306F Principles of Negotiable Instruments

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PREFACE
LL.B. Study Notes
306F Principles of Negotiable instruments
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This is PREFACE. Menu ---> CONTENTS | Module-1 | Module-2 | Module-3
Refer : Bare acts are a good source, in any subject of law :

http://ecourts.gov.in/sites/default/files/negotiable%20instruments%20act.pdf
https://www.lawfinderlive.com/bts4/NEGO-IA.htm
http://nadfm.nic.in/learning/SAS%20PAPER%20VII/SAS%20PAPER%20VII%20(NS)
%20FILES/C-%20Section%20III-Elements%20of%20Law/A%20-Commercial
%20Law/D-Negotiable%20Instrument%20Act%20.doc
http://cyberadvocate.in/pluginfile.php/1365/mod_resource/content/1/the-negotiable-
instruments-act-1881.pdf
http://assets.cacharya.com/Negotiable-Instruments-Act-1881-J9MXQE45.pdf?
1437739338
CONTENTS | Module-1 | Module-2 | Module-3 http://duralex.bhatt.net.in/

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CONTENTS
306F Principles of Negotiable instruments
Topic Page
Module-1 Introduction. 3
Module-2 Various terms and phenomenon under the Act. 34
Module-3 Special provisions relating to Dishonour of Cheque and its 63

remedies.
Objectives of the course :

In a fast growing society, no business transaction is possible in absence of any
Negotiable Instrument. It has now become very essential, not only for the law students
but even for a common man to know the provisions relating to transaction of the
Negotiable Instruments like Promissory Notes, Bills of Exchange and Cheques. It is very
important to know all the rights conferred to the payee and remedies available to him to
recover the debts from the debtor under the Act. Being innocent and bonafide payee of
any instrument, one can claim all the rights available over any Negotiable Instrument
and claim the amount mentioned therein. The provisions relating to Electronic Cheque is
also required to be studied along with the basic concept and types of the Negotiable
Instruments under the Act.
There is a drastic change in the provisions relating to dishonour of cheque and its
remedies available to the creditor under the Negotiable Instruments Act, 1881. In the
year 2002, there are significant amendments made in Chapter XVII of the Negotiable
Instruments Act, 1881 in order to effectively protect the right of the Payee of a cheque.
The Burden of Proof is upon the drawer of the cheque in the criminal prosecution. Mens
rea is not considered at all. The entire chapter is to be studied taking into consideration
various important decisions of the Supreme Court on the different issues arising out of
civil and criminal litigations relating to dishonour of cheque.

Module-1 :
1) Introduction :
1.1) The Negotiable Instruments Act, 1881 : Object and Reasons
1.2) Types of Negotiable Instruments
1.3) Negotiable Instruments covered under the Act: Promissory Notes, Bills of
Exchange and Cheques including Electronic Cheque, Validity period of
cheque (3 months by RBI amendment)
1.4) Definition and Characteristics of the Negotiable Instruments
1.5) Presumptions relating to Negotiable Instruments
1.6) Drawer, Drawee and Payee : Definition, Rights and duties
1.7) Holder and Holder in due course : advantages, rights and powers
1.8) Distinction between Holder and Holder in due course
This is Module-1. Menu ---> CONTENTS | Module-1 | Module-2 | Module-3
MODULE-1 QUESTIONS :
Discuss various terms under the NI Act 1881. <Just definitions>

Explain in detail the Definition of Negotiable Instrument and its kinds. (Mar-
2014)
Explain : Objects and reasons of the Negotiable Instruments Act, 1881. (Nov-2014)
Explain in detail the characteristics and presumptions of the Negotiable
Instruments. (Apr-2016)
Explain the provisions of Bill of Exchange and distinguish between Bill of
Exchange and Promissory Note. (Mar-2014)
Explain in detail essential factors of a valid Promissory Note. Distinguish it from Bill
of Exchange. (Nov-2014)
Define and explain in detail the essential ingredients of the Promissory Note. How it
differs from Bills of Exchange ? (Dec-2015)
What do you mean by Bills of Exchange ? Explain its elements in detail. Distinguish
it from cheque. (Dec-2015)
Explain : Electronic Cheque. (Dec-2015)
Explain in detail the various kinds of Negotiable Instruments and its provisions with
case laws. (Apr-2016)
Explain : Objects and reasons of the Negotiable Instruments Act, 1881. (Nov-

2014)
Discuss : Capacities of various parties to the NI and their rights, duties,
liabilities.
Explain in detail the Rights and Duties of the Drawee and Payee of the Negotiable
Instruments with case laws. (Mar-2014)
Discuss : Rights and duties of Drawer.
Explain in detail the definition of the Holder and Holder in due course and
explain in detail their Rights and Duties. (Mar-2014)
Distinguish : Holder and Holder in due course.
Explain in detail with illustrations, the rights of the Holder-in-due course of an
instrument. (Nov-2014)
Define and explain Holder and Holder in due Course. Discuss about the rights
available to Holder in due course of a negotiable instrument. (Dec-2015)
Explain in detail the meaning of the terms Holder and Holder in Due Course and
its provisions with case laws. (Apr-2016)
Other relevant concepts of NI Act 1881 : (i) Banker, (ii) Customer, (iii) Liability of a
banker, (iv) When banker MUST refuse payment, (v) When banker MAY refuse payment,
(vi) Protection of Paying Banker, (vii) Payment in due Course, (viii) Collecting Banker,
(ix) Overdue, Stale or Out-of-date Cheques, (x) Rights of Holder against Banke r, (xi)
Importance of Delivery.
MODULE-1 ANSWERS :
Discuss various terms under the NI Act 1881. <Just definitions>

ANSWER :
Refer :
Bare Act
http://assets.cacharya.com/Negotiable-Instruments-Act-1881-J9MXQE45.pdf?
1437739338
Endorsement -vs- Indorsement :
Endorsement and indorsement are both nouns with similar meaning.
In American English,
Genus. An endorsement is a public indication of approval or support.
Specie. An indorsement is a signature on a legal or financial document,

especially a cheque. However, even in financial documents, endorsement is

commonly used.
Indorsement is only used in financial contexts
Sec-7 :
Sec-7 : Drawer : The maker of a bill of exchange or Cheque
is called the drawer.
Drawee : The person thereby directed to pay
is called the Drawee. eg drawers bank
Sec-7 : 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.
Sec-8 Holder :
The holder of a promissory note, bill of exchange or cheque means
any person entitled in his own name to the possession thereof
and to receive or recover the amount due thereon from the parties thereto.
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.
Sec-9 Holder in due course :
Holder in due course means
(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.
Sec-10 Payment in due course :
Payment in due course means
payment in accordance with the apparent tenor of the instrument in good faith
and without negligence to any person in possession thereof
under circumstances which do not afford a reasonable ground for believing
that he is not entitled to receive payment of the amount therein mentioned.
Sec-13 Negotiable instrument :
(1)
A "negotiable instrument" means a promissory note, bill of exchange or cheque
payable either to order or to bearer.
Explanation (i) - 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.
Explanation (ii) - A promissory note, bill of exchange or cheque is payable to
bearer
which is expressed to be so payable
or on which the only or last endorsement is an indorsement in blank.
Explanation (iii). - Where a promissory note, bill of exchange or cheque,
either originally or by indorsement, is expressed to be payable to the order of
a specified person, and not to him or his order,
it is nevertheless payable to him or his order at his option.
(2)
A negotiable instrument
may 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.
Sec-14 Negotiation :
When a promissory note, bill of exchange or cheque is transferred to any person,
so as to constitute the person the holder thereof,
the instrument is said to be negotiated.
Sec-15 Indorsement :
When the maker or holder of a negotiable instrument
signs the same, otherwise than as such maker,
for the purpose of negotiation,
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
a negotiable instrument,
he is said to indorse the same, and is called the indorser.
Endorser : when the holder endorses the bill to anyone else, holder becomes the
endorser.
Endorsee : is someone to whom the bill is endorsed.
Sec-16 : Indorsement in blank and in full :
(1)
If the indorser signs his name only, the indorsement 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 indorsement is said to be in full,

and the person so specified is called the indorsee of the instrument.

(2)
The provisions of this Act relating to a payee shall apply with the necessary
modifications to an indorsee.
Sec-18 : Where amount is stated differently in figures and words :
If the amount undertaken or ordered to be paid is stated differently in figures and
in words,
the amount stated in words shall be the amount undertaken or ordered to be
paid.
Sec-19 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.
Sec-21 : "At sight" : "On presentment" :
In a promissory note or bill of exchange the expressions "at sight" and "on
presentment" mean on demand.
The expression "after sight" means,
in a promissory note, after presentment sight,
and in a bill of exchange, after acceptance, or noting non-acceptance, or protest
for non-acceptance.
Sec-22 : "Maturity and Days of grace" :
The maturity of a promissory note or exchange
is the date at which it falls due.
Days of grace :
Every promissory note or bill of exchange which is not expressed to be payable
on demand, at sight or on presentment
is at maturity on the third day after the day on which it is expressed to be
payable.

GO TO MODULE-1 QUESTIONS.
GO TO CONTENTS.
Explain in detail the Definition of Negotiable Instrument and its kinds. (Mar-
2014)
Explain : Objects and reasons of the Negotiable Instruments Act, 1881. (Nov-2014)
Explain in detail the characteristics and presumptions of the Negotiable
Instruments. (Apr-2016)

Explain the provisions of Bill of Exchange and distinguish between Bill of

Exchange and Promissory Note. (Mar-2014)
Explain in detail essential factors of a valid Promissory Note. Distinguish it from Bill
of Exchange. (Nov-2014)
Define and explain in detail the essential ingredients of the Promissory Note. How it
differs from Bills of Exchange ? (Dec-2015)
What do you mean by Bills of Exchange ? Explain its elements in detail. Distinguish
it from cheque. (Dec-2015)
Explain : Electronic Cheque. (Dec-2015)
Explain in detail the various kinds of Negotiable Instruments and its provisions with
case laws. (Apr-2016)
ANSWER :
Refer :
https://www.lawyered.in/legal-disrupt/articles/dishonor-cheque-section-138/
https://www.lawfinderlive.com/bts4/NEGO-IA.htm
http://lawnn.com/law-notes-the-negotiable-instruments-act1881-meaning-types/
https://www.lawteacher.net/free-law-essays/contract-law/the-negotiable-
instruments-act-1881-contract-law-essay.php
http://www.srdlawnotes.com/2017/08/characteristics-of-negotiable-
instrument.html
Object :
The Negotiable Instruments Act was prima facie intended to lay down the whole
law regarding cheques, bills of exchange and promissory notes.
Scope :
This Act applies and extends to the whole of India except the State of Jammu and
Kashmir.
Act is not Exhaustive : Negotiable Instruments Act cannot be considered to be
exhaustive of all matters relating to negotiable instruments.
This Act primarily deals with promissory notes, cheques and bill of exchange.
NI Act, merely takes care of matter relating to issuance, negotiation of bills and
notes
and does not touch their assignment and devolution of rights under those
instruments.
This Act does not affect the provisions of Section 25 of the Indian Paper Currency
Act, 1882
which prohibits private persons from issuing any instrument which amounts to
an unconditional promise to pay a certain sum of money to bearer on demand.
Meaning of Negotiable Instrument :

