Banking Law-Vth Module

Faculty I/c: Elizabeth P Mathai

Negotiable Instruments- Liabilities of the parties to the negotiable instruments-

Dishonor of Negotiable Instruments- Paying banker and statutory protection-Collecting
banker and statutory protection--Noting and Protest-Discharge of parties-Presumptions-
-Criminal Liability in dishonour of Cheque.

NEGOTIABLE INSTRUMENTS

Negotiable Instruments are written contracts whose benefit could be passed on from its
original holder to a new holder. In other words, negotiable instruments are documents
which promise payment to the assignee (the person whom it is assigned to/given to) or a
specified person. These instruments are transferable signed documents which promises to
pay the bearer/holder the sum of money when demanded or at any time in the future.

As mentioned above, these instruments are transferable. The final holder takes the funds
and can use them as per his requirements. That means, once an instrument is transferred,
holder of such instrument obtains a full legal title to such instrument.

Negotiable Instruments are signed legal documents that guarantee paying a particular
amount to a person or party at a set date or on-demand. It acts as an assurance of payment
or repayment that the assignee expects. Based on the nature of the note, this document may
or may not contain the recipients’ names.

Features

1. It is a written document signed by the issuer.

2. It is like a valid contract easily transferable from one party to another. The holder can
transfer the document to another individual or entity without hassle. It is this feature that
makes such instruments negotiable.

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3. As named on the instrument, the payee enjoys complete ownership of the legal
document. This means the title gets transferred when the note is handed over to the
consecutive parties.

4. A negotiable instrument always mentions the payee’s name, which signifies making the
payment to a specific person or firm.

5. In addition to the payee, the time is also predetermined and is certain. A payee can
present the document to encash it or receive the payment as promised within the specified
date or on-demand.

6. There is flexibility as the payee can receive the funds in cash or transfer the document
to another party for consecutive usage

TYPES OF NEGOTIABLE INSTRUMENTS

Promissory notes

A promissory note refers to a written promise to its holder by an entity or an individual to

pay a certain sum of money by a pre-decided date. In other words, Promissory notes show
the amount which someone owes to you or you owe to someone together with the interest
rate and also the date of payment.

For example, A purchases from B INR 10,000 worth of goods. In case A is not able to pay
for the purchases in cash, or doesn’t want to do so, he could give B a promissory note. It
is A’s promise to pay B either on a specified date or on demand.

In another possibility, A might have a promissory note which is issued by C. He could

endorse this note and give it to B and clear of his dues this way. However, the seller isn’t
bound to accept the promissory note. The reputation of a buyer is of great importance to a
seller in deciding whether to accept the promissory note or not

Bill of exchange

Bills of exchange refer to a legally binding, written document which instructs a party to
pay a predetermined sum of money to the second(another) party. Some of the bills might
state that money is due on a specified date in the future, or they might state that the payment
is due on demand.

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A bill of exchange is used in transactions pertaining to goods as well as services. It is
signed by a party who owes money (called the payer) and given to a party entitled to
receive money (called the payee or seller), and thus, this could be used for fulfilling the
contract for payment. However, a seller could also endorse a bill of exchange and give it
to someone else, thus passing such payment to some other party.

It is to be noted that when the bill of exchange is issued by the financial institutions, it’s
usually referred to as a bank draft. And if it is issued by an individual, it is usually referred
to as a trade draft.

A bill of exchange primarily acts as a promissory note in the international trade; the
exporter or seller, in the transaction addresses a bill of exchange to an importer or buyer.
A third party, usually the banks, is a party to several bills of exchange acting as a guarantee
for these payments. It helps in reducing any risk which is part and parcel of any transaction.

Cheques

A cheque refers to an instrument in writing which contains an unconditional order,

addressed to a banker and is signed by a person who has deposited his money with the
banker. This order, requires the banker to pay a certain sum of money on demand only to
to the bearer of cheque (person holding the cheque) or to any other person who is
specifically to be paid as per instructions given.Cheques could be a good way of paying
different kinds of bills. Although the usage of cheques is declining over the years due to
online banking.

