PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

4 NEGOTIABLE INSTRUMENTS ACT, 1881

LESSEN OUTLINE
 Definition of a Negotiable Instrument  Cheque
 Important Characteristics of Negotiable  Modes of Crossing
Instruments  Negotiation
 Classification of Negotiable Instruments  Importance of Delivery
 Kinds of Negotiable Instruments  Endorsement
 Promissory Notes  Acceptance of a Bill of Exchange
 Bills of Exchange

 DEFINITION OF A NEGOTIABLE INSTRUMENT :

The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881.
According to the act "A negotiable instrument" means a promissory note, bill of exchange or cheque
payable either to order or to bearer. [Section 13(1)]
According to business dictionary, "Document of title or evidence of indeptness that is freely
(Unconditionally) transferable in trading as a substitute for money. Negotiable instruments are
unconditional orders or promise to pay, and include cheques, drafts, bearer bonds, some certificates of
deposit, promissory notes and bank notes (currency). A negotiable instrument has three principal
attributes: (i) an asset or property (that is the subject matter of the instrument) passes from the
transferor to the transferee by mere delivery and/or endorsement of the instrument, (2) a transferee
accepting the instrument in good faith and for value (and who has no notice of any defect in the title of
the transferor) obtains an indefeasible title and may sue on the instrument in his or her name, and (3)
no notice of the transfer need to be given to the party liable in the instrument."
According to Justice Wills : "A negotiable instrument is one, the property in which is acquired by anyone
who takes it bona fide and for value not withstanding any defect of title in the person from whom he
took it."
According to the above definitions the following are the conditions of negotiability :
(a) The instrument should be freely transferable. An instrument cannot be negotiable unless it is such
and is such state that the ture owner could transfer by simple delivery or endorsement and delivery.
(b) The person who takes it for value and in good faith is not affected by the defect in the title of the
transferor.
Negotiability involves two elements namely, transferability free from equities and transferability by
delivery or endorsement (Mookerjee J. In Tailors Priya v. Gulb Chand, AIR 1965 (Cal).
But the Act recognizes only three types of instruments viz., a Promissory Note, a Bill of Exchange and a
Cheque as negotiable instruments. However, it does not mean that other instruments are not negotiable
instruments provided that they satisfy the following conditions of negotiability :
 Must be in writing and signed by the maker or drawer;

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 Must contain an unconditional promise or order to pay a certain sum in money;

 Must be payable on demand or at a fixed or determinable future time;
 Must be payable to the order of a specified person or to bearer;
 Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
 Important characteristics of Negotiable Instruments
A negotiable instrument has the following characteristics :
 the individual who possess the negotiable instrument is presumed to have the ownership of the
property contained therein. A negotiable instrument does not give mere possession of the
instrument but also a right to the property therein mentioned.
 the transferee of a negotiable instrument is known as holder in due course.
 the transferee of the negotiable instrument can sue inn his own name, in case of dishonour.
 a negotiable instrument can be transferred any number of times till it is at maturity.
 certain presumptions are applicable to all negotiable instruments e.g. a presumption that
consideration has been paid under it.
 a negotiable instrument enables the holder to expect prompt payment.
 CLASSIFICATION OF NEGOTIABLE INSTRUMENTS
The negotiable instruments may be classified as under :
1. Bearer Instruments : A promissory note, bill of exchange or cheque is payable to the bearer when
(a) it is expressed to be so payable, or (b) the only or last endorsement on the instrument is an
endorsement in blank, in such a condition the person who is a holder of a hearer instrument can
obtain the payment of the instrument.
2. Order Instruments : A promissory note, bill of exchange or cheque is payable to order (a) which is
expressed to be so payable; or (b) which is expressed to be payable to a particular person, and
does not contain any words prohibiting transfer or indicating an intention that it shall not be
transferable.
3. Inland Instrument (Section 11) :
A negotiable instrument.
 drawn or made in India,
 made payable in India,
 or drawn upon any person resident in India shall be deemed to be an inland instrument. Since a
promissory note is not drawn on any person, an inland promissory note is one which is made
payable in India. Subject to this exception, an inland instrument is one which is either.
(a) drawn and made payable in India, or
(b) drawn in India upon some persons resident therein, even though it is made payable in a
foreign country.
4. Foreign Instruments (Section 12) : An instrument which is not an inland instrument is deemed to
be a foreign instrument.
The essentials of a foreign instrument include that :

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(a) A promissory note made in India but payable outside India.

(b) A promissory note made outside India and payable outside India and accepted payable outside
India.
(c) A bill drawn in India on a person who is residing outside India and accepted payable outside
India.
(d) A bill drawn outside India made payable in India or outside India.
(e) A bill drawn outside India on a person who is residing outside.
5. Demand Instruments (Section 19) : A promissory note or a bill of exchange in which no time for
payment is specified is an instrument payable on demand.
6. Time Instruments : Time instruments are those which are payable sometime in the future.
Therefore, a promissory note or a bill of exchange payable after a fixed period, or after sight, or on a
specified day, or on the happening of an event which is certain to happen, is known as a time
instrument e.g. post dated cheque.
7. Ambiguous Instruments (Section 17) : An instrument, which in form is such that it may e3ither be
treated by the holder as bill or as a note, is an ambiguous instrument. Where an instrument may be
construed either as a promissory note or a bill of exchange, the holder may at his option treat it as a
bill or a note and the instrument thereafter shall be treated accordingly (Sec. 17). Bill drawn:
 to the order of the drawee of
 by an agent on his principal, or
 by one branch of a bank on another
 by the direction of a company or their cashier are also ambiguous instruments.
i. Inchoate or Incomplete Instrument (Section 20) : A blank but stamped instrument is
called inchoate instrument. When one person signs and delivers to another a paper stamped
in accordance with the law relating to negotiable instruments, and either wholly blank or an
incomplete negotiable instrument, he thereby gives prima facie authority to the holder
thereof the make or complete, as the case may be, upon it a negotiable instrument, for any
amount specified therein, and not exceeding the amount, covered by the stamp.
The person so signing shall be liable upon such instrument, in the capacity in which he signs
the same, to any holder in due course for such amount, provided that no person other than a
holder in due course shall recover from the person delivering the instrument anything in
excess of the amount intended by him to be paid thereon.

 KINDS OF NEGOTIABLE INSTRUMENTS

Under section 13 of the Act only 3 types' of negotiable instruments are provided for but it does not
exclude any other negotiable instrument provided the instrument entitles a person to a sum of money
and is transferable by delivery. Instruments such as hundis are also negotiable instruments. These
instruments are discussed below:
1. Promissory Note : A "promissory note" is an instrument in writing (not being a bank note or a
currency note) containing an unconditional undertaking, singed by the maker to pay a certain sum of
money to, or to the order of, a certain person, or only to bearer of the instrument. (Section 4).

