Negotiable Instruments Act, 1881 | CMA Inter Syllabus
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The objective of having negotiable instruments was to simplify the transaction in money, such that during the transfer of higher amounts of money, people do not fall prey to thefts or robbery committed on route. Such negotiable instruments came to be legalized and regulated through the Negotiable Instruments Act, 1881. Negotiable instruments are those documents that evidence a contractual right to claim payment and which can be transferred upon delivery. Therefore, the age-old rule that states no one can transfer a better title that the person who has the same, does not hold good in such situations. The system of negotiable instruments gets regulated by the Ministry of Finance that supervises the transfers and negotiability of such instruments.
Negotiable instruments are those documents which are used to transfer money between designated persons. These instruments either contains a promise or an instruction to pay to the other, an assigned sum of money at a particular time.
These instruments could exist in varying formats but have certain distinct features within them, such as, they are easily transferable and mobile, they are almost always in written format, contain a definite time for discharge of payment obligations, and has specific persons mentioned therein.
In most day-to-day transactions, in marketplaces or mandis, different types of trades, negotiable instruments have gained importance. These instruments can be transferred by delivery or by endorsement and delivery. The entire Act has been divided into many sections such as; definitions of various instruments and incidental terms thereto, rights and liabilities of parties to such transactions involving negotiable instruments, how negotiation and its subsequent payments are discharged, and provisions relating to dishonour and compensations.
1.1 Definition and Features of Negotiable Instrument
Negotiability is a feature that is distinct from the concept of transferability. By mere delivery or endorsements and delivery, the acquirer of the negotiable instruments gets the best title to the instrument by becoming the holder, which is not the case in instruments that are not negotiable and can bestow upon such rights by the procedures of sale or other means of transfer.
Indian law denotes three instruments which can be called as negotiable instrument and are legally valid. These instruments are: promissory note, bill of exchange and cheque. Section 13 of the Act defines the terms ‘negotiable instrument’ as a promissory note, bill of exchange or either payable either to order or to bearer.
Essential Features of a Negotiable Instrument:
1.2 Promissory Note
Section 4 of the Act defines the term ‘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 certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
In a promissory note, there are only two parties. One is the payer, the other is the payee. Such instruments can also be negotiated when endorsed and delivered or be delivered only.
Note: Provisions relating to currency notes are regulated by other pieces of legislation, including the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949.
Example -
The High Court in Santsingh vs. Madandas Panika, AIR 1976 MP 144 held that an instrument is a promissory
note if there are present the following elements-
The High Court, Andhra Pradesh in Bahadurrinisa vs. Vasudev, AIR 1967 AP 123 categorized the promissory note into three types-
1.3 Bill of Exchange
Section 5 defines the expression ‘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.
Example: A promise or order to pay is not ‘conditional’ within the meaning of this section and Section 4, byreason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
The sum payable may be ‘certain’ within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be a ‘certain person’ within the meaning of this section and section 4, although he is mis-named or designated by description only.
The Calcutta High Court in Sinha vs. Bidhu Bhusan De, AIR 1955 Cal. 562 narrated the essential character of a bill of exchange which is that it contains an order to accept or to pay and that the acceptor should accept it; in the absence of such a direction to pay, the document will not be a bill of exchange or a hundi.
The following are the bills of exchange-
1.4 Cheque
The term ‘cheque’ is defined under Section 6 of the Act. It is 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 electronic form.
There are three parties in a cheque. The drawer, drawee and the payee. In such cases the drawee is always the bank which has been instructed by the drawer, through the cheque to make the payment to the holder of the instrument which is the payee.
For the purposes of this section, the terms ‘a cheque in the electronic form’, ‘truncated cheque’ are defined which has been substituted by the Negotiable Instruments (Amendment) Act, 2015, with effect from 26.12.2015.
‘A cheque in the electronic form’ is a cheque drawn in electronic form by using any computer resource and signed in a secure system with digital signature (with or without biometric signature) and asymmetric crypto system or with electronic signature, as the case may be.
‘A truncated cheque’ is a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
The expression ‘clearing house’ is the clearing house managed by the RBI or a clearing house recognized as such by RBI.
Distinction between Promissory Note and Bill of Exchange
| Sl. No. | Promissory Note | Bill of Echange |
| 1 | It is defined in Sec. 4 of NI Act, 1881. | It is defined in Sec. 5 of the NI Act, 1881 |
| 2 | There are 2 parties: 1. Maker 2. Payee | There are 3 parties: 1. Drawer 2. Acceptor 3. Payee |
| 3 | It contains a Promise to pay. | It contains an order to pay. |
| 4 | No conditions shall be made in a promissory note. | A bill may be accepted conditionally. |
| 5 | The liability of a maker of the promissory note is primary and absolute. | The liability of the drawee of a bill of exchange is secondary and conditional. |
Distinction between Promissory Note and Cheque
| Sl. No. | Promissory Note | Cheque |
| 1 | It is defined in Sec. 4 of NI Act, 1881. | It is defined in Sec. 6 of the NI Act, 1881 |
| 2 | There are 2 parties: 1. Maker 2. Payee | There are 3 parties: 1. Drawer 2. Acceptor 3. Payee |
| 3 | Promissory note contains a promise to pay the sum with interest or without interest at a later date. | A cheque is payable immediately on demand without any days of grace. |
| 4 | Promissory note is not crossed. | Cheque can be crossed. |
| 5 | No protection is available to the payee of note. | Statutory protection is given to the drawee banker. (Sec. 128) |
| 6 | A promissory note cannot be self drawn. | A cheque can be self -drawn or bearer cheque. |
| 7 | No criminal liability shall be imposed on the maker. | Criminal Liability may be imposed on drawee for the dishonour of cheques in certain circumstances. |
| 8 | Stamp is necessary. | Stamp is not necessary. |
| 9 | Limitation: 3 years | Limitation: 6 months |
Distinction between Bill of Exchange and Cheque
| Sl. No. | Promissory Note | Cheque |
| 1 | It is defined in Sec. 5 of NI Act, 1881. | It is defined in Sec. 6 of the NI Act, 1881 |
| 2 | There are 3 parties: 1. Maker 2. Payee 3. Drawer | There are 3 parties: 1. Drawer 2. Acceptor 3. Payee |
| 3 | Bills of exchange are not crossed. | Cheques may be crossed. |
| 4 | Generally three days of grace are given for the payment in case of a bill of exchange. However, this convenience is not allowed in case of bill of exchange payable on demand. | Immediate payment is required in case of cheque. No grace days are allowed. |
| 5 | Anybody including banker may be a drawee in case of bill of exchange. | The drawee is always a baker. |
| 6 | It must be accepted before the acceptor can be made liable upon it. | It requires immediate payment. It does not require acceptance of the maker. Thus the question of acceptance does not arise in case of cheque. |
| 7 | Where a Bill of Exchange is not paid and not honoured, a notice of dishonour should be sent to the drawer to charge him. |
Where a cheque is dishonoured, Notice of Dishonour is not strictly necessary. The banker can return the cheque with the memo “Refer to Drawer” which is a sufficient notice. |
| 8 | Statutory protection is not available. | Sec. 85 of the N.I Act, 1881 affords protection to bankers. |
| 9 | Civil Liability in case of dishonour of bill of exchange. | Criminal liability in case of dishonour of a cheque/bouncing of a cheque and is liable to be prosecuted under Sec. 138 of the N.I. Act, 1881. |
1.5 Parties to the Instruments
The transaction of the instrument requires at least two persons. One is the drawer and other is the drawee. The drawer of the instrument is the person who makes a bill of exchange or a cheque and the person thereby directed to pay is called the drawee. In ‘Shivanth vs. Bishambar’- AIR 1935 Lah. 153 it was held that the definition of drawer is not exhaustive; the maker of the promissory note can also be called a drawer.
