fictitious in
a bill, it is called a fictitious bill.

Escrow:

A negotiable instrument
delivered conditionally or for a special
purpose such as a collateral security or
for safe custody only, but not for the
purpose of negotiation is called an
escrow.

PAYMENT IN DUE COURSE


[SECTION 10]
Payment

in due course means a


payment in accordance with the
apparent tenor of the instrument in
good faith and without negligence to
any person in possession thereof,
under circumstances which do not
afford a reasonable ground for
believing that he is not entitled to
recover payment of the amount
mentioned therein.

The

payment must be in accordance with


the apparent tenor of the instrument.
The payment must be made in good faith,
without negligence and under bona fide
circumstances.
The payment must be made to the person
who has actual possession of the
instrument.
The payment must be made by or on behalf
of the drawee or acceptor.
There must not exist any ground for
believing that the possessor is not entitled
to receive the payment, e.g., payment of an
instrument bearing forged endorsement.

MATURITY OF NEGOTIABLE
INSTRUMENT
The maturity of a promissory not, or a
billl of exchange is the date on which it
falls due [Section 22].
Days of grace are not allowed in the
case of the following instruments:
(i) A cheque,
(ii) A bill or note payable at sight, or
on presentment, or on demand,
and
(iii) A bill or note in which no time is
mentioned.

The

instrument entitled to days of


grace, are:
(a) A bill or note payable on a specified
day.
(b) A bill or note payable after sight.
(c) A bill or note payable at a certain
period after date, and
(d) A bill or note payable at a certain
period after the happening of a
certain event.

CALCULATION OF DATE OF
MATURITY
If

an instrument is payable a stated


number of months after date, or after
sight, or after a certain event, it
becomes payable three days after the
corresponding date of the month after
the stated number of months. [Sec.
23]
If the month in which the period would
terminate has no corresponding day,
the period is held to terminate on the
last day of such month. [Section 23]

Eg.

A bill dated January 30, 1992 is made


payable one month after date. The date of
maturity falls due on March 3, 1992.
Eg. A bill payable thirty days after sight is
presented for sight on 1st March, 1992. It
falls due on April 3, 1992.
If the day of maturity is a public holiday,
the instrument is deemed to be due on the
next preceding business day.
Eg. A bill dated 9th January, 1992 is
payable three months after date. It falls
due on 12th April 1992 which happens to be
a Sunday. Thus, the date of maturity shall
th

PARTIES TO
NEGOTIABLE
INSTRUMENT
S

The

maker and payee are the parties


to a promissory note.
The main parties in a bill of exchange
are the drawer, drawee and payee.
On endorsement, the transferor
becomes the endorser and the
transferee is called the endorsee.

Holder:

Section 8 describes that the


holder of a promissory note, Bill of
Exchange, or cheque means any person
entitled in his own name to the possession
thereof and to receive or recover the
amount due thereon from the parties
thereto.
1. He must be entitled in his own name to
the possession of the insrtument.
2. He must be entitled to receive or recover
the amount thereon from the parties
thereto.

Holder

in Due Course [Sec.9]


It means any person who for
consideration became the possessor of
promissory note, bill of exchange, or
cheque if payable to bearer or the
payee or endorsee thereof, if payable
to 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 whom he derived his title

In

order to be regarded a holder in due


course, the following conditions must be
satisfied:
1. Must be a holder of the instrument.
2. Must be a holder for valuable
consideration.
3. Must have obtained the instrument
before maturity.
4. Must have obtained the instrument in
good faith and with reasonable caution.

PRIVILEGES OF A HOLDER IN DUE


COURSE
1.

Right in case of an inchoate stamped


instrument [Sec. 20]
E.g. X delivers to Y a signed, stamped
and blank endorsed pronote with
authority to fill in the amount of Rs.
5000. Y fraudulently fills the amount
of Rs. 15000 which is adequately
covered by the stamp. He then
negotiates the pronote to Z who takes
it without notice of fraud. X must pay
Rs. 15000 to Z.

2.

Liability of prior parties [Sec.36]


E.g. X draws a bill on Y, payable to Z. It is duly accepted
by Y who endorses it to A. A further endorses it to B who
is a holder in due course. B can recover the amount of
the bill from Y, the acceptor. If Y fails to pay, he can
recover it from any of Z, X and A.

