Introduction
The law relating to negotiable instruments is contained in the negotiable Instruments Act, 1981. It is
an act to define and amend the law relating to promissory note, bills of exchange and cheques. The
purpose of the Act is to present an orderly and authoritative statement of the leading rules of law
relating to the negotiable instruments.
Applicability of the Act
This Act is applicable to the whole of India.
Negotiable Instrument
Section 13 of the Act defines the terms ‘negotiable instrument’ as a promissory note, bill of exchange
or either payable either to order or to bearer. A promissory note, bill of exchange or cheque-
• is payable to order which is expressed to be so payable or which is expressed to be payable to a
particular person and does not contain words prohibiting transfer or indicating an intention that it
shall not be transferable;
• is payable to the bearer which is expressed to be so payable or on which the only or last endorsement
is an endorsement in blank;
• either originally or by endorsement, is expressed to be payable to two or more payees jointly, or it
may be made payable in the alternative to one of two, or one or some of several payees.
Section 13 shows that the Act is confined to three specific types of instruments most in common use,
namely, promissory notes, bills of exchange and cheques. The Contract Act is a general statute
dealing with contracts. The Negotiable instruments Act is a statute dealing with a particular form of the
contract. The law laid down for special cases must always overrule the provisions of general character
as held in ‘Kwong Hip Lone Saw Mill Co. V. C.A.M.A.L. Firms’ – AIR 1933 Rang.131. The following are not
the negotiable instruments-
• share certificate passing from hand to hand with blank transfers – Hazarimaul V. Statis Chandra’ –
ILR 46 Cal.331;
• Deposit receipts – Anantharam V. O.L., of T.N.Q. Bank’ – 1939 Mad W.N. 1096;
• Mate’s receipt – Nacheppa Chetty V. Irravaddy Flotila & Co., - ILR 41 Cal. 670;
• Bill of lading – United Bank of India V. N.S. Bank – AIR 1959 Cal. 328;
• Promissory note - Khirodnath Gountia V. Arjun Panda’ – (1971) 2 Cut. W.R. 223
• A benefit under a letter of credit – Joseph Pyke & Son V. Kedarnath- AIR 1962 Cal.326.
Essential Features of a Negotiable Instrument:
1. It must be in writing.
2. It should be signed by the maker or drawer.
3. There must be a promise or order to pay.
4. The promise or order must be unconditional.
5. It must call for payment in money and money only.
6. It should call for payment of a certain sum.
7. The property in the instrument may be passed in two ways:
(a) by mere delivery; and
(b) by indorsement and delivery.
8. The consideration is also presumed to have been passed
Promissory Note
Section 4 of the Act defines the term ‘promissory note’ as an instrument in writing (not being a bank
note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a
certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
Example - 1. I promise to B or order ` 50000/-;
2. I acknowledge myself to be indebted to B in `1 lakh to be paid on demand, for value
received.
The instruments in the above two examples are promissory notes.
3. I promise to pay B `20000/- seven days after my marriage with Helen.
4. I promise to pay ` 50000/- on D’s death, provided D leaves me enough to pay that sum.
The instruments in the above two examples do not amount to promissory notes.
The High Court in ‘Santsingh v. Madandas Panika’AIR 1976 MP 144 held that an instrument is a promissory
note if there are present the following elements-
• There should be an unconditional undertaking to pay;
• The sum should be a sum of money and should be certain;
• The payment should be the order of a person who is certain, or to the bear of the instrument;
• The maker should sign it.
The High Court, Andhra Pradesh in ‘Bahadurrinisa V. Vasudev’ AIR 1967 AP 123 categorized the
promissory note into three types-
• A promise to pay a certain sum of money to a certain person;
• A promise to pay a certain sum of money to the order of a certain person;
• A promise to pay the bearer.
Bill of exchange
Section 5 defines the expression ‘bill of exchange’ as an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the
order of, a certain person or to the bearer of the instrument.
A promise or order to pay is not ‘conditional’ within the meaning of this section and Section 4, by
reason of the time for payment of the amount or any installment thereof being expressed to be on the
lapse of a certain period after the occurrence of a specified event which, according to the ordinary
expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
The sum payable may be ‘certain’ within the meaning of this section and section 4, although it
includes future interest or is payable at an indicated rate of exchange, or is according to the course
of exchange, and although the instrument provides that, on default of payment of an installment, the
balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be a ‘certain
person’ within the meaning of this section and section 4, although he is mis-named or designated by
description only.
The Calcutta High Court in ‘Hundi V. Sinha V. Bidhy Bhasan’ AIR 1955 Cal. 562 narrated the essential
character of a bill of exchange which is that it contains an order to accept or to pay and that the
acceptor should accept it; in the absence of such a direction to pay, the document will not be a bill
of exchange or a hundi.