• Individuals still use cheques for paying for loans, college fees, car EMIs, etc.

• Cheques are also a good way of keeping track of all the transactions on paper.

• On the other side, cheques are comparatively a slow method of payment and might take
some time to be processed.

Liability of Parties

The provisions relating to the liability of parties to negotiable instruments are under section
30 to 32 and 35 to 42 of the Negotiable Instrument Act, 1881.

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1. Liability of Drawer (Section 30)

Drawer means a person who signs a cheque or a bill of exchange ordering his or her bank to
pay the amount to the payee.

In case of dishonour of cheque or bill of exchange by the drawee or the acceptor, the drawer
of such cheque or bill of exchange needs to compensate the holder such amount. But, the
drawer needs to receive due notice of dishonour.

So, the nature of the drawer’s liability on drawing a bill is:

(i) On due presentation:- It should be accepted and paid accordingly.

(ii) In the case of dishonour:- Drawer needs to compensate the holder such amount, only
when he receives a notice of dishonour by the drawee.

2. Liability of the Drawee of Cheque (Section 31)

The person who draws a cheque i.e drawer 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.

The drawee of a cheque will always be a banker. As a cheque is a bill of exchange, drawn on
a specified banker by the drawer, the banker is bound to pay the cheque of the drawer, i.e.,
the customer. For the following conditions are need to be satisfied:

(i) Sufficient amount of funds to the credit of customer’s account should be there with the
banker.

(ii) Such funds are required to be properly applied against the payment of such cheque, e.g.,
the funds are not under any kind of lien etc.

(iii) 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 unjustifiably refuses to honour the cheque of its customer, it shall be liable for
damages.

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3. Liability of Acceptor of Bill and Maker of Note (Section 32)

As per section 32 of negotiable instrument act, in the absence of a contract to the contrary,
the maker of a promissory note and the acceptor before the maturity of a bill of exchange are
under the liability to pay the amount thereof at maturity.

They need to pay the amount according to the apparent tenor of the note or acceptance
respectively. The acceptor of a bill of exchange at or after maturity is liable to pay the amount
thereof to the holder on demand.

The liability of the acceptor of a bill or the maker of a note is absolute and unconditional but
is subject to a contract to the contrary and may be excluded or modified by a collateral
agreement.

4. Liability of Endorser (Section 35)

An endorser is the one who endorses and delivers a negotiable instrument before maturity.
Every endorser has a liability to the parties that are subsequent to him.

Also, he 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. However, he is to compensate only after the fulfilment of the
following conditions:

(i) There is no contract to the contrary

(ii) The Endorser has not expressly excluded, limited or made conditional his own liability

(iii)And, such endorser shall receive due notice of dishonour

5. Liability of Prior Parties (Section 36)

Until the instrument is duly satisfied, every prior party to a negotiable instrument has a
liability towards the holder in due course. The prior parties include the maker or drawer, the
acceptor and all the intervening endorsers. Also, there liability to a holder in due course is
joint and several. In the case of dishonour, the holder in due course may declare any or all
prior parties liable for the amount.

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6. Liability Inter-se

Every liable party has a different footing or stand with respect to the nature of liability of
each one of them.

7. Liability of Acceptor when Endorsement is Forged (Section 41)

An acceptor of a bill of exchange who had already endorsed the bill is not relieved from
liability even if such endorsement is forged. This is so even if he knew or had reason to
believe that the endorsement was forged when he accepted the bill.

8. Acceptor’s Liability when Bill is drawn in a Fictitious Name

An acceptor of a bill of exchange who draws a bill in a fictitious name, payable to the
drawer’s order will be liable to pay any holder in due course. He or she will not be relieved
from such liability by reason that such name is fictitious.