3.

Right in case of a fictitious bill [Sec.42]


E.g. X accepted a bill drawn by Y and payable to a
fictitious person. The bill was duly returned to Y after its
acceptance. Subsequently, Y endorsed the bill to A by
signing it as B. During the course of negotiation, the bill
came into the hands of C, a holder in due course. C can
recover the amount of bill from Y by showing that the
signature of the drawer (Y) and the first endorser(B) are
in the same hand

4.

Right when the instrument is delivered


conditionally [Sec. 46]
E.g. X, the holder of a bill endorses it to Y
or order for the specific purpose that Y
may get it discounted. Y negotiates the bill
to Z, a holder in due course. Z gets good
title and can sue all the previous parties.

5.

Instruments purged of all defects [Sec. 52]


E.g. X, by fraud induces Y to make a
pronote in his favour. X then endorses it to
Z, a holder in due course. Z endorses to M.
M can recover the amount of pronote from Y.

6.

Right in case of prior defects in the instrument


[Sec. 58]
E.g. X obtained a promissory note from Y by using
undue influence and endorsed it to Z, a holder in
due course. Z can recover the amount mentioned
in the pronote. Y cannot escape liability by stating
that the pronote has been obtained by means of
undue influence.

7.

Presumption as to title [Sec. 118]


E.g. A the holder of a bill gives it to B for getting
the same discounted. B fraudulently negotiates it
to C who transfers it to D. D sues the acceptor.
The acceptor proves Bs fraud. D must prove that
he is a holder in due course.

Estoppel against denying the original


validity of the instrument [Sec. 120].
9. Estoppel against denying the capacity
of the payee to endorse the
instrument [Sec. 121].
10. Estoppel against denying the
signature or contractual capacity of
any of the prior party [Sec. 122]
8.

DISTINCTION BETWEEN HOLDER


AND HOLDER IN DUE COURSE
Sl. Basis of
No. Distinctio
n
1.
Nature

2.

Holder

A holder is
entitled in his
own name to the
possession of
the instrument
and to recover
the amount due
thereon from
the parties
liable thereon.
Considera It is not

Holder in Due
Course
A holder in due
course denotes a
holder who takes
the instrument in
good faith, for a
consideration
and before its
maturity.

He must have

3. Maturity

4. Title

He may acquire
a negotiable
instrument even
after its
maturity
The title cannot
be better than
that of the
transferor.

5. Possession It is not
necessary for a
holder.
6. Good faith
and

A holder may
have defect in

He must have
obtained it
before maturity.

He gets the title


free from all
defects. His title
is not affected by
any defects in
the title of the
transferor.
He must have the
possession of the
negotiable
instrument.
A holder in due
course must act

7.

Right to
recover

A holder can
recover the
amount of the
instrument from
the maker and
the transferor
but not from all
the prior parties.

8.

Special
privileges

No special
privileges.

The holder in
due course
can recover
the amount
from any of
the prior
parties until
the
instrument is
duly
discharged.
The law has
conferred
special
privileges on
the holder in
due course.

CAPACITY OF PARTIES
According to Sec. 26, every person capable of
contracting, may bind himself and be bound by
making, drawing, accepting, accepting, endorsing,
delivering and negotiating a promissory note, bill
of exchange or a cheque.
The extent of liability of different parties:
1. Minor
2. Person of unsound mind
3. Joint Stock company
4. Agent
5. Partner

LIABILITY OF PARTIES
Liability of legal representative [Sec. 29]
2. Liability of drawer of a bill of exchange or of a
cheque [Sec. 30]
3. Liability of drawee of cheque [Sec. 31]
4. Liability of maker of note and acceptor of bill
[Sec. 30]
5. Liability of endorser [Sec. 35]
E.g. X is the holder of a bill which is payable to Y
or order . The bill contains three endorsements.
First endorsement: Y; Second endorsement: Z;
Third endorsement: M. X sues M and strikes off
the rest of the endorsements without Ms
consent. X cannot recover anything from M.
1.