The following are the bills of exchange-
• A banker’s draft – Birbhum Central Co-op bank V. Pioneer Bank Limited – AIR 1956 Cal. 615;
• A demand draft even if it be drawn upon another office of the same bank – S.N. Shukla V. Punjab
National Bank Limited’ – AIR 1960 All. 238;
• An order issued by a District Board Engineer on Government Treasury for payent to or order of a
certain person – Rangaswami V. Sankaralingam – ILR 43 Mad 816.
Cheque
The term ‘cheque’ is defined under Section 6 of the Act. It is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise than on demand and it includes the electronic
image of a truncated cheque and a cheque in the electronic form.
For the purposes of this section, the terms ‘a cheque in the electronic form’, ‘truncated cheque’ are
defined which has been substituted by the Negotiable Instruments (Amendment) Act, 2015, with effect
from 26.12.2015.
‘A cheque in the electronic form’ is a cheque drawn in electronic form by using any computer
resource and signed in a secure system with digital signature (with or without biometric signature) and
asymmetric crypto system or with electronic signature, as the case may be.
‘A truncated cheque’ is a cheque which is truncated during the course of a clearing cycle, either by
the clearing house or by the bank whether paying or receiving payment, immediately on generation
of an electronic image for transmission, substituting the further physical movement of the cheque in
writing.
The expression ‘clearing house’ is the clearing house managed by the RBI or a clearing house recognized
as such by RBI.
PARTIES TO THE INSTRUMENTS
The transaction of the instrument requires at least two persons. One is the drawer and other is the
drawee. The drawer of the instrument is the person who makes a bill of exchange or a cheque and the
person thereby directed to pay is called the drawee. In ‘Shivanth V. Bsihambar’- AIR 1935 Lah. 153 it
was held that the definition of drawer is not exhaustive; the maker of the promissory note can also be
called a drawer.
Drawer in case of need – When in the bill or in any endorsement thereof the name of any person is
given in addition to the drawee to be resorted to in case of need, such a person is called a ‘drawee
in case of need’.
Acceptor – After the drawee of a bill has signed his assent upon the bill, or, if there are more parts
thereof than one, upon one such parts, and delivered the same, or given notice of such signing to the
holder or to some person on his behalf, he is called the acceptor.
Acceptor for honor- When a bill of exchange has been noted or protested for non acceptance or
for better security and any person accepts it supra protest for honor of the drawer or any one of the
endorsers, such person is called an ‘acceptor for honor’.
Payee – The person named in the instrument, to whom or to whose order the money is by the instrument
directed to be paid, is called the ‘payee’.
Holder – Section 8 defines the term ‘holder’. The holder of a promissory note or a bill of exchange or
cheque is any person entitled in his own name to the possession thereof and to receive or recover the
amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its
holder is the person so entitled at the time of such loss or destruction.
In ‘Anjaniaih V. Nagappa’ – AIR 1967 AP 61 it was held that the term ‘holder’ as defined in Section 8
of the Act would not include a person, who, though in possession of the instrument, had no right to
recover the amount due from the parties thereto, such as the finder of a lost instrument payable to
bearer or a thief in possession of such an instrument, or even the payee himself, is he is prohibited by an
order of court from receiving the amount due on the instrument. Where a plaintiff sued not as a holder
in possession of the promissory note but claimed to recover the debt, on the basis of a succession
certificate, he would be the only person entitled to recover the debt.
Holder in due course – Section 9 defines the term ‘holder in due course. It means any person who for
consideration became the possessor of a promissory note, bill of exchange or cheque if payable to
bearer, or the payee or the endorsee thereof, if payable to order, before the amount mentioned in it
became payable, and without having sufficient cause to believe that any defect existed in the title of
the person from whom he derived his title.
In ‘Braja Kishore Dikshit V. Purna Chandra Panda’ – AIR 1957 Ori. 153 the High Court held that the holder
in due course under Section 9 has to satisfy the following three conditions-
• An endorsee becomes a holder in due course for consideration;
• He can become an endorsee before the amount mentioned in the promissory note became
payable; and
• He should have no sufficient cause to believe that any defect existed in the title of the person from
whom he was to derive his title.
As regard to the second condition the promissory note becomes payable either on demand or at
maturity.
Payment in due course- Section 10 defines this expression as payment in accordance with the apparent
tenor of the instrument in good faith and without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for believing that he is not entitled to receive
payment of the amount therein mentioned.
Example:
Where a bank makes payment in accordance with the apparent tenor of the instrument in good faith
and without negligence under circumstances which do not afford a reasonable ground for believing
that he is not entitled to receive payment, payment is said to be done in due course. Therefore it is said
“A banker’s duty in paying a cheque is discharged by payment in due course”.
Instruments
There are various types of instruments mentioned in this Act as follows:
• Inland instrument – a promissory note, bill of exchange or cheque drawn or made in India and
made payable in, or drawn upon any person resident in, India shall be deemed to be an inland
instrument.
• Foreign instrument – a promissory note, bill of exchange or cheque not drawn, made or made
payable, in India, shall be deemed to be a foreign instrument.
• Ambiguous instrument – where an instrument may be construed either as a promissory note or bill of
exchange, the holder may at his election, treat it as either and the instrument shall be thenceforward
treated accordingly.