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Parties to a Promissory Note :

A promissory note has the following parties :
(a) The Maker : the person who makes or executes the note promising to pay the amount stated
therein.
(b) The Payee : the one to whom the note is payable.
(c) The Holder : is either the payee or some other person to whom by may have endorsed the note.
(d) The endorser.
(e) The Endorsee.
Essentials of Promissory Note :
To be promissory note, an instrument must possess the following essentials :
(a) The promissory note must be in writing.
(b) The promissory note must contain an express promise or clear undertaking to pay
(c) The promise or undertaking to pay must be unconditional
(d) The maker must sign the promissory note in token of an undertaking to pay to the payee or his
order.
(e) The maker must be a certain person, i.e., the note must show clearly the person who is
engaging himself to pay.
(f) The payee must be certain.
(g) The sum payable must be certain and the amount must not be capable of contingent additions
or subtractions.
(h) Payment must be in legal money of the country.
(i) The promissory note must be properly stamped in accordance with the provisions of the Indian
Stamp Act.
(j) Each stamp must be duly cancelled by maker's signature or initials.
(k) The promissory note must contain the name of place, number and the date on which it is made.
However, their omission will not render the instrument invalid, e.g. if it is undated, it is deemed to
be dated on the date of delivery.
Note : A promissory note cannot be made payable or issued to bearer, no matter whether it is
payable on demand or after a certain time (Section 31 of the RBI Act).
2. Bills of Exchange :
A "bill of exchange" is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to or to the order of, a certain
person or to the bearer of the instrument (Section 5).
Parties to Bills of Exchange :
The following are parties to a bill of exchange :
(a) The Drawer : The person who draws the bill.
(b) The Drawee : The person on whom the bill is drawn.
(c) The Acceptor : One who accepts the bill.

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(d) The Payee : One to whom the sum stated in the bill is payable, either the drawer or any other
person may be the payee.
(e) The Holder : Is either the original payee or any other person to whom, the payee has endorsed
the bill. In case of a bearer bill, the bearer is the holder.
(f) The Endorser : When the holder endorses the bill to anyone else he becomes the endorser.
(g) The Endorsee : Is the person to whom the bill is endorsed.
(h) Drawee in case of Need : Besides the above parties, another person called the "drawee in
case of need" may be introduced at the option of the drawer. The name of such a person may
be inserted either by the drawer or by any endorser in order that resort may be made available
to him in case of need, i.e., when the bill is dishonoured by either non-acceptance or non-
payment.
(i) Acceptor for Honour : Further, any person may voluntarily become a party to a bill as
acceptor. A person, who on the refusal by the original drawee to accept the bill or to furnish
better security, when demanded by the notary, accept the bill supra protest in order to safeguard
the honour of the drawer or any endorser, is called the acceptor for honour.
Essentials of a bill of exchange :
(1) Must be a written document.
(2) It is an unconditional order to pay money and not merely a request.
(3) Must be duly signed by the drawer.
(4) The parties must be certain.
(5) The sum payable must also be certain.
(6) It must comply with other formalities e.g. stamps, date etc.
Distinction between bill of exchange and Promissory Note :
1. Number of Parties :
Bill of exchange : There are three parties in the bill of exchange.
Promissory note : There are two parties in the promissory note.
2. Number Written By :
Bill of exchange : It is written by the creditor.
Promissory note : It is written by the debtor.
3. Order and Promise :
Bill of exchange : In a bill of exchange it is order.
Promissory note : In a pronote it is a promise to make the payment.
4. Acceptance :
Bill of exchange : It must be accepted by the drawee before.
Promissory note : It requires no acceptance.
5. Dishonour Notice :
Bill of exchange : In this case notice of dishonour must be given by the holder to the concerned
parties.

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Promissory note : In case of promissory note there is no need to serve the notice to the maker.
6. Protest :
Bill of exchange : A foreign bill must be protested in case of dishonour.
Promissory note : Protect is not needed in case pronote.
7. In Sets :
Bill of exchange : A foreign bill can be drawn in sets.
Promissory note : A pronote cannot drawn in sets.
8. Liability :
Bill of exchange : The drawer is liable only when the acceptor does not honour the bill.
Promissory note : The liability of pronote maker is primary.
9. Payable to Bearers :
Bill of exchange : A bill can be drawn if it is not drawn payable to bearer on demand.
Promissory note : A pronote cannot be drawn payable to the bearer.
10. Drawer and Payee :
Bill of exchange : In this case drawer or payee may be the same person.
Promissory note : In case of pronote the drawer cannot become the payee.
11. Drawer's Position :
Bill of exchange : In this case the drawer of accepted bill stands in an immediate relation with
the acceptor and not the payee.
Promissory note : The drawer of the pronote stands immediate relations with the payee.
12. Conditional :
Bill of exchange : The acceptance of the bill may be conditional with the holders consent.
Promissory note : A pronote cannot be made conditional.
13. Presentiment :
Bill of exchange : In this case provision relating to presentment for acceptance is applicable.
Promissory note : Such provision is not applicable in case of promissory note.
3. Cheque :
The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 has broadened
the definition of cheque to include the electronic image of a truncated cheque and cheque in the
electronic form. Section 6 of the Act provides that a 'cheque' "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."
Despite the amendment as is evident the basic definition of the cheque has been retained and the
definition has only been enlarged to include cheque in the above form as well.
(a) 'a cheque in the electronic form' means a cheque which contains the exact mirror image of a
paper cheque, and is generated, written and signed in a secure system ensuring the minimum
safety standards with the use of digital signature (with or without biometrics signature) and
asymmetric crypto system;

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(b) 'a truncated cheque' means a cheque which is truncated during the course of a clearing cycle,
either by the clearing house or by the bank whether paying or receiving payment, immediately
on generation of an electronic image for transmission, substituting the further physical
movement of the cheque in writing.
The expression 'clearing house' means the clearing house managed by the Reserve Bank of
India or a clearing house recognized as such by the Reserve Bank of India. Simply stated, a
cheque is a bill of exchange drawn on a bank payable always on demand. Thus, a cheque is a
bill of exchange with two additional qualifications. namely -
 It is always drawn on a banker,
 It is always payable on demand.
A cheque being a species of a bill of exchange must satisfy all the requirements of a bill; it does
not, however, require acceptance.
Parties to Cheque :
The following are the parties to a cheque :
(a) The drawer : The person who draws the cheque.
(b) The drawee : The banker of the drawer on whom the cheque is drawn.
(c) The payee
(d) Holder
(e) Endorser
(f) Endorsee
Essentials of Cheque :
1. It is always drawn on a banker.
2. It is always payable on demand.
3. It does not require acceptance.
4. A cheque can be drawn on bank where the drawer has an account.
5. Cheque may be payable to the drawer himself. It may be made payable to bearer on demand unlike
a bill or a note.
6. The banker is liable only to the drawer. A holder has no remedy against the banker if a cheque is
dishonoured.
7. A cheque is usually valid for six months. However, it is not invalid if it is post dated or antedated.
8. No Stamp is required to be affixed on a cheque.
Distinction between Cheques and Bills of Exchange :
A cheque is always drawn on a particular banker and is always payable on demand. Consequently, all
cheques are bills of exchange but all bills are not cheque. Despite this following are the difference
between a cheque and a bill of exchange.
 CHEQ UE
1. It is always drawn on a specified banker.
2. It is immediately payable on demand without any grace.

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3. It does not require acceptance.

4. Its drawer is not discharged by the holder's failure to present it in due time unless the bank fails.
5. It may be crossed.
6. Notice of dishonour is not necessary when a cheque is not met.
7. No nothing and protesting is required.
8. The banker is protested if he pays a cheque under forged endorsement.
 BILL OF EXCHANGE
1. It may be drawn on anybody including a bank.
2. It may be payable on demand or at a fixed date.
3. It requires acceptance unless it is payable on demand.
4. It is entitled to three days of grace.
5. Its drawer and endorsers are discharged from liability. If the holder fails to present it to the acceptor
at a due date.
6. It can never be crossed.
7. A notice of dishonour must be given.
8. Nothing and sometimes protesting is required.
9. No such protection is afforded to a drawee in case of bill.
Banker :
A banker is one who does banking business. Section 5(b) of the Banking Regulation Act, 1949 defines
banking as, "accepting for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise and withdrawable by cheque, draft or otherwise." This definition
emphasizes two points:
(1) That the primary function of a banker consists of accepting of deposits for the purpose of lending or
investing the same;
(2) That the amount deposited is repayable to the depositor on demand or according to the Agreement.
In other words banker is a dealer in capital or more properly a dealer in money. He is an intermediate
party between the borrower and the lender. He borrows from one party and lends to another. According
to Doctor Herbert Hart, a banker or a bank is a person carrying on the business or receiving money and
collecting data for customers subject to the obligation of honoring available on their current accounts.
Customer :
The term "customer" is neither defined in Indian nor in English statutes. The general opinion is that a
customer is a person who maintains a regular account with the bank without taking into consideration
the duration and frequency of operation of his account.
The special features of the legal relationship between the banker and the customer amy be termed as
the obligations and rights of the banker. These are obligations to:
1. Honour cheque of the customers.
2. Collect cheque and drafts on behalf of the customers.
3. Keep proper record of transactions with the customer.