The term Negotiable means transfer by endorsement or delivery

and the term Instrument means any legal document in writing, which is
created in favour of any person.
Thus, Negotiable Instruments are,
written statements implying payment of money, either on demand or within a
particular time period with the drawers/payers name on it.
"Negotiable Instrument" means,
a piece of paper in writing entitling a right to the holder, a certain sum of
money.
It is is transferable
by simple delivery
or sometimes by endorsement and delivery.
A Negotiable Instrument
is a document that includes a promise to pay a certain amount of money to the
bearer of the document.
Its a mode of transferring a debt from one person to another.
Negotiable Instruments are always in written form.
Examples of Negotiable instruments
a cheque, a promissory note, a bill of exchange.
Sec-13 Negotiable instrument :
(1)
A "negotiable instrument" means a promissory note, bill of exchange or
cheque payable either to order or to bearer.
Explanation (i) -
A promissory note, bill of exchange or cheque is payable to order
which is expressed to be so payable to a particular person, and
does not contain words prohibiting transfer or indicating an intention that
it shall not be transferable.
Explanation (ii) -
A promissory note, bill of exchange or cheque is payable to bearer
which is expressed to be so payable or
on which the only or last endorsements is an endorsement is an
endorsement in blank.
Explanation (iii) -
Where a promissory note, bill of exchange or cheque, either originally or by
endorsement, is expressed to be payable to the order of a specified
person, and not to him or his order,

it is nevertheless payable to him or his order at his option.

(2)
A negotiable instrument
may 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.
It has to be noted that Sec-13, does not prohibit any other instrument which
satisfies the essential features of negotiability, to be treated as a negotiable
instrument.
ie Hundi is also a negotiable instrument due to its custom and usage.
Three characteristics which differentiate NI from an ordinary chattel :
{Chattel - tangible movable personal property (as livestock or an automobile)}
(a) the property in the negotiable instruments passes to the holder by mere
delivery.
It is the ownership that passes and not mere possession [ie the right of
retaining it as against the previous owner]
In the case of chattels nobody can claim ownership over a thing as against its
rightful owner.
(b) The holder in due course is not affected by any defects of title on the part of
transferor.
This is not so in the case of chattels.
(c) The holder can sue upon them in his own name.
Holder of a chattel can not sue the transferor.
Other characteristics of NI :
The NI Act recognises only three types of instruments viz., 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 :
1. The instrument should be freely transferable by (i) delivery or (ii)
endorsement and delivery.
The best thing about Negotiable instruments is that they are easily
transferable, negotiable and a good and easy substitute for money.
2. The person who obtains it in good faith and for consideration gets it free
from all defects and can sue upon it in his own name.
3. The holder has the right to transfer. The negotiability continues till the
maturity.
Negotiable instruments are widely used for trade/business.

"A negotiable instrument is one,

the property in which is acquired by one who takes it bona fide and for value,
notwithstanding any defects of title in the person from whom he took it;
from which it follows, that an instrument cannot be negotiable unless it is such
and in such a state that the true owner can transfer the contract or engagement
contained therein by simple delivery of the instrument".
ie the instrument must be complete at the time of the transfer.
Origin of Negotiable Instruments :-
In ancient times, the routes along which vast commerce was carried on were
insecure, and merchants carrying coins were usually robbed of their wealth by
pirates of sea, and robbers on land.
In the course of some centuries there came into existence an idea of exchange,
whereby (Hundi?) Letters of Credit, generally called Bills of Exchange from a
merchant of one country to his debtor who is a merchant of another country,
were issued,
requiring the debt to be paid to a third person who carried the letter of credit to
the place where the debtor resided.
A bill of exchange was thus originally an order to pay a trade-debt, and a system of
such bills afforded a convenient and facile way for the payments of debts in one
country due to a person in another,
without the danger of encumbrance of carrying money from one place to
another.
The law relating to the negotiable instruments has developed out of customs and
usages of the mercantile world in general.
Therefore, although in details this branch of law differs in different countries, the
general outline of the law is the same in almost all the countries.
The position in India was this that before the passing of the Negotiable Instruments
Act of 1881,
the English Bill of Exchange Act
and Law relating to promissory notes (Statutes of William III C 17 and 3 and 4
Anne, C 8), Acts VI of 1840 and V of 1886 of the Governor General in Council
were in force in India.
The Negotiable Instruments Act of 1881 was passed on the basis of a Bill drafted
by the Law Commission in 1866,
which was based on the Principles of English Law of Merchant.
Prior to the passing of this Act, where the parties were Europeans, the English law
relating to negotiable instruments was applied to them. However,
where the parties were Hindus or Mohammadans their personal law governed

the relations between them.

where the analogy between the native Hundies and the English Bills of Exchange
was complete, and there was absence of proof of any special usage, the English
law was held to apply.
Effect of Negotiability :
The general principle of law relating to transfer of property is that
no one can pass a better title than he himself has.
However, NI is an exception.
A bona fide transferee of negotiable instrument for consideration without notice
of any defect of title,
acquires the instrument free on any defect,
i.e., he acquires a better title than that of the transferor.
This exception to general rule arise by virtue of statute or by a custom.
Characteristics of the Negotiable Instruments :
Negotiability :
Negotiable instrument is negotiable by a legally recognized custom of trade or
law
Freely transferable.
The property is a negotiable instrument passes from the one person to another,
by delivery if the instrument is payable to bearer, and
by endorsement and delivery if it is payable order
without notice to the party liable.
A negotiable instrument is a transferable document either by the application of
the law or by the custom of the trade concerned.
Recovery :
The holder in due course can sue upon a negotiable instrument in his own name
for the recovery of the amount.
Further he need not give notice of the instrument to pay.
Free from any defect in the title :
Property in negotiable instrument passes on to a bonafide transferee (holder) for
value free from any defect in the title of the person from whom he obtained it.
The holder of the instrument is presumed to be the owner of the property
contained in it.
Holder is not affected by certain defense which might be available against the
previous holder, for example, fraud, provided he him self is not a party to it.
Holder is not in any way affected by any defect in the title of the transferor of
any prior party.

The instrument is transferable till maturity and in case of cheques till it becomes
stale (on the expiry of 6 months from the date of issue).
Certain equal presumptions are applicable to all negotiable instruments unless the
contrary is proved.
Presumptions of the Negotiable Instruments : [Sec-118 and Sec-119]
http://www.srdlawnotes.com/2017/08/characteristics-of-negotiable-
instrument.html
Following presumption apply to all NI unless contrary is provided :
(a) Consideration.
Every negotiable is presumed to have been made drawn, accepted, endorsed,
negotiable or transferred for consideration.
This would help a holder to get a decree from a court without any difficulty.
(b) Date.
Every negotiable instrument bearing a date is presumed to have been made or
drawn on such date.
(c) Time of acceptance.
When a bill of exchange has been accepted, it is presumed that it was
accepted within a reasonable time of its date and before its maturity.
(d) Time of transfer.
Every transfer of negotiable instrument is presumed to have been made before
its maturity.
(e) Order of endorsements.
The endorsement appearing upon a negotiable are presumed to have been
made in the order in which they appear thereon.
(f) Stamp.
When an instrument has been lost it is presumed that it duly stamped.
(g) Holder a holder in due course.
Every holder of a negotiable instrument is presumed to be holder in due course
(sec 118)
(h) Proof of protest.
In a suit upon an instrument which has been dishonored,
the court, on proof of the protest presumes the fact of dishonor, unless such
fact is disproved (sec 119).
Note :
The above presumptions are rebuttable by evidence.
If any one challenges any of this presumption, he has to prove his allegation.
These presumptions would not arise where an instrument has been obtained by

any offense, fraud or unlawful consideration.

Types 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 bearer when
(i) it is expressed to be so payable, or
(ii) the only or last endorsement on the instrument is an endorsement in
blank,
A person who is a holder of a bearer instrument can obtain the payment of the
instrument.
(2) Order Instruments :
A promissory note, bill of exchange or cheque is payable to order
(i) which is expressed to be so payable; or
(ii) which is expressed to be payable to a particular person, and
does not contain any words prohibiting transfer.
(3) Inland Instruments (Sec-11) :
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.
Exception :
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 :
(i) drawn and made payable in India, or
(ii) drawn in India upon some persons resident therein, even though it is made
payable in a foreign country.
(4) Foreign Instruments :
An instrument which is not an inland instrument, is deemed to be a foreign
instrument.
The essentials of a foreign instrument include that :
(i) it must be drawn outside India and made payable outside or inside India; or
(ii) it must be drawn in India and made payable outside India and drawn on a
person resident outside India.
(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 at sometime in the future.
Eg :
A promissory note or a bill of exchange
payable after a fixed period, or
after sight, or
on specified day, or
on the happening of an event which is certain to happen,
is known as a time instrument.
The expression "after slight" in a promissory note means that the payment
cannot be demanded on it unless it has been shown to the maker.
In the case of bill of exchange, the expression "after sight" means after
acceptance, or after noting for non-acceptance or after protest for non-
acceptance.
Ambiguous Instruments (Section 17) :
<Discussed in Module-2>
Inchoate or Incomplete Instrument (Section 20) :
<Discussed in Module-2>
Other types of NI, by custom or usage :
Some instruments, have acquired the character of negotiability by custom or
usage of trade.
Section 137 of the Transfer of Property Act, 1882, also recognized that an
instrument may be negotiable by law or custom.
(i) delivery order,
(ii) hundis.
Classification of Negotiable Instruments :
Negotiable instruments can be essentially classified as follows : [Sec-13]
(i) promissory note,
(ii) bill of exchange and
(iii) cheque.
1. Promissory Note :
A promissory note is that written document, by way of which a written promise
to pay a certain amount of money taken/ levied from the payee is made.
Sec-4 : Promissory note :
A promissory note is 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
Illustrations : Following (a) & (b) are promissory notes. Others are NOT.
A signs instruments in the following terms
(a) "I promise to pay B or order Rs. 500."
(b) "I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on
demand, for value received."
(c) Mr. B, O U Rs. 1,000."
(d) I promise to pay B Rs. 500 and all other sums which shall be due to
him."
(e) I promise to pay B Rs. 500, first deducting thereout any money which he
may owe me."
(f) " I promise to pay B Rs. 500 seven days after my marriage with C."
(g) " I promise to pay B Rs. 500 on D's death, provided D leaves me enough
to pay that sum."
(h) " I promise to pay B Rs. 500 and to deliver to him black horse on 1st
January next."
Parties to a promissory note :
(a) The maker : the person who makes or executes the note promising to pay
the amount stated therein.
(b) The payee : one to whom the note is payable.
(c) The holder : is either the payee or some other person to whom he may
have endorsed the note.
Note : (Section 31 of the RBI Act)
A promissory note cannot be made payable or issued to bearer, no matter
whether it is payable on demand or after a certain time.
Characteristics of a Promissory Note : To be a promissory note. an instrument
must possess the following essentials :
(a) It must be in writing. An oral promise to pay will not do.
(b) It must contain an express promise or clear undertaking to pay.
A promise to pay cannot be inferred. A mere acknowledgement of debt is
not sufficient.
If A writes to B "I owe you (I.O.U.) Rs. 500", there is no promise to pay and
the instrument is not a promissory note.