Drawer in case of need – When in the bill or in any endorsement thereof the name of any person is given in addition to the drawee to be resorted to in case of need, such a person is called a ‘drawee in case of need’.
Acceptor – After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the acceptor.
Acceptor for honor – When a bill of exchange has been noted or protested for non-acceptance or for better security and any person accepts it supra protest for honor of the drawer or any one of the endorsers, such person is called an ‘acceptor for honor’.
Payee – The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the ‘payee’.
Holder – Section 8 defines the term ‘holder’. The holder of a promissory note or a bill of exchange or chequeis any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.
In Anjaniaih vs. Nagappa, AIR 1967 AP 61 it was held that the term ‘holder’ as defined in Section 8 of the Act would not include a person, who, though in possession of the instrument, had no right to recover the amount due from the parties thereto, such as the finder of a lost instrument payable to bearer or a thief in possession of such an instrument, or even the payee himself, is he is prohibited by an order of court from receiving the amount due on the instrument. Where a plaintiff sued not as a holder in possession of the promissory note but claimed to recover the debt, on the basis of a succession certificate, he would be the only person entitled to recover the debt.
Holder in due course – Section 9 defines the term ‘holder in due course. It means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or the 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 Braja Kishore Dikshit vs. Purna Chandra Panda, AIR 1957 Ori. 153 the High Court held that the holder in due course under Section 9 has to satisfy the following three conditions-
As regard to the second condition the promissory note becomes payable either on demand or at maturity.
Difference between holder and holder in due course
| Sl. No. | Holder | Holder in due corse |
| 1 | Holder is entitled in his own name to possess the instrument and the amount thereon from parties involved. | Holder in due course possesses the instrument for consideration before maturity and in good faith. |
| 2 | Title of the holder is subject to title of the transferor. | Holder in due course gets a better title than transferor. |
| 3 | Holder may receive the instrument without consideration. | Holder in due course always receives the instrument for consideration. |
| 4 | Holder does not get certain privileges available to the holder in due course. | Holder in due course always gets privileges not available to holder. |
Payment in due course – Section 10 defines this expression as 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.
This basically means that the format of the cheque has to be in the format issued by the drawee, and needs to be made and claimed in good faith to and by the intended holder of the instrument.
Example:
Where a bank makes payment in accordance with the apparent tenor of the instrument in good faith and without negligence under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment, payment is said to be done in due course. Therefore, it is said “A banker’s duty in paying a cheque is discharged by payment in due course”.
Instruments
There are various types of instruments mentioned in this Act as follows:
1.6 Maturity [Section 22-25]
Section 22 provides the date of the maturity of the instruments. The maturity of a promissory note or bill of exchange is the date at which falls due. If the promissory note or bill of exchange does not express to be payable on demand, at sight or on presentment, the maturity for such cases is the third day on which it is expressed to be payable.
Example: X writes a post-dated cheque in favour of Y. Y cannot claim money by presenting the cheque to the banker before the date falls due.
In Hemadri vs. Seshamma, 1930 M.W.N. 1232 it was held that the term used in this section cannot apply to a promissory note payable on demand.
Calculation of maturity date
Section 23 provides for calculating maturity of bill or note payable so many months after date or sight. In calculating the date at which a promissory note or bill of exchange, made payable a stated number of months after date or after sight, or after a certain event, is at maturity-
If the month in which the period would terminate has no corresponding day, the period shall held to terminate on the last day of such month.
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 of two parallel transverse lines simply, either with or without the words ‘not negotiable’ that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally.
Section 124 provides that where a cheque bears across its face an addition of the name of a banker, either with or without the words ‘not negotiable’ that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker.
Section 125 provides that where a cheque is not crossed, the holder may cross it generally or specially.
Example: Ramesh writes a crossed cheque in favour of Mahesh. The cheque was additionally crossed specially to Punjab National Bank. Therefore, Mahesh can only collect the money through his bank, and not over the counter as cash from Ramesh’s banker. Moreover, Mahesh can only collect the same through Punjab National Bank where he must hold an account, since no other bank would be able to collect the money on that cheque.
2.1 Payment of Cheque
The payment may be made in respect of the following cases-
Section 126 provides that where a cheque is crossed generally, the banker, on whom it is drawn, shall not pay it otherwise than to a banker. Section 127 provides that where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collect, the banker on whom it is drawn shall refuse payment thereof. Section 128 provides that where the banker on whom a cross cheque is drawn has paid the same in due course, the banker paying the cheque, and (in such case cheque has come to the hands of the payee) the drawer thereof, shall respectively entitled to the same rights and be placed in the same position in all respects, as they would respectively be entitled to and placed in it if the amount of the cheque had been paid to and received by the true owner thereof.
Section 129 provides that any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.
Cheque bearing ‘not negotiable’
Section 130 provides that a person taking a cheque crossed generally or specially, bearing in either case the words ‘not negotiable’, shall not have, and shall not be capable of giving, a better title to the cheque than which the person from whom he took it had.
Example: X is the drawer of a cheque which was drawn in favour of Y. Moreover, X wrote the cheque as non-negotiable. Y will now not be able to endorse the cheque any further, and will have to claim the money on the cheque himself.
Non liability of banker
Section 131 provides that a banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title of the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.
A banker receives payment of a crossed cheque for a customer within the meaning of this section notwithstanding that he credits his customer’s account with the amount of the cheque before receiving payment thereof.
It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary case.