Liabilities of prior parties to holder in due


course [Sec. 36]
7. Liability inter se [Sec. 37 and 38]
E.g. A draws a bill payable to his own order
on B who accepts. A endorses the bill to
C, C to D and D to E. Between E and B, B
is the principal debtor and C and D are
sureties for B. As between E and A is the
principal debtor and C and D are sureties.
As between E and C, C is the principal
debtor and D is his surety.
6.

NEGOTIATION
AND
ENDORSEME
NT

negotiable instrument may be


transferred either
(i) By negotiation under the Negotiable
Instruments Act, or
(ii) By the assignment of the instrument
as an ordinary chose-in-action under
the transfer of Property Act.

NEGOTIATION
Modes of Negotiation
1. Negotiation by delivery [Sec. 47]
E.g. A holds a cheque payable to bearer. He puts the
cheque into his desk drawer from where it is stolen
by B. There is no negotiation of the cheque from A
to B as it has not been voluntarily delivered to B.
2. Negotiation by endorsement and delivery
E.g. A draws a cheque for Rs. 1000 payable to B and
delivers it to him. B endorses it in favour of C and
then puts the cheque in his table drawer.
Thereafter B meets with an accident and dies. The
cheque is found lying in Bs drawer by C. In this
case there is no negotiation because endorsement
has not been completed by delivery.

EFFECT OF NEGOTIATION
A

holder who takes a negotiable


instrument after negotiation and
for value gets a good title thereto,
notwithstanding any defect in the
title of the transferor except in
case of forgery.

ASSIGNMENT
It

is the transfer of the right to recover


payment of a debt by one person to
another.
Assignment is done by means of a
written and registered document.
The person who transfers his right
under a negotiable instrument is called
assignor and the person to whom
these rights are transferred is called an
assignee.

DIFFERENCE BETWEEN
NEGOTIATION AND ASSIGNMENT
Sl. No.

Negotiation

Assignment

1.
Formalities

Negotiation can be
done:
(i) By delivery in
the case of a
bearer
instrument,
(ii)By endorsement
and delivery in
case of order
instruments
Consideration is
always presumed
in case of

It requires a
written document
signed by the
assignor.

2.
Considerati
on

The assignor
must establish
that he has

3.Notice

4.Title

5. Right to
sue

No notice of
transfer is
necessary.

Notice of
assignment must
be given to the
debtor by the
transferee.
The transferee of a The title of the
negotiable
assignee is
instrument, if he is subject to the
a holder in due
defects that may
course, takes the
exist in the title
instrument free
of the assignor.
from any defect
that may exist in
the title of the
transferor.
Transferee can sue An assignee
the third parties in cannot sue third
his own name.
parties in his

ENDORSEMENT
According

to Sec. 15 endorsement is the


signing by the maker or the holder of his
name on a negotiable instrument for the
purpose of its negotiation to another
person.
Who can endorse? [Sec. 51]
1. Payee
2. Endorsee
3. Maker or drawer
4. Stranger

KINDS OF ENDORSEMENTS
1.

Blank or general endorsement [Sec 16(1)]


E.g. A bill of exchange is payable to X. X
signs only his name at the back of bill. This
is a blank endorsement.

2.

Special or full endorsement [Sec. 16(1)]


E.g. B holds a bill. On its back, he writes
the words Pay to A or order and signs at its
foot. It is an instance of full endorsement.

Conversion of Blank endorsement into Special


Endorsement
E.g. A endorses a bill of exchange in blank by signing his
name at its back and delivers it to B. Above As
signature, B writes the words, Pay to C or order. It
converts the blank endorsement into endorsement in
full. B will not be liable on the instrument as has not
signed it.

Effect of full endorsement following a blank endorsement


E.g. A is the payee and holder of a bill of exchange. He
endorses it in blank and delivers it to B. B also endorses
in blank and delivers it to C. C endorses it in full to D or
order. D delivers the bill to E without any endorsement.
In this case E can sue the drawer, acceptor and A or B.
But he cannot recover it from C or D because C is the
endorser in full and D is the endorsee from C.

Restrictive Endorsement
E.g. (i) Pay C only (ii) Pay X or order for the account
of Y.
3.

Partial Endorsement
E.g. X holds a bill for Rs. 1000. He endorses it as
Pay to B or order Rs. 500. This is a partial
endorsement and hence invalid.
4.