(c) The promise or undertaking to pay must be unconditional.

A promise to pay "when able", or "as soon as possible", or "after your
marriage to xyz", is conditional.
But a promise to pay after a specific' time or on the happening of an event
which must happen, is not conditional,
e.g. "I promise to pay Rs. 1,000 ten days after the death of B", is
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 ,
ie the note must show clearly who is the person engaging himself to pay.
(f) The payee must be certain.
The promissory note must contain a promise to pay to some person or
persons ascertained by name or designation or to their order.
(g) The sum payable must be certain and the amount must not be capable of
contingent additions or subtractions.
Eg If A promises to pay Rs. 100 and all other sums which shall become due
to him, the instrument is not a promissory note.
(h) Payment must be in legal money of the country.
Thus, a promise to pay Rs. 500 and deliver 10 kgs of rice is not a
promissory note.
(i) It must be properly stamped in accordance with the provisions of the Indian
Stamp Act.
Each stamp must be duly cancelled by maker's signature or initials.
(j) It must contain the name of place, number and the date on which it is
made. However, their omission will not render the instrument invalid,
eg if it is undated, it is deemed to be dated on the date of delivery.
2. Bill of Exchange :
Sec-5. Bill 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.
Note :
A promise or order to pay is not conditional by reason of

the time for payment of the amount or any installment thereof

being expressed to be on the lapse of certain period after the occurrence of
a specified event which 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 payment is to be made
may be a certain person within the meaning of this section and section 4,
although he is misnamed or designated by description only.
The following are parties to a bill of exchange :
(a) Drawer : person who makes the bill of exchange.
(b) Drawee : A person on whom the bill is drawn
(c) Payee : to whom the amount mentioned in the bill of exchange is payble
Essentials of a Bill of Exchange :
(1) It must be in writing.
(2) It must contain an unconditional order to pay money (not merely a
request)
(3) It must be 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.
3. Cheque :
A cheque in general is that document that orders a payment of money from a
bank account.
Sec-6. Cheque :
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.
Explanation I.-For the purposes of this section, the expressions-

(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 biometric signature) and asymmetric crypto
system;
(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.
Explanation II. -For the purposes of this section, the expression clearing
house means the clearing house managed by the Reserve Bank of India or a
clearing house recognised as such by the Reserve Bank of India.
A cheque is always payable by the banker only 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.
By virtue of Section 31 of the Reserve Bank of India Act,
Only a cheque can be payable to bearer on demand.
No bill of exchange or hundi can be made payable to bearer on demand, and
no promissory note or a bank draft can be made payable to bearer,
whether on demand or after a specified time.
Parties to a cheque : The following are the parties to a cheque :
The drawer : The person who draws/ writes the cheque.
The drawee : The banker of the drawer on whom the cheque is drawn.
The payee
Essentials of a Cheque :
(1) It is always drawn on a banker.
(2) It is always payable on demand.
(3) It does not require acceptance. There is, however, a custom among banks
to mark cheques as good for purposes of clearance.
(4) A cheque can be drawn on bank where the drawer has an account.
(5) Cheques 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 fix months. However, it is not invalid if it is
post dated or ante-dated.
(8) No Stamp is required to be affixed on cheques.
Kinds of cheques :
Bearer Cheque
Crossed Cheque
Open cheque
Order Cheque
Marked Cheque
Not payable or bad cheque
Ante-dated Cheque
Post dated Cheque
Stale Cheque
Multilated Cheque
Digital Cheque- Cheques in Electronic form and Truncated Cheques.
Banker Cheque
Golden Cheque
Travelers Cheque
4. Electronic cheque :
http://www.investopedia.com/terms/e/electroniccheck.asp
An electronic cheque is an electronic copy (scanned image) of a real cheque,
which is then transferred by email.
In addition to the cheque's 'real' signature, the transfer must be digitally signed
using the sender's private key to authenticate the transfer.
Electronic cheque,
is a form of payment made via the internet, or other data network,
is designed to perform the same function as a conventional paper check.
Since the cheque is in an electronic format, it can be processed in fewer steps.
Additionally, it has more security features than standard paper checks including
authentication,
public key cryptography,
digital signatures
and encryption, among others.
An electronic check is part of the larger electronic banking field and part of a
subset of transactions referred to as electronic fund transfers (EFT),

EFT include not only electronic checks but also other computerized banking
functions such as
ATM withdrawals and deposits, debit card transactions and remote cheque
depositing features.
ETF transactions require the use of various computer and networking
technologies to gain access to the relevant account data to perform the
requested actions.
Development of the Electronic Cheque :
Electronic cheques were developed in response to the transactions that arose
in the world of electronic commerce.
Electronic cheques can be used to make a payment for any transaction that a
paper cheque can cover, and are governed by the same laws that apply to
paper cheques. This was the first form of internet-based payment used by the
U.S. Treasury for making large online payments.
Benefits Associated With Electronic Cheques :
Generally, the costs associated with issuing an electronic cheques are lower
than those associated with paper cheques.
It is estimated that while a traditional cheque may cost as much as $1 to
issue, an electronic cheque costs closer to $0.10.
There no requirement for a physical paper cheque, which costs money to
produce.
Electronic cheques do not require physical postage in cases of outstation
payments.
Electronic cheques have lower risk of the associated funds being stolen, as
there is no tangible item to intercept.
There are multiple levels of authentication to help ensure funds are routed
properly.
Common Electronic Cheques :
One of the more frequently used versions of the electronic cheque is the
direct deposit system offered by many employers.
It is an electronic method of sending an employees wages directly into the
employees bank account.
Additionally, tax payers due a refund on federal tax returns can elect to
receive a directly deposited electronic cheque from the Income Tax
Department instead of having a physical paper check sent through the mail.
Distinguish Promissory note from Bill of Exchange :
Most of the rules which apply to promissory notes are in general applicable to bill
of exchange.
The following are the important points of distinction :

(a) A promissory note is a two-party instrument, with a maker (debtor) and a

payee (creditor).
In a bill. there are three parties - drawer, drawee and payee , though any two
out of the three capacities may be filled by one and the same person.
In a bill; the drawer is the maker who orders the drawee to pay the bill to a
person called the payee or to his order.
When the drawee accepts the bill he is called the acceptor,
(b) A note cannot be made payable to the maker himself,
while in a bill, the drawer and payee may be the same person.
(c) A note contains an unconditional promise by the maker to pay to the
payee or his order;
in a bill there is an unconditional order to the drawee to pay according to
the directions of the drawer.
(d) A note is presented for payment without any prior acceptance by the maker.
A bill payable, after sight, must be accepted by the drawee or someone else
on his behalf before it can be presented for payment.
(e) The liability of the maker of a promissory note is primary and absolute,
but the liability of the drawer of a bill is secondary and conditional.
(f) In case of dishonour of foreign note, no protest is necessary
while foreign bill must be protested for dishonour
(g) When a note is dishonoured no notice need to be given.
When a bill is dishonoured, due notice of dishonour is to be given by the holder
to the drawer and the intermediate endorsee,
(h) A promissory note cannot be made payable to bearer, even if it is made
payable otherwise than on demand.
A bill can be drawn payable to bearer provided it is not payable on demand.
(i)
a bill of exchange can bind one party to pay a third party the money who was
not a party to the bill of exchange at the time it was executed.
Distinguish bill of exchange from cheque :
A cheque is a bill of exchange drawn on a specified banker and always payable on
demand.
Consequently, all cheques are bills of exchange but all bills are not cheques.
As a general rule, the provisions applicable to bills payable on demand apply to
cheques.
However, there are few points of distinction between the two, namely :
(a) A cheque is a bill of exchange and always drawn on a banker,

while a bill may be drawn on anyone, including banker.

(b) A cheque can only be drawn payable on demand,
a bill may be drawn payable on demand, or on the expiry of a specified' period
after sight or date.
(c) A cheque does not require acceptance and is intended for immediate
payment.
A bill payable after sight must be accepted by drawee before payment can be
demanded,
(d) No grace is given in the case of a cheque, for payment.
Grace of 3 days is allowed in the case of time bills,
(e) The drawer of a cheque is discharged only if he suffers any damage by delay
in presentment for payment.
The drawer of a bill is discharged, if it is not presented for payment,
(f) Notice of the dishonour of a cheque is not necessary
in case of bill it is necessary.
(g) The cheque being a revocable mandate, the authority may be revoked by
countermanding payment, and is determined by notice of the customer's death
or insolvency.
This is not so in the case of bill.
(h) A cheque may be crossed,
but not a bill
Discuss : Capacities of various parties to the NI and their rights, duties,

liabilities.
ANSWER :
Refer :
http://nadfm.nic.in/learning/SAS%20PAPER%20VII/SAS%20PAPER%20VII
%20(NS)%20FILES/C-%20Section%20III-Elements%20of%20Law/A%20-
Commercial%20Law/D-Negotiable%20Instrument%20Act%20.doc
Capacity of Parties :
Capacity to incur liability as a party to a negotiable instrument is co-extensive with
capacity to contract.
Sec-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.

Thus, minors, lunatics, idiots, drunken person and persons otherwise disqualified
by their personal law, do not incur any liability as parties to negotiable
instruments.
But incapacity of one or more of the parties to a negotiable instrument in no way,
dimnishes the abilities and the liabilities of the competent parties.
ie Where a minor is the endorser or payee of an instrument which has been
endorsed all the parties accepting the minor are liable in the event of its
dishonour.
Liability of Parties : [Sec-30 to 32 and Sec-35-42]
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 :
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 :
By drawing a bill, the drawer 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.
Liability of the Drawee of Cheque (Section 31) :
The drawee of a 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 a bill of exchange, drawn on a specified banker, the drawee of a
cheque must always be a banker.
The banker, therefore, is bound to pay the cheque of the drawer, ie customer, if

the following conditions are satisfied :

(i) The banker has sufficient funds to the credit of customer's account.
(ii) The funds are properly applicable to the payment of such cheque, eg 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 is unjustified in refusing to honour the cheque of its customer, it
shall be liable for damages.
Liability of "Maker" of Note and ''Acceptor of Bill (Section 32) :
In the absence of a contract to the contrary,
the maker of a 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.
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 the contract to the contrary (eg
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 any-one else, and it must be made at maturity and not before.
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
(i) there is no contract to the contrary;
(ii) he (endorser) has not expressly excluded, limited or made conditional
his own liability; and
(iii) 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.