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4. Comply with the express standing instructions of the customer.

5. Not to disclose the state of customer's account to anyone else.
6. Give reasonable notice to the customer, if the banker wishes to close the account.
7. Right of lien over any goods and securities bailed to him for a general balance of account.
8. Right of set off and right of appropriation.
9. Right to claim incidental charges and interest as per rules and regulations of the bank, as
communicated to the customer at the time of opening the account.
Liability of a Banker :
By opening a current account of a customer, the banker becomes liable to his debtor to the extent of
the amount so received in the said account and undertakes to honour the cheque drawn by the
customer so long as he holds sufficient funds to the customer's credit. If a banker, without justification,
fails to honour his customer's cheque, he is liable to compensate the drawer for any loss or damage
suffered by him. But the payee or holder of the cheque has no cause of action against the banker as
the obligation to honour a cheque is only towards the drawer.
The banker must also maintain proper and accurate accounts of credits and debits. He must honour a
cheque presented in due course. But in the following circumstance, he must refuse to honour a cheque.
When Banker must refuse Payment :
In the following cases the authority of the banker to honour customer's cheque comes to an end:
(a) When a customer countermand payment.
(b) When the banker receives notice of customer's death.
(c) When customer has been adjudged an insolvent.
(d) When the banker receives notice of customer's insanity.
(e) When an order (e.g., Garnishee Order) of the Court, prohibits payment.
(f) When the customer has given notice of assignment of the credit balance of his account.
(g) When the holder's title is defective and the banker comes to know of it.
(h) When the customer has given notice for closing his account.
When Banker may refuse Payment :
In the following cases the banker may refuse to pay a customer's cheque.
(a) When the cheque is post-dated.
(b) When the banker does not have sufficient funds of the drawer with him and there is no
communication between the bank and the customer to honour the cheque.
(c) When the cheque is of doubtful legality.
(d) When the cheque is not duly presented.
A banker one who does banking business. Section 5(b) of the Banking Regulation Act 1949 defines
banking as, "accepting for the purpose of lending or investment, of deposits of money from the
public, repayable on demand or otherwise and withdrawable by cheque draft or otherwise." This
definition emphasizes two points :

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(1) That the primary function of a banker consists of accepting of deposits for the purpose of
lending or investing the same;
(2) That the amount deposited is repayable to the depositor on demand or according to the
agreement.
In other words banker is dealer in capital or more properly a dealer in money. He is an intermediate
party between the borrower and the lender. He borrows from one party and lends to another.
According to Doctor Herbert Hart, a banker or a bank is a person carrying on the business of
receiving money and collecting data for customers subject to the obligation of honouring available
on their current accounts.
(e) When the cheque on the face of it is irregular, ambiguous or otherwise materially altered.
(f) When the cheque is presented at branch where the customer has no account.
(g) When some persons have joint account and the cheque is not signed jointly by all or by the
survivors of them.
(h) When the cheque has been allowed to become stale, i.e., it has not been presented within six
months of the date mentioned on it.
Payment in Due Course (Section 10) : Section 10 defines payment in due course as "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 amount mentioned
therein." The other important provisions relating to payment in due course are the following.
A payment will be a payment in due course if :
(a) It is in accordance with the apparent tenor of the instrument, i.e., according to what appears on the
face of the instrument to be the intention of the parties;
(b) It is made in good faith and without negligence, and under circumstances which do not afford a
ground for believing that the person to whom it is made is not entitled to receive the amount;
(c) It is made to the person in possession of the instrument who is entitled as holder to receive
payment;
(d) Payment is made under circumstances which do not afford a reasonable ground believing that he is
not entitled to receive payment of the amount mentioned in the instrument; and
(e) Payment is made in money and money only.
Collecting Banker :
A collecting banker is one who undertakes to collect the amount of a cheque and bills for his customer
from the paying banker. A banker is under no legal obligation to collect cheque drawn upon other banks
for a customer. But this function is performed by every modern bank.
In other words Collecting Banker is one who collects the proceeds of a cheque for a customer. Although
a banker collects the proceeds of a cheque for a customer purely as a matter of service, yet the
Negotiable Instruments Act, 1881 indirectly imposes statutory obligation, statutory in nature. This is
evident from Section 126 of the Act which provides that a cheque bearing a "general crossing" shall not
be paid to a person other than the banker to whom it is crossed.

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Thus, a paying banker must pay a generally crossed cheque only to a banker thereby meaning that it
should be collected by another banker. It cannot be expected of a banker to know or to ensure that all
the signatures appearing in endorsements on the reverse of the cheque are genuine. The banker is
expected to be conversant only with the signatures of his customer. In the event of the endorser's
signature being proved to be forged at later date, the banker who collected the proceeds should not be
held liable for the simple reason that he has merely collected the proceeds of a cheque. Section 131 of
the Negotiable Instruments Act affords statutory protection in such a case where the customer's title to
the cheque which the banker has collected has been questioned. It reads as follows:
"A banker who has in good faith and without negligence received payment for a customer of a cheque
crossed generally or specially to him shall not, in case the title to the cheque proves defective, incur any
liability to the true owner of the cheque by reason of only having received such payment".
Explanation : "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".
The Amendment Act, 2002 has added a new explanation to Section 131 which provides that 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
care.
(i) The collecting banker should have acted in good faith and without negligence.
(ii) The banker should have collected a crossed cheque, i.e., the cheque should have been crossed
before it came to him for collection.
(iii) The proceeds should have been collected for a customer.
(iv) That the collecting banker has only acted as an agent of the customer. If he had become the holder
for value, the protection available under section 131 is forfeited.
Overdue, State or Out-of-date Cheque :
A cheque after three years of its date of issue becomes statute-barred. This means a holder cannot sue
on the cheque after the completion of three years. Apart from this provision, the holder of a cheque is
required to present it for payment within a reasonable time, as a cheque is not meant for indefinite
circulation. In India, a cheque, which has been in circulation for more than six months, is regarded by
bankers as stale. If, as a result of any delay in presenting a cheque, the drawer suffers any loss, as by
the failure of the bank, the drawer is discharged from liability to the holder to the extent of the damage.
Liability of Endorser :
In order to charge an endorser, it is necessary to present the cheque for payment within a reasonable
time of its delivery by such endorser. 'A' endorses and delivers a cheque to B and B keeps it for an
unreasonable length of time, and then endorses and delivers it to C. C presents it for payment within a
reasonable time after its receipt by him, and it is dishonoured. C can enforce payment against B but not
against A, as qua A, the cheque has become stale.
Rights of Holder against Banker :
A banker is liable to his customer for wrongful dishonour of his cheque but it is not liable to the payee or
holder of the cheque. The holder has no right to enforce payment from the banker except in two cases,
namely,