• Instruments payable on demand – A promissory note or bill of exchange, in which no time for
payment is specified, and a cheque, are payable on demand.
• Inchoate stamped instruments – Where one person signs and delivers to another a paper stamped
in accordance with the law relating to negotiable instruments for the time being in force in India
and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby
gives prima facie authority to the holder thereof to 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
signed 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 mount intended by him to be paid there under.
Maturity (Sec 22-25)
Section 22 provides the date of the maturity of the instruments. The maturity of a promissory note or bill
of exchange is the date at which falls due. If the promissory note or bill of exchange does not express
to be payable on demand, at sight or on presentment, the maturity for such cases is the third day on
which it is expressed to be payable.
In ‘Hemadri V. Seshamma’ – 1930 M.W.N. 1232 it was held that the term used in this section cannot
apply to a promissory note payable on demand.
Calculation of maturity date
Section 23 provides for calculating maturity of bill or note payable so many months after date or sight.
In calculating the date at which a promissory note or bill of exchange, made payable a stated number
of months after date or after sight, or after a certain event, is at maturity-
• the period stated shall be held to terminate on the day of the month which corresponds with the
day on which the instrument is dated; or
• presented for acceptance or sight; or
• noted for non acceptance; or
• or protested for non acceptance; or
• the event happens; or
• where the instrument is a bill of exchange made payable a stated number of months after sight
and has been accepted for honor with the day on which it was so accepted.
If the month in which the period would terminate has no corresponding day, the period shall held to
terminate on the last day of such month.
CROSSING OF CHEQUES
Section 123 provides that where a cheque bears across its face an addition of the words ‘and company’
or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines
simply, either with or without the words ‘not negotiable’ that addition shall be deemed a crossing, and
the cheque shall be deemed to be crossed generally.
Section 124 provides that where a cheque bears across its face an addition of the name of a banker,
either with or without the words ‘not negotiable’ that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed specially, and to be crossed to that banker.
Section 125 provides that where a cheque is not crossed, the holder may cross it generally or specially.
• Where a cheque is crossed generally, the holder may cross it specially;
• Where a cheque is crossed generally or specially, the holder may add the word ‘not negotiable’;
• Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially
to another banker, his agent, for collection.
Payment of cheque
The payment may be made in respect of the following cases-
• payment of cheque crossed generally;
• payment of cheque crossed specially;
• payment of cheque crossed specially more than once;
• payment in due course of crossed cheque;
• payment of crossed cheque out of due course.
Section 126 provides that where a cheque is crossed generally, the banker, on whom it is drawn, shall
not pay it otherwise than to a banker. Section 127 provides that where a cheque is crossed specially
to more than one banker, except when crossed to an agent for the purpose of collect, the banker on
whom it is drawn shall refuse payment thereof. Section 128 provides that where the banker on whom
a cross cheque is drawn has paid the same in due course, the banker paying the cheque, and (in
such case cheque has come to the hands of the payee) the drawer thereof, shall respectively entitled
to the same rights and be placed in the same position in all respects, as they would respectively be
entitled to and placed in it if the amount of the cheque had been paid to and received by the true
owner thereof.
Section 129 provides that any banker paying a cheque crossed generally otherwise than to a banker,
or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent
for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may
sustain owing to the cheque having been so paid.
Cheque bearing ‘not negotiable’
Section 130 provides that a person taking a cheque crossed generally or specially, bearing in either
case the words ‘not negotiable’, shall not have, and shall not be capable of giving, a better title to the
cheque than which the person from whom he took it had.
Non liability of banker
Section 131 provides that a banker who has in good faith and without negligence received payment
for a customer of a cheque crossed generally or specially to himself shall not, in case the title of the
cheque proves defective, incur any liability to the true owner of the cheque by reason only of having
received such payment.
A banker receives payment of a crossed cheque for a customer within the meaning of this section
notwithstanding that he credits his customer’s account with the amount of the cheque before receiving
payment thereof.
It shall be the duty of the banker who receives payment based on an electronic image of a truncated
cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any
fraud, forgery or tampering apparent on the face of the instrument that can be verified with due
diligence and ordinary case.
ENDORSEMENT
Meaning of Endorsement: The term ‘Endorsement’ can also be pronunciated as ‘Indorsement’. This
term is said to have been derived from the Latin word ‘indorsum’, which means ‘upon the back’
(in = upon; dorsum = back).
The ‘Indorsement’ means signatures of the person which are generally made at the back of the
instrument, for the purpose of transfer of rights to another person.
Section 15 of the Act provides that when the maker or holder of a negotiable instrument signs the
same, otherwise than as such maker, for the purpose of negation on the back or face thereof or on
a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be
completed as negotiable instrument he is said to indorse the same and is called the ‘indorser’.
Therefore, endorsement (indorsement) means writing of a person’s name (other than maker) on the
face or back of an instrument or on a slip of paper attached thereto for the purpose of negotiation.
The person signing the instrument is known as endorser and the person in whose favour it is endorsed is
known as endorsee.