(Section 88) He is bound by his endorsement notwithstanding any previous

alteration of the instrument.
Liability of Prior Parties (Section 36) :
Every prior party to a negotiable instrument is liable thereon to a holder in due
course until the instrument is duly satisfied.
Prior parties may include the maker or drawer, the acceptor and all the
intervening endorsers to a 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.
Liability interse :
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.
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 to believe
the endorsement to be forged when he accepted the bill.
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 purporting to be made by the drawer.
Explain in detail the Rights and Duties of the Drawee and Payee of the Negotiable
Instruments with case laws. (Mar-2014)
Discuss : Rights and duties of Drawer.
ANSWER :
Refer :

Rights and duties of Drawer :

Rights and duties of Drawee :

Rights and duties of Payee :

Explain in detail the definition of the Holder and Holder in due course and
explain in detail their Rights and Duties. (Mar-2014)
Distinguish : Holder and Holder in due course.
Explain in detail with illustrations, the rights of the Holder-in-due course of an
instrument. (Nov-2014)
Define and explain Holder and Holder in due Course. Discuss about the rights
available to Holder in due course of a negotiable instrument. (Dec-2015)
Explain in detail the meaning of the terms Holder and Holder in Due Course and
its provisions with case laws. (Apr-2016)
ANSWER :
Refer :
page- 21 http://nadfm.nic.in/learning/SAS%20PAPER%20VII/SAS%20PAPER
%20VII%20(NS)%20FILES/C-%20Section%20III-Elements%20of%20Law/A%20-
Holder :
Sec-8 Holder :
The holder of a promissory note, bill of exchange or cheque means
any person entitled in his own name to the possession thereof
and to receive or recover the amount due thereon from the parties thereto.
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.
It is not every person in possession of the instrument who is called a holder.
To be a holder,
the person must be named in the instrument as the payee, or the endorsee, or
he must be the bearer thereof.
A person who has obtained possession of an instrument by theft, or under a forged
endorsement, is not a holder because he is not entitled to recover the instrument.
The holder implies de jure holder (holder in law) and not de facto holder (holder in
fact).
An agent holding an instrument for his principal is not a holder although he may
receive its payment.
Rights and Duties :


Holder in Due Course :

Sec-9 Holder in due course :
Holder in due course means
(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.
Conditions for being a holder in due course :
(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.
Once an instrument passes through the hands of a holder in due course, it is
purged of all defects.
It is like current coin. Whoever takes it can recover the amount from all parties
previous to such holder.
A holder in due course can recover the amount of the instrument from all previous
parties,
although, as a matter of fact, no consideration was paid by some of the previous
parties to the instrument
or there was a defect of title in the party from whom he took it.
Rights and Duties :

Difference between Holder and Holder in due course :

Other relevant concepts of NI Act 1881 : (i) Banker, (ii) Customer, (iii) Liability of a
banker, (iv) When banker MUST refuse payment, (v) When banker MAY refuse payment,
(vi) Protection of Paying Banker, (vii) Payment in due Course, (viii) Collecting Banker,

(ix) Overdue, Stale or Out-of-date Cheques, (x) Rights of Holder against Banker, (xi)
Negotiation and Assignment, (xii) Importance of Delivery, (xiii) Negotiation by Mere
Delivery, (xiv) Negotiation by Endorsement and Delivery..
ANSWER :
Refer :
(i) Banker :
A banker is one who does banking business.
Sec-5(b) of the Banking Regulation Act, 1949 :
Banking means,
"accepting for the purpose of lending or investment, of deposits of money from
the public, repayable on demand or otherwise and withdrawal by cheque, draft
or otherwise."
This definition emphasises 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.
The demand for repayment can be made through a cheque, draft or otherwise, and
not merely by verbal order.
(ii) Customer :
The term "customer" is neither defined in Indian nor in English statutes.
The general opinion is that a customer is one who has an account with the bank or
who utilises the services of the bank.
The special features of the legal relationship between the banker and the customer
may be termed as the obligations and rights of the banker. These are :
1. Obligation to honour cheques of the customers.
2. Obligation to collect cheques and drafts on behalf of the customers.
3. Obligation to keep proper record of transactions with the customer.
4. Obligation to comply with the express standing instructions of the customer.
5. Obligation not to disclose the state of customer's account to anyone else.
6. Obligation to 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.
(iii) 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 cheques drawn by the customer so long as he holds sufficient funds
to the customer's credit.
If a banker, without justification, fails to honour customer's cheques, 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 cheques is only towards the drawer.
The banker must also maintain proper and accurate accounts of credits and debits.
(iv) When banker MUST refuse payment : In the following cases, the banker MUST
refuse to honour cheques issued by the customer :
(a) When a customer countermands payment ie, where or when a customer, after
issuing a cheque issues instructions not to honour it, the banker must not pay it.
(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., Seizure 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.
(v) 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 has not 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, e.g., it is presented after banking
hours.
(e) When the cheque on the face of it is irregular, ambiguous or otherwise
materially altered.
(f) When the cheque is presented at a 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, ie it has not been

presented within six months of the date mentioned on it.

(vi) Protection of Paying Banker : (Sections 10, 85 and 128)
Sec-85 :
where a cheque payable to order purports to be endorsed by or on behalf of the
payee,
the banker is discharged by payment in due course.
He can debit the account of the customer with the amount even though the
endorsement turns out subsequently to have been forged, or the agent of the
payee without authority endorsed it on behalf of the payee.
Here, the payee includes endorsee.
This protection is granted because a banker cannot be expected to know the
signatures of all the persons in the world. He is only bound to know the signatures
of his own customers.
However, the forgery of drawer's signature will not ordinarily protect the banker,
but even in this case, the banker may debit the account of the customer, if it can
show that the forgery was intimately connected with the negligence of the
customer and was the proximate cause of loss.
In the case of bearer cheques, the rule is that
once a bearer cheque, always a bearer cheque.
Where, therefore, a cheque originally expressed by the drawer himself to be
payable to bearer,
the banker may ignore any endorsement on the cheque.
He will be discharged by payment in due course.
A banker is discharged from liability on a crossed cheque if he makes payment in
due course.
(vii) Payment in due Course : (Section 10)
Under Sections 10 and 128, a paying banker making payment in due course is
protected.
Any person liable to make payment under a negotiable instrument,
must make the payment of the amount due thereunder in due course in order to
obtain a valid discharge against the holder.
Sec-10 : A payment in due course means
a payment in accordance with the apparent tenor of the instrument, in good
faith and without negligence to any person in possession thereof.
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;
(viii) Collecting Banker : (Section 126)
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.
Sec-126 :
A cheque bearing a "general crossing" shall not be paid to anyone other than
banker
and a cheque which is "specially crossed" shall not be paid to a person other
than the banker to whom it is crossed.
Thus, a paying banker must pay a generally crossed cheque only to a banker
thereby meaning that it should be collected by another banker.
While so collecting the cheques for a customer, it is quite possible that the banker
collects for a customer, proceeds of a cheque to which the customer had no title in
fact.
In such cases, the true owner may sue the collecting banker for "conversion".
At the same time, 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.
A customer to whom a cheque has been endorsed, would request his banker to
collect a cheque.
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.
(ix) Overdue, Stale or Out-of-date Cheques :
A cheque is overdue or becomes statute-barred after 3 years from its due date
of issue.

A holder cannot sue on the cheque after that time.

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.
(x) 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,
(i) 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 banker pays a crossed cheque by mistake over the counter, he is
liable to the owner for any loss occasioned by it.
(xi) Importance of Delivery :
Negotiation is effected
by mere delivery of a bearer instrument
and by endorsement and delivery of an order instrument.
This shows that "delivery" is essential in negotiable instruments.
Sec-46 :
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 the person to whom it is given is essential.

Module-2 :
2) Various terms and phenomenon under the Act :
2.1) Ambiguous Instrument, Inchoate Stamped Instrument
2.2) Drawee in case of need
2.3) Acceptance for honour, Payment for honour
2.4) Notice of Dishonour, liabilities of Drawee and Drawer
2.5) Maturity of Negotiable Instrument and Days of Grace
2.6) Endorsement : Types and advantages
2.7) Crossing of Cheque : kinds of crossing, advantages of crossing
2.8) Negotiation of Instrument, Negotiation Back
2.9) Noting and Protest
Explain in detail the meaning of the terms Ambiguous Instruments and Inchoate
Stamped Instruments and its provisions with case laws. (Apr-2016)
Explain : Ambiguous Instrument. (Nov-2014, Dec-2015)
Explain : Inchoate Stamped Instrument. (Nov-2014)
Explain in detail the provisions relating to the Drawee in case of Need with case laws.
(Apr-2016)
Explain : Drawee in case of need. (Dec-2015)
Explain : Acceptance for honour and payment for honour. (Nov-2014, Dec-2015)
Discuss : Notice of Dishonour, liabilities of Drawee and Drawer .
Explain : Maturity and days of grace. (Nov-2014)
What do you mean by Endorsement ? Explain the types of Endorsement and the
effects thereof. (Nov-2014)
Discuss : Forged Endorsement.
Explain in detail the Types of Crossing and Kinds of Endorsement. (Mar-2014)
Explain : Endorsement and its kinds (Dec-2015)
Explain in detail the various kinds of crossing of cheques and its provisions with
decided cases. (Apr-2016)
Define and explain the term Cheque and Electronic Cheque. Describe in detail

various type of crossing and advantages thereof. (Nov-2014)