5.
(i)
(ii)
(iii)
(iv)

Conditional Endorsement
Sans recourse endorsement
Facultative endorsement
Sans frais endorsement
Contingent endorsement

EFFECT OF ENDORSEMENT [SEC.


30]
(i)

(ii)

(iii)

The ownership of the instrument is


transferred from the endorser to the
endorsee.
The endorsee gets the right of further
negotiation.
The endorsee can bring an action for
recovery against all the parties
whose names appear on the
instrument.

NEGOTIATION BACK OR CIRCUITY


OF ACTION
E.g. Suppose A endorses a bill in favour of B, B
in favour of C; C in favour of D; D in favour of
E and E in favour of A. The bill is, thus,
negotiated back to A who was the original
holder. In case the bill is dishonoured, A
could have the right to recover money from
the prior parties. However being a prior
party, he himself is also liable thereon. If A
were allowed to sue the prior parties, they
too could sue A by reason of his being a prior
endorsee.
Since this involves circuity of
action, Section 52 prohibits it.

PRESENTMEN
T OF
NEGOTIABLE
INSTRUMENT
S

Meaning

of Presentment
Presentment means showing an
instrument to the drawee, acceptor, or
maker for acceptance or payment.
Presentment is of three kinds,
(a) For acceptance, in case of a bill of
exchange,
(b) For sight in case of a promissory note,
and
(c) For payment in case of all the
negotiable instruments

1. PRESENTMENT OF BILL FOR


ACCEPTANCE
A bill of exchange payable after acceptance on sight,
so as to fix the date of maturity of the bill.
(b) A bill of exchange which contains an express
stipulation that it should be presented for acceptance
before it is presented for payment.
(c) A bill of exchange which is payable at a place other
than the place of residence or business of the drawee.
Presentment can also made,
(d) to get additional security of the acceptors name on the
bill
(e) To get an immediate right of recourse against the
drawer, in case of dishonour after acceptance, or for
non-acceptance on presentation.
(a)

ESSENTIALS OF VALID
ACCEPTANCE
(a)
(b)
(c)

(d)

(e)

It must be given in writing.


It must be given in the bill.
It must be signed by the drawee or his
duly authorised agent, and duly
identified by means of official seal, or
full address and other identifying
details.
The instrument should be delivered to
the holder.
It should be absolute and unconditional.

PRESENTMENT TO WHOM
Presentment for acceptance maybe made to the
following:
(i) To the drawee or his duly authorized agent.
(ii) To all the drawees, except in the case os a
trading firm where one partner may accept for
the firm on behalf of all the partners.
(iii) To the legal representative, in case the drawee is
dead.
(iv) To the official assignee/receiver in case the
drawee has become insolvent.
(v) To a drawee in case of need.
(vi) To an acceptor for honour;

PRESENTMENT FOR ACCEPTANCE


WHEN AND WHERE?

Time for Presentment: If the time of presentment


for acceptance is specified, it must be presented
within that time and before maturity.

Place of Presentment: Presentment must be made


at the place specified, the bill shall be presented
at the drawees usual place of business or
residence.
Effect of non-presentment: On the failure of holder
to present the bill for acceptance where it is
obligatory, the drawer and all the endorsers are
discharged from liability to him.

CIRCUMSTANCES WHEN
PRESENTMENT FOR ACCEPTANCE
IS EXCUSED
When

the drawee cannot, after


reasonable search be found.
Where the drawee is a fictitious person
or incapable of contracting.
Where, though the presentment id
irregular, acceptance has been refused
on some other ground.
Where the drawee is dead or insolvent.
Where the drawee refuses to accept.

ACCEPTANCE FOR HONOUR [SECS.


108 112]
Where

a bill is dishonoured for nonacceptance, the holder may still allow


any other person to accept it for the
honour of the drawer or any other
party thereto.

The

person so accepting the bill is


called acceptor for honour.

CONDITIONS FOR ACCEPTANCE FOR


HONOUR
1.

2.

3.

4.

The bill must have been noted or


protested for non-acceptance or for
better security.
The acceptance for honour must be
made with the consent of the holder.
It must be given on the bill and
indicate that it is an acceptance for
honour.
It must be signed by the acceptor for
honour.