9.Liability of an agent

Section 28 addresses an agent’s liability when signing a negotiable instrument (like a cheque
or promissory note) for a principal. Generally, if the agent does not clearly state they are
acting on behalf of someone else (e.g., by writing “on behalf of [Principal]”) and does not
explicitly disclaim personal responsibility, they can be held personally liable for the
instrument. This ensures accountability when their role is unclear. However, an exception
exists if the agent was misled by another party (such as the creditor or principal) into believing
only the principal would be liable, even if they failed to clarify their representative role. In
such cases, the agent can avoid personal liability by proving they were deceived about their
responsibility.
10.Liability of Legal Representative Signing

Section 29 outlines the liability of legal representatives (e.g., executors or administrators)

when signing negotiable instruments for a deceased person’s estate. Under the general rule,
the representative is personally liable for the instrument unless they explicitly state that
their responsibility is limited to the assets inherited from the estate. Merely identifying
their role (e.g., “Executor of Thomas”) is not enough to avoid personal liability. To limit
their liability, the representative must include clear language restricting their responsibility,

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such as: “Signed as executor of Thomas’s estate, liable only to the extent of estate assets.”
Without such specific wording, they remain personally accountable.

DISHONOR OF NEGOTIABLE INSTRUMENT

What is dishonor of negotiable instrument?

Meaning of Dishonor of Negotiable Instrument: – Dishonor of a negotiable instrument

means loss of honor or respect for the instrument which is in question on the part of the
maker, payer or acceptor, as the case may be, which ultimately does not result in realization
of the payment due on the instrument. This may be by non-acceptance, when a bill of
argument is accessible for receipt and this is declined or cannot be obtained or by non-
payment, when the bill is presented for payment and payment is refused or cannot be
obtained.

Definition: Dishonor of Negotiable Instrument refers to the state when the party who has
to pay the sum in an instrument fails to honor it. In other words, it implies the loss of honor
for the instrument indicating the unsuitability of the instrument to realize funds.

A negotiable instrument is dishonoured when:

➢ For Cheques: The bank refuses payment due to insufficient funds, signature
mismatch, account closure, or exceeding the overdraft limit.

➢ For Bills of Exchange: The drawee (payer) refuses to accept or pay the bill.

➢ For Promissory Notes: The maker (payer) fails to pay the amount on the due date.

Dishonour of Cheques (Sections 138–148)

The legal framework under Sections 138 to 148 of the Negotiable Instruments Act, 1881
addresses the dishonour of cheques, ensuring accountability for issuers and protecting
payees.

Section 138 criminalizes cheque dishonour due to insufficient funds or exceeding the
overdraft limit. To invoke this provision, specific conditions must be met:

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1. The cheque must be presented to the bank within 3 months of issuance (as per RBI
guidelines post-2012).

2. The payee must issue a written demand notice to the drawer within 30 days of dishonour,
explicitly demanding payment and warning of legal action.

3. The drawer has 15 days from receiving the notice to repay the amount. If unpaid, the
payee must file a complaint within 30 days after this 15-day window, resulting in a total
time limit of 75 days from dishonour.

4. Failure to repay may lead to imprisonment up to 2 years, a fine up to twice the cheque
amount, or both. The Supreme Court in K. Bhaskaran v. Sankaran Vaidhyan Balan (1999)
clarified that complaints can be filed in jurisdictions where the cheque was issued,
presented, or where the demand notice was delivered.

Section 139 creates a rebuttable presumption that a dishonoured cheque was issued for a
legally enforceable debt. The burden lies on the drawer to disprove this (e.g., proving the
cheque was stolen). The Krishna Janardhan Bhat v. Dattatraya G. Hegde (2008) case
affirmed that the accused must provide credible evidence to rebut this presumption.

Section 140 bars the drawer from claiming ignorance (e.g., “no reason to believe” the
cheque would bounce) as a defense. The Supreme Court in Modi Cements Ltd. v. Kuchil
Kumar Nandi (1998) ruled that lack of awareness about insufficient funds is not a valid
excuse.