Explain : Types of Crossing (Dec-2015)
Explain : Negotiation and Negotiation Back. (Nov-2014)
Explain : Negotiation Back (Dec-2015)
Discuss : (i) Negotiation and Assignment (ii) Negotiation by Mere Delivery, (iii)
Negotiation by Endorsement and Delivery
Discuss : Noting and Protest.
Discuss : (i) Discharge of the Instrument, (ii) Discharge of a party or parties .
MODULE-2 ANSWERS :
Explain in detail the meaning of the terms Ambiguous Instruments and Inchoate
Stamped Instruments and its provisions with case laws. (Apr-2016)
Explain : Ambiguous Instrument. (Nov-2014, Dec-2015)
Explain : Inchoate Stamped Instrument. (Nov-2014)
ANSWER :
Refer :
Ambiguous Instrument (Sec-17) :
Sec-17 :
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.
Note :
An Ambiguous Instrument treated as a P/N or as a B/E cannot be treated
differently afterwards.
Example:-
A bill is drawn by A, an agent, acting within the scope of his authority upon his
principal, P.
The holder may at his option, treat it as a note or a bill,

because the drawer (A) and the drawee (P) are the same person.
Sec-5(2) :
Where in a bill, the drawer and the drawee are the same person or
where the drawee is a fictitious person or a person incompetent to contract,
the holder may treat the instrument, at his option, either as a bill of
exchange or as a promissory note.
Bill drawn to or to the order of the drawee
or by an agent on his principal,
or by one branch of a bank on another
or by the direction of a company or their cashier
are also ambiguous instruments.
A promissory note addressed to a third person may be treated as a bill by such
person by accepting it,
while a bill not addressed to anyone may be treated as a note.
But where the drawer and payee are the same (eg where A draws a bill payable to
A's order),
it is not an ambiguous instrument and cannot be treated as a promissory note.
Inchoate or Incomplete Instrument (Sec-20) :
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 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.
Such an instrument is called an inchoate instrument.
Sec-20 Inchoate stamped instruments : Blank cheque ?
Where one person
signs and delivers to another a paper stamped in accordance with the law
relating to negotiable instruments
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 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 any thing in excess of
the amount intended by him to be paid thereunder.
Conditions for an inchoate instrument :
A person signs a negotiable instrument.
The negotiable instrument is stamped.
The negotiable instrument is either wholly blank or is partially blank.
The person signing such negotiable instrument delivers it to another person.
The authority to fill up a blank or incomplete instrument may be exercised by any
"holder" and not only the first holder to whom the instrument was delivered.
The person signing and delivering the paper is liable both to a "holder" and a
"holder-in-due-course". But there is a difference in their respective rights.
A "holder" can recover only what the person signing and delivering the paper
agreed to pay under the instrument,
while a "holder-in- due-course" can recover the whole amount made payable by
the instrument provided that it is covered by the stamp, even though the
amount authorised was smaller.
Example :-
A bill is drawn payable to..................or order.
Legal effect :
The holder gets a prima facie authority to make or complete the negotiable
instrument.
Liability on an inchoate instrument :
A person to whom an inchoate instrument is delivered,
can recover only such amount as he was authorised to fill.
Rights of Holder in Due Course :
He can recover the whole amount stated in the instrument, but not exceeding
the amount covered by the stamps.
Eg A owes B Rs. 1000. He gives B a blank acceptance on a bill which is
sufficiently stamped to cover any amount upto Rs. 2,000.
B indorses the bill to H, a Holder in due Course.
H can fill up the amount as Rs. 2000, and recover the amount.


GO TO CONTENTS.
Explain in detail the provisions relating to the Drawee in case of Need with case laws.
(Apr-2016)
Explain : Drawee in case of need. (Dec-2015)
ANSWER :
Refer :

Sec-7 : Drawee in case of need : When the bill or in any indorsement thereon,
the name of any person is given in addition to the drawee to be resorted to in
case of need (when the bill is dishonoured by either non-acceptance or non-
payment.)
such person is called a drawee in case of need.

Explain : Acceptance for honour and payment for honour. (Nov-2014, Dec-2015)
ANSWER :
Refer :
Acceptance of a Bill of Exchange :
The drawee of a bill of exchange, as such, has no liability on any bill addressed 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 sign 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 assent 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.
An acceptance may be either general or qualified.
A general acceptance is absolute and as a rule, an acceptance has to be general.

Where an acceptance is made subject to some condition or qualification, thereby

varying the effect of the bill, it is a qualified acceptance.
The holder of the bill may either refuse to take a qualified acceptance or non-
acquiescence in it.
Where he refuses to take it, he can treat the bill as dishonoured by non-
acceptance, and sue the drawer accordingly.
Acceptance for Honour :
Sec-7 : Acceptor : After the drawee of a bill has signed his assent upon the bill
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 honour is 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.
When a bill has been noted or protested 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 under his hand that he accepts the
protested bill for the honour of the drawer or any particular endorser whom he
names.
Sec-7 : Acceptor for honour : 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 honour of the drawer or of any one of the indorser,
such person is called an acceptor for honour.
When a bill is paid supra protest, it ceases to be negotiable.
The stranger, on paying for honour, acquires all the right of holder for whom he
pays.
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
and the bill has been noted and protested for non-payment.
Presentment for Acceptance :
It is only bills of exchange that require presentment for acceptance and even these
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 :
(a) A bill payable after sight. Presentment is necessary in order to fix maturity of
the bills; and
(b) A bill in which there is an express stipulation that it shall be presented for
acceptance before it is presented for payment.
The presentment for acceptance must be made to the drawee or his duly
authorised agent.
If 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 :
(i) The drawee or his duly authorised agent.
(ii) If there are many drawee, bill must be presented to all of them.
(iii) The legal representatives of the drawee if drawee is dead.
(iv) The official receiver or assignee of insolvent drawee.
(v) To a drawee in case of need, if there is any. This is necessary when the
original drawee refuses to accept the bill.
(vi) The acceptor for honour. In case the bill is not accepted and is noted or
protested for non-acceptance, the bill may be accepted by the acceptor for
honour. He is a person who comes forward to accept the bill when it is
dishonoured by non-acceptance.
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.
When presentment is compulsory and the holder fails to present for acceptance,
the drawer and all the endorsers are discharged from liability to him.
Presentment for Acceptance when Excused :
Compulsory presentment for acceptance is excused 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.
Discuss : Notice of Dishonour, liabilities of Drawee and Drawer.

ANSWER :
Refer :
https://www.lawteacher.net/free-law-essays/contract-law/the-negotiable-
instruments-act-1881-contract-law-essay.php
Parties and capacity of parties to contract :
The parties to a negotiable instrument, namely, the maker, drawer, drawee and
the payee, enter in to a contract among themselves.
It is therefore very essential that they should have a capacity to enter in to a valid
contracts.
Sec-26 : Capacity to make promissory note :
Every person capable of contracting, according to the law to which he is
subject,
may bind himself and be bound by the making, drawing, acceptance,
endorsement, delivery and negotiations of a promissory note, bill of exchange
or a cheque".
Minor : A minor may draw, endorse, deliver and negotiate such instruments as
to bind all parties except himself.
Nothing herein contained shall be deemed to empower a corporation to make,
endorse or accept such instruments except in cases in which they are so
empowered.
Sec-11 of the Indian Contract Act, states the requirements of parties to contract.
Accordingly,
any person who is of a sound mind, above the age of majority and not
disqualified form entering in to contract by any Act,
is competent to enter in to valid contract.
Dishonour of an instrument :
All notes. bills and cheques must be presented for payment to the maker, acceptor
or drawee thereof respectively
by or on behalf of the holder during the usual hours of business , and if at
banker's within banking hours.

However in the following cases, no presentment is necessary and the instrument

may be treated as dishonoured :
(a) Where the maker, drawer or acceptor actively does something so as to
intentionally obstruct the presentment of the instrument,
eg 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 notwithstanding 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 drawer and the drawee are the same person.
(j) Where the bill is dishonoured by non-acceptance.
(k) Where presentment has become impossible,
eg declaration of war between the countries of the holder and drawee.
(l) Where though the presentment is irregular, acceptance has been refused on
some other grounds.
Dishonour by Non-Acceptance :
Sec-91 :
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 can not
be found.
(e) Where the acceptance is a qualified one.
Dishonour by Non-payment :
Sec-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 non-payment
when presentment for payment is excused and the instrument when overdue
remains unpaid.
Notice of Dishonour : (Sections 91-98 and Sections 105-107)
If the bill is dishonoured either by non-acceptance or by non- payment,
the drawer and ail 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.
The holder or some party liable thereon must give notice of dishonour to all other
parties whom he seeks 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
but to whom the party notified of his liability
and in 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 so necessary that 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, but it must be actual formal notice.
It must be given within a responsible' time of dishonour.
Notice of Dishonour : When Unnecessary :
No notice of dishonour is necessary :
(a) When it is dispensed with or waived by the party entitled thereto,
eg where an endorser writes on the instrument such words as "notice of
dishonour waived" ,
(b) When the drawer has countermanded (reversed) payment.
(c) When the party charged would not suffer damage for want of notice.
(d) When the party entitled to notice cannot after due search be found.
(e) When the omission to give notice is caused by unavoidable circumstances,
eg death or dangerous illness of the holder.
(f) Where the acceptor is also a drawer, eg where a firm draws on its branch.
(g) Where the promissory note is not negotiable. Such a note cannot be

endorsed.
(h) Where the party entitled to notice promises to pay unconditionally.
Liabilities of Drawee :

Liabilities of Drawer :
Liability of drawer of bill or a cheque :
Essentially the liability of the parties to a negotiable instrument has it statutory
provisions under Sections 30, 32 and 35 of the Negotiable Instruments Act 1881.
The first section in this aspect to be analyzed, would be S.30 of the Act, which
provides for the Liability of the drawer of the bill or a cheque.
The drawer of the cheque, as defined by S.7 of the Act, is
The maker of a bill of exchange or Cheque"
Thus Section 30 of the Act, goes on to define the liability of the drawer of a bill
or cheque
Sec-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 give
to, or received by, the drawer as hereinafter provided"
The important thing to be noted here is that
the liability of the drawer here arises only in case of
dishonor of the cheque
or a bill of exchange
and nothing prior to it.
A bill of exchange it is seen is dishonored by non-acceptance or by non-
payment,
but on the other hand, a cheque, is dishonored by non-payment only.
As soon as this bill or exchange or a cheque has been dishonored by non-
acceptance by the drawee,
it is seen that the holder has the right to recourse against the drawer.
The drawee, as per Section 7 of the Act,
is the person directed to pay"
It also has to be noted that the drawer, becomes liable only when the bill of
exchange or the cheque has been dishonored by the drawee.
But unlike the bill of exchange, it has to be noted that
in case of dishonor of a cheque, the drawer remains liable thereto, even if the
cheque is not presented by the holder to the drawer bank.

This was held by the Supreme Court, in Harish Cnander v. M/s. Ganga Singh and
Sons and others.
Here again the relevance of Sections 72 and 84, were looked in to. These
sections essentially deal with the discharge of the drawers liability, in case he
suffers damage as a result in the presentment of the cheque
Another aspect that needs to be looked in to before the drawer can be held
liable, is the fact that due and sufficient prior notice of dishonor, has been
given.
But again taking Section 98 [8] in to consideration,
no notice is required if the provision of this section are being taken in to
consideration.
It has to be noted that the service of this notice, may be oral or written or may
even be faxed [9] , but it is a must.
V.V.L.N.Chary and Others v. N.A.Martin and others, is another case, which needs
to be looked in to.
The issue here, was whether a post-dated cheque for payment of goods is only
a promise to pay on a future date or not?.
The court, held in the affirmative and stated that it is but a promise.
It further held that if this promise is broken by the dishonor of the cheque,
it would enforce a civil liability only.
The liability of proving the dishonest intention of the drawer was put on the
shoulders of the holder, as the court stated that only if prior knowledge was
present on the drawers part that he intended to dishonor the cheque, can
he be convicted.
This case essentially put the drawer in a rather better position, by ensuring that
unnecessary accusations and liabilities would not be enforced on him.
So then would a drawer ever be criminally liable?.
The answer to this came later on in the Banking, Public Financial Institutions and
Negotiable Instruments Laws (Amendment) Act 1988, which was further
modified by the Negotiable Instruments (Amendment and Miscellaneous
Provisions) Act, 2002.
As per this act, the dishonor of cheques due to the insufficiency of funds, was
deemed to be an offence for which the drawer could be punished with an
imprisonment for a term up to a year or with a fine up to twice the amount of
the cheque or with both.
More specifically Section 138-142, were inserted which deal with these offences.
Sec-31 : Liability of the drawee of the cheque :
The drawee of a 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 so to do, and, in default of such payment, must compensate the
drawer for any loss or damage caused by such default.
Sec-32 : Liability of the maker of the note and the acceptor of the bill
In the absence of contract to the contrary,
the maker of a promissory note and the acceptor before maturity of a bill of
exchange are bound to pay the amount thereof at maturity according to the
apparent tenor of the note or acceptance respectively,
and the acceptor of a bill of exchange at or after maturity is bound to pay
the amount thereof to the holder on demand.
In default of such payment as aforesaid, such maker or acceptor is bound to
compensate any party to the note or bill for any loss or damage sustained by
him and caused by such default.
Here, it has to be noted that the maker of a promissory note and the acceptor of
a bill of exchange are the principle debtors and their liability on the instrument,
is absolute and unconditional.
The first part of this section, deals with the liability of the maker of a note and
the second part with the consequences on default.
The crux of this section can summed up as.
This section essentially puts the maker of the note and the acceptor of the bill
on the same footing.
It makes both liable as principle debtor.
Besides this, it can be seen that a bill may be accepted before the maturity or
at or after maturity.
An acceptor of the bill, it is seen before maturity is bound to pay the amount
at maturity and an acceptor at or after maturity shall have to pay the amount
to the holder on demand.