2. PRESENTMENT OF PROMISSORY
NOTE FOR SIGHT
A

pronote must be presented to the


maker for sight in orfer to fix its
maturity.
The presentment is excused if the
maker cannot, after reasonable search,
be found.
On default in presenting, no party will
be liable thereon to the person making
the default.

3. PRESENTMENT FOR PAYMENT


According

to Sec. 64, 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.

On

default, other parties are not liable


to such holder.

CIRCUMSTANCES WHEN
PRESENTMENT FOR PAYMENT IS
NOT NECESSARY
1.
2.
3.
4.
5.
6.
7.
8.

Intentional prevention of presentment.


Closure of place of business.
Absence from place of payment.
Non traceability of payer.
Waiver of presentment.
Promise to pay despite non-presentment.
The bill is dishonour by non-acceptance.
When drawer could not suffer damage.
(a) In case of accommodation bills.
(b) If the drawee is a fictitious person.
(c) If the drawer and drawee are the same
person.

PAYMENT FOR HONOUR [SEC. 113]


When

a Bill of Exchange has been


noted or protested for non-payment,
any person may pay the same for the
honour of any party liable to pay the
same.
The person so paying must declare
before a notary as to the person for
whose honour he pays.

DISHONOUR
AND
DISCHARGE
OF A
NEGOTIABLE
INSTRUMENT

negotiable instrument may


be dishonoured by:

(a) non-acceptance
(b) non-payment

1. DISHONOUR BY NONACCEPTANCE
If the drawee refuses to accept it, or
does not accept it within 48 hours
from the time of presentment for
acceptance.
(ii) If presentment for acceptance is
excused and it has remained un
accepted.
(iii) If the drawee is incompetent to
contract.
(iv) If the drawee gives qualified
acceptance.
(i)

2. DISHONOUR BY NON-PAYMENT
When

the maker of a note; acceptor of


a bill, or drawee of a cheque makes
default in payment upon being duly
required to pay the same.

When

presentment for payment is


excused and the instrument remains
unpaid at maturity.

NOTICE OF DISHONOUR
Section

93 makes it obligatory
for the holder of an
instrument to give a notice of
dishonour to every party
whom he wants to make
liable.

EFFECT OF FAILURE TO GIVE


NOTICE
When notice of dishonour is Unnecessary:
(i) When it s dispensed with by the party entitled thereto.
(ii) When the drawer has countermanded payment.
(iii) When the party charged could not suffer damage for
want of notice.
(iv) When the party entitled to notice cannot, after due
search, be found, or the party bound to give notice is
for any other reasons such as a serious illness,
accident, unable to give it.
(v) To charge the drawer when the acceptor is also the
drawer.
(vi) In case of a promissory note which is not negotiable.
(vii) When the party entitled to notice, knowing the facts,
promises to pay the amount unconditionally.

DISCHARGE OF A NEGOTIABLE
INSTRUMENT
The

discharge of one or more


of the parties liable under the
instrument,
Discharge of the instrument.

METHODS OF DISCHARGE OF AN
INSTRUMENT
By payment in due course to the
person legally entitled to receive it at
or before maturity.
(ii) When the party primarily liable
becomes holder of the instrument in
his own right.
(iii) By express waiver
(iv) By cancellation of the instrument by
the holder.
(v) By discharge as a simple contract.
(i)

DISCHARGE OF A PARTY OR
PARTIES
By payment in due course.
(ii) By cancellation of the instrument.
(iii) Be release of a party to the instrument.
(iv) By allowing drawee more than 48 hours to
accept.
(v) By non-presentment of a cheque within a
reasonable time of its issue.
(vi) In case of a qualified acceptance, the parties
not consenting to it are discharged.
(vii) By operation of law.
(viii)By material alteration.
(i)

MATERIAL ALTERATION
It

connotes any change in a written


instrument which causes it to speak a
different language in legal effect from
that which it had originally spoken.
(a) Alters the character of the
instrument.
(b) Changes the rights and liabilities of
any of the parties to the instrument.
(c) Alters the operation of the
instrument.

Instances

of material alteration:
(a) Alteration in the date, time or place of
payment;
(b) Conversion of an order cheque into a
bearer cheque;
(c) Alteration in the sum payable.
(d) Opening a crossed cheque.
(e) Alteration in the rate of interest.
(f) The addition of names of new parties
as payees of the instrument.

