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Negotiable Instrument Act, 1881

INDEX
Day 1 : Meaning of Negotiable Instrument & Promissory Note

Day 2 : Bill of Exchange & Cheque

Day 3 : Acceptance, Types of Negotiable Instrument

Day 4 : Maturity of Negotiable Instrument& HDC

Day 5 : Negotiation & Endorsement

Day 6 : Liabilities of Parties & Presentment

Day 7 : Discharge & Material alteration

Day 8 : Dishonour of Negotiable Instrument

Day 9 : Crossing , Liabilities of bankers

Day 10 : Past Exam Questions

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yDay
1 : 1:
Meaning of of
Meaning Negotiable Instrument
Negotiable & Promissory
Instrument Note
& Promissory Note

1.Meaning of Negotiable Instrument

Negotiable Instrument Act came into effect from 1st March 1882.It is a English common law.
It applies to whole of India including Jammu & Kashmir. It is Recently amended in 2002,
2015 & 2018.
Negotiable Instruments is an instrument in writing, which is freely transferable by
delivery, like cash and is capable of being sued upon.
The Act does not define the term ‘Negotiable Instruments’. However, Section 13 of the Act
provides for only three instruments as being negotiable instruments:

Types of
Negotiable
Instruments

Promissory Note Bill of Exchange Cheque

Sec 4 Sec 5 Sec 6

It does not mean that other instruments are not negotiable in India, instruments like
Government Promissory Note, Shah Jog Hundi, Delivery Order or Delivery Receipt are also
negotiable by custom or promissory note.
Essential Characteristics of Negotiable Instruments
1. Transferable Ad Infinitum.
2. Negotiability Holder in Due Course [HDC] gets a good title free from defects irrespective of
title of transferor. Good faith plus before maturity plus for consideration is equals to Holder
in Due Course. Negotiability is an Independent tittle.
3. HDC can sue in his own name.
4. Negotiable Instrument in writing, stamped, dated and signed and may be used as an
evidence of debt.
5. It must contain either a promise or order to pay money.
6. The order or promise must be unconditional. (Conditions must be Universal Truth)
7. The promise or order to pay must consist of money only. Also, the sum payable must be
certain.
8. Presumptions as to Negotiable Instrument (Section 118)
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No. Presumption made in relation Presumption Drawn

Until the contrary is proved, the following presumption shall be made :
1 of consideration every negotiable instrument was made
or drawn for consideration.
2 as to date every negotiable instrument bearing a
date was made or drawn on such date.
3 as to time of acceptance every accepted bill of exchange was
accepted within a reasonable time after
its date & maturity.
4 as to time of transfer every transfer of negotiable instrument
was made before maturity.
5 as to order of endorsements endorsement appear upon a negotiable
instrument were made in the order in
which they appear thereon.
6 as to stamps lost promissory note, bill of exchange or
cheque was duly stamped
7 as to holder the holder of a negotiable instrument is a
holder in due course.

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2.Types of Negotiable Instrument under the Act

Types of
Negotiable
Instruments

Promissory Note Bill of Exchange Cheque

Sec 4 Sec 5 Sec 6

Section 4 Promissory Note

Promissory note is an instrument in writing, not being a bank-note or a currency note

containing an unconditional undertaking, sign by the maker to pay a certain sum of money
to, or to the order of a certain person, or to the bearer of the instrument. Currency Notes are
equals to Promissory Note.
However, only RBI can draw promissory note payable to bearer.
EXAMPLE: Rama executes a promissory note in the following form, 'I promise to pay a sum
of Rs. 10,000 after three months'. Decide whether the promissory note is a valid
promissory note.
Hint: The instrument is illegal as per RBI Act and cannot be legally enforced.

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Promissory
Notes

To pay a
An Instrument Not a Must contain Signed By Maker certain sum of
money

to order of the to the bearer

Unconditional
In Writting Bank Note, or Currency Note a certain of the
undertaking
person or instrument

Features:
1. It must be in writing, sign by the maker on any part of the instrument.
2. It must be stamped.
3. There must be an express promise to pay. Mere acknowledgement of debt is insufficient.
Example: I acknowledge myself to be indebted to B in ₹ 1,000, to be paid on demand, for
value received. (Valid promissory note as the promise to pay is definite)
Example: “Mr. B I.O.U ₹ 1,000.” – Invalid promissory note as there is no promise to pay. It is
just an acknowledgement of debt.
4. Amount must be certain.
Example: “I promise to pay B ₹ 500 and all other sums which shall be due to
him.”- Promissory note invalid as the amount payable is not certain.
5. The promise must be unconditional and it must not be linked to an unconditional event.
Example: I promise to pay B ₹ 500 seven days after my marriage with C. (the promissory
note is invalid as marriage with C may or may not happen.)
Example: I promise to pay B ₹ 500 on D’s death – as the death of D is certain, promise is
unconditional. Thus, the promissory note is valid.
Example: I promise to pay B ₹ 500 on D’s death, provided D leaves me enough to pay that
sum. Invalid promissory note as promise is dependent on D leaving behind money which
is not certain.
6. It must be made for money only and not for goods.
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Example: I promise to pay B ₹ 500 and to deliver to him my black horse on 1st January
next. – It is not a valid promissory note, as the promisor needs to deliver its black horse
which is not money.
7. Maker and Payee must be certain, definite and different persons.
8. There are 2 parties:-
 Maker [Cannot be a Minor]
 Payee [Can be a Minor]
Let’s check your understanding

Examples :
A signs instruments in the following terms :
a) “I promise to pay B or order Rs.500”
b) “I acknowledge myself to be indebted to B in Rs.1000 to be paid on demand for value
received”.
c) “Mr. B I.O.U Rs.1000”.
d) “I promise to pay B Rs.500 and all other sums which shall be due to him”.
e) “I promise to pay B Rs.500 first deducting there out any money which he may owe me”.
f) “I promise to pay B Rs.500 after my marriage with C”.
g) “I promise to pay B Rs.500 on D’s Death provided that D lefts me enough to pay that sum.
h) “I promise to pay B Rs.500 and to deliver him black horse on 1st January next.

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Day 2 : Bill of Exchange & Cheque

3. Section 5 Bill of Exchange

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.

Bill of
Exchange

Signed by Directing a
An Instrument Must contain
Maker certain person

to the order of
Unconditional To pay certain the bearer of
In writting a certain
order sum of money. instrument
person or

Parties of the Bill of exchange

1. Drawer: The maker of a bill of exchange.
2. Drawee: He is the person on whom the bill is drawn.
3. Payee: The person named in the instrument, to whom or to whose order the money
is, by the instrument, directed to be paid.
Features:
1. It must be in writing and signed by drawer in any part of the instrument.
2. Must contain an express order to pay.
3. It must be unconditional.
4. Drawer, drawee and payee must be certain.
5. It must be stamped.
6. It must be made for money only.
7. Sum of money should be certain.
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8. It may have 2 parties or may have 3 parties.

9. Liability:-
 Drawer: Secondary and Conditional
 Drawee: Primary and Unconditional
 Payee: No Liability
Specimen of Bill of Exchange
Mr. A (Drawer)
48, MP Nagar, Bhopal (M.P.)
April 10, 2018
₹ 10,000/-
Four months after date, pay to Mr. B(Payee) a sum of Rupees Ten Thousand,
for value received.
To
Mr. C (Drawee)
576, Arera Colony, Bhopal (M.P.)
Signature
Mr. A

[Note: A Bill of Exchange cannot be made Bearer on Demand]

DISTINCTION BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHAGE
S.NO. PROMISSORY NOTE BILL OF EXCHANGE

1 It contains a promise to pay. It contains an order to pay.

2 The liability of the maker of a The liability of the drawer of a bill is

note is primary and absolute. secondary and conditional.
3 A promissory note does not The Bill of Exchange needs
require any acceptance, as it is acceptance from the drawee.
signed by the person who is
liable to pay.
4 There are only 2 parties:- There are 3 parties :-
Maker (Debtor) Drawer
Payee (Creditor) Drawee
Payee
5 It cannot be drawn in sets. The bills can be drawn in sets.

6 It can never be conditional. Order is not conditional. However

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acceptance can be conditional

(Qualified)
7 The maker and payee cannot The drawee and the payee may be
be the same person. the same person.
8 Cannot be payable to bearer. Cannot be payable to bearer on
demand.