It is however not that there is no difference between the liability of the maker of
the note and the acceptor of the bill.
The maker of the note, it is seen is bound to pay the amount according to the
apparent tenor of the note.
That he, as he makes it himself, he cannot change its terms and shall have to
abide by the tenor of the note.
But on the other hand, it is seen that the acceptor of the bill, is liable to pay the
amount according to the apparent tenor of his acceptance.
That is to say, if the acceptor accepts the bill, he is required to honor the bill as
per his qualified acceptance and not according to the tenor of the bill.
This can be illustrated by the following example.

If A, draws a bill of Rs.10,00 on B, to be paid after a year and B, gives his

acceptance to pay the amount after 18 months.
Here, B is liable to pay after 18 moths and not a year.
It is to be noted that in case of a promissory note signed by two or more
promisors and the consideration has been received by only one of them,
irrespective of any reason, all the promisors shall be equally liable for the
amount of the promissory note.
It also has to be noted that Sections 78, 41 42 and 88 of the Act, also deal with
the liability of the maker of the note and the acceptor of a bill
Explain : Maturity and days of grace. (Nov-2014)

ANSWER :
Refer :
What is maturity?
Cheques are 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.
Sec-22 :
"the maturity of a promissory note or a bill of exchange is the date at which it
falls due".
Sec-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
a promissory note or a 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.
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 for 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.
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 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.
Where an instrument is payable by instalments, it must be presented for payment
on the third day after the day fixed for the payment of each instalment.
Grace period :
Every instrument payable at a specified period after date or after sight is entitled to
three days of grace.
Such a bill or note matures or falls due on the last day of the grace period, and
must be presented for payment on that day
and if dishonoured, suit can be instituted on the next day after maturity.
If an instrument is payable by instalments, each instalment is entitled to three days
of grace.
No days of grace are allowed for cheques, as they are payable on demand.
Illustration :
(i) A negotiable instrument dated 31-Jan-2001, is made payable at one months
after date. The instrument is at maturity on the third day after the 28th February,
2001, ie on 3rd March, 2001.
(ii) A negotiable instrument dated 30th August, 2001, is made payable three
months after date. The instrument is at maturity on 3 rd December, 2001.
(iii) A negotiable instrument dated the 31st August, 2001, is made payable three
months after date. The instrument is at maturity on 3 rd December, 2001.
What do you mean by Endorsement ? Explain the types of Endorsement and the
effects thereof. (Nov-2014)
Discuss : Forged Endorsement.

Explain : Endorsement and its kinds (Dec-2015)

ANSWER :
Refer :
Endorsement (Sections 15 and 16) :
Sec-15 : Where the maker or holder of a negotiable instrument
signs the same otherwise than as such maker (for the purpose of negotiation) 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
a negotiable instrument,
he is said to endorse the same.
The person to whom the instrument is endorsed is called the endorsee.
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.
Classes/ Types of endorsement : An endorsement may be
(a) Blank or General,
(b) Special or Full,
(c) Restrictive,
(d) Partial, and
(e) Conditional or Qualified.
(a) Blank or General :
An endorsement is to be blank or general where the endorser merely writes 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 "Mohan or order", and he writes on its back
"Mohan", it is an endorsement in blank by Mohan and
the property in the bill can pass by mere delivery, as long as the
endorsement continues to be 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.
(b) Special or 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 bill made payable to Mohan or Mohan or order, and endorsed "pay to the
order of Sohan" would be specially endorsed until Sohan endorses it further.
A blank endorsement can be turned into a special one by the addition of an
order making the bill payable to the transferee.
(c) Restrictive :
An endorsement is restrictive which prohibits or restricts the further
negotiation of an instrument.
Examples of restrictive endorsement: "Pay A only" or "Pay A for my use" or
"Pay A on account of B" or "Pay A or order for collection".
(d) Partial :
An endorsement partial is one which purports to transfer to the endorsee a
part only of the amount payable on the instrument.
Such endorsement is partial and invalid.
A partial endorsement does not operate as negotiation of the instrument.
A holds a bill for Rs. 1,000 and endorses it as "Pay B or order Rs. 500".
(e) Conditional or qualified :
An endorsement is conditional or qualified which limits or negatives the liability
of the endorser.
Sec-52 :
The endorser of a negotiable instrument may,
by express words in the endorsement exclude his own liability thereon, or
make such liability or the right of the endorsee to receive the amount due
thereon depend upon the happening of a specified event, although such
event may never happen.
Thus, an endorser may limit his liability in any of the following ways :
(i) By sans recourse / without recourse endorsement :
The endorser excludes his liability by adding the words "sans recourse" or
"without recourse",
eg "pay A or order sans recourse".
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.
(ii) By making his liability depending upon happening of a specified event
which may never happen,
eg the holder of a bill may endorse it thus :
"Pay A-or order on his marrying B". In such a case, the endorser will

not be liable until A marries B.

Forged Endorsement :
The case of a forged endorsement is worth special notice.
If an instrument is endorsed in full,
it cannot be negotiated except by an endorsement signed by the person to
whom or to whose order the instrument is payable,
because 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,
because the endorsement is a nullity.
Forgery conveys no title.
Exception : Bearer instrument :
Where the instrument is a bearer instrument or has been endorsed in blank,
it can be negotiated by mere delivery, and the holder derives his title
independent of the subsequent forged endorsement and can claim the amount
from any of the parties to to the instrument.
For example, a bill is endorsed, "Pay A or order".
A endorses it in blank, and it comes into the hands of B, who simply delivers it
to C, C forges B's endorsement and transfer it to D,
Here, D, as the holder does not derive his title through the forged
endorsement of B, but through the genuine endorsement of A and can claim
payment from any of the parties to the instrument in spite of the intervening
forged endorsement.
Liability of Endorser : (Section 35)
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.
Example :
'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.
Here, C can enforce payment against B but not against A, as qua A, the
cheque has become stale.
Sec-35 : Liability of indorser :
In the absence of a contract to the contrary,
whoever indorses and delivers a negotiable instrument
before maturity without, in such indorsement, expressly excluding or making

conditional his own liability,

is bound thereby to every subsequent holder,
in case of dishonour by the drawee, acceptor or maker,
to compensate such holder for any loss or damage caused to him by such
dishonour,
provided due notice of dishonour has been given to, or received by, such
indorser as hereinafter provided.
Thus, every indorser after dishonour is liable, as upon payable on demand.
Effect of Sec-35 :
It is seen that in order to invoke Section 35,
there has to be an endorsement of an instrument, which has to be delivered to
the endorsee.
IF either of this act does not occur, the liability of the endorser does not arise.
Sec-35 puts the endorser of the cheque on the same footing as the drawer of a
bill/ cheque or maker of a note, in the sense that it confers upon him the same
levels of liability.
The idea behind this concept of endorsement is essentially on the belief that
the bill, cheque or note, will be duly accepted or honored by the drawee or the
maker.
On the failure of this event happening, the liability of the endorser occurs.
The role of the endorser is pretty much equivalent to that of a surety, who
undertakes the performance by the acceptor of the bill.
Immediately on the dishonor of an instrument, the holder of the instrument, gets
an inherent right to sue to endorser at once, which can in no way be challenged.
In fact the holder stands in a rather advantageous position as he is in a better
position to sue either parties,
the drawer for non-compliance
or the endorser for failure to ensure compliance on the part of the drawer.
It has to be noted that the liability of an endorser arises only when there is an
absence of a contract to the contrary.
Exception :
The endorser may save himself from liability by either excluding his liability
thereon
by endorsing sans recourse
or by making his liability conditional.
WHEN the endorsers liability is discharged?
Sec-36 : Liability of prior parties to holder in due course :

Every prior party to a negotiable instrument is liable thereon to a holder in due

course until the instrument is duly satisfied.
Sec-40 :
Where the holder of a negotiable instrument, without the consent of the
endorser, destroys or impairs the endorser's remedy against a prior party,
the endorser is discharged from liability to the holder to the same extent as if
the instrument had been paid at maturity.
2002 Amendments :
Prior to 2002 amendments, there was no criminal liability imposed on parties.
The amendment of 2002, imposed upon a greater sense of responsibility as it
brought upon more stringent measures to counter the offending parties.
The essence of this liabilities being imposed upon the parties, is nothing by an act
to being upon greater sense of responsibilities on the part of the parties.
Explain in detail the various kinds of crossing of cheques and its provisions with
decided cases. (Apr-2016)
Define and explain the term Cheque and Electronic Cheque. Describe in detail
various type of crossing and advantages thereof. (Nov-2014)
Explain : Types of Crossing (Dec-2015)
ANSWER :
Refer :
Intro :
A cheque is either "open" or "crossed".
An open cheque can be presented by the payee to the paying banker and is paid
over the counter.
A crossed cheque cannot be paid across the counter but must be collected
through a banker.
Crossing affords security and protection to the holder of the cheque.
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.
Modes of Crossing (Sections 123-131A) :
There are two types of crossing which may be used on cheque, namely :
(i) General, and
(ii) Special.
To these may be added another type, Restrictive crossing.
(i) General :
Sec-123 :
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.
Two transverse parallel lines are essential for a general crossing.
The addition of the words "and Co" do not have any significance
but the addition of the words "not negotiable" restrict the negotiability of
the cheque and in case of transfer, the transferee will not get a better title
than that of a transferor.
As stated earlier, where a cheque is crossed generally, the paying banker will
pay to any banker.
In case of general crossing, the holder or payee cannot get the payment over
the counter of the bank but through a bank only.
(ii) Special :
Sec-124 :
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 constitutes a
crossing and the cheque is crossed specially and to that banker.
The paying banker will pay only to the banker whose name appears across the
cheque, or to his collecting agent.
Parallel transverse lines are not essential,

but the name of the banker is the insignia of a special crossing.