For companies, Section 141 holds directors/officers in charge personally liable unless they
prove the offence occurred without their knowledge or despite due diligence. Courts, in
S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005) and N. Rangachari v. Bharat Sanchar
Nigam Ltd (2007), clarified that only directors actively managing daily operations can be
prosecuted.

Section 142 mandates filing complaints within 1 month after the 15-day payment window
expires, in courts where the cheque was presented/dishonoured (post-2015 amendment).
Trials under Section 143 are conducted as summary proceedings (ideally resolved within
6 months), with summons served via speed post/courier (Section 144). Evidence may be
submitted via affidavit (Section 145), and the bank’s return memo serves as prima facie
proof of dishonour (Section 146).

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Sections 147 allows compounding (settlement) of offences with court approval. During
appeals, Section 148 empowers courts to order the appellant to deposit 20% of the cheque
amount as interim compensation.

(Due to technical issues, the search service is temporarily unavailable.)

Dishonour of a Bill of Exchange

A bill of exchange is a negotiable instrument directing one party (the drawee) to pay a
specified sum to another party (the payee) either on demand or at a predetermined future
date. Dishonour occurs when the drawee fails to fulfill their obligations under the bill, as
outlined in Sections 91 and 92 of the Negotiable Instruments Act, 1881:

1. Dishonour by Non-Acceptance (Section 91)

A bill is dishonoured by non-acceptance if the drawee:

- Refuses to accept the bill within 48 hours of presentment (excluding public holidays).

- Cannot be located after reasonable efforts by the holder.

- Is legally incompetent to enter into a contract (e.g., insolvent, minor, or of unsound mind).

- Accepts the bill conditionally (e.g., with unauthorized amendments to terms like amount,
date, or parties).

2. Dishonour by Non-Payment (Section 92)

A bill is dishonoured by non-payment if the drawee:

- Refuses to pay the amount when the bill matures (i.e., on the due date for payment).

- Fails to make payment despite the bill being duly accepted and presented for payment.

(Due to technical issues, the search service is temporarily unavailable.)

Dishonour of Promissory Notes and Procedure for Notice (Sections 92–94)

1. Dishonour of Promissory Notes (Section 92)

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A promissory note is a written, unconditional promise by the maker to pay a specified sum
to the payee (or bearer) on demand or at a fixed future date. It is deemed dishonoured if
the maker fails to pay the amount upon maturity or demand.

2. Procedure for Notice of Dishonour (Sections 93 & 94)

Section 93: Parties Responsible for Notice

- Who Must Give Notice

- The holder of the dishonoured instrument.

- Any party liable on the instrument (e.g., an endorser).

- To Whom Notice Must Be Given

- All parties the holder intends to hold severally liable (individually responsible).

- At least one party in cases of joint liability.

- Exception

- No notice is required for the maker of a promissory note or the drawee/acceptor of a

bill/cheque, as they are directly liable for payment.

Section 94: Mode and Requirements for Notice

- Recipient

- The party liable, their agent, legal representative (if deceased), or assignee (in
insolvency cases).

- Form of Notic

- May be oral or written (if written, it can be sent via post).

- Must clearly state

1. The instrument has been dishonoured.

2. The reason for dishonour (e.g., non-payment).

3. The liability of the notified party.

- Timing

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 - Must be sent within a reasonable time (typically 30 days in India).

- Delivery

- Sent to the party’s place of business, residence, or last-known address.

Noting and Protest (Sections 99–104A)

1. Noting (Section 99)

Noting is a formal process conducted by a notary public to record the dishonour (non-
acceptance/non-payment) of negotiable instruments like bills of exchange or promissory
notes. It acts as preliminary evidence of dishonour and includes critical details such as
the date, reason for dishonour (e.g., "insufficient funds"), notary fees, and implied
grounds for dishonour (e.g., drawee’s absence). This must be completed within 24–48
hours of dishonour. For instance, a notary may inscribe “Dishonoured on 15/11/2024 for
insufficient funds. Notary fees: ₹200” on the instrument’s reverse or an attached sheet
(allonge) if space is limited.