2.2 Endorsement
Endorsement means signatures of the person which are generally made at the back of the instrument, for the purpose of transfer of rights to another person.
Section 15 of the Act provides that when the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negation on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as negotiable instrument he is said to indorse the same and is called the ‘indorser’.
Therefore, endorsement (indorsement) means writing of a person’s name (other than maker) on the face or back of an instrument or on a slip of paper attached thereto for the purpose of negotiation. The person signing the instrument is known as endorser and the person in whose favour it is endorsed is known as endorsee.
Essentials of a valid endorsement
Who may endorse a bill?
The first endorsement of an instrument can be made by the payee only, however, subsequent endorsement can be made by any person who becomes the holder of the instrument. As per section 15 endorsement cannot be made by the maker or holder of an instrument as maker. Thus, if a bill is drawn payable to the drawer’s order the first signature of the drawer as a drawer is not an endorsement, but if he signs the bills second time for the purpose of negotiating it, the second signature would be an endorsement.
It may note that as per section 51 every sole maker, drawer, payee or indorsee or all of several joint makers, drawers, payees or indorsees of a negotiable instrument may endorse and negotiate it.
Types of endorsement:
The endorsement of a negotiable instrument can be:
As per Section 16 (1), if the endorser signs his name only, the endorsement is said to be “in blank”, and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be “in full”, and the person so specified is called the “endorsee” of the instrument. Section 49 of the Act provides the mechanism of conversion of a blank endorsement into a full endorsement. As per section 49 the holder of a negotiable instrument indorsed in blank may, without signing his own name, by writing above the endorser’s signature a direction to pay to any other person as endorsee, convert the endorsement in full; and the holder does not thereby incur the responsibility of an endorser.
Example 1:
X is a holder of a bill which has been endorsed in blank by Y and delivered to him. If X writes over the signature of Y “Pay to Z or order”, X is not liable as a endorser but this operate as full endorsement by Y to Z.As per section 55 if a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it cannot be claimed from the endorser in full, except by the person to whom it has been indorsed in full, or by one who derives title through such person. As per section 54, subject to the provisions hereinafter (section 55) contained crossed cheques, a negotiable instrument indorsed in blank is payable to the bearer thereof even although originally payable to order.
Example 2:
If A is a payee and holder of a negotiable instrument. He endorses it in blank and delivers it to B who in turn endorse in full” Pay to C or order”. C transfers it to D without any formal endorsement. In the instant D as the bearer of the instrument is entitled to payment or to sue drawer, acceptor or A who endorsed the bill in blank but he cannot hold B or C liable. However, C can sue B as he received the bill in full endorsement from B. But if C makes a proper endorsement in favor of D and then delivers to him, D can claim payment from all the prior parties including A and B in addition to C.
As per Section 50 endorsement of a negotiable instrument followed by delivery thereof has the effect of transferring the property in the instrument to the endorsee with a further right to negotiate the Instrument. But the endorser may by express words restrict or exclude such rights in which it will be called a restrictive endorsement. As per section 50 the of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation; but the endorsement may be express words, restrict or exclude such right, or may merely constitute the endorsee an agent to indorse the instrument, or to receive its contents for the endorser, or for some other specified person.
The effect of restrictive endorsement is that the endorsee gets the right to full payment of the bill when due for payment and has right to sue any party to the bill but he has no right to transfer this right to any other person unless he expressly authorized to do so. The negotiability of the instrument comes to an end and the last endorsee is the person to sue upon. However, when the restrictive endorsement transfer the right of further endorsement or transfer all the subsequent endorsee get the bill with same right and liabilities as the fires endorsee after the first restrictive endorsement.
As per section 40 if the holder of a negotiable instrument without consent of the endorsee, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability as if the instrument had been paid at maturity.
Quite possible the holder of a negotiable instrument lost the instrument before its date of maturity. In such cases as per section 45 A of the act the holder has right to claim a duplicate copy of the lost bill subject to giving security to the drawer, if required, to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again. If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do so as he has no option to give a duplicate copy of the said instrument.
As per section 52 of the Act, the endorser of a negotiable instrument may, by express words in the endorsement, exclude his own liability thereon, or make such liability or the right of the endorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen. This is called conditional endorsement.
Where an endorser so excludes his liability and afterwards becomes the holder of the instrument all intermediate endorsers are liable to him.
Example 3: if the endorser of a negotiable instrument signs his name adding the words “without recourse” upon this endorsement he incurs no liability.
Example 4: X is both holder as well payee of a negotiable instrument. Excluding personal liability by an endorsement “without recourse” he transfers the Instrument to B and B further endorses it to C who endorse it to A. A is not only reinstated in his former rights, but has the rights of an endorsee against B and C.
As clear from the above examples we can say that an endorser can exclude or limit his liability in the following ways:
2.3 Material Alteration
Any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties:
Alteration by endorsee: And any such alteration, if made by an endorsee, discharges his endorser from all liability to him in respect of the consideration thereof.
It may be noted that to get benefit of this section the alteration must be intentional and not purely accidental. Secondly the alteration must be material. In Lokaram Sethiya vs. Ivon E John (1977) SC defined the term material alteration as follows:
“A material alteration is one which varies the rights, liabilities or legal position of the parties as ascertained by the deeds in its original state or otherwise varies the legal effets of the instruments as originally expressed or which may otherwise prejudice the party bound by the deed as originally executed. Some of the alterations which have been held to be material in various cases are as under:
From the above cases of alteration which have been treated material alteration we can say that any alteration which changes the legal character of the instrument or alters the liabilities of the parties, whether change is prejudicial or beneficial is a material alteration.
Though we have discussed that material alteration discharges the parties to an instrument. But still there are some alterations which do not vitiate the instrument. These are as under:
Example: X writes a cheque in favour of Y. Y lost the cheque and Z found the same. Z tried to claim the money by taking it to X’s banker. However he changed the name of the payee on the cheque and replaced it with his name. The banker cannot make the payment anymore as the cheque has been materially altered.
Payment of instrument on which alteration is not apparent
So far we have discussed that material alteration on a instrument discharge the parties to it. Still there may be some alteration in an instrument which may not be apparent at the time of payment. As per section 89:
If a bill of exchange which has been negotiated is, at or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished. (Section 90)
3.1 Acceptance
Only certain types of bills require acceptance. Essentials of a valid acceptance are:
Meaning of acceptance
A bill is said to be accepted when the drawee (i.e., the person on whom the bill is drawn), after putting his signature on it, either delivers it or gives notice of such acceptance to the holder of the bill or to some person on his behalf.