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4.Section 6 Cheque
A “cheque” is a bill of exchange drawn on a specified banker and is not payable otherwise
than on demand. It includes the electronic image of a truncated cheque and a cheque in the
electronic form.
(a)Cheque in the electronic form: means a cheque drawn in electronic form by using any
computer resource, and signed in secure system with digital signature (with/without
biometric signature) and asymmetric crypto system or electronic signature as the case may
be.
(b) A truncated cheque means a cheque truncated during the course of clearing cycle,
either by clearing house or by bank whether paying or receiving payment, immediately on
generation of electronic image for transmission, substituting the further physical
movement of cheque in writing.

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Payable on demand means - It should be payable whenever the holder chooses to present
it to the drawee (the banker).
The expression “Banker” includes any person acting as a banker and any post office
saving bank.
Parties to Cheque:
1. Drawer: The person who makes the cheque.
2. Drawee: The specific bank on whom cheque is drawn. In case of cheque, drawee is
always banker.
3. Payee: The person named in the instrument, to whom or to whose order the money
is, by the instrument, directed to be paid.
Essentials:
1. All essentials of bill of exchange is to be satisfied.
2. Always on a specified banker. ***
3. Always payable on demand without any days of grace. ***
*Above two additional features distinguish a cheque from bill. Thus, all cheques are
bills while all bills are not cheques.
4. It does not require any stamping or acceptance.
5. Parties:-
 Maker
 Paying Banker
 Payee
6. If minor draws a cheque, it shall not be held liable.
Cheque must be dated [after 3 months - stale]. A future date cheque is called Post Dated
Cheque [PDC], validity period of every cheque is 3 months.
DISTINCTION BETWEEN A CHEQUE and BILL OF EXCHANGE
S.NO. CHEQUE BILL OF EXCHANGE

1 In a cheque drawee is always a In a bill the drawee may be a Bank or any

Bank. other person.
2 In a cheque days of grace are not Where as in a bill 3 days of grace are
allowed. allowed for payment.
3 Notice of dishonour is not needed. Notice of dishonour is required.

4 A cheque can be drawn to bearer A bill cannot be bearer, if it is made

and made payable on demand. payable on demand.
5 Cheque does not require Bill sometimes require presentment for
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presentment for acceptance. It acceptance and it is advisable to present

needs presentment for payment. them for acceptance, even when it is not
essential to do so.
6 Cheque does not require to be Whereas bill must be stamped according
stamped in India. to the law.
7 A cheque may be crossed. A bill cannot be crossed.

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Day-3 Acceptance, Types of Negotiable Instrument & Maturity of Negotiable

Difference between Promissory Note, Bill of Exchange & Cheque

Basics Promissory Note Bill of Exchange (Section Cheque (Section 6)
(Section 4) 5)
Acceptance Not needed Mandatory Not needed
Nature Promise to pay Order to pay Order to pay on bank
Liabilities Maker : Primary / Drawer : Primary / Banker : Primary
Unconditional Unconditional Drawer : Maker : Secondary
Second / Conditional
Relation Maker & Payee stand Drawer & Drawee : In Maker : A/c holder
in immediate relation Drawer & Payee : May with in immediate
relation or payee
Parties Only 2 : Maker & Payee There can be 3 or 2 There can be 3 or 2
parties : parties :
Drawer/Drawee/Payee Maker/Drawee/Payee
Sets Cannot be drawn Can be drawn Can be drawn
Notice of Not needed Compulsory if to be To be given to endorse
Dishonour made liable not maker
Grace Days 3 Days/Time NI 3 Days/Time NI No days
Payment Both : Time/Demand Both : Time/Demand Only on demand
made
Stamping Compulsory Compulsory Not needed in India
Crossing No provision No provision Allowed in India

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5.Acceptance: Bill of Exchange

An acceptance is the signature of the drawee of a bill who has signed his assent upon the
bill and delivered it.

Essentials of a valid acceptance of a Bill of Exchange:

(i) Acceptance must be written: The drawee may use any appropriate word to convey
his assent. Only signature is sufficient without adding additional words. An oral
acceptance is not valid in law.
(ii) Acceptance must be signed: A mere signature would be sufficient for the purpose.
Alternatively, the words ‘accepted’ may be written across the face of the bill with a
signature underneath.
(iii) Acceptance must be on the bill: The acceptance should be on the face of the bill
normally but it is not necessary. An acceptance written on the back of a bill has been
held to be sufficient in law. What is essential is that must be written on the bill; else it
creates no liability as acceptor on the part of the person who signs it.
(iv) Acceptance must be completed by delivery: Acceptance would not be complete and
the drawee would not be bound until the drawee has either actually delivered the
accepted bill to the holder or tendered notice of such acceptance to the holder of the
bill or some person on his behalf.
(v) Where a bill is drawn in sets: The acceptance should be put on one part only. Where
the drawee signs his acceptance on two or more parts, he may become liable on each of
them separately.
(vi) Acceptance may be either general or qualified: An acceptance is said to be general
when the drawee assents without qualification order of the drawer. The qualification
may relate to an event, amount, place, time etc.
“Acceptor” – An acceptor is the drawee who has signed his assent upon the bill and
delivered it to the holder.

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Acceptor for honour (Section 112-113)

Meaning:
 When a party, who is not liable on the bill, accepts the bill for another person’s honour, it
is said acceptance for honour.
 The bill is 1st presented to the primary party and upon non-acceptance by primary party
such a situation arises.
Essential of valid acceptance for honour
(i) The bill must have been noted or protested for non-acceptance.
(ii) The acceptance must be given before maturity of the bill.
(iii) The acceptance must be made in writing on the bill.
(iv) The acceptance is given by any person who is already not liable under the bill.
(v) The acceptance is given with the consent of the holder of the bill.
(vi) The acceptance is given for the honour of any party already liable under the bill.
Can be recovered later from primary part.
Liabilities of Acceptor for Honour:
 He is liable to pay the amount of the bill, if the drawee does not pay on maturity.
 He is liable only to the parties subsequent to the party for whose honour the bill is
accepted.
Rights of Acceptor for Honour:
 He is entitled to recover the amount paid by him from the party for whose honour the
bill was accepted and from all the parties prior to such party.

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6.Classification Of Negotiable Instrument

Classification
Of Negotiable
Instrument

On Basis of On Basis of On Basis of On Basis of

Payee Location Payment Validity

Bearer Order Inland Foreign Time Demand Inchoate Ambigous

(i) Bearer Instrument: Payee is not mentioned. Transferable by delivery. Last end kept
blank.
(ii) Order Instrument: Payee is mentioned. Transferable by endorsement plus delivery.
(iii) Inland Instrument (Section 11): Must satisfy two conditions:
 Made in India, and
 Payable in India or Drawn on a Resident of India.
Example:
 A promissory note made in Kolkata and payable in Mumbai.
 A bill drawn in Varanasi on a person resident in Jodhpur (although it is stated to be
payable in Singapore)
(iv) Foreign Instrument (Section 12): Any such instrument not so drawn, made or
made payable shall be deemed to be foreign instrument in other words.
(a)Bills drawn outside India and made payable in or drawn upon any person resident
in any country outside India.
(b) Bills drawn outside India and made payable in India, or drawn upon any person
resident in India.
(c)Bill drawn in India made payable outside India or drawn upon any resident outside
India, but not made payable in India.

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For Example:
FF
Made in Chennai / Payable in Chennai
are foreign bills.
Made in Delhi / on Mr. B (resident)

Made in Pune / Payable in Dubai on Mr. C (resident of India)

Made in India / Payable in Mumbai on Mr. X (Non-Resident)

Made in UK / Payable in Delhi

Made in US / on Mr. A (Resident of India)

Made in India / on Mr. Steve / Noted payable in UK

(v) Demand Instrument or At Sight (Section 19): An instrument where maturity date is
not specified. It is payable on demand without any days of grace. If a bill is payable at
sight the date on which it is presented is excluded.
(vi) Time Instruments or After Sight(Section 20): Where the time of maturity is
specified clearly, 3 days of grace are given in such bill, if the maturity date is pre-
declared holiday then previous business day, if a maturity date is suddenly declared
holiday then the next day. Depends on Happening of ‘Certain’ event.
Example 2: A owes a certain sum of money to B. A does not know the exact amount
and hence he makes out a blank cheque in favour of B. signs and delivers it to B with a
request to fill up the amount due, payable by him. B fills up fraudulently the amount
larger than the amount due, payable by A and endorses the cheque to C in full payment
of dues of B. Cheque of A is dishonoured. Referring to the provisions of the Negotiable
Instruments Act 1881, discuss the right of B and C.
(vii) Inchoate Instrument: An inchoate Instrument is one where a person signs and
delivers to an another person a paper stamped in accordance with the law relating to
negotiable instrument then enforce, either wholly blank or having incomplete
particulars, thereby giving authority to the holder to complete it. It is called inchoate
instrument. In such case immediate parties can recover only upto actual intention.
However, HDC can recover upto full value of stamp.
(viii) Ambiguous Instrument: is an unclear instrument. It is an instrument where
instruction of the maker is not specific or it is not clear whether it is promissory note
or bill of exchange.