2. Protest (Section 100)

Protest is a formal, legally admissible certificate issued by a notary, confirming
dishonour. It expands on noting by incorporating a transcript of the instrument, parties
involved, and the notary’s demand for payment/acceptance. Protest must be executed
within a reasonable timeframe and is mandatory for foreign bills if required by the law
of the country where the bill originated.

3. Contents of Protest (Section 101)

A valid protest must include: (i) a copy of the instrument and endorsements, (ii) names of
the holder and protested party, (iii) details of the notary’s demand and the drawee’s
refusal/absence, (iv) place and date of dishonour, and (v) the notary’s authentication.

4. Notice of Protest (Section 102)

When protest is required, the notary must issue a notice of protest (distinct from a notice
of dishonour) to liable parties, following the same procedure as for dishonour notices.
This notice is critical to enforce liability against endorsers or prior parties.

5. Protest for Non-Payment After Non-Acceptance (Section 103)

If a bill is dishonoured by non-acceptance, the holder may protest for non-payment
without re-presenting the bill to the drawee.

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6. Protest of Foreign Bills (Section 104)
Foreign bills (drawn outside India) must be protested if mandated by the law of the
country where they were issued. For example, a bill drawn in France must be protested if
French law requires it.

7. Noting Equivalent to Protest (Section 104A)

Noting within the stipulated timeframe (e.g., 24–48 hours) suffices as valid protest, even
if formal documentation is delayed. The protest is backdated to the noting date. For
example, noting on Day 25 and formalizing protest on Day 40 renders the protest valid as
of Day 25.

Paying Banker and Statutory Protection

A paying banker, also known as the drawee bank, is legally obligated to honor negotiable
instruments such as cheques or demand drafts when presented by the rightful holder. The
banker’s primary duty is to verify the instrument’s authenticity, ensure sufficient funds in
the drawer’s account, and adhere to procedural safeguards under the Negotiable
Instruments Act, 1881 (NI Act). Failure to exercise due diligence may result in liability
for wrongful payment.

Precautions for Honoring Cheques

The paying banker must exercise meticulous care while processing cheques to avoid
liability. For crossed cheques, which are marked with two parallel lines, the banker must
strictly follow crossing instructions. A generally crossed cheque (without a bank’s
name) mandates payment only through another bank account, not in cash over the
counter. A specially crossed cheque (bearing a specific bank’s name between the lines)
restricts payment exclusively to the named bank. Disregarding these instructions renders
the banker liable to the true owner for losses. Open cheques (uncrossed) may be paid in
cash directly to the payee or bearer.

The banker must ensure the cheque is in the proper form as prescribed by law. This
includes verifying the date: post-dated cheques (dated in the future) or stale cheques (older
than three months) must be rejected. The amount must be consistent in words and figures;
discrepancies are resolved in favor of the amount stated in words.
Unauthorized alterations or overwriting invalidate the cheque, and payment must be
refused. Crucially, the drawer’s signature must match the specimen on record;
mismatches warrant further verification or refusal.
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Statutory Protections Under the NI Act
To shield bankers from liability when acting in good faith, the NI Act provides statutory
protections under specific conditions:

1. Section 85: Protection for Order Cheques

Applies to cheques payable to a specific person or their order (e.g., “Pay to X or
order”). The banker is protected even if the cheque bears a forged endorsement,
provided payment is made in due course. This requires acting in good faith (honest
belief in the transaction’s legitimacy) and without negligence (e.g., failing to detect
obvious discrepancies).