Acceptor
After the drawee has accepted the bill, he is known as the acceptor. It is only the bill of exchange (other than cheque) which requires acceptance. However, acceptance is not necessary to make a valid bill. If a bill is not accepted, it does not become invalid. It only becomes dishonoured by non-acceptance.
Presentation for acceptance may be excused in the following circumstances
Acceptance in Case of Bills in Sets
Where a bill is drawn in sets, the acceptance is required to 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 respectively.
When presentation for acceptance is necessary
In no other case is presentation for acceptance necessary in order to render liable any party to the bill.
Example: X instructed Y to pay to Z a sum of ` 100. Y accepted to pay the same to Z. Therefore, Y is the acceptor of the bill. However, if Z claims the money after X’s death, Y having the knowledge of X’s death now will not be able to accept the bill anymore.
Types of Acceptance
Acceptance may be either general or qualified.
General Acceptance: An acceptance is said to be general when the drawee accepts the bill without qualification to the order of the drawer. If the acceptance is not absolute, the holder may treat the bill as dishonoured by nonacceptance
Qualified Acceptance: An acceptance is said to be qualified when the drawee accepts the bill subject to qualification. It may be noted that an acceptance will not be treated as a qualified acceptance unless the qualification is expressed on the bill in the clearest language. The qualification may relate to an event, amount, place, time, etc.
Circumstances indicating Qualified Acceptance
According to Section 86, an acceptance is qualified under the following circumstances:
Effect of Qualified Acceptance
Examples of Qualified Acceptance
3.2 Negotiation
Section 14 defines the term ‘negotiation’. When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.
Delivery
Section 46 provides that the making, acceptance or indorsement of a promissory note, bill of exchange or cheque is completed by delivery. The delivery is of two types – one is actual delivery and the other is constructive delivery.
As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or indorsing the instrument, or by a person authorized by him in that behalf.
As between such parties and any holder of instrument other than a holder in due course, it may be shown that the instrument was delivered conditionally or for a special purpose only, and not for the purpose of transferring absolutely the property therein.
A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof. A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by indorsement and delivery thereof.
In Bhagwati Prasad vs. Pahil Sundari, AIR 1969 Pat 215 it was held where property in a promissory note is transferred by partition, the transferee is entitled to maintain his suit on it; his rights cannot be defeated on the ground of non-endorsement.
In Vaddadi Venkitasami vs. Md. Begum, AIR 1956 AP 9 it was held that in addition to the mode of transfer of a promissory note indicated in Section 46 here are two other modes of its transfer-
The only difference between the two modes is that while transfer by negotiation clothes the transferee with certain rights, assignment as a chose-in-action under Section 130 limits such rights, as the transferor had in the document i.e., the assignee takes only subject to equities in favor of the maker; an assignee of a promissory note otherwise than by indorsement such as transfer by means of writing under Section 130 of the Transfer of Property Act, can sue on the promissory note.
Negotiation is of two types: one is negotiation by delivery and the other is negotiation by indorsement.
Negotiation by delivery
Section 47 provides that subject to the provisions of Section 58 a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof. There is an exception to this. A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in certain event is not negotiable (except in the hands of a holder for value without notice to the condition) unless such event happens.
Examples:
Negotiation by endorsement
Section 48 provides that subject to the provisions of Section 58, a promissory note, a bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof.
In Chaitram vs. Mohanlal, AIR 1957 Nag. 65 it was held that where a promissory note payable to a particular person does not contain any words prohibiting transfers or indicating that it was not transferable, it would be a negotiable instrument payable to order; it would be negotiable by the holder by endorsement and delivery with the necessary intention to constitute the person in whose favor the endorsement is made as the holder thereof; there must be intention of the endorser to constitute the endorsee as a holder of the pro-note accompanied by delivery; unless this is proved negotiation is not complete.
Conversion of endorsement in blank into endorsement in full
Section 49 provides that the holder of a negotiable instrument indorsed in blank may, without signing his own name, by writing above the indorser’s signature a director to pay to any other person as endorsee, convert the endorsement in blank into an endorsement in full and the holder does not there by incur the responsibility of an endorse.
Effect of endorsement
Section 50 provides that the endorsement of a negotiable instrument followed by delivery transfer to the endorsee the property therein with the right of further negotiation, but the endorsement may, by express words, restrict or exclude such right, or may merely constitute the endorsee an agent to endorse the instrument, or to receive its contents for the endorser, or for some other specified person.
Example:
B signs the following indorsements on different negotiable instruments payable to bearer-
These indorsements do not exclude the right of further negotiation by C.
In Wasudev vs. National Savings Bank, IR 1953 Bom. 209 it was held that Section 50 deals with what are known as restrictive endorsements which in express words restrict or exclude the rights of endorsees; it does not apply to cases where the endorsee wishes to satisfy the Court by oral evidence that he was endorsee for a particular purpose only.
Who may negotiate?
Section 51 provides that every sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payees or indorsees, of a negotiable instrument may, if the negotiability of such instrument has not been restricted or excluded as mentioned in Section 50, indorse and negotiate the same.
Nothing in this section enables a maker or drawer to indorse or negotiate an instrument, unless he is in lawful possession or is holder thereof; or enables a payee or indorsee to indorse or negotiate an instrument unless he is holder thereof.
Example: A bill is drawn payable to A or order. A indorses it to B, the indorsement not containing the words ‘or order’ or any equivalent words. B may negotiate the instrument.
Indorser who excludes his own liability
Section 52 provides that the indorser of a negotiable instrument may, by express words in the indorsement, exclude his own liability thereon, or make such liability or the right of the indorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen. Where an indorser so excludes his liability and after becomes the holder of the instrument, all intermediate indorsers are liable to him.
Holder deriving title from holder in due course
Section 53 provides that a holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course.
Instrument indorsed in blank
Section 54 provides that subject to the provisions contained as to crossed cheques, a negotiable instrument indorsed in blank is payable to the bearer thereof even although originally payable to order.
Claim on the conversion of indorsement of blank into indorsement in full
Section 55 provides that if a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it cannot be claimed from the indorser in full, except by the person to whom it has been indorsed in full, or by one who derives the title through such person.
Indorsement for part of sum due
Section 56 provides that no writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument where such amount has been partly paid, a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance.
Instrument obtained by unlawful means
Section 57 provides that when a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder by means of an offence or fraud or for an unlawful consideration, no possessor or indorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or indorsee is, or some person through whom he claims was, a holder thereof in due course.
Instrument acquired after dishonour
Section 59 provides that the holder of a negotiable instrument, who has acquired it after dishonour, whether by non-acceptance or nonpayment, with notice thereof, or after maturity, has only, as against the other parties, the rights thereon of his transferor.