In case of special crossing, the paying, banker is to honour the cheque only
when it is prescribed through the bank mentioned in the crossing or it's agent
bank.
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.
Such crossing does not affect the paying banker, who is under no duty to
ascertain that the cheque is in fact collected for the account of the person named
as payee.
However, 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 a special crossing.
Sec-130 :
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.
The crossing of cheque "not negotiable" does not mean that it is non-
transferable. It only deprives the instrument of the incident of negotiability.
Effect of Not Negotiable crossing :
Normally speaking, the essential feature of a negotiable instrument as opposed
to chattels is that
A person who takes the instrument in good faith, without negligence, for value
before maturity
and without knowledge of the defect in the title of the transferor,
gets a good title to the instrument.
In other words, he is called a holder in due course who acquires an
indisputable title to the cheque.
When the instrument passes through a holder-in-due course, it is purged of all
defects and the subsequent holders also get good title.

It is exactly this important feature which is taken away by crossing the cheque
"not negotiable".
In other words, a cheque crossed not negotiable" is like any other chattel and
therefore the transferee gets same title to the cheque which his transferor had.
That is to say that, after Non Negotiable crossing,
the transferee cannot claim the rights of a holder-in-due-course.
So long as the title of the transferor is good, the title of the transferee is also
good
but if there is a taint in the title to the cheque of one of the endorsers, then all
the subsequent transferees' title also become tainted with the same defect
they cannot claim to be holders-in-due-course.
Rational for Non Negotiable crossing :
The object of this Sec-130 is to give,
to the drawer or holder of a cheque who is desirous of transmitting it to
another person,
as much protection as can reasonably be afforded to him against dishonestly
or actual miscarriage in the course of transit.
Illustration :
A cheque payable to bearer is crossed generally and is marked "not negotiable".
It is lost or stolen and comes into the possession of X who takes it in good faith
and gives value for it, X collects the cheque through his bank and paying banker
also pays.
In this case, both the paying and the collecting bankers are protected under
Sections 128 and 131 respectively.
But X cannot claim that he is a holder-in-due course which he could have
under the normal circumstances claimed.
The reason is that cheque is crossed "not negotiable" and hence the true
owner's (holder's) right supercedes the rights of the holder-in-due-course.
Since X obtained the cheque from a person who had no title to the cheque (ie
from one whose title was defective), X can claim no better title, solely because
the cheque was crossed "not negotiable" and not for any other reason.
Thus "not negotiable" crossing not only protects the rights of the true owner of the
cheque,
but also serves as a warning to the endorsees' to enquire thoroughly before
taking the cheque,
because they may have to be answerable to the true owner thereof if the
endorser's title is found to be defective.
Conclusion :

"Not negotiable" restricts the negotiability of the cheque and in case of transfer,
the transferee will not get a better title than that of a transferor.
If the cheque becomes "not negotiable" it lacks negotiability.
A cheque crossed specially or generally bearing the words "not negotiable lacks
negotiability and therefore is not a negotiable instrument in the true sense.
It does not restrict transferability but restricts negotiability only.
Explain : Negotiation and Negotiation Back. (Nov-2014)

Explain : Negotiation Back (Dec-2015)
Discuss : (i) Negotiation and Assignment, (ii) Negotiation by Mere Delivery,
(iii) Negotiation by Endorsement and Delivery, (iv) Negotiation of lost
instrument or that obtained by unlawful means, (v) Negotiation Back.
ANSWER :
Refer :
(i) Negotiation and Assignment :
A negotiable instrument may be transferred by negotiation or assignment.
Sec-14 : Negotiation :
When a promissory note, bill of exchange or cheque is transferred to any person,
so as to constitute the person the holder thereof, the instrument is said to be
negotiated.
Negotiation conveys the title & constitutes the transferee as holder of the
instrument.
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 attending the negotiation.
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.
Difference : A transfer by negotiation differs from transfer by assignment in the
following respects :
(a) Negotiation requires mere delivery of a bearer instrument and endorsement
& delivery of an order instrument to effectuate a transfer.

While, assignment requires a written document signed by the transferor.

(b) Notice of transfer of debt (actionable claim) is not necessary in a transfer by
negotiation.
Notice of transfer of debt (actionable claim) must be given by the assignee to
the debtor in order to complete his title;
(c) In case of negotiation the transferee, as holder-in-due course, "takes the
instrument free from any defects in the title of the transferor.
On assignment, the transferee of an actionable claim takes it subject to all the
defects in the title of, and subject to all the equities and defences available
against the assignor, even though he took the assignment for value and in
good faith.
(ii) 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 :
(i) Where it is made so payable, or
(ii) Where it is originally made payable to order but the last endorsement is in
blank.
(iii) Where the payee is a fictitious or a non-existing person
(iv) These Instruments do not require signature of the transferor. The person
who takes them is a holder, and can sue in his own name on them.
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.
(iii) Negotiation by Endorsement and Delivery :
An instrument which is payable
to a specified person or to the order of a specified person
is an instrument payable to order.
and such an instrument can be negotiated only by endorsement and delivery.
Unless the holder signs his endorsement on the instrument, the transferee does not
become a holder.
Where an instrument payable to order is delivered without endorsement, it is
merely assigned and not negotiated,

and the holder is not entitled to the rights of a holder in due course, and he
cannot negotiate it to a third person.
(iv) 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 means 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.
(v) Negotiation Back :
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 circuity of action.
For example,
A the holder of a bill endorses it to B, B endorses to C, and C to D, and D
endorses it again to A.
Here, A, being a holder in due course of the bill by second endorsement by D,
cannot recover the amount thereof from B, C, or D
and himself being a prior party is liable to all of them.
Therefore, A having been relegated by the second endorsement to his original
position, cannot sue B, C and D.
Where an endorser excludes his liability (eg 'sans recourse') and afterwards
becomes the holder of the instrument,
all the intermediate endorsers are liable to him.
Example :
A is the payee of a negotiable instrument. He endorses the instrument 'sans
recourse' to B, B endorses 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 also has the right
of an endorsee against B, C and D.
Discuss : Noting and Protest.

ANSWER :
Refer :
Noting and Protest (Sections 99-104 A)
Noting :
Where a note or bill is dishonoured, the holder is entitled after giving due notice of
dishonour, to sue the drawer and the endorsers.
Sec-99 : Authenticating the fact of dishonour by means of "Noting" :
When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment,
the holder may cause such dishonour to be noted by a notary public upon the
instrument, or upon a paper attached thereto, or partly upon each.
Such note must be made within a reasonable time after dishonour, and must
specify,
the date of dishonour, the reason, if any, assigned for such dishonour,
or, if the instrument has not been expressly dishonoured, the reason why
the holder treats it as dishonoured,
and the notary's charges.
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, then the reasons why
the holder treats it dishonoured
and notary's charges.
Protest :
Meaning of protest :
The protest is the formal notarial certificate attesting the dishonour of the bill,
and based upon the noting which has been effected 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.
The notary public demands better security and on its refusal makes a protest
known as "protest for better security".
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.
A protest to be valid must contain on the instrument itself or a literal transcript
thereof,
the names of the parties for and against whom protest is made,
the fact and reasons for dishonour
together with 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.
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.
Discuss : (i) Discharge of the Instrument, (ii) Discharge of a party or parties.

ANSWER :
Refer :
Discharge :
The discharge in relation to negotiable instrument may be either
(i) Discharge of the instrument or
(ii) 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 undischarged 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, ie 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.

Module-3 :
3) Special provisions relating to Dishonour of Cheque and its remedies :
(Section 138 to 147 of the Negotiable Instruments Act, 1881)
3.1) Remedy to initiate criminal proceedings in case of dishonour of Cheque
3.2) Absolute Liability of Drawer of Cheque in case of its dishonour, absence of
Mens rea no defence at all (Sec. 139), Object and reasons of inserting
chapter XVII under the Act
3.3) Modes of Dishonour of Cheque: Stop Payment, Funds not arranged for,
Account Closed, Referred to the Drawer, Insufficient Funds, Post Dated
Cheque etc. - its consequences
3.4) Essentials for criminal proceedings in case of dishonour of cheque:
3.4.1) Cheque must be written pursuant to Legal Debt
3.4.2) Notice of dishonour within prescribed time
3.4.3) Cheque : can be deposited in bank more than once within its validity
period before initiating criminal proceedings
3.4.4) Filing of criminal complaint : formalities, Forum of Criminal court,
time limit, jurisdiction of criminal courts
3.5) Penal Provisions under the Act in case of dishonour of cheque
3.6) Dishonour of cheque by a company or a firm : consequences, joint and
several liabilities, Discharge from liability in case of Ex-officio Directors of
Government Companies
3.7) Offence committed against a company or firm, persons competent to file
criminal complaints, prior formalities
3.8) Delay in filing of criminal complaint u/s 138 of the Act: consequences
3.9) Compounding of offences under the Act: Powers of the Magistrate
3.10) Defences available to the Drawer of the Cheque
3.11) Important decisions of the Supreme Court
(Section 138 to 147 of the Negotiable Instruments Act, 1881)
Discuss the provisions relating to the dishonour of cheque and remedies

available against the drawer of a cheque under the Negotiable Instruments Act,

1881. (Nov-2014)
Explain the essential ingredients for initiating criminal proceedings against the
drawee of a cheque in the event of dishonour of cheque under the Negotiable
Instrument Act, 1881 along with the approach of the Supreme Court of India.
(Mar-2014)
Discuss : Penal Provisions under the Act in case of dishonour of cheque.
Discuss : Defences available to the Drawer of the Cheque.
Discuss in detail about liability of the drawer of a cheque in case of the dishonour of
cheque under the Negotiable Instruments Act, 1881 in the light of decided cases of
the Supreme Court of India. (Dec-2015)
Explain in detail the provisions of criminal proceedings in case of Dishonour of
cheques with case laws. (Apr-2016)
Explain : Importance of Mens Rea in cases of dishonour of Cheque. (Dec-2015)
Discuss following modes of Dishonour of Cheque and their consequences : (i)
Stop Payment, (ii) Funds not arranged for, (iii) Account Closed, (iv) Signatures do
not match, (v) Referred to the Drawer, (vi) Insufficient Funds, (vii) Post Dated
Cheque.
Explain in detail provisions of criminal liability of the managements of the
company and partners of the firm in case of Dishonour of Cheques with case laws.
(Apr-2016)
Discuss : Offence committed against a company or firm, persons competent to file
criminal complaints, prior formalities.
Explain : Liability of Directors of a company nominated by the Government in
the event of dishonour of cheque. (Dec-2015)
Explain : Liabilities of Partner of a firm in case of dishonour of cheque. (Dec-2015)
Discuss : Delay in filing of criminal complaint u/s 138 of the Act and its
consequences.
Explain : Power and Jurisdiction of court in a case punishable under section 138
of the Negotiable Instruments Act, 1881. (Nov-2014)
Discuss : Compounding of offences under the Act : Powers of the Magistrate.
MODULE-3 ANSWERS :
Discuss the provisions relating to the dishonour of cheque and remedies