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(j) Where the holder does not present the cheque within a reasonable time after issue, and as a result
the drawer suffers damage by the failure of the banker in liquidation proceedings; and
(ii) Where a banker pays a crossed cheque by mistake over the counter, he is liable to the owner for
any loss occasioned by it.
Crossing of Cheques :
A cheque is either "open" or "crossed". An open cheque can be presented by the payee to the paying
banker and it paid over the counter. A crossed cheque cannot be paid across the counter but must be
collected through a banker. Crossing is a popular device for protecting the drawer and payee of a
cheque. Both bearer and order cheque can be crossed. Crossing prevents fraud and wrong payments.
Crossing of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. Thus,
crossing is necessary in order to have safety. Crossed cheque must be presented through the bank
only because they are not paid at the counter.
A crossing is a direction to the paying banker to pay the money generally to a banker or to a particular
banker, and not to pay otherwise. The object of crossing is to secure payment to a banker so that it
could be traced to the person receiving the amount of the cheque. Crossing is a direction to the paying
banker that the cheque should be paid only to a banker or a specified banker. To restrain negotiability,
addition of words "Not Negotiable" or "Account Payee Only" is necessary. A crossed bearer cheque can
be negotiated by delivery and crossed order cheque by endorsement and delivery. Crossing affords
security and protection to the holder of the cheque.
Modes of Crossing (Sections 123-131A)
There are two types of crossing which may be used on cheque, namely:
 General : It is general crossing where a cheque bears across its face an addition of two parallel
transverse lines and/or the addition of the words " and Co." between them, or addition of "not
negotiable". As stated earlier, where a cheque is crossed generally, the paying banker will pay to
any banker. Two transverse parallel lines are essential for a general crossing (Sections 123-126).
 Special : In a special crossing, the name of a banker with or without the words 'not negotiable' is
written on the cheque. Such a cheque is crossed specially to that banker. It should be noted that
two transverse parallel lines not necessary for special crossing as in the case of general crossing.
The effect to special crossing is that the paying banker will be the amount of the cheque only
through the bank named in the cheque.
 Restrictive Crossing : This type of crossing has been recognized by usage and custom of the
trade in a restrictive crossing the words ' Account Payee' or 'Account Payee Only' are added to the
general or special crossing. The effect of restrictive crossing is that the payment of the cheque will
be made by the bank to the collecting banker only for the account payee named.
 Account Payee's Crossing : Such crossing does, in practice, restrict negotiability of a cheque. It
warns the collecting banker that the proceeds are to be credited only to the account of the payee, or
the party named, or his agent. If the collecting banker allows the proceeds of a cheque bearing such
crossing to be credited to any other account, he will be guilty of negligence and will not be entitled to
the protection given to collecting banker under Section 131.
 Not Negotiable Crossing : A cheque may be crossed not negotiable by writing across the face of
the cheque the words "Not Negotiable" within two transverse parallel lines in the case of a general
crossing or along with the name of a banker in the case of special crossing. Section 130 of the

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

Negotiable Instruments Act provides "A person taking a cheque crossed generally or specially
bearing in either case with the words "not negotiable" shall not have and shall not be capable of
giving, a better title to the cheque than that which the person from whom he took it had".
In other words a person taking is cheque crossed generally or specially, bearing in either case the word
'not negotiable' shall not be able to give a better title to the holder than that of the transferor. The effect
of a not negotiable crossing is that the cheque can be transferred but the transferee will not acquire a
better title to the cheque. Thus a cheque is deprived of its essential feature of negotiability. The object
of "not negotiable" crossing is to protect the drawer against loss or theft in the course of transit.
Example :
A cheque was drawn in favour of a firm B & Co. The cheque was crossed 'not negotiable'; one of the
partners, A in fraud of his Co-partner B, endorsed the cheque to P who encased it. Held that B, who
under the terms of the partnership agreement was entitled to the cheque could recover the amount from
P as A could not transfer better title than he himself had [Fisher v. Roherst].
It is to be noted that as a rule, it is the drawer who can cross a cheque. However, Sec. 125 provides
that even a holder can cross the cheque. It further provides that a banker can cross the cheque
specially for collecting to another banker as his agent for collection.
Maturity :
A Cheque is always payable on demand but other instruments like bills, notes, etc. may be made
payable on a specified date or after the specified period of time. The date on which payment of an
instrument falls due is called its maturity. According to Section 22 of the Act, "the maturity of a
promissory note or a bill of exchange is the date at which it falls due". According to Section 21 a
promissory note or bill of exchange payable "at sight" or "on presentment" is payable on demand. It is
due for payment as soon as it is issued. The question of maturity, therefore, arises only in the case of
promissory note or bill of exchange payable "after date" or "after sight" or at a certain period after the
happening of an event which is certain to happen.
Maturity is the date on which the payment of an instrument falls due. Every instrument payable at a
specified period after date or after sight is entitled to three days of grace. No days of grace are allowed
for cheques, as they are payable on demand. Where a note or bill is expressed to be payable on the
expiry of specified number of months after sight, or after date, the period of payment terminates on the
day of the month which corresponds with the date of instrument, or with the date of acceptance if the
bill be accepted or presented for sight, or noted or protested ofr non-acceptance. If the month in which
the period would terminate has no corresponding day, the period shall be held to terminate on the last
day of such month.
Illustration :
(1) A negotiable instrument dated 31st January, 2001, is made payable at one months after date. The
instrument is maturity on the third day after the 28th February, 2001, i.e. on 3rd March, 2001.
(2) A negotiable instrument dated 30 th August, 2001, is made payable three months after date. The
instrument is at maturity on 3 rd December, 2001.
(3) A negotiable instrument dated the 31 st August, 2001, is made payable three months after date. The
instrument is at maturity on 3 rd December, 2001.
If the day of maturity falls on a public holiday, the instrument is payable on the preceding business day.
Thus, if a bill is at maturity on a Sunday, it will be deemed due on Saturday and not on Monday. The

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

ascertainment of the date of maturity becomes important because all these instruments must be
presented for payment on the last day of grace and their payment. cannot be demanded before that
date.
Holder :
According to Section 8 of the Act a person is a holder of a negotiable instrument who is entitled in his
own name
(1) to the possession of the instrument
(2) to recover or receive its amount from the parties thereto.
A holder is an individual who is in possession of an instrument that is either payable to him or her as the
payee, endorsed to him or her, or payable to or endorsed properly to their order. The party in
possession is not considered to be the holder in a case in which a necessary endorsement has been
forged. Those who obtain instruments after the payee are holders if such instrument is either payable to
the bearer. The holder implies de jure (holder in law) holder and not de facto (holder in fact) holder. An
agent holding an instrument for his principal is not a holder although he may receive its payment.
Holder in Due Course :
Section 9 states that a holder in due course is (i) a person who for consideration, obtains possession of
a negotiable instrument if payable to bearer, or (ii) the payee or endorsee thereof, if payable to order,
before its maturity and without having sufficient cause to believe that any defect existed in the title of
the person from whom he derived his title.
In order to be a holder in due course, a person must satisfy the following conditions:
(i) He must be the holder of the instrument.
(ii) He should have obtained the instrument for value or consideration.
(iii) He must have obtained the negotiable instrument before maturity.
(iv) The instrument should be complete and regular on the face of it.
(v) The holder should take the instrument in good faith.
A holder in due course is in a privileged position. He is not only himself protected against all defects of
the persons from whom he received the instrument as current coin, but also serves as a channel to
protect all subsequent holders.
Capacity of Parties :
According to Section 26, every person capable of contracting according to law to which he is subject,
may bind himself and be bound by making, drawing, acceptance, endorsement, delivery and
negotiation of a promissory note, bill of exchange or cheque.
 lunatics,
 Idiots,
 drunken person, and
 persons otherwise disqualified by their personal law do not incur any liability as parties to negotiable
instruments.
Liability of Parties :