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(ix) Accommodation Bill (Section 43): Accommodation Bill is one where no

consideration is exchanged between parties it is made without consideration or for a
consideration that fails.

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PRACTICE QUESTIONS:-

Que. 1 A draws a bill on B. B accepts the bill without any consideration. The bill is
transferred to C without consideration. C transferred it to D for value. Decide-
(i) Whether D can sue the prior parties of the bill, and
(ii) Whether the prior parties other than D have any right of action inter se?
Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881.
Hint:
(i) D can sue any of the parties i.e. A, B or C, as D arrived a good title on it being taken with
consideration.
(ii) The prior parties before D i.e., A, B and C have no right of action inter se.

Que. 2 P draws a bill on Q for ₹ 10,000. Q accepts the bill. On maturity, the bill was
dishonored by non-payment. P files a suit against Q for payment of ₹ 10,000. Q proved that
the bill was accepted for value of ₹ 7,000 and as an accommodation to the plaintiff for the
balance amount i.e. ₹ 3,000. Referring to the provisions of the Negotiable Instruments Act,
1881 decide whether P would succeed in recovering the whole amount of the bill?
Hint: P would succeed to recover ₹ 7,000 only from Q.

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(x) Fictitious Bill: A fictitious bill is one in which the payee does not exist. However, if such
N.I. received by holder in due course, the acceptor cannot deny the liability on the same,
provided the bill is drawn and endorsed in same hand writing.
Example: X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to
the order of Z. The bill is duly accepted by Y. M obtains the bill from X thus, becoming its
holder in due course. Can Y avoid payment of the bill? Decide in the light of the
provisions of the Negotiable Instruments Act, 1881.
Hint: Y cannot avoid payment by raising the plea that the drawer (Z) is fictitious. The only
condition is that the signature of Z as drawer and as endorser must be in the same
handwriting.
(xi) Duplicate Bill: If the original N.I. is lost before it’s overdue, the holder can demand
from the drawer to given him another bill of the same tenure. However, the drawer may
demand indemnity or security in case of any misuse of the bill.
If the drawer refuses to give such duplicate bill, he may be compelled to do so under law.
(xii) Hundi : A bill of exchange drawn in an oriental language /local/Vernacular language.
Negotiable Instrument Act 1881 applies to Hundis. There was no local usage of trade or
custom prevailing in area where Hundi is drawn. However, if any local custom is
prevalent. ‘That law’ will apply to Hundi and NI Act not apply.
Eg: Nam Jog Hundi, Dhani Jog Hundi , Darshani Hundi , Miadi Hundi Peth Perpeth &
Khokha.

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Day-4 Maturity Of Negotiable Instrument, HDC

7.Maturity Of Negotiable Instrument (Section 22-25)
The maturity of a promissory note or bill of exchange is the date on which it falls due.
Days of grace: Every instrument payable otherwise than “on demand” is entitled to three
days of grace.
8(a) Instruments not entitled to “days of grace” are:
(i) A cheque (as it is intended for immediate payment)
(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.
8(b) Instruments entitled to “days of grace”
(i) A bill or note payable on a specified day
(ii) A bill or note payable “after sight”
(iii) A bill or note payable at a certain period after date and
(iv) A bill or note payable at certain period after the happening of a certain event.
Examples:
(a) A negotiable instrument dated 29th January, 2017, is made payable at one month
after date. The instrument is at maturity on the third day after the 28th February, 2017.
(b) A negotiable instrument, dated 30th August, 2019, is made payable three months
after date. The instrument is at maturity on the 3rd December, 2019.
(c) A promissory note or bill of exchange, dated 31st August, 2019, is made payable
three months after date. The instrument is at maturity on the 3rd December, 2019.
Example: Bill issues on 1st January 2020 for 3 Months than due date will be 1st April plus 3
grace days 4th April.
8(c) Calculating maturity of bill or note payable so many days after date or sight
If a bill of exchange or promissory note is payable at sight the date on which it is
presented shall be excluded.

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Example: Bharat executed a promissory note in favour of Bhushan for ₹ 5 crores. The said
amount was payable three days after sight. Bhushan, on maturity, presented the
promissory note on 1st January, 2017 to Bharat. Bharat made the payments on 4th
January, 2017. Bhushan wants to recover interest for one day from Bharat. Advise Bharat,
in the light of provisions of the Negotiable Instruments Act, 1881, whether he is liable to
pay the interest for one day?
Answer: Bharat is not liable to pay the interest for one day. Bharat paid rightly “three days
after sight”. Since the bill was presented on 1st January, Bharat was required to pay only
on the 4th and not on 3rd January, as contended by Bhushan.
8(d) When day of maturity is a holiday
When the day on which a promissory note or bill of exchange is at maturity is a public
holiday, the instrument shall be deemed to be due on the next preceding business day.
Explanation: The expression “Public Holiday” includes Sundays and any other day
declared by the Central Government, by notification in the Official Gazette, to be a public
holiday.
Que. 1 State briefly the rules laid down under the Negotiable Instruments Act for
determining the date of maturity of a bill of exchange.
Que. 2 Ascertain the date of maturity of a bill payable hundred days after sight and which
is presented for sight on 4th May, 2018.
Hint: 14th August, 2018.

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8.HDC Vs Holder
Holder In Due Course
(a)HDC is a person who is holder with 3 attributes:-

 Good faith,
 Before maturity, and
 Consideration.

(b)He will get good title irrespective of title of transferor. If the title of transferor is bad or
defective yet HDC gets the good title.

Example 1: A draws a cheque for ₹ 5,000 and hands it over to B by way of gift. B is a
holder but not a holder in due course as he does not get the cheque for value and
consideration. His title is good and bonafide. As a holder he is entitled to receive ₹ 5000
from the bank on whom the cheque is drawn.

Example 2: On a Bill of Exchange for ₹ 1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes
the Bill from his customer for value and in good faith before the Bill becomes payable.
State with reasons whether ‘A’ can be considered as a ‘Holder in due course’ and whether
he (A) can receive the amount of the Bill from ‘X’.

(Section 8)Holder [the owner of a negotiable instrument]

(a)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.

(b)Holder gets the title of the transferor. If the title of transferor is defective, holder will
also get defective title.
Example: A person who finds or steals a bearer instrument or takes an instrument
under forged endorsement is not holder: The reason is that holder of a negotiable
instrument must have right to receive or recover the money thereon from the parties
thereto.
Effects of Being HDC (Section 9)

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Case 1:
Case 2:
Case 3:
Case 4:
Case 5:
Case 6:
Case 7:
Case 8:
Case 9:
Case 10:

Let’s check your understanding

Discuss with reasons, whether the following persons can be called as a ‘holder’ under the
Negotiable Instruments Act, 1881:

(i) X who obtains a cheque drawn by Y by way of gift.

(ii) A, the payee of the cheque, who is prohibited by a court order from receiving the
amount of the cheque.
(iii) M, who finds a cheque payable to bearer, on the road and retains it.
(iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who is
the payee.
(v) B, who steals a blank cheque of A and forges A’s signature.

Hint: (i) Yes, (ii) No, (iii) No, (iv) No, (v) No.
Privileges of being a holder in due course:
(i) In case of Inchoate Instrument: HDC can claim full amount of N.I. (Not exceeding
amount covered by Stamp) even though such amount is in excess of the amount authorised
by the person delivering an Inchoate N.I.
Example: A signs his name on a blank but stamped instrument which he gives to B with an
authority to fill up as a note for a sum of ₹ 3 000 only. But B fills it for ₹ 5,000. B then
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transfers it to C for a consideration of ₹ 5000 who takes it in good faith. Here in the case, C
is entitled to recover the full amount of the instrument because he is a holder in due
course whereas B, being a holder cannot recover the amount because he filled in the
amount in excess of his authority.
(ii) In case of fictitious bill: HDC can enforce payment of a fictitious bill and drawer cannot
deny liability.
(iii) In case of conditional bill HDC will get good title and is entitled to amount of bill even if
conditions are broken.
(iv) In case of bill or N.I. is drawn illegally or through coercion or fraud HDC get good title
irrespective of title of transferor.
Difference between Holder and Holder in Due Course
S.no. Holder Holder in Due Course
1 Holder is a person who is entitled to HDC is a person who is a holder with 3
N.I. in his own name. attributable: (a) Good faith (b) Before
maturity (c) For consideration.
2 Holder gets a title of the transferor, if HDC gets a good title irrespective of the
transferor’s title is defected holder transferor’s title. If transferor’s title is bad
will also get defected title. or defected yet HDC gets a good title.
3 A holder may become payee of an Whereas HDC is one who acquires
instrument even without possession for consideration.
consideration.
4 He may become the possessor before It become before the amount thereon
or after maturity. becomes payable.
5 He cannot enforce his rights against He can enforce his rights against all the
all the prior parties. prior parties.
6 Each holder is not a holder in due Each holder in due course is also a holder.
course.