2. Section 85A: Protection for Bearer Cheques

Covers cheques payable to “bearer” (any holder). The banker is protected if payment is
made in good faith and in the ordinary course of business, meaning standard banking
practices are followed. The cheque must also be valid (e.g., not altered, post-dated, or
stale).

3. Section 128: Protection for Crossed Cheques

Ensures immunity for the banker if payment aligns with the crossing instructions. For
instance, a cheque crossed “Account Payee” must be credited only to the payee’s
account, not transferred to third parties. The banker must adhere to general
crossings (payable through any bank) or special crossings (payable only to the named
bank).

Collecting Banker and Statutory Protection: Standard Notes

Definition of Collecting Banker

A collecting banker is a bank that accepts cheques, bills, or negotiable instruments from
customers to collect payment from the drawee/paying banker. The banker acts either as
a holder for value or an agent depending on the transaction context.

Roles of a Collecting Banker

1. Holder for Value:

➢ The banker becomes a holder for value if they provide immediate value (e.g., cash,
loan, or pre-clearance credit) against the instrument. In this role, the banker assumes
ownership rights and risks associated with the instrument.

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➢ Example: Advancing funds to a customer against a cheque before it is cleared.

2. Agent:

➢ Acts as an agent when they process the instrument for collection without providing
immediate value. The customer’s account is credited only after the cheque is cleared.

➢ Example: Depositing a cheque into a customer’s account with funds released post-
clearance.

Statutory Protection (Section 131 of the Negotiable Instruments Act, 1881)

The collecting banker is protected from liability for conversion (unauthorized handling) of
instruments if:

1. The instrument is crossed (general or special).

2. The banker acts in good faith (honestly and without malice).

3. The banker exercises due diligence (no negligence in handling the instrument).

Consequence of Protection:

➢ The banker is not liable to the true owner of the instrument, even if the customer’s title
is defective (e.g., stolen cheque), provided the above conditions are met.

Duties of a Collecting Banker (to Retain Protection)

1. Customer Due Diligence:

➢ Conduct KYC verification as per RBI guidelines (e.g., valid ID proof, address proof,
PAN).

➢ Ensure the customer has a legitimate account and the authority to deposit the
instrument.

2. Check for Defects

➢ Detect material alterations (e.g., mismatched amounts in words/figures, unauthorized

corrections).

➢ Identify forged signatures or suspicious endorsements.

➢ Verify crossing instructions (e.g., ensure a specially crossed cheque is deposited only
into the named bank’s account).

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3. Adhere to Crossing Rules-Process crossed cheques strictly through banking channels
(no cash payments).

Follow special crossing instructions (e.g., “Account Payee Only”).

4. Confirm Legal Title-Ensure the customer has lawful ownership or authority to

negotiate the instrument (e.g., valid endorsement).

Examples of Negligence (Loss of Protection)

➢ Collecting a cheque with an obvious forged drawer’s signature.

➢ Ignoring a crossing (e.g., cashing a crossed cheque instead of depositing it).
➢ Failing to detect discrepancies in the amount (words vs. figures).

Discharge from Liability under the Negotiable Instruments Act, 1881: Standardized
Note

Discharge from liability under the Negotiable Instruments Act, 1881, refers to the
termination of legal obligations for parties (e.g., maker, drawer, endorser) associated with
a negotiable instrument or the instrument itself. This release can occur through specific
statutory modes outlined in the Act, ensuring clarity and fairness in commercial
transactions.

By Payment (Sections 78 & 82(c))

A party primarily liable, such as the maker of a promissory note or acceptor of a bill,
discharges all obligations by paying the holder in due course at or after maturity. For
example, if the maker of a promissory note pays ₹50,000 to the holder on the due date,
the instrument and all parties are discharged. If a third party pays, the original party is
discharged only if the holder authorizes or accepts such payment.

By Cancellation (Section 82(a))

A holder may intentionally cancel a party’s name (e.g., an endorser’s signature) on the
instrument, explicitly releasing them from liability. For instance, striking out an
endorser’s name on a cheque discharges that endorser and subsequent parties connected
to them. This act must be deliberate and evident on the instrument.