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

The provisions regarding the liability of parties to negotiable instruments are laid down in Sections 30 to
32 and 35 to 42 of the Negotiable Instruments Act. These provisions are as follows:
1. Liability of Drawer (Section 30)
The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or
acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to or
received by the drawer.
The nature of drawer's liability is that by drawing a bill, he undertakes that (i) on due presentation, it
shall be accepted and paid according to its tenor, and (ii) in case of dishonour, he will compensate
the holder or any endorser, provided notice of dishonour has been duly given. However, in case of
accommodation bill no notice of dishonour to the drawer is required.
The liability of a drawer of a bill of exchange is secondary and arises only on default of the drawee,
who is primarily liable to make payment of the negotiable instrument.
2. Liability of the Drawee of Cheque (Section 31)
The drawee of cheque having sufficient funds of the drawer in his hands properly applicable to the
payment of such cheque must pay the cheque when duly required to do so and, or in default of such
payment, he shall compensate the drawer for any loss or damage caused by such default.
As a cheque is bill of exchange, drawn on a specified banker, the drawee of cheque must always be
a banker. The banker, therefore, is bound to pay the cheque of the drawer, i.e., customer, if the
following conditions are satisfied:
(1) The banker has sufficient funds to the credit of customer's account.
(2) The funds are properly applicable to the payment of such cheque
(3) The cheque is duly required to be paid during banking hours and on or after the date on which it
is made payable.
If the banker is unjustified in refusing to honour the cheque of its customer, it shall be liable for
damages.
3. Liability of "Maker" of Note and "Acceptor" of Bill (Section 32)
In the absence of a 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. The acceptor of a bill of exchange at or after
maturity is bound to pay the amount thereof to the holder on demand.
It follows that the liability of the acceptor of a bill corresponds to that of the maker of a note and is
absolute and unconditional but the liability under this section is subject to a contract to the contrary
(e.g., as in the case of accommodation bills) and may be excluded or modified by a collateral
agreement. Further, the payment must be made to the party named in the instrument and not to
anyone else, and it must be made at maturity and not before.
4. Liability of Endorser (Section 35)
Every endorser incurs liability to the parties that are subsequent to him. Whoever endorses and
delivers a negotiable instrument before maturity is bound thereby to every subsequent holder in
case of dishonour of the instrument by the drawee, acceptor or maker, to compensate such holder
of any loss or damage caused to him by such dishonour provided. -
(1) There is no contract to the contrary

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

(2) The (endorser) has not expressly excluded, limited or made conditional his own liability; and
(3) Due notice of dishonour has been given to, or received by, such endorser.
Every endorser after dishonour, is liable upon the instrument as if it is payable on demand. He is
bound by his endorsement notwithstanding any previous alteration of the instrument (Section 88).
5. Liability of Prior Parties (Section 36)
Every previous party to negotiable instrument is liable thereon the a holder in due course until the
instrument is duly satisfied. Previous parties may include the maker or drawer, the acceptor and all
the intervening endorsers to negotiable instrument. The liability of the prior parties to a holder in due
course is joint and several. The holder in due course may hold any or all prior parties liable for the
amount of the dishonoured instrument.
6. Liability Inter se
Various parties to a negotiable instrument who are liable thereon stand on a different footing with
respect to the nature of liability of each one of them.
7. Liability of Acceptor of forged Endorsement (Section 41)
An acceptor of a bill of exchange already endorsed is not relieved from liability by reason that such
endorsement is forged. if he knew or had reason that such endorsement is forged, if knew or had
reason to believe the endorsement to be forged when he accepted the bill.
8. Acceptor's liability on a Bill drawn in a Fictitious Name
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 endorsement by the same hand as the drawer's signature and posing it to be made by the
drawer.
Negotiation (Section 4)
Negotiation is the transfer of an instrument (a note, bill or cheque) from one person to another is such a
manner as to convey title and to constitute the transferee of the holder thereof. When a negotiable
instrument is transferred by negotiation, the rights of the transferee may rise higher than those of the
transferor, depending upon the circumstances. Section 14 reads "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 negotiable". When the transfer is made by assignment, the assignee has only
those rights which the assignor possessed. In case of assignment, there is a transfer of ownership by
means of a written and registered document.
Negotiability and Assignability Distinguished :
Sr. Basis Transfer by Negotiation Transfer by Assignment
No.
1. Effectuation of Negotiation requires mere Assignment requires a written
transfer delivery of a bearer instrument document signed by the
and endorsement and delivery of transferor .
an order instrument to effectuate
a transfer.

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

Sr.No. Basis Transfer by Negotiation Transfer by Assignment

2. Notice of transfer No such notice is necessary in a Notice must be given by the

of debt transfer by negotiation assignee to the debtor in order to
complete his title
3. Title The transferee, as holder in due The transferee of an actionable
course, takes the instrument free claim takes it subject to all the
from any defects in the title of the defects in the title of, even
transferor. though he took the assignment
for value and in good faith

Importance of Delivery :
Negotiation is effected upon delivery of a bearer instrument and by endorsement and delivery of an
order instrument. Thus "delivery" is essential in negotiable instruments. Section 46 expressly provides
that making acceptance or endorsement of negotiable instrument is not complete until delivery, actual
or constructive, of the instrument. Delivery made voluntarily with the intention of passing property in the
instrument to a person to whom it is given is essential.
Negotiation by Mere Delivery :
A bill or cheque payable to bearer is negotiated by mere delivery of the instrument. An instrument is
payable to bearer:
(a) Where it is made so payable, or
(b) Where it is originally made payable to order but the only or the last endorsement is blank.
(c) Where the payee is a fictitious or a non-existing person.
These instruments do not necessitate do not necessitate signature of the transferor. The person who
receives them is a holder, and can sue in his own name. Where a bearer negotiates an instrument by
mere delivery, and does not put his signature thereon, he is not liable to any party to the instrument in
case the instrument is dishonoured, as he has not lent his credit to it. His obligations are only towards
his immediate transferee and to no other holders.
A cheque, originally drawn payable to bearer remains bearer, even though it is subsequently endorsed
in full. The rule is once a bearer cheque always a bearer cheque.
Negotiation by Endorsement and Delivery :
An instrument payable to a specified person or the the order of a specified person or to a specified
person or order is an instrument payable to order. Such an instrument can negotiated only by
endorsement and delivery. Unless the original holder signs his endorsement on the instrument, the
transferee does not become a holder. Where an instrument payable or order is delivered without
endorsement, it is merely assigned and not negotiated and the holder thereof is not entitled to the rights
of a holder in due course, and cannot negotiate it with a third person.
Endorsement (Sections 15 and 16) :
In other words, 'endorsement' means and involves the writing of something on the back of an
instrument for the purpose of transferring the right, title and interest therein to some other person.
Class of Endorsement :
An endorsement may be