IF YOU NEED TO WRITE ANY EXTRA POINT, DO REFER THIS SECTION.

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Day-5 Endorsement & Negotiation

9.Negotiation

Negotiation is:-
 Passing of possession
 With intention to pass title.
 It must be transferred in such a manner that the transferee becomes holder thereof.
Example: A was the holder of a cheque of ₹ 1,00,000 payable to bearer. He delivered this
cheque to C to keep it in his (C) safe custody. In this case there is no negotiation of cheque
from A to C because the transfer of cheque to C makes him bailee only and not the holder of
the cheque. The transfer must be made with an intention to transfer the title of the
instrument to the Transferee.
(a)Negotiation by delivery (Section 47):
 A promissory note or bill of exchange or cheque payable to bearer is negotiated by
simple delivery.
 If an instrument is delivered with some condition attached, it is called conditional
delivery. In such a case the property in the instrument does not pass to the transferee,
till the condition is fulfilled.
However, if such instrument is further endorsed to HDC (who accepts instrument
without notice of the condition) then negotiation is valid. HDC is entitled to recover
money even though such condition is not satisfied.
Examples:
(i) A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent
to keep for B. The instrument has been negotiated.
(ii) Y delivers a bearer cheque to N on the condition that N will not encash or
negotiate the cheque unless N supplies goods to Y. There is a conditional delivery
by Y to N and the property in the cheque will pass to N only after supplying the
goods. If the endorsee i.e. N encashes the cheque before supplying the goods then
Y can recover the money so paid to him.
But if N negotiates the cheque to S, who takes the same in good faith and for value,
then S becomes the holder in due course and can rightfully encash the cheque.
(b)Negotiation by endorsement and delivery (Section 48):

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 A negotiable instrument payable to order is negotiated by the holder by

endorsement and delivery.

Que. 1 M drew a cheque amounting to ₹ 2 lakh payable to N and subsequently delivered

to him. After receipt of cheque N endorsed the same to C but kept it in his safe locker.
After sometime, N died, and P found the cheque in N’s safe locker. Does this amount
to endorsement under the Negotiable Instrument Act, 1881?
Hint: No.
Delivery is essential for Negotiation
 Delivery of an instrument is essential whether the instrument is payable to bearer
or order for effecting the negotiation.
 Delivery refers to the whole of the instrument and not merely part of it. Delivery of
half instrument cannot be treated as constructive delivery of the whole.
 The delivery** must be voluntary and the object of delivery should be to pass the
property in the instrument to the person to whom it is delivered.
 In this case, a mere signing of a negotiable instrument for the purpose of negotiation
does not complete the negotiation process unless the instrument is delivered.
Where a person has endorsed but not delivered a negotiable instrument, and dies,
his legal representatives cannot negotiate it by mere delivery of such instrument.
Delivery can be actual or constructive.
Que. 1 M owes money to N. Therefore, he makes a promissory note for the amount in
favor of N, for safety of transmission he cuts the note in half and posts one half to N. He
then changes his mind and calls upon N to return the half of the note which he had sent. N
requires M to send the other half of the promissory note. Decide how rights of the parties
are to be adjusted.
Hint: The claim of N to have the other half of the P/N sent to him is not maintainable.
M is justified in demanding the return of the first half sent by him. He can change his mind
and refuse to send the other half of the P/N.

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Difference between Negotiation & Assignment

Negotiation Assignment
Covered by Negotiable Instrument Act,1881 Covered by transfer of property Act,1882
(Section 130)
HDC gets a better tittle in case of Transfer gets the tittle of the transferor.
negotiation, irrespective of the tittle of the
transferor.
Consideration is presumed by court. Consideration must be proved as in case of
any other contract.
Negotiation required delivery in case of Notice transfer is to be served. Assignment
bearer instrument & endorsement & done in writing signed by tranferer upon
delivery in case of order of instrument/ No payment of stamp duty.
stamp duty.

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10.Endorsement (Section 15)

Endorsement means transfer of a negotiable instrument by holder to another person

making him holder of thereof. Endorsement must be in writing, sign by the holder on any
part of negotiable instrument or allonge.

Example: X, who is the holder of a negotiable instrument writes on the back thereof: “pay
to Y or order” and signs the instrument. In such a case, X is deemed to have en-dorsed the
instrument to Y. If X delivers the instrument to Y, X ceases to be the holder and Y becomes
the holder.
PARTIES:
 Endorser: The person who endorses the instrument is called Endorser.
 Endorsee: The person to whom the instrument is endorsed is called Endorsee.
Features of a valid Endorsement
 It must be in writing.
 It must be signed by the endorser or else the endorsement shall be invalid.
 It is completed by the delivery of the instrument.
 It must be made by the holder of the instrument.

Types Of Endorsement:
1. Blank or General Endorsement (only signature): When the endorser just puts his
signature without specifying the payee.
2. Full or Special Endorsement (name and signature): When along with endorser’s
signature, the name of payee is mentioned. It remains transferrable by delivery and
endorsement.
3. Restrictive Endorsement: An endorsement which restricts the right of further
negotiation. Thus, in case of restrictive endorsement if the endorsee further
negotiates the instrument then the subsequent endorsee will not get better title than
the party delivers the instrument.
Example: D signs the following endorsements on different negotiable
instruments payable to bearer:
(a) Pay the contents to G only
(b) Pay G for my use
(c) Pay G or order for the account of H
These endorsements exclude the right of further negotiation by G.
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4. Partial Endorsement: An endorsement which intends to transfer only a part of the

amount of instrument is called as partial endorsement. Partial endorsement is not
valid at law.

Example: A is a holder of a bill for ₹ 10000. A indorses it thus: “Pay B or order ₹

5000”. This is partial endorsement and invalid for the purpose of negotiation.
5. Conditional Endorsement: It includes an order to pay to pay with condition.
Endorser makes his liability dependent on the happening of some event.
6. Conversion Of Endorsement In Blank Into Endorsement In Full

Conditional
Endorsement

Liability
Facultative Sans-Frais
Sans Recourse dependent upon
Endorsement Endorsement
a contingency

(a) Sans Recourse: Endorser relieves himself from the liability to all subsequent
endorsement. [Mere pass palat kar mat aana]
(b) Facultative Endorsement: In case of dishonour Notice is compulsory to prior
party. if notice is not given to prior party, he is discharged.
In facilitative endorsement Endorser waives his right to receive notice of the
dishonour.
(c)Sans-Frais Endorsement: Endorser relieves himself from any liability with respect
to any expenses that may be incurred in case of dishonour of negotiable instrument.
(d) Liability dependent upon a contingency: It is an endorsement where
Endorser makes his liability dependent on happening of some event.
The holder of a negotiable instrument endorsed in blank may,
 Convert the endorsement in blank into full,
 Without signing his own name, by writing above the endorser’s signature’
 A direction to pay to any other person as endorsee,
 In such a case, the holder does not incur the responsibility of an endorser.
Example: A is the holder of a bill endorsed by B in blank. A writes over B’s signature,
the word ‘Pay to C or order’. A is not liable as an endorser but such writing operates
as an endorsement in full from B to C.
Liability Of Endorser
Every endorser of a negotiable instrument is liable to every subsequent party to it
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provided due notice of dishonour is given to or received by him.

Cancellation OF Endorsement
 If the holder of a negotiable instrument destroys or impairs the endorser’s remedy
against a prior party without the consent of the endorser then,
The endorser is discharged from liability of instrument to the holder to the same extent
as if it had been paid at maturity.
Example: A is the holder of a bill of exchange made payable to the order of B. which
contains the following endorsements in blank: 1st endorsement - ‘B’, 2nd endorsement -
C, 3rd endorsement - D, 4th endorsement – E. A strikes out the endorsements by C and D,
without E’s consent. A is not entitled to recover anything from E.
Negotiation Back
Meaning: If the primary party becomes holder of an instrument then liability is discharged.
Effects:
 The holder cannot enforce payment against an intermediate party to whom he was
previously liable.
 Holder can sue all prior parties, if he had made san recourse endorsement.
Example: A, holder of bill endorsed it to B. B endorsed it to C. C to D, D endorsed it
again to A. In this case, endorsement by D to A is negotiation back and B, C, D are not
liable to A.