Essentials of a valid endorsement (endorsement)
(I) It must be on the instrument itself or on a separate slip of paper (called allonge) attached thereto.
(II) For the purpose of negotiation, it must be signed by the endorser.
(III) The instrument may contain in addition to the signature of the endorser, the name of the endorsee
also. No particular form of words is necessary for endorsement.
(IV) Endorsement is complete when the instrument is delivered to the endorsee with the intention of
passing the property in it to the endorsee. Delivery is to be made by the endorser himself or someone
on behalf of him.
Who may endorse a bill
The first endorsement of an instrument can be made by the payee only, however, subsequent
endorsement can be made by any person who becomes the holder of the instrument. As per section 15
endorsement can not be made by the maker or holder of an instrument as maker. Thus if a bill is drawn
payable to the drawer’s order the first signature of the drawer as a drawer is not an endorsement, but
if he signs the bills second time for the purpose of negotiating it, the second signature would be an
endorsement.
It may noted that as per section 51 every sole maker, drawer, payee or indorsee or all of several joint
makers, drawers, payees or indorsees of a negotiable instrument may endorse and negotiate it.
Types of endorsement
The endorsement of a negotiable instrument can be (i) blank (ii) full (iii) restrictive endorsement or (iv)
conditional endorsement
As per section 16(1), if the endorser signs his name only, the endorsement is said to be “in blank”, and
if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified
person, the endorsement is said to be “in full”, and the person so specified is called the “endorsee” of
the instrument. Section 49 of the Act provides the mechanism of conversion of a blank endorsement
into a full endorsement. As per section 49 the holder of a negotiable instrument indorsed in blank may,
without signing his own name, by writing above the endorser’s signature a direction to pay to any
other person as endorsee, convert the endorsement in full; and the holder does not thereby incur the
responsibility of an endorser.
ACCEPTANCE
Only certain types of bills require acceptance. Essentials of a valid acceptance are—
(i) Must be written on the face of the bill,
(ii) The bill must be signed by drawee or his authorized agent.
(iii) The accepted bill is required to be delivered to the holder of the instrument.
Meaning of acceptance:
A bill is said to be accepted when the drawee (i.e., the person on whom the bill is drawn), after putting
his signature on it, either delivers it or gives notice of such acceptance to the holder of the bill or to
some person on his behalf.
Acceptor:
After the drawee has accepted the bill, he is known as the acceptor. It is only the bill of exchange (other
than cheque) which requires acceptance. However, acceptance is not necessary to make a valid bill.
If a bill is not accepted, it does not become invalid. It only becomes dishonoured by non-acceptance.
Presentation for acceptance may be excused in the following circumstances:
(a) Where the drawee is dead or insolvent.
(b) Where the drawee is a fictitious person or one incapable of contracting.
(c) When the drawee can cannot be found with reasonable efforts.
(d) When acceptance has been refused on some other grounds.
Acceptance in Case of Bills in Sets:
Where a bill is drawn in sets, the acceptance is required to be put on one part only. Where the drawee
signs his acceptance on two or more parts, he may become liable on each of them respectively.
When presentation for acceptance is necessary:
(a) Where the bill is payable at a given time after acceptance or after sight.
(b) Where the bill expressly stipulates that it shall be presented for acceptance before presented for
payment.
(c) Where the bill is made payable at a place other than the place of residence or business of the
drawee.
In no other case is presentation for acceptance necessary in order to render liable any party to
the bill.
Types of Acceptance:
Acceptance may be either general or qualified.
General Acceptance: An acceptance is said to be general when the drawee accepts the bill without
qualification to the order of the drawer. If the acceptance is not absolute, the holder may treat the bill
as dishonoured by non- acceptance
Qualified Acceptance: An acceptance is said to be qualified when the drawee accepts the bill subject
to qualification. It may be noted that an acceptance will not be treated as a qualified acceptance
unless the qualification is expressed on the bill in the clearest language. The qualification may relate to
an event, amount, place, time, etc.
Circumstances indicating Qualified Acceptance
According to Section 86, an acceptance is qualified under the following circumstances:
(a) Where it undertakes the payment on the happening of an event therein stated;
(b) Where it undertakes the payment of part only of the sum ordered to be paid;
(c) Where it undertakes the payment at a specified place of his choice and not otherwise or elsewhere;
(d) Where it undertakes the payment at a time other than that at which under the order it would be
legally due.
(e) Where it is not signed by all drawees who are not partners.
ASSIGNMENT OF NEGOTIABLE INSTRUMENTS
Assignment takes place where the holder of an instrument transfers it to another so as to confer a
right on the transferee to receive the payment of the instrument. All negotiable instruments are chose
in action and as such are transferable by assignment without endorsement under sections 130-132
of the Transfer of property act. Assignment of a negotiable instrument is effected by writing without
endorsement. The main feature of assignment is that the assignee obtains the right of the assignor.
Therefore if the assignor’s title is defective assignee’s title will also be defective.