By Release (Section 82(b))

A holder may absolve a party’s liability through a written or verbal agreement without
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altering the instrument. For example, a holder signing a release agreement to free a
drawer from liability discharges only that party, while others remain bound.

By Allowing Extra Time for Acceptance (Section 83)

If a holder grants the drawee more than 48 hours (excluding public holidays) to accept a
bill, prior parties (drawer/endorsers) who did not consent to the extension are discharged.
This prevents delays that could harm prior parties’ rights. For instance, permitting a
drawee 72 hours to accept a bill without the drawer’s approval discharges the drawer.

By Material Alteration (Section 87)

Unauthorized changes to key terms (amount, date, parties, time/place of payment)
discharge prior parties unless they consent. For example, altering a cheque’s amount
from ₹10,000 to ₹50,000 without authorization voids the altering party’s claims against
prior parties.

By Operation of Law
Liability may cease due to insolvency, death (subject to heirs’ obligations), or merger of
roles. For example, if the acceptor of a bill becomes its holder at maturity, the instrument
is discharged as the same entity cannot owe and claim payment simultaneously.

By Qualified Acceptance (Section 86)

If the holder consents to a qualified acceptance (e.g., altering payment terms) without
prior parties’ approval, those non-consenting parties are discharged. For instance, an
acceptor changing a bill’s payment date from 30 to 90 days without the drawer’s
agreement releases the drawer from liability.

By Acceptor Becoming Holder (Section 90)

When the acceptor becomes the holder of the bill at or after maturity, the instrument is
discharged due to a merger of liability. For example, if an acceptor repurchases a bill
from the holder before maturity, they cannot sue themselves upon maturity,
extinguishing the obligation.

Presumptions and Estoppels under the Negotiable Instruments Act, 1881

Presumptions in Legal Context

A presumption in law is an inference drawn by courts or juries from established facts,

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which stands unless disproven. It bridges the gap between one fact and another based on
prior experience of their connection. Presumptions are categorized into three types:
presumptions of law (mandatory inferences dictated by statute), presumptions of fact
(discretionary inferences based on logic), and mixed presumptions (combining both).
Under the Negotiable Instruments Act, 1881 (NI Act), Sections 118 and 119 codify
specific presumptions to expedite commercial transactions by reducing the burden of
proof on holders of negotiable instruments.

Section 118: Presumptions as to Negotiable Instruments

Section 118 establishes rebuttable presumptions of law that courts must adopt unless
contradicted by evidence. These apply only after the instrument’s execution (signature
and delivery) is proven. Key presumptions include:

1. Consideration: Every negotiable instrument is presumed to be made, accepted, or

endorsed for valid consideration. This shifts the burden to the defendant to prove absence
of consideration, fraud, or undue influence. For instance, in Mukundbhai v. Banthia
Trading Co., the court emphasized that defendants must actively rebut this presumption,
not merely rely on the plaintiff’s lack of evidence. The presumption exists to facilitate
commerce, recognizing the impracticality of proving consideration in countless daily
transactions. However, it does not extend to proving the exact quantum of consideration
or the purpose (e.g., discharge of debt), which the claimant must establish separately, as
noted in P. Venugopal v. Madan P. Sarathi.

2. Date: A dated instrument is presumed executed on that date. Ante-dating or post-dating

must be proven by the party challenging it. For example, in Fulchand v. Laxminarayan,
evidence showing ante-dating nullified the presumption.

3. Time of Acceptance: Undated acceptances are presumed made within a reasonable

time pre-maturity. If dated, the date is taken as conclusive.

4. Time of Transfer: Transfers are presumed to occur before maturity, though the exact
date is not inferred.

5. Order of Endorsements: Endorsements are presumed sequential as they appear on the

instrument. In promissory notes, this order determines liability among endorsers.