IF YOU NEED TO WRITE ANY EXTRA POINT, DO REFER THIS SECTION.

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Day-6 Liabilities of Parties, Presentment & Negotiation Back

11. Liabilities Of Parties

Capacity of the parties

Every person who is

capable of contracting

Parties to
the
Instruments
Every person through
duly authorised agent

Capacity to make, draw, accepts etc. of instruments : Every person capable of

contracting may bind himself and be bound by the making, drawing, acceptance,
endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.

11(a) Minor:
 As a minor agreement is void, he cannot bind himself by becoming a party to a
negotiable instrument.
 But he may Draw, endorse, deliver and negotiate a negotiable instrument so as to
bind all parties except himself, that is he may operate as a channel to convey title and
liabilities but not to originate it.
Example: A draws a cheque in favour of M, a minor. M endorses the same in favour of X.
The cheque is dishonoured by the bank on grounds of inadequate funds. Here in this case,
M being a minor may draw, endorse, deliver and negotiate the instrument so as to bind all
parties except himself. Therefore, M is not liable. X can, thus, proceed against A.
Que. 1 Mr. S Venkatesh drew a cheque in favor of M who was sixteen years old. M settled
his rental due by endorsing the cheque in favor of Mrs. A the owner of the house in which
he stayed. The cheque was dishonored when Mrs. A presented it for payment on grounds
of inadequacy of funds. Advise Mrs. A how she can proceed to collect her dues.

Hint: Mrs. A can proceed against Mr. S venkatesh to collect her dues.

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11(b) Authority to sign i.e. through Agency:

 A person capable of contracting may make, draw, accept, endorse, deliver and
negotiate a bill, note or cheque either himself or through a duly authorized 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 bill of exchange so as
to bind his principal.

Liability of agent: An agent is personally liable on the instrument, when-

 he signs it without indicating that he signs as agent or
 that he does not intend to incur personal responsibility.
However, he is not liable to those who induced him to sign upon the belief that the Principal
would only be held liable but not he.
11(c) Legal Representatives:
 A legal representative is entitled to all the instrument of the holder after the death
of the latter.
 He can sue on them for the recovery of amount.
 If he signs his name to a promissory note, bill of exchange, or cheque, he is
personally liable there on unless he expressly limits his liability to the extent of the
assets received by him as such.
 In the absence of an express contract to the contrary, the liability of a legal
representative is unlimited.
 Further, he may exclude his liability i.e. by adding the words “Sans recourse or
without recourse.”
Liability of legal representative:
 A legal representative of a deceased person who signs his name to a negotiable
instrument is personally liable to that instrument.
 However, if he expressly limits his liability to the extent of the assets received by him
as such then his liability is limited to that extent.

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IF YOU NEED TO WRITE ANY EXTRA POINT, DO REFER THIS SECTION.

12. Presentment of Negotiable Instrument

Presentment
Presentment means bringing the bill in the knowledge of the parties. It is of 3 types:-
i. Presentment of bill of exchange for Acceptance.
ii. Presentment of promissory note for sight.
iii. Presentment of negotiable instrument for Payment.

i. Presentment for Acceptance:

 It must be made by the person entitled to demand acceptance i.e. holder or his
duly authorized agent.
 It must be made to the drawee of a bill of exchange.
 It must be done at the decided place, if it’s mentioned on bill. However, if no
place is specified then bill must be presented at the place of drawee’s business or
at the residence of the drawee.
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 It must be presented for acceptance within a specified time. However, if the bill
has no date or time specify for presentment, it must be presented within
reasonable time after it’s drawn in business hours on a business day. If such
presentment is not done, the prior parties are not liable to the holder.
 Where a bill of exchange is presented to Drawee for acceptance, the holder must
allow the Drawee 48 hours of time (excluding public holidays) to consider
whether he is willing to accept is or not.
 However, drawee cannot be found after reasonable search, the bill treated as
dishonour also presentment can be done either personally or through agent or
even through registered post, if it’s usage or custom of the area.
ii. Presentment of promissory note for sight:
P/N payable at a certain period after sight

presented to the maker for sight

by a person entitled for payment in

reasonable time

in business hours on business days

 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.
 On default of such presentment, the parties to the instrument (i.e. other than
maker) are not liable to the person (holder) making such default.
 Purpose: Such presentment is required to fix the maturity of the note.

iii. Presentment for Payment:

 It means bringing the instrument on due date to the drawer to recover payment.
 Presentment can be done either personally or through agent or even through
registered post, if it’s usage or custom of the area.
 On default of such presentment, the parties to the instrument (maker, acceptor or
Drawee) are not liable to the holder.
 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.
Other Essentials :
Time for presentment:
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 Presentment for payment must be made during the business hours if Drawee is
other than banker, or
 Within banking hours if Drawee is a banker.
 Presentment before maturity is not a valid presentment.
 A promissory note payable by installments must be presented for payment on
the third day after the date fixed for payment of each installment (thus every
installment is entitled to three days of grace).
 If a single installment is not paid the whole of the note can be treated as
dishonoured by non-payment.
Section 75A : When Payments Unnecessary

If Maker/drawee He has agreed to pay If drawer could not suffer

After maturity, Knowing
intentionally prevents notwithstanding any damage of non
that no presentment done
presentment. presentment. presentment.

Or
Or make part payment
Closer place of business
during business hours.

Or
Or promises to pay
If place specified person
attends it.

Or Cannot be found after

Or waives right to take
due search.
advantage of Non
payment.

Place of presentment:
 A Negotiable instrument must be presented for payment at the decided place.
 Acceptor will be discharged in case an instrument is not presented at the
specified place.

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 However, if no place is specified then bill must be presented for the payment at the
place of business or at usual place of residence, of the maker, drawee or acceptor
thereof, as the case may be.
 “Specified place” implies the precise address of the place; the mere mention of a
big city like ‘Madras’ is not sufficient.
Interest for late Payment

Where interest rate is Expressly Where No rate specified.

made payable.
 18% pa.
 From due date to payment  If party charged is endorser,
date. than liable from date of
 As count directs. notice

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Day-7 Discharge & Material alteration

13.Discharge of Contract (Section 82 to 90 )

 Party to a Negotiable Instrument is discharged when his liability on instrument
comes to an end.
 Discharge from liability of a party to an instrument is different from the discharge of
negotiable instrument itself.
 It means, when some parties are discharged, other parties are liable then instrument
cannot be said to be discharged.

Discharge of
Discharge of Party
Instrument

Modes of discharge from liability on Instruments

5.By holder giving a 7.Bill reaches

1.By Cancellation 2.By Release qualified acceptor after
Acceptance maturity date

4.By allowing more 6.Cheque not

8.Matreial
than 48 hours for presented with in
alteration without
3.By Payment acceptance reasonable time &
consent.
(Excluding PH) bank fails

(a) By Cancellation: If the holder of an instrument or his agent cancels name of a party
on the instrument with an intention to discharge him then such party and all
subsequent parties are discharged from liability to the holder.
(b) By release: If the order of an instrument releases any party to the instrument by any
method other than cancellation then the party so released is discharged from liability.
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The effect of release is the same as that of cancelling a party’s name.

(c) By Payment: When payment is made by any party liable on the instrument, such a
party and all parties subsequent to him are discharged.
(d) By allowing drawee more than 48 hours to accept: If the holder of a bill of
exchange allows more than 48 hours (excluding public holidays) to the drawee to
accept the bill, all prior parties not consenting to the same are discharged from
liability to such holder.
(e) By the holder agreeing to a qualified or limited acceptance of bill of exchange:
If the holder consents to qualified acceptance then all the prior parties not
consenting to the same are discharged.
(f) By the drawer not duly presenting a cheque for payment: The drawer of a
cheque is discharged to the extent of loss or damage suffered by him if the following
two conditions are fulfilled-
a) The cheque is not presented for payment within a reasonable time of its issue, and
b) The drawer suffers actual damages through the delay.
Example: “A draws a cheque for ₹ 1000 and, when the cheque ought to be presented, has
funds at the bank to meet it. The bank fails before the cheque is presented. The drawer is
discharged, but the holder can prove against the bank for lahe amount of the cheque”
Example: “A draws a cheque at Ambala on a bank in Kolkata. The bank fails before the
cheque could be presented in ordinary course. A is not discharged, for he has not suffered
actual damage through any delay in presenting the cheque”.
(g) By the bill coming to the acceptor’s hands after maturity: When the acceptor of
bill of exchange or maker of promissory note becomes holder on or after maturity,
the instrument is discharged.
(h) Material alteration without consent : Gour Chandra Vs Prasanna Kumar
Alteration must be material :An alteration is material which in any way alters the
operation of the instrument and alter the operation of the instrument and affects the
liability of parties thereto. Any alteration is material (a)alters the business effect of
the instrument if used for any business purpose. (b) Which causes it to speak a
different language in legal effect from that which it originally spoke or which changes
the legal identity or character of the instrument.
By material alteration, the liability of the parties is avoided, whether the change be
prejudiced or beneficial to the parties. A material alteration is one which varies the
rights, liabilities or legal position of the parties as ascertained by original instrument.