The law relating to negotiable instruments is contained in the negotiable Instruments Act, 1981. It is
an act to define and amend the law relating to promissory note, bills of exchange and cheques. The
purpose of the Act is to present an orderly and authoritative statement of the leading rules of law
relating to the negotiable instruments.
Applicability of the Act
This Act is applicable to the whole of India.
Negotiable Instrument
Section 13 of the Act defines the terms ‘negotiable instrument’ as a promissory note, bill of exchange
or either payable either to order or to bearer. A promissory note, bill of exchange or cheque-
• is payable to order which is expressed to be so payable or which is expressed to be payable to a
particular person and does not contain words prohibiting transfer or indicating an intention that it
shall not be transferable;
• is payable to the bearer which is expressed to be so payable or on which the only or last endorsement
is an endorsement in blank;
• either originally or by endorsement, is expressed to be payable to two or more payees jointly, or it
may be made payable in the alternative to one of two, or one or some of several payees.
Section 13 shows that the Act is confined to three specific types of instruments most in common use,
namely, promissory notes, bills of exchange and cheques. The Contract Act is a general statute
dealing with contracts. The Negotiable instruments Act is a statute dealing with a particular form of the
contract. The law laid down for special cases must always overrule the provisions of general character
as held in ‘Kwong Hip Lone Saw Mill Co. V. C.A.M.A.L. Firms’ – AIR 1933 Rang.131. The following are not
the negotiable instruments-
• share certificate passing from hand to hand with blank transfers – Hazarimaul V. Statis Chandra’ –
ILR 46 Cal.331;
• Deposit receipts – Anantharam V. O.L., of T.N.Q. Bank’ – 1939 Mad W.N. 1096;
• Mate’s receipt – Nacheppa Chetty V. Irravaddy Flotila & Co., - ILR 41 Cal. 670;
• Bill of lading – United Bank of India V. N.S. Bank – AIR 1959 Cal. 328;
• Promissory note - Khirodnath Gountia V. Arjun Panda’ – (1971) 2 Cut. W.R. 223
• A benefit under a letter of credit – Joseph Pyke & Son V. Kedarnath- AIR 1962 Cal.326.
Essential Features of a Negotiable Instrument:
1. It must be in writing.
2. It should be signed by the maker or drawer.
3. There must be a promise or order to pay.
4. The promise or order must be unconditional.
5. It must call for payment in money and money only.
6. It should call for payment of a certain sum.
7. The property in the instrument may be passed in two ways:
(a) by mere delivery; and
(b) by indorsement and delivery.
8. The consideration is also presumed to have been passed
Promissory Note
Section 4 of the Act defines the term ‘promissory note’ as an instrument in writing (not being a bank
note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a
certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
Example - 1. I promise to B or order ` 50000/-;
2. I acknowledge myself to be indebted to B in `1 lakh to be paid on demand, for value
received.
The instruments in the above two examples are promissory notes.
3. I promise to pay B `20000/- seven days after my marriage with Helen.
4. I promise to pay ` 50000/- on D’s death, provided D leaves me enough to pay that sum.
The instruments in the above two examples do not amount to promissory notes.
The High Court in ‘Santsingh v. Madandas Panika’AIR 1976 MP 144 held that an instrument is a promissory
note if there are present the following elements-
• There should be an unconditional undertaking to pay;
• The sum should be a sum of money and should be certain;
• The payment should be the order of a person who is certain, or to the bear of the instrument;
• The maker should sign it.
The High Court, Andhra Pradesh in ‘Bahadurrinisa V. Vasudev’ AIR 1967 AP 123 categorized the
promissory note into three types-
• A promise to pay a certain sum of money to a certain person;
• A promise to pay a certain sum of money to the order of a certain person;
• A promise to pay the bearer.
Bill of exchange
Section 5 defines the expression ‘bill of exchange’ as an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the
order of, a certain person or to the bearer of the instrument.
A promise or order to pay is not ‘conditional’ within the meaning of this section and Section 4, by
reason of the time for payment of the amount or any installment thereof being expressed to be on the
lapse of a certain period after the occurrence of a specified event which, according to the ordinary
expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
The sum payable may be ‘certain’ within the meaning of this section and section 4, although it
includes future interest or is payable at an indicated rate of exchange, or is according to the course
of exchange, and although the instrument provides that, on default of payment of an installment, the
balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be a ‘certain
person’ within the meaning of this section and section 4, although he is mis-named or designated by
description only.
The Calcutta High Court in ‘Hundi V. Sinha V. Bidhy Bhasan’ AIR 1955 Cal. 562 narrated the essential
character of a bill of exchange which is that it contains an order to accept or to pay and that the
acceptor should accept it; in the absence of such a direction to pay, the document will not be a bill
of exchange or a hundi.
The following are the bills of exchange-
• A banker’s draft – Birbhum Central Co-op bank V. Pioneer Bank Limited – AIR 1956 Cal. 615;
• A demand draft even if it be drawn upon another office of the same bank – S.N. Shukla V. Punjab
National Bank Limited’ – AIR 1960 All. 238;
• An order issued by a District Board Engineer on Government Treasury for payent to or order of a
certain person – Rangaswami V. Sankaralingam – ILR 43 Mad 816.