Accommodation bill
Any person, who in good faith and for consideration becomes the holder, after maturity, of a promissory note or a bill of exchange made, drawn or accepted without consideration, for the purpose of enabling some party thereto to raise money thereon, may recover the amount or bill from any party.
Example: The acceptor of a bill of exchange, when he accepted it, deposited with the drawer certain goods as a collateral security for the payment of the bill, with power to the drawer to sell the goods and apply the proceeds in discharge of the bill but if it were not paid at maturity. The bill not having been paid at maturity the drawer sold the goods and retained the proceeds but indorsed the bill to A. A’s title is subject to the same objection as the drawer’s bill.
Instrument negotiable till payment
Section 60 provides that a negotiable instrument may be negotiated, (except by the maker, drawee or acceptor after maturity) until payment or satisfaction by the maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction.
Presentment
Chapter V of the Act provides the procedure of presentment of negotiable instruments.
In Jagjivan Mavji vs. Ranchoddas, AIR 1954 SC 553 it was held by the Supreme Court that a bill payable after sight has two distinct stages; firstly, when it is presented for acceptance and later when it is presented for payment. Section 61 deals with the former and Section 64 deals with the later. Presentment for acceptance must always and in every case precede presentment for payment. But when the bill is payable on demand, both stages synchronize; there would be only one presentment, both for acceptance and for payment. When the bill is paid, it involves acceptance; but when not paid, it is really dishonoured for non-acceptance. But whether the bill is payable after sight, or at sight or on demand, acceptance by the drawee is necessary before he can fixed with liability on it. It is acceptance that establishes privity on the instrument between the payee and the drawee.
In Banaras Bank Limited vs. Normusji Pestonji, AIR 1930 All. 648 it was held that Section 64 should be given its plain meaning; the exception to it must be read as more or less an independent rule of law; non presentment of hundis for payment does not exempt the acceptor from his liability; it exempts only other parties to the hundis.
In Nanumal vs. Shibba Mal, AIR 1939 Lah. 18 it was held that where the place of payment is not indicated by the maker in the instrument, the note or bill has to be presented at the place of business, if any, or at the usual residence of the maker, drawee or acceptor.
In Jayaram vs. Sivaram, AIR 1963 Mad 294 it was held that the term specified place in Section 69 must have been intended to refer to a place indicated with sufficient precision to enable the person, who wants to charge the maker with liability, to resort to him readily, a promissory note which refers to a large city like Madras as the place for presentment does not fall under Section 69 and does not require presentment.
In Gopikisan vs. Jethmal, AIR 1935 Nag.144 it was held that in the absence of any indication in the instrument itself of the place of payment, presentment must be at the place of business of the acceptor or maker or the place where he has his home or residence.
Presentment when not necessary
Section 76 provides that no presentment for payment is necessary in any one of the following cases-
3.3 Payment and Interest
Chapter VI deals with the payment of interest. Section 78 provides that the payment should be made to the holder or his accredited agent. Section 79 provides that interest is payable on the amount which has been paid after the due date. The interest is payable from the date of due to the date of realization. Section 80 provides that when no interest rate has been specified in the instrument then the interest shall be calculated at the rate of 18% per annum from the date of due to the date of realization of the amount.
Section 80 provides that any person liable to pay and called upon by the holder to pay the amount due on a negotiable instrument is before payment entitled to have it shown and is on payment entitled to have it delivered up, to him, or if the instrument is lost or cannot be produced to be indemnified against any further claim thereon against him.
3.4 Assignment of Negotiation Instruments
Assignment takes place where the holder of an instrument transfers it to another so as to confer a right on the transferee to receive the payment of the instrument. All negotiable instruments are choosing in action and as such are transferable by assignment without endorsement under sections 130-132 of the Transfer of property act. Assignment of a negotiable instrument is effected by writing without endorsement. The main feature of assignment is that the assignee obtains the right of the assignor. Therefore, if the assignor’s title is defective assignee’s title will also be defective.
Distinction between Negotiation and Assignment
| Negotiation | Assignment |
| Consideration is presumed until contrary is proved. | Consideration must be proved |
| It transferee is a holder in due course he takes the instrument free from any defects. | Assignee’s title is always subject to defenses and equities between the original debtor and assignor. |
| Notice of transfer is not necessary. | Notice of assignment must be given. |
| Negotiation is effected by delivery in case of instruments payable to bearer and by delivery and endorsement in case of instrument payable to order. | Assignment is effected only by writing |
| Transferee can sue the third party in his own name. | Assignee cannot do so. |
| There are a number of presumptions in favor of holder in due courses. | There are no such presumptions. |
Discharge from liability
Chapter VII deals with the discharge from liability on negotiable instruments. Section 82 provides the methods of discharge from liability-
Section 83 provides that if the holder allows the drawee more than 48 hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance and thereby discharged them from liability to such holder.
Delay in presentation of cheque
Section 84 provides that where a cheque is not presented for payment within a reasonable time and the drawer at the time when presentment ought to have been made, as between himself and the banker, to have the cheque paid and suffers actual damage through the delay, he discharged to the extent of such damage, that is to say, to the extent to which such drawer is a creditor of the banker to a larger amount that he would have been if such cheque had been paid.
In ‘Abdul Majid vs. Ganesh Das Kalooram’ – AIR 1954 Ori. 124 it was held that a drawer of a cheque who wants to take advantage of Section 84 must prove two facts-
Cheque payable to order
Section 85 provides that where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharge by the payment in due course. Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any indorsement whether in full or in blank appearing thereon, and notwithstanding that any such indorsement purports to restrict or exclude further negotiation.
Parties to notes, bills and cheques:
Chapter III of the Act deals with the parties to notes, bills and cheques.
Capacity
Section 26 provides that every person capable of contracting may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque. A minor may draw, indorse, deliver and negotiate such instrument so as to bind all parties except himself.
Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered.
In ‘Sulochana V. Pnaidyan Bank Limited’ - AIR 1975 Mad 70 (DB) it was held that when a minor being along with one other executed a promissory note, held, though no liability could be enforced against the minor executants, the other executants, also a party to the document, could not escape his liability.
In ‘Orilo Industries Limited v. Bombay Mercantile Bank Limited’ – AIR 1961 SC 993 it was held that Section 26 does not purpose to make any provision of substantive or procedural law. The latter part of the section merely brings out that a company cannot claim authority to issue a cheque under its first part. The law in regard to the company’s power to issue negotiable instruments has to be found in the relevant provisions of the Companies Act itself.
Agency:
Section 27 provides that every person capable of binding himself or being bound may so bind himself or be bound by a duly authorized agent acting in his name. A general authority to transact business and to receive and discharge debt does not confer upon an agent the power of accepting or indorsing bills of exchange so as to bind his principal. An authority to draw bills of exchange does not itself import an authority to indorse.