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

1. Blank or General,
2. Special or Full,
3. Restrictive or
4. Partial and
5. Conditional or Qualified.
1. Blank or General : An endorsement is to be blank or general where the endorser merely scribes
his signature on the back of the instrument, and the instrument so endorsed becomes payable to
bearer, even though originally it was payable to order. Thus, where bill is payable to "Ram or order",
and he adds his signature on its back "Ram", it is an endorsement in blank of Mohan and the
property in the bill can pass by mere delivery, as long as the endorsement continues to be a blank.
But a holder of an instrument endorsed in blank may convert the endorsement in blank into an
endorsement in full, by writing above the endorser's signature, a direction to pay the instrument to
another person or his order.
2. Special of Full : If the endorser signs his name and 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 special or in
full. A blank endorsement can be turned into a special one by the addition of an order making the
bill payable to the transferee.
3. Restrictive : An endorsement is restrictive which prohibits or restricts the further negotiation of an
instrument. Examples of restrictive endorsement : "Pay Neha only" or "Pay Neha for me use" or
"Pay Neha on account of B" or "Pay Neha or order for collection".
4. Partial : An endorsement partial is one which aims to transfer to the endorsee a part only of the
amount payable on the instrument. A partial endorsement does not operate as negotiation of the
instrument. Ram holds a bill for Rs. 1,000 and endorses it as "Pay Bennet or order Rs. 500". The
endorsement is partial and invalid.
5. Conditional or Qualified : An endorsement is conditional or qualified which limits the liability of the
endorser. An endorser may limit his liability in any of the following ways:
a. By sans recourse endorsement, i.e. by making it clear that he does not incur the liability of an
endorser to the endorsee or subsequent holders and they should not look to him in case of
dishonour of instrument.
b. By making his liability depending upon happening of a specified event which may never
happen. Let us now refer to section 52 of the Negotiable instruments Act, 1881. It reads "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 the receive the amount due
thereon depend upon the happening of a specified event, although such event may never
happen."
Negotiation Bank :
Where an endorser negotiates an instrument and again becomes its holder, the instrument is said to be
negotiated back to that endorser and none of the intermediary endorsees are then liable to him. The
rule prevents a circuitry of action.
Where an endorser so excludes his liability and afterwards becomes the hodler of the instrument, all the
intermediate endorsers are liable to him. An illustration will make the point clear. A is the payee of a

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

negotiable instrument. He endorses the instrument 'sans recourse' to B, B endorsees to C, C to D, and

D again endorses it to A. In this case, A is not only reinstated in his former rights but has the right of an
endorsee against B, C and D.
Negotiation of Lost Instrument or that Obtained by Unlawful Means :
When a negotiable instrument has been lost or has been obtained from any maker, acceptor or holder
thereof by the way of an offence or fraud, or for an unlawful consideration, no possessor or endorsee,
who claims through the person who found or obtained the instrument is entitled to receive the amount
due thereon from such maker, acceptor, or holder from any party prior to such holder unless such
possessor or endorsee is, or some person through whom he claims was, a holder in due course.
Forged Endorsement :
If an instrument is endorsed in full, if cannot be negotiated except by an endorsement signed by the
person to whom or to whose order the instrument is payable, for the endorsee obtains title only through
his endorsement. Thus, if an instrument be negotiated by means of a forged endorsement, the
endorsee acquires no title even though he be a purchaser for value and in good faith, the endorsement
is a nullity. Forgery convey no title.
Acceptance of a bill of exchange :
The drawee of a bill of exchange, as such, has no liability on any bill made to him for acceptance or
payment. A refusal to accept or to pay such bill gives the holder no rights against him. The drawee
becomes liable only after he accepts the bill. The acceptor has to write the word 'accepted' on the bill
and sing his name below it. Thus, it is the acceptor who is primarily liable on a bill. The acceptance of a
bill is the indication by the drawee of his acquiesces to the order of the drawer. Thus, when the drawee
writes across the face of the bill the word "accepted" and signs his name underneath he becomes the
acceptor of the bill.
And acceptance may be either general or qualified. A general acceptance is absolute. Where an
acceptance is made subject to some condition or qualification, thereby varying the effect of the bill, it is
a qualified acceptance.
Acceptance for Honour :
When a bill has been noted for non-acceptance or for better security, any person not being a party
already liable thereon may, with the consent of the holder, by writing on the bill, accept the same for the
honour of any party thereto. The stranger so accepting, will declare in writing that he accepts the said
bill for the honour of the drawer or any particular endorser whom he names.
The acceptor for honour is liable to pay only when the bill has been duly presented at maturity to the
drawee for payment and the drawee has refused to pay leading the bill to be noted and protested for
non-payment. Where a bill has been protested for non-payment after having been duly accepted, any
person may intervene and pay it supra protest for the honour of any party liable on the bill. When a bill
is paid supra protest, it ceases to be negotiable. The stranger, on paying for honour, acquires all the
rights of holder for whom he pays.
Presentment for Acceptance :
Only bills of exchanger require presentiment for acceptance and even those of certain kinds only. Bills
payable on demand or on a fixed date need not be presented. Thus, a bill payable 60 days after due
date on the happening of a certain event may or may not be presented for acceptance. But the
following bills must be presented for acceptance otherwise; the parties to the bill will not be liable on it:

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

(a) A bill payable after sight where Presentment is necessary in order to fix maturity of the bills;
(b) A bill in which there is an express stipulation that it shall be presented for acceptance before it is
presented for payment.
Section 15 provides that the presentment for acceptance must be made to the drawee or his duly
authorized agent. If in case the drawee is dead, the bill should be presented to his legal representative,
or if he has been declared an insolvent, to the official receiver or assigner.
The following are the persons to whom a bill of exchange should be presented:
(1) The drawee or his duly authorized agent.
(2) If there are many drawees, bill must be presented to all of them.
(3) The legal representatives of the drawee if drawee is dead.
(4) The official receiver or assignee of insolvent drawee.
(5) To a drawee in case of need, if there is any. This is necessary when the original drawee refuses to
accept the bill.
The presentment must be made before maturity, within a reasonable time after it is drawn, or within the
stipulated period, if any, on a business day within business hours and at the place of business or
residence of the drawee.
The presentment must be made by exhibiting the bill to the drawee; mere notice of its existence in the
possession of holder will not be sufficient.
Presentment for Acceptance when Excused :
Compulsory presentment for acceptance is exempted and the bill may be treated as dishonoured in the
following cases:
(a) Where the drawee cannot be found after reasonable search.
(b) Where drawee is a fictitious person or one incapable of contracting.
(c) Where although the presentment is irregular, acceptance has been refused on some other ground.
Presentment for payment :
Section 64 lays down the general rule as the presentment of negotiable instruments for payment. It
says all notes, bills and cheque must be presented for payment thereof respectively by or on behalf of
the holder during the usual hours of business and of the maker or acceptor, and if at bankers within
banking hours. [Section 64(1)].
As mentioned earlier, the definition of cheque has been broadened to include the electronic image of a
truncated cheque and a cheque in the electronic form. Thus, the section has also been suitably
amended to provide rules as to presentment of truncated cheque. The amendment. despite recognizing
electronic image of a truncated cheque, has made provision for the drawee bank to call for the
truncated cheque in original if it is not satisfied about the instrument.
Section 64(2) stipulates, where an electronic image of a truncated cheque is presented for payment, the
drawee bank is entitled to demand any further information regarding the truncated cheque from the
bank holding the truncated cheque in case of any reasonable suspicion about the authenticity of the
evident tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of
the instrument, it is entitled to further demand the presentment of the truncated cheque itself for
substantiation :

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

Presentment for Payment when Excused :