Cheque
The term ‘cheque’ is defined under Section 6 of the Act. It is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise than on demand and it includes the electronic
image of a truncated cheque and a cheque in the electronic form.
For the purposes of this section, the terms ‘a cheque in the electronic form’, ‘truncated cheque’ are
defined which has been substituted by the Negotiable Instruments (Amendment) Act, 2015, with effect
from 26.12.2015.
‘A cheque in the electronic form’ is a cheque drawn in electronic form by using any computer
resource and signed in a secure system with digital signature (with or without biometric signature) and
asymmetric crypto system or with electronic signature, as the case may be.
‘A truncated cheque’ is a cheque which is truncated during the course of a clearing cycle, either by
the clearing house or by the bank whether paying or receiving payment, immediately on generation
of an electronic image for transmission, substituting the further physical movement of the cheque in
writing.
The expression ‘clearing house’ is the clearing house managed by the RBI or a clearing house recognized
as such by RBI.
PARTIES TO THE INSTRUMENTS
The transaction of the instrument requires at least two persons. One is the drawer and other is the
drawee. The drawer of the instrument is the person who makes a bill of exchange or a cheque and the
person thereby directed to pay is called the drawee. In ‘Shivanth V. Bsihambar’- AIR 1935 Lah. 153 it
was held that the definition of drawer is not exhaustive; the maker of the promissory note can also be
called a drawer.
Drawer in case of need – When in the bill or in any endorsement thereof the name of any person is
given in addition to the drawee to be resorted to in case of need, such a person is called a ‘drawee
in case of need’.
Acceptor – After the drawee of a bill has signed his assent upon the bill, or, if there are more parts
thereof than one, upon one such parts, and delivered the same, or given notice of such signing to the
holder or to some person on his behalf, he is called the acceptor.
Acceptor for honor- When a bill of exchange has been noted or protested for non acceptance or
for better security and any person accepts it supra protest for honor of the drawer or any one of the
endorsers, such person is called an ‘acceptor for honor’.
Payee – The person named in the instrument, to whom or to whose order the money is by the instrument
directed to be paid, is called the ‘payee’.
Holder – Section 8 defines the term ‘holder’. The holder of a promissory note or a bill of exchange or
cheque is any person entitled in his own name to the possession thereof and to receive or recover the
amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its
holder is the person so entitled at the time of such loss or destruction.
In ‘Anjaniaih V. Nagappa’ – AIR 1967 AP 61 it was held that the term ‘holder’ as defined in Section 8
of the Act would not include a person, who, though in possession of the instrument, had no right to
recover the amount due from the parties thereto, such as the finder of a lost instrument payable to
bearer or a thief in possession of such an instrument, or even the payee himself, is he is prohibited by an
order of court from receiving the amount due on the instrument. Where a plaintiff sued not as a holder
in possession of the promissory note but claimed to recover the debt, on the basis of a succession
certificate, he would be the only person entitled to recover the debt.
Holder in due course – Section 9 defines the term ‘holder in due course. It means any person who for
consideration became the possessor of a promissory note, bill of exchange or cheque if payable to
bearer, or the payee or the endorsee thereof, if payable to order, before the amount mentioned in it
became payable, and without having sufficient cause to believe that any defect existed in the title of
the person from whom he derived his title.
In ‘Braja Kishore Dikshit V. Purna Chandra Panda’ – AIR 1957 Ori. 153 the High Court held that the holder
in due course under Section 9 has to satisfy the following three conditions-
• An endorsee becomes a holder in due course for consideration;
• He can become an endorsee before the amount mentioned in the promissory note became
payable; and
• He should have no sufficient cause to believe that any defect existed in the title of the person from
whom he was to derive his title.
As regard to the second condition the promissory note becomes payable either on demand or at
maturity.
Payment in due course- Section 10 defines this expression as payment in accordance with the apparent
tenor of the instrument in good faith and without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for believing that he is not entitled to receive
payment of the amount therein mentioned.
Example:
Where a bank makes payment in accordance with the apparent tenor of the instrument in good faith
and without negligence under circumstances which do not afford a reasonable ground for believing
that he is not entitled to receive payment, payment is said to be done in due course. Therefore it is said
“A banker’s duty in paying a cheque is discharged by payment in due course”.
Instruments
There are various types of instruments mentioned in this Act as follows:
• Inland instrument – a promissory note, bill of exchange or cheque drawn or made in India and
made payable in, or drawn upon any person resident in, India shall be deemed to be an inland
instrument.
• Foreign instrument – a promissory note, bill of exchange or cheque not drawn, made or made
payable, in India, shall be deemed to be a foreign instrument.
• Ambiguous instrument – where an instrument may be construed either as a promissory note or bill of
exchange, the holder may at his election, treat it as either and the instrument shall be thenceforward
treated accordingly.