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14.Material Alteration Section (87)

An alteration is called material if it alters
 The character or operation of N.I.
 The rights and liabilities of any party to a N.I.

Needed
Authorization
Material
Alteration
Not needed
Alteration
Authoriaztion
Non-material
Alteration

1.Material Change

(a)Material changes but not needed authorization [Alteration permitted by Act]:

Following material alterations have been authorized by the Act and do not require any
authentication-
 Filling blanks in case of inchoate instrument
 Conversion of a blank endorsement into an endorsement in full
 Crossing of cheques
 Converting a general crossing into special or account payee or not negotiable
crossing
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 Converting a bearer instrument into order instrument.

Example: A promissory note was made without mentioning any time for payment. The
holder added the words “on demand” on the face of the instrument. As per the above
provision of the Negotiable Instruments Act, 1881 this is not a material alteration as a
promissory note where no date of payment is specified will be treated as payable on
demand. Hence adding the words “on demand” does not alter the business effect of the
instrument.
Example: State whether the following alterations are material alterations under the
Negotiable Instruments Act, 1881?
(i) The holder of the bill inserts the word “or order” in the bill,
(ii) The holder of the bearer cheque converts it into account payee cheque,
Answer: The following materials alterations have been authorised by the Act and do not require
any authentication:
(a) filling blanks of inchoate instruments
(b) Conversion of a blank endorsement into an endorsement in full.

(b)Material changes needing authorization:

 Alteration of Date
 Alteration of rate of interest
 Alteration of amount, e.g. a bill for ₹ 5000 altered into a bill for ₹ 500.
 Alteration in time of payment, e.g. a bill payable 3 months after date is altered to be
payable 1 month after date.
 Alteration of place of payment
 Alteration by addition of parties (from one maker/payee to two makers/payees).
 Alteration by tearing material part of the instrument.
 Alteration by increasing or affixing stamps
 Alteration by erasure of an “account payee” crossing
 Alteration regarding relationship between parties
If authentication is not taken then instrument is void.
2.Non-material not needing authorization: Conversion of bearer instrument to order
instrument.
Alteration not affecting liability :
The following alterations do not affect the liability of parties thereto.

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(a)If the alteration is unintentional and due to pure accident (Eg. Accidental disfigurement
of document).
(b)Alteration made by a stranger without consent of holder and without any fraud and
negligence on his part.
(c)An alteration made to correct a clerical error or a mistake, thus if instead of 1823, the
date entered 1832, the agent of drawer held entitled to correct mistake. Such correction is
deemed to be giving effect to the original intention of the parties.
(d)Alteration made to carry out common intention of original parties is permitted by Sec.
87. For example, where the words “or order” after the name of payee, inserted
subsequently [Byrom v Thomson (1839) 11 A&E 31]
(e)Alteration with the consent of the parties liable thereto.
(f)An alteration made before the completion or the issue of negotiable Instrument.
(g)A material alteration doesn’t affect the liability of those parties who become liable after
the alteration is made. Sec. 88 provides that the acceptor or indorser is bound by his
acceptance or indorsement notwithstanding any previous alteration of the instrument.
(h)An alteration which is not material e.g. when a bill payable to bearer is converted to bill
payable to order/or an incomplete name of a person converted into the complete name of
same person.

Let’s check your understanding

Do the following alterations of a negotiable instrument render the instrument void?

(a)The holder of a bill alters the date of the instrument to accelerate or postpone the time of
payment.
(b)The drawer of a negotiable instrument draws a bill but forgets to write the words 'or
order'. Subsequently, the holder of the instrument inserts these words.
(c)A bill payable three months after date is altered into a bill payable three months after
sight.
(d)A bill was dated 2002 instead of 2003 and' subsequently the agent of the drawer
corrected the mistake.
(e)A bill is accepted payable at the Union Bank, and the holder, without the consent of the
acceptor, scores out the name of the Union Bank and inserts that of the Syndicate Bank.
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Sol:(a) Yes. (b) No. (c) Yes. (d) No. (e) Yes

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Day-8 Dishonour of Negotiable instrument

A bill may be dishonoured by:

a) Non-acceptance, or
b) Non-payment.

a) Dishonour by Non-acceptance
A bill is dishonoured by non-acceptance, if the bill is duly presented for acceptance but
not accepted. This happens in the following cases:
 Bill is not accepted by drawee within 48 hours of presentment of bill for acceptance.
 Drawee gives a qualified acceptance.
 When presentment for acceptance is excused and bill is not accepted.
 Drawee is incompetent to contract.
 Drawee is :-
 A fictitious person, or
 After reasonably search cannot be found.
Effect: Holder of the bill gets an immediate right to sue all the prior parties without
waiting for maturity of bill.
Ques1. What are the circumstances under which a bill of exchange can be dishonoured by
non-acceptance?

b) Dishonour by Non-payment
A promissory note, bill of exchange or cheque is said to be dishonored by non-payment-
 When the maker of the promissory note,
 Acceptor of the bill, or
 Drawee of the cheque
Makes default in payment upon presentment.
Note: Also, a promissory note or bill of exchange is dishonoured by non-payment when
presentment for payment is excused by the maker of the note or acceptor of the bill and
the note or bill remains unpaid at or after maturity.

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Distinction between dishonour by non-acceptance and by non-payment:

On dishonour by non- On dishonour by non-
acceptance payment
 Drawee cannot be  The acceptor
sued because he is (drawee) can be
not a party to the bill. sued

NOTICE OF DISHONOUR

1. A negotiable instrument can be dishonoured:

 by Non-acceptance
 by Non-payment.
In both the cases need arises to send notice of dishonour.
2. Object of Notice of Dishonour: The object of notice of dishonour is to inform or intimate
the drawer of bill of exchange regarding dishonour. Notice is necessary in order to make
parties liable.
3. Notice by Whom: Notice may be given by the Holder or any party liable on the negotiable
instrument.
4. Notice to whom:
 Notice must be given to all the parties other than the maker or the acceptor or the
drawee whom the holder seeks to make liable.
 To the duly authorised agent of the person to whom it is required to be given.
 To the legal representative of deceased party.
 To the assignee of the insolvent.
5. Modes of giving notice:
 Notice of dishonour is the formal communication of the fact of dishonour.
 Notice may be oral or in writing or even by post.
 Notice must be given within a reasonable time.
 It is given at the place of business or residence.
6. Party receiving must transmit notice of dishonour: A person receiving notice must
transmit it to prior parties whom he wishes to make liable to himself because the holder
may have omitted to give notice to some of the prior parties.
7. When party to whom notice given is dead: When the party to whom notice of
dishonour is dispatched is dead, but the party dispatching the notice is ignorant of his
death, the notice is sufficient.
8. Notice is not needed in the following cases:
a) Facultative endorsement
b) Drawer cannot be found after reasonable search.
c) In case of cheque and promissory note the maker being primary party need not be
informed about the dishonour.
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d) When drawer and drawee are same.

e) When none of the parties is going to suffer any loss for want of notice.

Let’s check your understanding

Examples: Is notice of dishonour necessary in the following cases:

(1) X having a balance of ₹ 1,000 with his bankers and having no
authority to over draw, drew a cheque for ₹ 5,000/-. The cheque was
dishonored when duly presented for repayment.
(2) X, drawer of a Bill informs Y, the holder of the bill that the bill would
be dishonored on the presentment for payment.
Answer: Notice of dishonour is not necessary in both the cases.