No presentment is essential and the instrument may be treated as dishonoured in the following
instances:
(a) Where the maker, drawer or acceptor actively does something so as to deliberately obstruct the
presentment of the instrument, e.g., deprives the holder of the instrument and keeps it after
maturity.
(b) Where his business place is closed on the due date.
(c) Where no person is present to make payment at the place specified for payment.
(d) Where he cannot, after due search be found. (Section 61)
(e) Where there is a promise to pay despite non-presentment.
(f) Where the presentment is express or impliedly waived by the party entitled to presentment.
(g) Where the drawer could not possibly have suffered any damage by non-presentment.
(h) Where the drawer is a fictitious person, or one incompetent to contract.
(i) Where the bill is dishonoured by non-acceptance.
(j) Where presentment has become impossible, e.g., the declaration of war between the countries of
the holder and drawee.
(k) Where through the presentment is irregular, acceptance has been refused on some other grounds.
(l) Where though the presentment is irregular, acceptance has been refused on some other grounds.
Dishonour by Non-Acceptance :
Section 91 provides that a bill is said to be dishonoured by non-acceptance:
(a) When the drawee does not accept it within 48 hours from the time of presentment for acceptance.
(b) When presentment for acceptance is excused and the bill remains unaccepted.
(c) When the drawee is incompetent to contract.
(d) When the drawee is a fictitious person or after reasonable search cannot be found.
(e) Where the acceptance is a qualified one.
Dishonour by Non-Payment (Section 92) :
A promissory note, bill of exchange or cheque 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. Also, a negotiable instrument is dishonoured by nonpayment when
presentment for payment is exempt and the instrument when overdue remains unpaid.
It the bill is dishonoured either by non-acceptance or by non-payment, the drawer and all the endorsers
of the bill are liable to the holder, provided he gives notice of such dishonour. The drawee is liable only
when there is dishonour by non-payment.
Notice of Dishonour (Sections 91-98 and Sections 105-107) :
When a negotiable instrument is dishonoured either by non acceptance or by non-payment, the holder
or some party liable thereon must give notice of dishonour to all other parties whom he intends to make
liable. Each 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 after he has received it. The object of
giving notice is not to demand payment. I is to clarify to whom the party notified of his liability and in

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

case of drawer to enable him to protect himself as against the drawee or acceptor who has dishonoured
the instrument issued by him.
Notice of dishonour is absolutely mandatory and an omission to give it discharges all parties other than
the maker or acceptor. These parties are discharged not only on the bill or note, but also in respect of
the original consideration.
Notice may be oral or in writing. It must be given within a reasonable time of dishonour.
Notice of Dishonour Unnecessary :
The notice of dishonour is unnecessary when:
(a) It is dispensed with or waived by the party entitled thereto, e.g., where an endorser writes on the
instrument such words as "notice of dishonour waived",
(b) The drawer has countermanded payment.
(e) The party charged shall not suffer any damage for want of notice.
(d) The party entitled to notice cannot after due search be found.
(e) The omission to give notice is caused by unavoidable circumstances, e.g., death or dangerous
illness of the holder
(f) The acceptor is also a drawer, e.g., where a firm draws on its branch.
(g) The promissory note is not negotiable. Such a note cannot be endorsed.
(h) The party entitled to notice promises to pay unconditionally.
Noting and Protest (Sections 99-104A) :
Noting : Where a note or bill is dishonoured, the holder is entitled after serving due notice of dishonour,
to sue the drawer and the endorsers. Section 99 provides a convenient method of authenticating the
fact of dishonour by means of "Noting". Where a bill or note is dishonoured, the holder may, if he so
desires cause such dishonour to be noted by a notary public on the instrument, or on a paper attached
thereto or partly on each. The noting or minute must be recorded by the notary public within a
reasonable time after dishonour and must contain -
 The fact of dishonour
 The date of dishonour.
 The reason, if any, assigned for such dishonour if the instrument has not been expressly
dishonoured the reasons why the holder treats it dishonoured and notary's charges.
Protest : The protest is the formal notaries' certificate attesting the dishonour of the bill, and based
upon the noting which has been affected on the dishonour of the bill. After the noting has been made,
the formal protest is drawn up by the notary and when it is drawn up it relates back to the date of noting.
Where the acceptor of a bill has become insolvent, or has suspended payment or his credit has been
publicly impeached, before the maturity of the bill, the holder may have the bill protested for better
security and on its denial makes a protest known as "protest for better security."
Foreign bills must be protested for dishonour when such protest is required by the law of the place
where they are drawn. Foreign promissory notes need not be so protested. Where a bill is required by
law to be protested, then instead of a notice of dishonour, notice of protest must be given by the notary
public.
For a protest to be valid it must contain on the instrument itself or a literal transcript thereof.

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 The names of the parties for and against whom protest is made,
 The fact and reasons for dishonour
 The place and time of dishonour and
 The signature of the notary public. Protest affords an authentic evidence of dishonour to the drawer
and the endorsee.
Discharge :
The discharge in relation to negotiable instrument may be either
(i) discharge of the instrument.
(i) discharge of one or more parties to the instrument from liability.
Discharge of the Instrument :
A negotiable instrument is discharged:
(a) by payment in due course;
(b) when the principal debtor becomes the holder;
(c) by an act that would discharge simple contract;
(d) by renunciation; and
(e) by cancellation.
Discharge of a Party or Parties :
When any particular party or parties are discharged, the instrument continues to be negotiable and the
un-discharged parties remain liable on it. For cxample, the non-presentment of a bill and the un-
discharged parties remain liable on it. For example, the non-presentment of a bill on the due date
discharges the endorsers from their liability, but the acceptor remains liable on it.
A party may be discharged in the following ways :
(a) By cancellation by the holder of the name of any party to it with the intention of discharging him.
(b) By release, when the holder releases any party to the instrument.
(c) Discharge of secondary parties, i.e., endorsers.
(d) By the operation of the law, ie., by insolvency of the debtor.
(e) By allowing drawee more than 48 hours to accept the bill, all previous parties are discharged.
(f) By non-presentment of cheque promptly the drawer is discharged.
(g) By taking qualified acceptance all the previous parties are discharged.
(h) By material alteration.
Material Alteration (Section 87) :
An alteration which in any way alters the operation of the instrument and the liabilities of the parties is
known as material alteration. Therefore, any change in an instrument which causes it to speak a
different language in legal effect from that which it originally spoke, or which changes legal character of
the instrument is a material alteration.
A material alteration renders the instrument void, but it affects only those person who have already
become parties at the date of the alteration. Those who take the altered instrument cannot complain.

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Section 88 provides that an acceptor or endorser of a negotiable instrument is bound by his acceptance
or endorsement, notwithstanding any previous alteration of the instrument.
Examples of material alteration are :
(i) Alteration brought about in
(ii) the date of the instrument
(iii) of the sum payable
(iv) in the time of payment
(v) of the place of payment
(vi) of the rate of interest
(vii) by addition of a new party,
(viii) tearing the instrument in a material part.
Following are the cases where alteration is not considered as material alteration:
(i) correction of a mistake,
(ii) to carry out the common intention of the parties
(iii) an alteration made before the instrument is issued with the consent of the parties.
(iv) crossing a cheque,
(v) addition of the words "on demand" in an instrument where no time of payment is stated.
Section 89 supplies protection to a person who pays an altered note bill or cheque. However, in order to
be able to claim the protection, the following conditions must be fulfilled :
(i) the alteration should not be evident;
(ii) the payment must be made in due course; and
(iii) the payment must be by a individual or banker liable to pay.
Section 89 has been amended to provide for the amendment in the definition of cheque so as to
provide for electronic image of a truncated cheque. The section provides that any bank or a clearing
house which receives a transmitted electronic image of a truncated cheque, shall verify from the party
who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the
same. Where there is any difference in apparent tenor of such electronic image and the truncated
cheque, it shall be a material alteration, in which case, it shall be the duty of the bank or the clearing
house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the
truncated cheque while truncating and transmitting the image. If the bank fails to discharge this duty,
the payment made by it shall not be regarded as good and it shall not be afforded protection.
Retirement of a Bill under Rebate :
The bill is said to be retired when an acceptor of a bill makes payment before maturity, but it is not
discharged and must not be cancelled except by the acceptor when it comes into his hands. It
customary in such a case to make allowance of interest on the money to the acceptor for the remainder
of the time which the bill has to run. This interest allowance is known as rebte.
Hundis :
Hundis are negotiable instruments written in an oriental language. Generally, they are governed by the
customs and usages in the locality but when the custom is silent on the point in dispute before the