• Instruments payable on demand – A promissory note or bill of exchange, in which no time for
payment is specified, and a cheque, are payable on demand.
• Inchoate stamped instruments – Where one person signs and delivers to another a paper stamped
in accordance with the law relating to negotiable instruments for the time being in force in India
and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby
gives prima facie authority to the holder thereof to 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
signed 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 mount intended by him to be paid there under.
Maturity (Sec 22-25)
Section 22 provides the date of the maturity of the instruments. The maturity of a promissory note or bill
of exchange is the date at which falls due. If the promissory note or bill of exchange does not express
to be payable on demand, at sight or on presentment, the maturity for such cases is the third day on
which it is expressed to be payable.
In ‘Hemadri V. Seshamma’ – 1930 M.W.N. 1232 it was held that the term used in this section cannot
apply to a promissory note payable on demand.
Calculation of maturity date
Section 23 provides for calculating maturity of bill or note payable so many months after date or sight.
In calculating the date at which a promissory note or bill of exchange, made payable a stated number
of months after date or after sight, or after a certain event, is at maturity-
• the period stated shall be held to terminate on the day of the month which corresponds with the
day on which the instrument is dated; or
• presented for acceptance or sight; or
• noted for non acceptance; or
• or protested for non acceptance; or
• the event happens; or
• where the instrument is a bill of exchange made payable a stated number of months after sight
and has been accepted for honor with the day on which it was so accepted.
If the month in which the period would terminate has no corresponding day, the period shall held to
terminate on the last day of such month.
CROSSING OF CHEQUES
Section 123 provides that where a cheque bears across its face an addition of the words ‘and company’
or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines
simply, either with or without the words ‘not negotiable’ that addition shall be deemed a crossing, and
the cheque shall be deemed to be crossed generally.
Section 124 provides that where a cheque bears across its face an addition of the name of a banker,
either with or without the words ‘not negotiable’ that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed specially, and to be crossed to that banker.
Section 125 provides that where a cheque is not crossed, the holder may cross it generally or specially.
• Where a cheque is crossed generally, the holder may cross it specially;
• Where a cheque is crossed generally or specially, the holder may add the word ‘not negotiable’;
• Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially
to another banker, his agent, for collection.
Payment of cheque
The payment may be made in respect of the following cases-
• payment of cheque crossed generally;
• payment of cheque crossed specially;
• payment of cheque crossed specially more than once;
• payment in due course of crossed cheque;
• payment of crossed cheque out of due course.
Section 126 provides that where a cheque is crossed generally, the banker, on whom it is drawn, shall
not pay it otherwise than to a banker. Section 127 provides that where a cheque is crossed specially
to more than one banker, except when crossed to an agent for the purpose of collect, the banker on
whom it is drawn shall refuse payment thereof. Section 128 provides that where the banker on whom
a cross cheque is drawn has paid the same in due course, the banker paying the cheque, and (in
such case cheque has come to the hands of the payee) the drawer thereof, shall respectively entitled
to the same rights and be placed in the same position in all respects, as they would respectively be
entitled to and placed in it if the amount of the cheque had been paid to and received by the true
owner thereof.
Section 129 provides that any banker paying a cheque crossed generally otherwise than to a banker,
or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent
for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may
sustain owing to the cheque having been so paid.
Cheque bearing ‘not negotiable’
Section 130 provides that a person taking a cheque crossed generally or specially, bearing in either
case the words ‘not negotiable’, shall not have, and shall not be capable of giving, a better title to the
cheque than which the person from whom he took it had.
Non liability of banker
Section 131 provides that a banker who has in good faith and without negligence received payment
for a customer of a cheque crossed generally or specially to himself shall not, in case the title of the
cheque proves defective, incur any liability to the true owner of the cheque by reason only of having
received such payment.
A banker receives payment of a crossed cheque for a customer within the meaning of this section
notwithstanding that he credits his customer’s account with the amount of the cheque before receiving
payment thereof.
It shall be the duty of the banker who receives payment based on an electronic image of a truncated
cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any
fraud, forgery or tampering apparent on the face of the instrument that can be verified with due
diligence and ordinary case.
ENDORSEMENT
Meaning of Endorsement: The term ‘Endorsement’ can also be pronunciated as ‘Indorsement’. This
term is said to have been derived from the Latin word ‘indorsum’, which means ‘upon the back’
(in = upon; dorsum = back).
The ‘Indorsement’ means signatures of the person which are generally made at the back of the
instrument, for the purpose of transfer of rights to another person.
Section 15 of the Act provides that when the maker or holder of a negotiable instrument signs the
same, otherwise than as such maker, for the purpose of negation on the back or face thereof or on
a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be
completed as negotiable instrument he is said to indorse the same and is called the ‘indorser’.
Therefore, endorsement (indorsement) means writing of a person’s name (other than maker) on the
face or back of an instrument or on a slip of paper attached thereto for the purpose of negotiation.
The person signing the instrument is known as endorser and the person in whose favour it is endorsed is
known as endorsee.