In ‘M. Rajagopal vs.. K.S. Imam Ali’ – AIR 1981 Ker 36 (DB) it was held that in case of conflict between Sections 19 and 22 of the Partnership Act on the one hand and Sections 26, 27 and 28 of the Negotiable Instruments Act on the other, the latter Act should prevail. A claim against a firm based on a written contract by one partner in the course of business and with authority to act is binding on the firm. But when such claim is made on a promissory note or bill of exchange, the Court has to be satisfied that the negotiable instrument disclosed the liability of the firm clearly.
4.1 Liability of Agent
Section 28 of the Act provides that an agent who signs his name to a promissory note, bill of exchange or cheque without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the instrument, except to those who induced him to sign upon the belief that the principal only would be held liable.
This section carries an exception to the general law of contract, that the principal, though not disclosed on the instrument may be proceeded against if it is discovered later on that the agent had acted on his behalf as held in ‘Ramanathan V.Baldeo Singh’- AIR 1933 Rang.111.
4.2 Liability of the representative
Section 29 provides that a legal representative of a deceased person who signs his name to a promissory note, bill of exchange or a cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such.
4.3 Liability of drawer
Section 30 provides that the drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or accepter thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by the drawer as herein provided.
In ‘Union Bank of India vs. Swastika Motors’ – AIR 1983 Del. 420 it was held that a drawee having dishonoured the hundis, their drawer would be liable to the payee provided he had due notice of dishonour, even if the documents of title, accompanying the hundis, had been delivered to the drawee without valid acceptance.
In ‘Silchar Bank vs. Pioneer Bank’- AIR 1951 Assam 127 it was held that if the drawee bank dishonours the cheque after the drawer had stopped payment, the question of notice of dishonour does not arise; the drawer is liable to compensate the holder.
4.4 Liability of the drawee of cheque
Section 31 provides that the drawee of a cheque having sufficient funds of the drawer in his hands property applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.
4.5 Liability of maker of note and acceptor of bil
Section 32 provides that in the absence of contract to the contrary, the maker of promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder of the demand. In default of such payment, such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default.
In ‘Jagjivan Mavji vs. Ranchoddas’ – AIR 1954 SC 554, the Supreme Court held that the drawee of a negotiable instrument is not liable to the payee, unless the drawee has accepted it. Under Section 32 the liability of the drawee arises only when he accepts the bill; there is no provision in the Act that the drawee is as such liable on the instrument, except under Section 31 when the drawee has sufficient funds of the customer in his hands; and even then, the liability is only towards the drawer, not the payee.
In ‘M. Ramnarain Private Limited vs. State Trading Corporation of India Limited’ – AIR 1988 Bom 45 (DB) it was held that where the payee was the holder of bills but not willing to part with them unless the entire amount covered by the bills had been paid to him, the drawer may sue the acceptor for compensation but only after payment to the payee and his endorsement on the bills in favor of the drawer.
4.6 Only drawee can be acceptor except in need or for honor
Section 33 provides that no person except the drawee of the bill of exchange or all or some of several drawees, or a person named therein as a drawee in case of need, or an acceptor for honor can bind him by an acceptance. In ‘Manikchand V. Chartered bank’ – AIR 1961 Cal. 653 (DB) the High Court narrated the scope of Section 33. Section 33 must not be misread as preventing the drawee from accepting through an agent; under Section 26 and 27 the drawee can accept a bill through his agent.
4.7 Acceptance by several drawees not partners
Section 34 provides that where there are several drawees of a bill of exchange who are not partners, each of them can accept it for himself, but none of them can accept it for another without his authority.
4.8 Liability of Indorser
Section 35 provides that in the absence of contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without, in such indorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been given to, or received by, such indorser as herein after provided.
4.9 Liability of prior parties to holder in due course
Section 36 provides every prior party to a negotiable instrument is liable thereon to holder in due course until the instrument is duly satisfied.
Maker, drawer and acceptor principals
Section 37 provides that the maker of a promissory note or a cheque, the drawer of a bill of exchange until acceptance, and the acceptor are, in the absence of a contract to the contrary, respectively liable thereon as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or acceptor as the case may be.
Prior party a principal in respect of each subsequent party
Section 38 provides that as between the parties the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of each subsequent party.
Example: A draws a bill payable to his own order on B, who accepts. A afterwards indorses the bill to C, C to D and D to E. As between E and B, B is the principal debtors, and A,C and D are his sureties. As between E and A, A is the principal debtors and C and D are his sureties. As between E and C, C the principal debtor and D is his surety.
Suretyship
Section 39 provides that when the holder of an accepted bill of exchange enters into any contract with the acceptor which, under Sections 134 or 135 of the Contract Act, would discharge the other parties, the holder may expressly reserve his right to charge the other parties, and in such case they are not discharged.
4.10 Discharger of indorser’s liability
Section 40 provides that where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser’s remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.
Example:
As the holder of a bill of exchange made payable to the order of B, which contains the following indorsements in blank-
This bill A puts in suit against John Rozario and strikes without John Rozario’s consent the indorsements by Peter Williams and Wright and Co. A is not entitled to recover anything from Rozario
Acceptor bound, although indorsement forged
Section 41 provides that an acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such indorsement is forged, if he knew or had reason to believe the indorsement to be forged when he accepted the bill.
Acceptance of bill drawn in fictitious name
Section 42 provide that an acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an indorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.
Negotiable instrument made without consideration
Section 43 provides that a negotiable instrument made, drawn, accepted , indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if such party has transferred the instrument with or without endorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
Explanation 1 to this section provides that no party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.
Explanation 2 to this section provides that no party to the instrument who has induced any other party to make, draw, accept, indorse or transfer the same to him for a consideration which he failed to pay or perform in full shall recover thereon an amount exceeding the value of the consideration (if any) which he has actually paid or performed.
In ‘Ram Narain V. Ramjiwan’ AIR 1937 Nag. 267 it was held that Section 43 must be read subject to Section 59 in all cases in which the latter section applies; the holder, as against other parties, would have only the rights thereon of his transferor.
Partial absence or failure of money consideration
Section 44 provides that when the consideration for which a person signed a promissory note, bill of exchange or cheque consisted or money, and was originally absent in part of has subsequently failed in part, the sum which is a holder standing in immediate relation with such signer is entitled to receive from his is proportionately reduced.
Explanation to this section provides that the drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the indorser with the indorsee. Other signers may by agreement stand in immediate relation with the holder.