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

Court, this Act applies to the hundis. The term "hundi" was formerly applicable to native bills of
exchange. The promissory notes were then called "teep". The hundis were in circulation in India even
before the present Negotiable Instruments Act, 1881 came into operation. The usages attached to
these hundis vary with the locality in which they are in circulation. Generally understood, the term
"hundi" includes indigenous negotiable instruments whether they are bills of exchange or promissory
notes.
An instrument in order to be a hundi must be capable of being sued by the holder in his own name, and
must by the custom of trade is transferred like cash by delivery.
The following types of hundis are worth mentioning :
1. Jawabee Hundi : According to Macpherson, "A person desirous of making a remittance writes to
the payee and delivers the letter to a banker, who either endorses it on to any of his correspondents
near the payee's place of residence, or negotiates its transfer. On the arrival, the letter is forwarded
to the payee, who attends and gives his receipt in the form of an answer to the letter which is
forwarded by the same channel of the drawer or the order." Therefore, this is a form of hundi which
is used for remitting money from one place to another.
2. Shah Jog Hundi : "Shah" means a respectable and accountable person or a man of merit in the
bazaar. Shah Jog Hundi means a hundi which is payable only to a respectable holder, as opposed
to a hundi payable to bearer. In other words the drawee before paying the same has to satisfy
himself that the payee is a 'SHAH'.
3. Nam Jog Hundi : It is a hundi payable to the party named in the bill or his order. The name of the
payee is specifically written in the hundi. It can also be negotiated like a bill of exchange. Its
adjustment into a Shah Jog hundi si considered as material alteration and hence renders it void.
4. Jokhumi Hundi : A "Jokhmi" hundi is always drawn on or against goods shipped on the vessel
mentioned in the hundi. It implies a condition that money will be paid only in the event of arrival of
the goods against which the hundi is drawn. It is similar to the policy of insurance. The difference,
however, is that the money is paid beforehand and is to be recovered if the ship arrives safely.
5. Darshani Hundi : This is hundi payable at sight. It is freely negotiable and the price is regulated by
demand and supply.
Presumptions of Law :
A negotiable instrument is subject to certain presumptions. These have been recognized by the
Negotiable Instruments Act under Sections 118 and 119 with a view to smooth the progress of the
business transactions.
It shall be presumed that :
(1) Every negotiable instrument is made or drawn for consideration whether or not it is mentioned in the
instrument.
(2) Every negotiable instrument having a date was made on such date.
(3) Every accepted bill of exchange was accepted within a reasonable time before its maturity.
(4) Every negotiable instrument was transferred before its maturity.
(5) The instruments were endorsed in the order in which they appear on it.
(6) A lost or destroyed instrument was duly signed and stamped.
(7) The holder of the instrument is a holder in due course.

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

(8) In a suit upon an instrument which has been dishonoured, the Court shall presume the fact of
dishonour.
However, these legal presumptions are refutable by evidence to the country. The burden to prove to the
contrary lies upon the defendant to the suit and not upon the plaintiff.
Payment of Interest in case of Dishonour :
The Negotiable Instruments Act, 1881 was amended in the year 1988, revising the rate of interest as
mentioned in sections 80 and 117 from 6 per cent to 18 per cent per annum payable on negotiable
instruments form the due date in case no rate of interest is specified, or payable to an endorser from
the date of payment on a negotiable instrument on its dishonour with an aim to discourage the
withholding of payment on negotiable instruments on due dates.
Penalties in case of Dishonour of Cheques :
Chapter XVIl of the Negotiable Instruments Act provides for penalties in case of dishonour of certain
cheque Due to deficiency of funds in the accounts. Sections 138 to 147 deal with these aspects.
Chapter XVII has been amended by the Negotiable Instruments (Amendment and Miscellaneous
Provisions) Act, 2002. The amendments have -
 Provided the drawer with more time to send notice,
 Made the punishment for the offence more stringent,
 Given power to court for condonation of delay in filing of complaint
 Excluded liability of Government nominated directors
 Made provision for summary trial of cases and time bound disposal of cases,
 Have relaxed the rules of evidence, and made the offences under the Act compoundable.
The working of the provisions of Chapter XVII for a period of more than a decade had brought to the
fore front various lacunae and shortcomings from which it suffered. It was seen that there were
enormous delays in the disposal of the cases filed under section 138 and the drawer of the cheque, by
taking shield of various technicalities and procedures were frustrating the very object of the Chapter
very object of the Chapter.
The provisions contained in this Chapter state that where any cheque drawn by a person for discharge
of any liability is returned by the bank unpaid for the reason of insufficiency of the amount of money
standing to the credit of the account on which the cheque was drawn or for the reason that it exceeds
the arrangement made by the drawer of the cheque with the banker for that account, the drawer of such
cheque shall be deemed to have committed an offence. In that case, the drawer, without prejudice to
the other provisions of the Act, shall be punishable with imprisonment for a term which may extend to
two years, or with fine which may extend to twice the amount of the cheque, or with both.
In order to make up the said offence :
(a) such cheque should have been presented to the bank within a period of six months from the date on
which it is drawn or within the period of its validity, whichever is earlier;
(b) the payee or holder in due course of such cheque should have made a demand for the payment of
the said amount of money by giving notice, in writing, to the drawer of the cheque within thirty days
of the receipt of information by him from the bank regarding the return of the cheque unpaid; and

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

(c) the drawer of such cheque should have failed to make the payment of the said amount of money to
the payee or the holder in due course of the cheque within fifteen days of the receipt of the said
notice.
The Supreme Court in Modi Cements Lid v. K.K Nandi (1988) 28 CLA 491, held that merely because
the drawer issued a notice to the drawee or to the Bank for 'stop payment', it would not preclude an
action under Section 138 by the drawee or holder in due course.
The liability of government nominated directors has been excluded under Section 141 of the Act dealing
with 'offences by companies. The second proviso inserted in Section 141 by the Amendment Act, 2002
provides that where a person is nominated as a director of a 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.
In order to ensure that genuine and honest bank customers are not harassed or put to inconvenience,
sufficient safeguards have also been provided in the new Chapter, as under :
(a) that no court shall take cognizance of such offence except on a complaint in writing made by the
payee or the holder in due course of the cheque;
(b) that such complaint is made within one month or the date on which the cause of action arises :
Provided that the cognizance of a complaint may be taken by the court after the prescribed period,
if the complainant satisfies the court that he had sufficient cause for not making the complaint within
such period.
(c) that no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class
shall try any such offence. (Section 142).
Moreover, the new sections inserted by the Amendment Act, 2002 provide that all offences under
this chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate
and the provisions of Sections 262 to 265 (both inclusive) of the said Code shall, as far as may be,
apply to such trials:
(1) Provided that in the case of any conviction in a summary trial under this Section, 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 five thousand rupees:
Provided further that 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 said Code.
(2) The trial of a case under this section shall, so far as practicable, consistently with the interests of
justice, be continued from day to day until its conclusion, unless the court finds the adjournment
of the trial beyond the following day to be necessary for reasons to be recorded in writing.
(3) Every trial under this Section shall be conducted as expeditiously as possible and an endeavour
shall be made to conclude the trial within six months from the date of filing of the complaint.
(Section 143)

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PART B : BUSINESS LAWS Negotiable Instruments Act, 1881

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 by 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 has been duly served.
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 enquiry, trial or other proceeding under the said Code. 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. (Section 145)
The court shall, in respect of every proceeding under this Chapter, 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. Every offence
punishable under this Act shall be compoundable. (Sections 146 and 147).

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