6. Stamp Duty: Lost instruments are presumed duly stamped, crucial for enforceability
(Atmoram Mohanlal Case).

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7. Holder in Due Course: The holder is presumed to have acquired the instrument for
value, in good faith, and without knowledge of defects. If fraud or illegality is alleged (e.g.,
stolen cheque), the holder must prove their status as a holder in due course by
demonstrating lawful consideration and lack of awareness of title defects.

Section 119: Presumption on Proof of Protest

For dishonored instruments, Section 119 presumes dishonor upon proof of protest (a
notarial record). Protest aids in authenticating dishonor, especially for international
transactions, and preserves recourse against prior parties. Courts rely on protest
certificates to presume dishonor, simplifying litigation.

Estoppels under Section 120

Section 120 estops makers, drawers, and acceptors from denying the instrument’s
validity or the payee’s capacity to endorse. This estoppel protects holders in due course
by preventing issuers from contesting the instrument’s legitimacy post-creation. For
example:

➢ A maker of a promissory note cannot claim invalidity due to initial defects if a holder
in due course relies on it.

➢ Drawers cannot dispute the payee’s authority to endorse unless fraud is proven.

Case Law on Estoppel

➢ Young v. Grote: A customer’s negligence in leaving signed blank cheques estopped him
from disputing unauthorized alterations.

➢ London Joint Stock Bank v. Macmillan: Affirmed that customers must exercise care to
prevent fraudulent alterations, failing which they bear losses.

➢ Mercantile Bank of India v. Central Bank: Estoppel applies only if negligence directly
causes the loss, emphasizing proximate cause.

Criminal Liability on Dishonour of Cheque under Section 138, Negotiable

Instruments Act, 1881: Standard Note

Section 138 of the Negotiable Instruments Act, 1881, introduced through the 1988
Amendment, criminalizes the dishonour of cheques due to insufficient
funds or exceeding an agreed overdraft limit. This provision was enacted to bolster the

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credibility of cheques as reliable instruments of payment, promote trust in banking
operations, and deter financial negligence. Prior to 1988, dishonoured cheques only
entitled the payee to pursue civil remedies for debt recovery, while criminal liability under
the Indian Penal Code (IPC) required proving mens rea (intent to cheat) under Section 420,
a burden rarely met due to the difficulty of establishing fraudulent intent.

Under Section 138, liability is strict and arises automatically upon dishonour, eliminating
the need to prove intent. Key procedural conditions include: (1) the cheque must be
presented within 3 months of issuance; (2) the payee must issue a written demand
notice to the drawer within 30 days of dishonour, explicitly seeking payment; and (3) the
drawer must fail to repay within 15 days of receiving the notice. Non-compliance
empowers the payee to file a criminal complaint within 30 days after the 15-day window.
Conviction attracts imprisonment up to 2 years, a fine up to twice the cheque amount, or
both.

Critics argue that Section 138’s exclusion of mens rea deviates from foundational criminal
law principles, as liability attaches irrespective of the drawer’s intent. This strict liability
framework is often compared to public welfare offences (e.g., narcotics laws), raising
questions about its proportionality given the civil nature of cheque transactions.
Additionally, the 2-year imprisonment is deemed excessive compared to penalties for
graver offences. Judicial interpretations, however, emphasize Section 138’s role as
a socio-legal remedy, prioritizing deterrence and swift resolution over technical defenses.
Courts have ruled that once dishonour is proven, the burden shifts to the drawer to rebut
liability, such as by proving the cheque was issued as security or stolen (Modi Cements
Ltd. v. Kuchil Kumar Nandi).

Despite criticisms, Section 138 has significantly reduced cheque fraud and enhanced
commercial efficiency. It balances accountability with procedural safeguards, ensuring
drawers are not unduly harassed while protecting payees from financial injury. Judicial
trends underscore cautious application to prevent misuse, maintaining the provision’s
deterrent effect without compromising fairness.

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