Example:
A draws a bill on ` 500 payable to the order of A. B accepts the bill, but subsequently dishonours it by nonpayment. A sues B on the bill, B proves that it was accepted for value as to ` 400 and as accommodation to the plaintiff as to the residue. A can only recover ` 400.
In ‘Tirupagari Tayaramma vs. Sri Ramanjaneya Mercantile Co. Eluru’ – AIR 1977 AP 205 it was held that Section 44 would not apply when consideration for the promissory note was a set of obligations, not merely of money.
Partial failure of consideration not consisting of money
Section 45 provides that where a part of the consideration for which a person signed a promissory note, bill of exchange or a cheque, though not consisting of money, is ascertainable in money without collateral enquiry, and there has been a failure of that part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionately reduced.
Holder’s right to duplicate of lost bill
Section 45A provides that where a bill of exchange has been lost before it is overdue the person who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again. If the drawer on request refuses to give such duplicate bill, he may be compelled to do so.
Notice of dishonour
Chapter VIII deals with the notice of dishonour.
When dishonoured?
The dishonour may be due to the following reasons-
Section 91 provides that a bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees, not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. When the drawee is incompetent to contract, or the acceptance is qualified the bill may be treated as dishonoured. Section 92 provides that an instrument is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.
5.1 Notice
Section 93 provides that when an instrument is dishonoured the holder must give notice that the instrument has been dishonoured. In ‘Union bank vs.. Dina Nath’ – AIR 1953 All. 637 it was held that this section was intended to confine the holder’s right of enforcing the liability to only those who are otherwise liable under the law and to whom notice has been given; it was not intended to enlarge the holder’s right so as to enable him to claim damages from persons against whom he has no remedy under the Act.
Mode of giving notice
Section 94 provides that the notice may be in writing or oral. If it is in written form it must be sent by post and may be in any form but it must inform the party to whom it is given either in express term or by reasonable intendment that the instrument has been dishonoured and he will be held liable thereon. It must be given within a reasonable time after dishonour at the place of business or at the residence of the party for whom it is intended.
Section 95 provides that any party receiving notice of dishonour must, in order to render any prior party liable to himself, give notice of dishonour to such party within a reasonable time, unless such party otherwise receives due notice.
Section 96 provides that when the instrument is deposited with an agent for presentment, the agent is to issue notice to his principal who is entitled to a further like period to give notice of dishonour.
Section 97 provides that when the party, to whom a notice of dishonour is dispatched, is dead, but the party is not aware of the death, the notice is sufficient.
Notice – when not necessary?
Section 98 provides that in the following circumstances there is no requirement to issue notice
5.2 Noting and Protest
Chapter IX deals with the procedure of noting and protest.
Noting
Section 99 provides that when an instrument is dishonoured for any reason, the holder may cause the dishonour to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each. The noting must be made within a reasonable time after dishonour. The noting must specify the date of dishonour, the reason assigned for such dishonour or if the instrument has not been expressly dishonoured, the reason the holder treats it as dishonoured and the notary’s charges.
Protest
Section 100 provides that when an instrument is dishonoured the holder may cause such dishonour to be noted and certified by a notary public. Such certificate is called a protest. When the acceptor of an instrument becomes insolvent or his credit has been publicly impeached, before maturity of bill, the older may, within a reasonable time, cause a notary public to demand better security of the acceptor and on its being refused may, within a reasonable time, cause such facts to be noted and certified. Such certificate is called a protest for better security.
Contents of the protest
Section 101 provides that a protest must contain-
Notice of protest
Section 102 provides that notice of protest must be given instead of notice of dishonour in the same manner and subject to the same conditions but the notice may be given by the notary public who makes the protest.
Special Rules of evidence
Chapter XIII deals with this subject. Section 118 what are the presumptions that can be made as to negotiable instruments. Until the contrary is proved the following presumptions shall be made-
It can be presumed that-
Onus of holder in due course
Where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or has been obtained from the maker or acceptor thereof by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon them.
Presumption on proof of protest
Section 119 provides that in a suit upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour, unless and until such fact is disproved.
Estoppel
Sections 120 to 122 deals with the following types of estoppels-
Section 120 provides that no maker of a promissory note, and no drawer of a bill of exchange or cheque and no acceptor of a bill of exchange for the honor of the drawer shall, in a suit thereon by a holder in due course, be permitted to deny the validity of the instrument as originally made or drawn.
Section 121 provides that no maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s capacity, at the date of the note or bill, to indorse the same.
Section 122 provides that no indorser of a negotiable instrument shall, in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity to contract of any prior party to the indorsement.
5.3 International Law
Chapter XVI deals with the negotiable instrument in international law. Section 134 provides that in the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory note, bill of exchange, or cheque is regulated by the law of the place where he made the instrument and the respective liabilities of the acceptor and indorser by the law of the place where the instrument is made payable.
Example: A bill of exchange was drawn by A in California, where the rate of interest is 25% accepted by B, payable in Washington where the rate of interest is 6%. The bill is indorsed in India and is dishonoured. An action on the bill is brought against B in India. He is liable to pay interest at the rate 6% only; but if A is charged as drawer, A is liable to pay interest @ 25%.
Section 135 provides that where a promissory note, bill of exchange or a cheque is made payable in a different place from that in which it is made or indorsed, the law of the place where it is made payable determines what constitutes dishonour and what notice of dishonour is sufficient.
Example: A bill of exchange is drawn and indorsed in India but accepted payable in France, is dishonoured. The indorsee causes it to be protested for such dishonour and given notice in accordance with the law of France, though not in accordance with the rules herein contained in respect of bill which are not foreign. The notice is sufficient.
Section 136 provides that if an instrument is made, drawn, accepted or indorsed outside India, but in accordance with the law of India, the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or indorsement made thereon within India.
Section 137 provides that the law of any foreign country regarding promissory notes, bill of exchange and cheques shall be presumed to be the same as that of India unless and until the contrary is proved.
5.4 Penalties
Section 138 provides penalty for dishonour of cheque for insufficiency etc., of funds in the account. Where any cheque drawn by a person on an account maintained by him with a banker for payment of any money to another person from out of that account for the discharge, in whole or in part, of any ‘debt or other liability’ (a legally enforceable debt or other liability) is returned by the bank unpaid,-
The penal provision in this cheque shall not apply unless-
5.5 Conditions precedent
In ‘Kusum Ingots & Alloys Limited V. Pennar Peterson Securities Limited’ – AIR 2000 SC 954, the Supreme Court held that the ingredients which are to be satisfied for making out a case under Section 138 of the Act, are-
5.6 Presumption in favor of holder
Section 139 provides that it shall be presumed, unless the contrary is proved that the holder of a cheque received the cheque, of the nature referred to in Section 138, for the discharge, in whole or in part, of any debt or other liability.