Essentials of a valid endorsement (endorsement)
(I) It must be on the instrument itself or on a separate slip of paper (called allonge) attached thereto.
(II) For the purpose of negotiation, it must be signed by the endorser.
(III) The instrument may contain in addition to the signature of the endorser, the name of the endorsee
also. No particular form of words is necessary for endorsement.
(IV) Endorsement is complete when the instrument is delivered to the endorsee with the intention of
passing the property in it to the endorsee. Delivery is to be made by the endorser himself or someone
on behalf of him.
Who may endorse a bill
The first endorsement of an instrument can be made by the payee only, however, subsequent
endorsement can be made by any person who becomes the holder of the instrument. As per section 15
endorsement can not be made by the maker or holder of an instrument as maker. Thus if a bill is drawn
payable to the drawer’s order the first signature of the drawer as a drawer is not an endorsement, but
if he signs the bills second time for the purpose of negotiating it, the second signature would be an
endorsement.
It may noted that as per section 51 every sole maker, drawer, payee or indorsee or all of several joint
makers, drawers, payees or indorsees of a negotiable instrument may endorse and negotiate it.
Types of endorsement
The endorsement of a negotiable instrument can be (i) blank (ii) full (iii) restrictive endorsement or (iv)
conditional endorsement
As per section 16(1), if the endorser signs his name only, the endorsement is said to be “in blank”, and
if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified
person, the endorsement is said to be “in full”, and the person so specified is called the “endorsee” of
the instrument. Section 49 of the Act provides the mechanism of conversion of a blank endorsement
into a full endorsement. As per section 49 the holder of a negotiable instrument indorsed in blank may,
without signing his own name, by writing above the endorser’s signature a direction to pay to any
other person as endorsee, convert the endorsement in full; and the holder does not thereby incur the
responsibility of an endorser.
ACCEPTANCE
Only certain types of bills require acceptance. Essentials of a valid acceptance are—
(i) Must be written on the face of the bill,
(ii) The bill must be signed by drawee or his authorized agent.
(iii) The accepted bill is required to be delivered to the holder of the instrument.
Meaning of acceptance:
A bill is said to be accepted when the drawee (i.e., the person on whom the bill is drawn), after putting
his signature on it, either delivers it or gives notice of such acceptance to the holder of the bill or to
some person on his behalf.
Acceptor:
After the drawee has accepted the bill, he is known as the acceptor. It is only the bill of exchange (other
than cheque) which requires acceptance. However, acceptance is not necessary to make a valid bill.
If a bill is not accepted, it does not become invalid. It only becomes dishonoured by non-acceptance.
Presentation for acceptance may be excused in the following circumstances:
(a) Where the drawee is dead or insolvent.
(b) Where the drawee is a fictitious person or one incapable of contracting.
(c) When the drawee can cannot be found with reasonable efforts.
(d) When acceptance has been refused on some other grounds.
Acceptance in Case of Bills in Sets:
Where a bill is drawn in sets, the acceptance is required to be put on one part only. Where the drawee
signs his acceptance on two or more parts, he may become liable on each of them respectively.
When presentation for acceptance is necessary:
(a) Where the bill is payable at a given time after acceptance or after sight.
(b) Where the bill expressly stipulates that it shall be presented for acceptance before presented for
payment.
(c) Where the bill is made payable at a place other than the place of residence or business of the
drawee.
In no other case is presentation for acceptance necessary in order to render liable any party to
the bill.
Types of Acceptance:
Acceptance may be either general or qualified.
General Acceptance: An acceptance is said to be general when the drawee accepts the bill without
qualification to the order of the drawer. If the acceptance is not absolute, the holder may treat the bill
as dishonoured by non- acceptance
Qualified Acceptance: An acceptance is said to be qualified when the drawee accepts the bill subject
to qualification. It may be noted that an acceptance will not be treated as a qualified acceptance
unless the qualification is expressed on the bill in the clearest language. The qualification may relate to
an event, amount, place, time, etc.
Circumstances indicating Qualified Acceptance
According to Section 86, an acceptance is qualified under the following circumstances:
(a) Where it undertakes the payment on the happening of an event therein stated;
(b) Where it undertakes the payment of part only of the sum ordered to be paid;
(c) Where it undertakes the payment at a specified place of his choice and not otherwise or elsewhere;
(d) Where it undertakes the payment at a time other than that at which under the order it would be
legally due.
(e) Where it is not signed by all drawees who are not partners.
ASSIGNMENT OF NEGOTIABLE INSTRUMENTS
Assignment takes place where the holder of an instrument transfers it to another so as to confer a
right on the transferee to receive the payment of the instrument. All negotiable instruments are chose
in action and as such are transferable by assignment without endorsement under sections 130-132
of the Transfer of property act. Assignment of a negotiable instrument is effected by writing without
endorsement. The main feature of assignment is that the assignee obtains the right of the assignor.
Therefore if the assignor’s title is defective assignee’s title will also be defective.
such bata type kia hai ye sara
ReplyDelete