Noting & Protest (Section 99)

Noting:
 Noting means recording the fact of dishonour of a negotiable instrument on the
instrument.
 Noting is done by a person officially designated for this purpose and such person
is known as Notary Public.
Requirement of Noting:
 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.
 Noting must be made within a reasonable time after dishonour and must specify
the date of dishonour.
Contents of noting:
A dishonoured bill is handed over to a notary public who represents it again for
acceptance or payment as the case may be, and if the drawee or acceptor still refuses to
accept or pay the bill, the notary public records:
 Date of dishonour
 Fact of dishonour
 Reason for dishonour,
 if the instrument has not been expressly dishonoured, the reason why the holder
treats it as dishonour
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 Notary charges
Note: Noting is optional in case of inland bills and is compulsory in the case of foreign
bills. Since noting provides an additional evidence of dishounour, it is better to get the
dishonoured bill noted.
Protest (Section 100)
Protest is formal certificate issued by the Notary Public about the dishonour of a bill or
note. Protest must be done within a reasonable time.
Requirement of Protest:
 When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment.
 The holder may cause the fact not only to be noted, but also to be certified by a
Notary Public that the bill has been dishonoured.
 Such a certificate is referred to as a protest.
Contents of Protest:
Protest is based upon noting. In order to be valid, a protest must contain all the
following particulars:
 Name of the person for whom and against whom protest has been protested.
 Date of dishonour
 Fact of dishonour
 Place and time of dishonor
 Signature of notary public

Reasonable time of giving notice of dishonour

Is the holder and the party to whom notice of dishonour given carry on business or live in
different place?

Yes No

Notice is given within a Notice is given within

reasonable time if it is a reasonable time if it
dispatched by the next is dispatched in time
post or on the day next to reach its
after the day of destination on the
dishonour. date next after the
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Dishonour of cheque; Section 138

Punishment

If a cheque issued by the drawer is dishonoured or is returned by the bank unpaid due to
insufficiency of funds or the amount exceeding the arrangement made with the bank then
such person shall be deemed to have committed an offence and shall be punished with:-
(i) imprisonment for term upto 2 years, or
(ii) fine which may extend to twice the amount of the cheque, or both.

Process

A legal notice u/s 138 of Legal notice shall give a

the N.I. Act, 1881 has to period of 15 days for
ON RETURN OF CHEQUE be sent within 30 days of making payment of the
receipt of the infromation amount of the
of dishonour of cheque. dishonoured cheque.

If no payment is made The criminal complaint

within 15 days of the shall be filed within 30
receipt of the notice of days of the expiry of the
dishonour of cheque. notice period.

Conditions
Provided that this section shall not apply, unless-
a) The cheque should be 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 HDC of the cheque (as the case may be) makes a demand in
writing for the payment of the said amount of money by giving a notice 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, and
c) The drawer of such cheque fails to make the payment of the said amount of
money to the payee or to the holder in due course of the cheque (as the case may
be), within fifteen days of the receipt of the said notice.
Presumption in favor of holder

 It shall be presumed that the holder of a cheque received the cheque in whole or in
part, of any debt or other liability.

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 Thus, the burden to prove that the cheque in a particular case was not given to
discharge a legally enforceable debt or liability, lies on the drawer.
LIABILITY OF DRAWER OF CHEQUE IN CASE OF STOP PAYMENT
If drawer after having issued the cheque, informs drawee not to present the cheque for
payment and as well give a stop payment request to the bank in respect of the cheque
issued still section 138 would be applicable in case of non-payment.
OFFENCES BY A COMPANY Section 141
(i) If a person, committing the offence under section 138 is a company then every person
who is officer in default shall be deemed to be guilty of the offence.
(ii) Officer in default is a person who
 was in charge and
 responsible for the conduct of company’s business at the time of default.
(iii) However, such person shall not be liable if he proves that offence was committed
without his knowledge or that he was exercised all due diligence to prevent such
offence.
Also any nominee director who is employee of CG, SG or any financial institution
shall not be liable to be prosecuted under this section.
(iv) If any offence has been committed by a company and
 it is proved that the offence has been committed
 with the consent or is attributable to
 any director, manager, secretary or other officer of the company
then such director, manager, secretary or other officer shall also be deemed to be
guilty of that offence and shall be liable to be prosecuted and punished
accordingly.
Example: A promoter who has borrowed a loan on behalf of company, who is neither a
director nor a person-in-charge, sent a cheque from the companies account to discharge
its legal liability. Subsequently, the cheque was dishonoured and the complaint was
lodged against him. Is he liable for an offence under section 138?
Hint: No. because he is not in charge of the affairs of the company.

Let’s check your understanding

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Qu1.Bholenath drew a cheque in favour of Surendar. After having issued the cheque;
Bholenath requested Surendar not to present the cheque for payment and gave a stop
payment request to the bank in respect of the cheque issued to Surendar. Decide under
the provisions of the Negotiable Instrument Act, 1881 whether the said acts of Bholenath
constitute an offence?
Hint: The act of Bholenath, i.e., his request of stop payment constitutes an offence under
the provisions of the Negotiable Instruments Act, 1881.
Qu.2Explain the consequences if a cheque gets dishonoured for insufficiency of funds in
the account?
OFFENCES ARE COMPUNDABLE [Sec 147]
Notwithstanding anything contained in the Code of Criminal Procedure, 1973 every
offence punishable under this Act shall be compoundable.
COGNIZANCE OF OFFENCES [Sec 142]

(a) Basic Requirement

In Negotiable Instrument Act, no court, shall cognizance of an offence under
section 138 unless a written complaint is made by Payee or HDC, also no court
inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first
class shall try the offence punishable under section 138.
1 month is the period of limitation. This means the case must be filed within 1 month of
the course of action. However, the court can condone the delay due to reasonable caused.

(b)Jurisdiction of court
If multiple cases are filled by 1 party on another all the subsequent cases shall be
transferred to the place of original case. Also the jurisdiction of court shall be decided as
follows:

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Through A/c In case of uncrossed cheque,

presentment on counter

Case – Branch of Case – Branch of

Payee is located. drawer is located.

Example: Mr. A holds an account in Navrangpura Branch, Ahmedabad of “XYZ” Bank,

issues a cheque payable in favor of B. B, who holds an account with the M.S University
Road Branch, Vadodara of the “PQR” bank, deposits the said cheque at Surat Branch of
‘PQR bank’ and the cheque is dishonored. The complaint will have to be filed before the
court having jurisdiction where the M.S University road branch is situated.
Power to direct Interim compensation Section 143A
(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the
Court trying an offence under section 138 may order the drawer of the cheque to
pay interim compensation to the complainant—
(a) in a summary trial or a summons case, where he pleads not guilty to the
accusation made in the complaint; and
(b) in any other case, upon framing of charge.

(2) The interim compensation under sub-section (1) shall not exceed twenty
per cent. of the amount of the cheque.
(3) The interim compensation shall be paid within sixty days from the date of
the order under sub-section (1), or within such further period not exceeding thirty
days as may be directed by the Court on sufficient cause being shown by the drawer of
the cheque.
(4) If the drawer of the cheque is acquitted, the Court shall direct the complainant to
repay to the drawer the amount of interim compensation, with interest at the bank
rate as published by the Reserve Bank of India, prevalent at the beginning of the
relevant financial year, within sixty days from the date of the order, or within such
further period not exceeding thirty days as may be directed by the Court on
sufficient cause being shown by the complainant.
(5) The interim compensation payable under this section may be recovered as if it
were a fine under section 421 of the Code of Criminal Procedure, 1973.

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Power of appellate court to order payment pending appeal against conviction

[Section 148]

(1) Notwithstanding anything contained in the Code of Criminal Procedure,

1973, in an appeal by the drawer against conviction under section 138, the
Appellate Court may order the appellant to deposit such sum which shall be
trial Court:
Provided that the amount payable under this sub-section shall be in addition
to any interim compensation paid by the appellant under section 143A.
(2) The amount referred to in sub-section (1) shall be deposited within sixty
days from the date of the order, or within such further period not exceeding
thirty days as may be directed by the Court on sufficient cause being shown by
the appellant.
(3) The Appellate Court may direct the release of the amount deposited by
the appellant to the complainant at any time during the pendency of the
appeal:
Provided that if the appellant is acquitted, the Court shall direct the complainant to repay
to the appellant the amount so released, with interest at the bank rate as published by the
Reserve Bank of India, prevalent at the beginning of the relevant financial year, within
sixty days from the date of the order, or within such further period not exceeding thirty
days as may be directed by the Court on sufficient cause being shown by the complainant.