In ‘B. Mohan Krishna V. Union of India’ – 1996 CrLJ 683 (AP DB), the Andhra Pradesh High Court Division Bench held that the presumption in Section 139 in favor of the holder of a cheque is not violative of Article 20(3) of the Constitution which incorporates immunity against self incrimination.
Section 140 provides that it shall not be a 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 the reasons stated in the section.
5.7 Offences by companies
Section 141 of the Act provides that a company and every person who was in charge of and responsible to the company for the conduct of the business of the company at the time of offence, the company and such person shall be liable to be proceeded against and punished accordingly. If such person proves that the offence was committed without his knowledge or that he has exercised such due diligence to prevent the commission of the offence he shall not be punishable.
Where a person is nominated as a Director of the company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government as the case may be, he shall not be liable for prosecution under this Chapter. If it is proved that the offence has been committed with the connivance or consent of, it is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such persons shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Cognizance of offence
Section 142 provides that no court shall take cognizance of any offence punishable under Section 138 except upon a complaint, in writing, made by the payee or the holder in due course of the cheque. Such complaint shall be made within one month of the date on which the cause of action arises. The cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he has sufficient cause for not making a complaint within such period. No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class shall try any offence punishable under Section 138.
The offence shall be inquired and tried only by a court within those local jurisdiction-
Where a cheque is delivered for collection at any branch of the bank of the payee or holder in due course, then the cheque shall be deemed to have been delivered to the branch of the bank in which the payee or holder in due course maintains the account.
Summary trial
Section 143 provides that all the offences under this Chapter shall be tried by a Judicial Magistrate of the I class or by a Metropolitan Magistrate. The provisions of Section 262 to 265 of the Code of Criminal Procedure shall apply to such trials.
In case of any conviction in a summary trial it shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an amount of fine exceeding ` 5,000.
When at the commencement of, or in the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the case in the manner provided by the Code of Criminal Procedure.
The trial shall be continued from day to day until its conclusion, unless the court finds the adjournment of trial beyond the following day to be necessary for reasons to be recorded in writing. Every trial under this section shall be conducted as expeditiously as possible and an endeavor shall be made to conclude the trial within 6 months from the date of filing of the complaint.
The Act was amended in August 2018. Section 143A has been inserted which empowers the court to direct the drawer to pay interim compensation upto 20% of the cheque value which the drawer pleads “no guilty”. In case the drawer files an appeal, the appellate court may direct to the drawer to deposit 20% of the fine or compensation, in addition to what has been paid at trial stage.
Service of summons
Section 144 provides that a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or such courier services as are approved by a Court of Session.
Where an acknowledgement purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorized by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons have been duly served.
Evidence on affidavit
Section 145 provides that the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be read in evidence in any inquiry, trial or other proceeding under the Code of Criminal Procedure. The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein.
Bank’s slip – prima facie evidence
Section 146 provides that the Court shall, in respect of every proceeding, on production of bank’s slip or memo having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved.
Compounding
Section 147 of the Act provides that every offence punishable under this Act is compoundable.In ‘M. Rangaswamiah V. R.
Shettappa’- 2002 CrLJ 4792 (Karn) the High Court held that there is no prohibition in this Act against compounding of an offence punishable under Section 138. In the absence of any such prohibition therefore, where the Court finds that the parties have settled the matter, where the complainant being present before the Court and submits before the Court that the accused has paid the money covered by the cheque it would be appropriate to allow the parties to compound, rather than negativing such a joint request made by the parties, and proceeding to inflict the sentence on the accused. Particularly when there is no prohibition against compounding, any rejection of request in that regard would not further the cause of the justice, and particularly where the commission of offence is not related to the society at large, but only against a particular person, viz., the complainant to whom certain sum is due under the cheque. Therefore it would be legally permissible for the parties to compound the offence punishable under Section 138 of the Negotiable Instruments Act, 1881.
1. The Negotiable Instruments Act, 1881 is an Act to define and amend the law relating to:
Answer: d. All of the above
2. “banker” includes:
Answer: b. Any person acting as a banker and any post office saving bank.
3. Which is NOT an example of “Promissory Note”:
Answer: b. Mr B, I.O.U ` 1,000.”
4. In a Promissory Note, how many parties are involved:
Answer: b. Two
5. Which is NOT correct about the “Promissory Note”:
Answer: a. It contains a conditional undertaking
6. The Negotiable Instruments Act, 1881 extends to:
Answer: b. The whole of India
1. Discuss about the various types of Instruments.
Answer :
2. who are the parties to an instrument?
Answer :
3. Write short notes on-
(a) Bill of Exchange
(b) Types of Acceptance
(c) Holder in due course
Answer :
1. Discuss briefly the historical background of law of Negotiable Instruments in India.
Answer :
2. What is the object, scope and applicability of Negotiable Instruments Act? Is it exhaustive on matters relating to Negotiable Instruments?
Answer :
3. What do you understand by term “Negotiable Instruments”? What are its special characteristics?
Answer :
4. Define and explain `Promissory Note’. What are its essential features?
Answer :
5. Define and explain “Bill of Exchange”. What are the essential requisites of Bill of Exchange. What is the distinction between Promissory Note and Bill of Exchange ?
Answer :
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
Ruchika Ma'am has been a meritorious student throughout her student life. She is one of those who did not study from exam point of view or out of fear but because of the fact that she JUST LOVED STUDYING. When she says - love what you study, it has a deeper meaning.
She believes - "When you study, you get wise, you obtain knowledge. A knowledge that helps you in real life, in solving problems, finding opportunities. Implement what you study". She has a huge affinity for the Law Subject in particular and always encourages student to - "STUDY FROM THE BARE ACT, MAKE YOUR OWN INTERPRETATIONS". A rare practice that you will find in her video lectures as well.
She specializes in theory subjects - Law and Auditing.
Yashvardhan Saboo
A Story teller, passionate for simplifying complexities, techie. Perfectionist by heart, he is the founder of - Konceptca.
Yash Sir (As students call him fondly) is not a teacher per se. He is a story teller who specializes in simplifying things, connecting the dots and building a story behind everything he teaches. A firm believer of Real Teaching, according to him - "Real Teaching is not teaching standard methods but giving the power to students to develop his own methods".
He cleared his CA Finals in May 2011 and has been into teaching since. He started teaching CA, CS, 11th, 12th, B.Com, M.Com students in an offline mode until 2016 when Konceptca was launched. One of the pioneers in Online Education, he believes in providing a learning experience which is NEAT, SMOOTH and AFFORDABLE.
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