The following are not considered to be material


alterations:
(i) Conversion of an instrument payable to bearer
into an instrument payable to order.
(ii) Alterations made with the consent of all parties.
(iii) Alterations made to correct a mistake.
(iv) Addition of the words on demand on an
instrument in which no time of payment is
stated.
(v) Conversion of blank endorsement into
endorsement in full.
(vi) Completion of an inchoate instrument.
(vii) Making a qualified acceptance.
(viii) Crossing of cheques.

EFFECT OF MATERIAL ALTERATION


When

any material alteration is made


in an instrument without the consent
of all the parties thereto, all such
parties shall be discharged from their
liability. The conditions for such
discharge are as follows:
(a) The alteration should be material.
(b) It should not be intentional.
(c) It should be apparent on the face of
the instrument.

BOUNCING
OF CHEQUES

Section 138 provides as follows:


When any cheque drawn by a person on an account
maintained by him with a banker for payment of any
amount of money to another person from out of that
account for the discharge, in whole or in part, of any
debt or other liability, is returned by the bank unpaid,
either because 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
that bank, such person shall be deemed to have
committed an offence and shall, without prejudice to
any other provision of that Act, be punished with
imprisonment for a term which may extend to two
years or with fine which may extend mto twice the
amount of cheque, or with both.

CONDITIONS FOR THE


APPLICABILITY OF SECTION 138
1.

2.

3.
4.

5.
6.

Time limit for presentation of cheque


to the drawer bank:
Cheque must have been drawn in
discharge of a debt or other liability.
Reasons for dishonour.
Notice of dishonour and demand
notice to the drawer.
Failure of drawer to pay.
Filing a written complaint

DOCUMENTS TO BE FILED WITH THE


COMPLAINT
(i)
(ii)
(iii)

(iv)

(v)

The bounced cheque.


The memorandum issued by the banker.
Copy of the legal notice issued to the
drawer of the cheque intimating dishonour
of cheque and demanding the amount
stated in the cheque.
The receipt issued by the post office
regarding posting of legal notice by
registered post.
The postal acknowledgement card for the
legal notice.

PRESUMPTION IN FAVOUR OF
HOLDER [SEC. 139]
It

shall be rpesumed unless the


contrary is proved that the
holder of a cheque received the
cheque, of the nature transferred
to in Section 138 for the
discharge in whole or in part of
any debt or other liability.

Defences

which may not be allowed in


prosecution under section 138:
It shall be no defence in a prosecution
for an offence under Section 138 that
the drawer had no reason to believe
when he issued the cheque that the
cheque may be dishonoured on
presentment for reasons stated in that
section.

OFFENCES BY COMPANIES [SEC.


141]
In

case the offence under Section 138


has been committed by a company,
every person who, at the time the
offence was committed, was in charge
of and was responsible to the company
for the conduct of business of the
company, as well as the company,
shall be deemed guilty of the offence
and shall be liable to be proceeded
against and punished accordingly.

Pay Orders whether covered under Section 138


The Supreme Court has held in Punjab and Sind
Bank vs. Vinkar Sahakari Bank Ltd., that a pay
order falls within the definition of cheque.
Accordingly, the appeal of the complainant bank
for dishonoured pay order was held to be
maintainable under Section 138.

Death of Complainant:
The complaint under Section 138 does not abate
on the death of the complainant. His legal heirs
may pursue the case.
If the accused dies, the criminal complaint cannot
be continued against his legal heirs.

Offence

Compoundable [Sec. 147]:


Compounding is the amicable
settlement of the issue between the
complainant and the accused
Repeated

presentations of the Cheque:


The payee or holder in due course of
the cheque can present it to the bank
any number of times within its validity
period

SOME ISSUES RELATED TO BOUNCING OF


CHEQUES
Drawers refusal to receive notice of dishonour.
Stop Payment of Cheque: Is Section 138 attracted?
Presentation of Petition for Winding up: Whether a Bar
on Suit under Sec. 138.
Complaint against Surety.
Declaration of a Company as Sick under SICA,
whether a Bar to Applicability of Sec. 138.
Vicarious Liability of Directors
Post-dated Cheque in which Drawer stops payment by
issuing instructions in drawer bank
Closure of Account Whether a Defence Against Sec.
138