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Day-9 Crossing, Liability of Banker

Meaning of Crossing:
Crossing is a direction given by the drawer of the cheque to the drawee bank not to pay
cheque across the counter but only when presented through a banker. It purpose is to trace
the person to whom the payment is made in order to protect the interest of both the
parties.
TYPES OF CHEQUE

Open cheque Crossed cheque

A cheque which can be When a cheque bears across its

paid at the counter of the face two parallel transverse
bank lines

Objects of Crossing:
A crossing is a warning to the bank not to make payment of the crosses cheque over the
counter. Crossing operates as a caution to the paying banker.
(i) Crossing affects the mode of payment of cheque- The payment of a cross cheque
can be obtained only through a banker. Thus, crossing is a mode of assuring that
only the rightful holder (i.e. the person entitled to receive money) gets payment.
(ii) Crossing does not affect the transferability or negotiability of cheque- a
crossed cheque can be negotiated just the same way as an open cheque. A person
acquiring a crossed cheque in good faith becomes its holder in due course just as in
case of open cheque.
(iii) Crossing is a material alteration- but crossing of cheque by the holder does
not in any way affect his rights in respect of cheques.
Types of Crossing

Types of Crossing

General Crossing Special Crossing Not Negotiable Restrictive/Account

[Sec 123] [Sec 124] [Sec 125] Payee Crossing

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 GENERAL CROSSING [Sec 123]

It specifies that payment should be made only through account of holder, not across the
counter.

 SPECIAL CROSSING [Sec 124]

It specifies that payment shall be made only to the banker specified in crossing. Once a
cheque is special it cannot be converted into general.

 NOT NEGOTIABLE [Sec 125]

It specifies that negotiability of the cheque is lost, if it reaches a non-bonafide person. It
remains transferable. It is a statutory crossing. Ordinarily, in a negotiable instrument, if
the title of the transferor is defective and if transferee is a HDC, will have a good title.
However, when the words “not negotiable” are written, even a HDC will get the same
title as that of transferor.

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 RESTRICTIVE CROSSING/ACCOUNT PAYEE CROSSING

This means that payment will be made only in the account of payee. It cannot be
transferred further.
However, if no name is specify as payee, it can be transferred.
Multiple Crossing is allowed.

If a person receives uncross cheque, he can do crossing himself also.

A cheque may be crossed by the following parties:
(i) By Drawer: A drawer may cross it generally or specially.
(ii) By Holder: If the cheque is crossed generally, the holder may cross specially. If cheque
crossed generally or specially, he may add words “not negotiable”.
(iii) By Banker: A banker may cross an uncrossed cheque, or if a cheque is crossed
generally, he may cross it specially to himself. Where a cheque is crossed specially, the
banker to whom it is crossed may again cross it specially to another banker, his agent,
for collection.
PROTECTION OF LIABILITY OF THE PAYING BANKER

(a) Cheque payable to order [Section 85(1)]: Where a cheque payable to order
purports to be endorsed by or on behalf of the payee, the banker is discharged by
payment in due course. The banker, in other words, can debit his customers account
even though the endorsement by the payee might turn out to be forgery or the
endorsement might have been placed by the payee’s agent without his authority.
(b) Cheque payable to bearer [Section 85(2
(c) Payment of cheque crossed generally)]: As regards bearer cheque the rule is “once
a bearer always a bearer”. A banker gets a good discharge by payment in due course of
the amount on a bearer cheque to the holder of the cheque. It does not matter whether
the apparent holder is the owner of the cheque or not.
(d) Payment of cheque crossed specially
(e) Payment in due course of crossed cheque Section 128
(f) Payment of crossed cheque out of due course Section 129

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LIABILITY OF THE COLLECTING BANKER

To collect as per the tenor of cheque
Payment in due course” [Section 10]—”Payment in due course” means payment in
accordance with the apparent tenor of the instrument in good faith and without
negligence to any person in possession thereof under circumstances which do not afford a
reasonable ground for believing that he is not entitled to receive payment of the amount
therein mentioned.
EXCEPTION: Payment of a cheque on which drawer signatures were
forged: If any drawee banks made the payment on a cheque on which
drawer signatures were forged then such bank shall be liable to the true
owner. Thus, the paying banker shall be liable if it makes the payment of the
cheque on which drawers’ signature was forged.

days as may be directed by the Court on sufficient cause being shown by

the complainant.

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Day-10 Past Exam Questions

Question 1.X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to
the order of Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its
holder in due course. Can Y avoid payment of the bill ? decided in the light of the provision
of negotiable instrument act 1881.
Question 2(a). Explain the holder’s rights to duplicate the lost bill, as per the provisions of
the Negotiable Instrument Act,1881.
Question 2(b). On a bill of exchange for ₹1lakh, X’s acceptance to the bill is forged. A takes
the bill from his customer for value and in good faith before the Bill becomes payable.
Discuss with reasons whether A can be considered as a Holder in due course and whether A
can receive the amount of the bill from X. Give your answer as per the Negotiable
Instrument Act,1881.
(ii). Manoj draws a cheque in favour of Meera, a minor. Meera endorses the same in favour
of Sheila. The cheque is dishonored by the bank on grounds of inadequate funds. Discuss as
per the Negotiable Instrument Act,1881 whether Meera is liable.
Question 3.E is the holder of a bill of exchange made payable to the order of F. The bill of
exchange contains the following endorsements in blank:
First endorsement F
Second endorsement G
Third endorsement H
Fourth endorsement I
E strikes out without I’s consent, the endorsement by G and H. Decide with reasons whether
E is entitled to recover anything from I under the provisions of the Negotiable Instrument
Act,1881.
Question 4. What are the privileges of HDC?
Question 5. State the difference between bills of exchange, cheque and promissory note.
Question 6. (a) A draws a bill on B, B accepts the bill without any consideration. The bill is
transferred to C without consideration. C transferred it to D for value. Decide:

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(a) Whether D can sue the prior parties of the bill

(b)Whether the prior parties other than D have any right inter se?
Give your answer under the provisions of the Negotiable Instrument Act,1881.
(b). What is ‘Sans Recours’ endorsement? A bill of exchange is drawn payable to X or order.
X endorses it to Y, Y to Z, Z to A, A to B and B to X. state with reasons whether X can recover
the amount of the bill from Y,Z,A and B, if he has originally endorsed the bill to Y by adding
the words ‘Sans Recours’.
(c). A banker made payment of a cheque in which the drawer’s signature was forged. Can
the banker claim protection in respect of such payment? What would be protection if it was
a case of forgery of endorsee’s signature?
Question 7. What is Escrow?
Question 8. (a) Referring to the provisions of the Negotiable Instrument Act,1881, examine
the validity of the following:
(a) A bill of exchange originally drawn by Mukesh for a sum of ₹ 10,000, but accepted by
Deepa only for ₹ 7,000.
(b)A cheque marked ‘Not Negotiable’ is not transferrable.
(b) Harish executed a promissory note in favour of Sejal for ₹5 crores. The said amount was
payable three days after sight. Sejal, on maturity presented the promissory note on 1st
January,2016 to Harish. Harish made the payments on 4th January,2016, Sejal wants to
recover interest for one day from Harish. Advise Harish, in the light of the provisions of the
Negotiable Instrument Act,1881, whether he is liable to pay the interest for one day.
(c) Jagdish, a shareholder of a company purchased for his personal use certain goods from a
mall (Departmental Store) on credit. He sent a cheque drawn on the company’s account to
the Mall (Departmental Store) towards the full payment of the bills. The cheques was
dishonoured by the Company’s Bank. Jagdish, the shareholder of the company was neither a
director nor a person in charge of the company. Examining the provisions of the Negotiable
Instrument Act,1881 state whether Jagdish has committed an offence under Section 138 of
the Act and decide whether Jagdish can be held liable for the payment, for the goods
purchased from the Mall (Departmental Store).

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EXTRA POINTS

 The Act was originally drafted in 1866 by the 3rd India Law Commission and
introduced in December,1867 in the Council and it was referred to a Select
Committee.
 Objections were raised by the mercantile community to the numerous deviations
from the English La which it contained.
 The bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism
by the Local Government, the High Courts and the chambers of Commerce, the Bill
was revised by a Select Committee. In spite of this Bill could not reach the final stage.
 In 1880 by the Order of the Secretary of the State, the bill had to be referred to a new
Law commission. On the recommendation of the new Law Commission the Bill was
redrafted and again it was sent to a Select Committee.
 The draft thus prepared for the fourth time was introduced in the Council and was
passed into law in 1881 being the Negotiable Instrument Act,1881

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APT BEST COMMERCE CLASSES FOR CA & CS CONTACT NO:9755557307 APT|BHOPAL

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APT BEST COMMERCE CLASSES FOR CA & CS CONTACT NO:9755557307 APT|BHOPAL

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APT BEST COMMERCE CLASSES FOR CA & CS CONTACT NO:9755557307 APT|BHOPAL

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APT BEST COMMERCE CLASSES FOR CA & CS CONTACT NO:9755557307 APT|BHOPAL