available against the drawer of a cheque under the Negotiable Instruments Act,

1881. (Nov-2014)
Explain the essential ingredients for initiating criminal proceedings against the
drawee of a cheque in the event of dishonour of cheque under the Negotiable
Instrument Act, 1881 along with the approach of the Supreme Court of India.
(Mar-2014)
Discuss : Penal Provisions under the Act in case of dishonour of cheque.
Discuss : Defences available to the Drawer of the Cheque.
Discuss in detail about liability of the drawer of a cheque in case of the dishonour of
cheque under the Negotiable Instruments Act, 1881 in the light of decided cases of
the Supreme Court of India. (Dec-2015)
Explain in detail the provisions of criminal proceedings in case of Dishonour of
cheques with case laws. (Apr-2016)
ANSWER :
Refer :
https://www.lawyered.in/legal-disrupt/articles/dishonor-cheque-section-138/
Intro :
The term Negotiable means transfer by endorsement or delivery
and the term Instrument means any legal document in writing, which is
created in favour of any person.
Thus, Negotiable Instruments are,
written statements implying payment of money, either on demand or within a
particular time period with the drawers/payers name on it.
In India, Negotiable Instruments Act, 1881 codifies the law governing transactions
involving negotiable instruments.
There are various negotiable instruments; such as cheques, promissory notes, bills
of exchange, bank notes, etc.
However, for day to day transactions, cheque is the most widely used negotiable
instrument in businesses today.
Evolution of Sec-138 and penal provisions :
Prior to 1988, in case a cheque was not honoured on presentment, the only
remedy available under the Act was to file a civil suit in the court against the
offender.
However, this remedy did not have a desired deterrent effect on offenders and
cheques started losing their credibility.
Hence, the Act was amended several times to incorporate more stringent
provisions to deal with dishonour.
1988 :
The Banking, Public Financial Institutions and Negotiable Instruments Laws

(Amendment) Act, 1988 amended the Act to make dishonour of cheques a

criminal liability.
The NI Act 1881 was amended to add Sec-138.
2002 :
The NI Act 1881 was amended to further extended the term of imprisonment to
up to 2 (two) years.
Cheques :
Sec-6 of the Act defines a cheque as,
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.
Parties to a cheque :
Drawer Is the maker of the cheque.
Drawee Is the person thereby directed to pay.
Payee Is the person named in the instrument, to whom or to whose order the
money is by the instrument directed to be paid.
Holder Of the cheque means any person entitled in his own name to the
possession thereof and to receive or recover the amount due thereon from the
parties thereto.
Dishonour of cheque :
The drawer pays off his liability to the payee through cheque
and when bank returns the cheque unpaid due to insufficient balance on the
account held by the drawer,
the liability/debt remains due to the drawer and the amount remains unpaid.
The return of cheque can be because of insufficient funds in the account or due to
exceeding the limit of the amount which was agreed to be paid by the bank.
Such a default by any person, creates a liability under sec-138.
Sec-138 : Dishonour of cheques for insufficiency etc of funds in the account :
Where any cheque drawn by a person on an account maintained by him with a
banker for payment of any amount of money to another person from out of that
account for the discharge of any debt or other liability, is returned by the bank
unpaid,
either because of the amount of money standing to the credit of that account is
insufficient to honour the cheque or that it exceeds the amount arranged to be
paid from that account,
such person shall be deemed to have committed an offence and shall, be
punished with imprisonment for a term which may be extended to two years, or

with fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless--
(a) the cheque has been presented to the bank within its period of its validity;
(b) the payee or the holder in due course of the cheque, makes a demand for
the payment of the said amount of money by giving a notice in writing, to the
drawer of the cheque, within thirty days of the return of the cheque as unpaid;
and
(c) the drawer of such cheque fails to make the payment of the said amount of
money within fifteen days of the receipt of the said notice.
Explanation :
For the purposes of this section, "debt or other liability" means a legally
enforceable debt or other liability.
Sec-139 : Presumption in favour of holder :
It shall be presumed, unless the contrary is proved,
that the holder of a cheque received the cheque of the nature referred to in
section 138 for the discharge, in whole or in part, of any debt or other liability.
Sec-142 of the Act deals with the cognizance of offences in compliance with the
provision of Code of Criminal Procedure, 1973 (CrPC).
Sec-142 : Cognizance of offences :
Notwithstanding anything contained in the Code of Criminal Procedure, 1973 -
(a) no court shall take cognizance of any offence punishable under section 138
except upon a complaint, in writing, made by the payee or the holder in due
course of the cheque;
(b) such complaint is made within one month of the date on which the cause-of-
action arises under clause (c) of the proviso to section 138 :
(c) no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate
of the first class sh all try any offence punishable under section 138.
Importance of cheque being drawn in discharge of any debt or other liability :
The provisions of section 138 will be attracted only when the cheque has been
issued for the discharge of any debt or other legally enforceable liability.
The maker of the cheque is not liable for prosecution if cheque which is
dishonoured, is the one, which is given as gift, present or donation.
Essential ingredients for initiating criminal proceedings :
The cheque should have been drawn for the discharge of any legally enforceable
debt or other liability to payee,
The cheque should have been presented within its period of validity.
The cheque must have been returned unpaid or dishonoured due to :
Insufficiency of fund in the account of the drawer;

Issuance of stop payment instructions by the drawer to the drawer bank;

Amount of cheque exceeding the arrangement with the drawer bank.
Within 30 days of return, the payee should have made a demand for the payment
of the said amount of money by giving a notice in writing, to the drawer of the
cheque,
The drawer should have failed to make the payment of the said amount of money
within fifteen days of the receipt of the such notice.
Jurisdiction :
It is not necessary that all the above five acts/ ingredients should have been
perpetrated at the same locality.
They may have been performed in five different localities.
Complaint can be filed at any of the places mentioned below.
One of the Courts exercising jurisdiction in one of the five local areas can become
the place of trail for the offence under sec. 138 of the Act
1.Where the cheque was drawn.
2. Where the cheque was presented for encashment.
3. Where the cheque was returned unpaid by drawee bank.
4. Where notice in writing was given to drawer of cheque demanding payment.
5. Where drawer of cheque failed to make payment within 15 days of receipt of
notice.
In Dashrath Rupsingh Rathod v. State of Maharashtra, a 3-Judge bench of the
Supreme Court held that,
a cheque bouncing case can be filed only in a court which has the territorial
jurisdiction over the place where the cheque is dishonoured by the bank on
which it is drawn.
Compoundable Nature of Offense :
By an alteration presented in 2002, under Section 147, EVERY offense under NI Act
1881 (shame of a cheque) can be compounded.
Filing a complaint under Section 138 of the Act : For filing a complaint, the
complainant needs to follow these steps ;
1. Notice asking for payment of dues :
This Act provides that, once the cheque has been dishonoured,
a notice needs to be issued (by registered A.D.) to the drawer within 30 days
of the receipt of memo from drawee bank that the cheque is dishonoured.
The notice to be sent should mention the following points ;
The cheque issued was presented for payment in bank;
The cheque was subsequently dishonoured for the reason provided by the
drawee bank (which should be any of the three reasons mentioned above);

Asking for payment for sum written on cheque within a period of 15 days from
the date of receipt of notice.
2. Filing complaint :
Where on the receipt of notice, if the drawer of the cheque remains silent or
refuses to pay the money within 15 days from the date of receipt of notice,
then a criminal complaint should be filed against the drawer (Accused) within
next 30 days from the expiry of time period provided to the drawer.
3. Place of filing the complaint :
The place for filing the complaint shall be determined based on any of the
following ;
Place of the bank on which the cheque is drawn;
Place where cheque is presented to the bank and the same is dishonoured;
Place of residence/business of the complainant;
Place of residence/business of Accused;
Place from where the notice is sent to the drawer of the cheque demanding the
cheque amount.
4. Contents of criminal complaint :
A complaint should contain complete details about,
Complainant,
Accused,
details of the transaction,
details of the notice sent to Accused,
jurisdiction clause,
limitation clause,
prayers asking for compensation
and punishment for the Accused.
The complaint should also be accompanied with all the important attachments
like,
the list of witnesses,
list of all original documents
and copies, board resolution giving authority to a person to file complaint on
behalf of the company (if applicable) etc.
5. Issuance of summons :
Upon filing of complaint and completion of all procedural aspects,
the Magistrate before whom the complaint is filed shall verify the documents
and upon subsequent verification, shall issue summons against the Accused.
6. Post Issuance of summons :

On issuance of summons, the Accused may appear or may not appear.

On appearance of the Accused; the plea of the Accused shall be recorded and
the proceedings shall be conducted as per Section 262 and 265 of CrPC.
Where Accused fails to appear; A Bailable warrant shall be issued against the
Accused.
Even after this, where the Accused fails to appear, a Non-Bailable warrant will
be issued.
If the Accused appears, the procedure will be the same as in the case of
issuance of summons.
However, if the Accused fails to secure his attendance, then by courts order,
Accused shall be declared absconding and a notice shall be issued in local
newspaper in respect of the same.
Properties of the Accused will be attached and will be sold by public auction.
Complainant can recover his dues out of the sale proceeds.
7. Orders :
Upon hearing the parties, the court may pass any of the following orders ;
The Accused may be acquitted of all the charges; or
The Accused may be held guilty of the offence committed under Section 138 of
the Act and shall be penalized as follows;
imprisonment up to two years; or
monetary fine which may extend to twice the amount of cheque; or
both imprisonment and fine; or
paying off the dishonored cheque amount to the complainant.
Approach of the Supreme Court :
In N. Harihara Krishnan v. J. Thomas the Apex court held that,
any failure to include the company as an Accused in the complaint, filed under
section 138 of the Negotiable Instruments Act, 1881 of dishonour of a cheque
issued by a company,
would be fatal to the prosecution of such company even if the complaint filed
against the signatory of the cheque has been duly complied with.
In Dashrath Rupsingh Rathod v. State of Maharashtra, a 3-Judge bench of the
Supreme Court held that,
a cheque bouncing case can be filed only in a court which has the territorial
jurisdiction over the place where the cheque is dishonoured by the bank on
which it is drawn.
Note :
After 2015 amendment,
if the cheque is delivered through an account, then the court having local

jurisdiction over the branch where the payee or the holder maintains the
account would try the case.
Defences available to the Drawer of the Cheque :
<work on this>
Does dishonour of a cheque due to stopped payment by drawer or account closed
or signatures do not match constitute an offence under Section 138 of the NI Act?
http://prashantghai.com/138-ni-act-cheque-dishonour/
It may appear that a dishonour of cheque would constitute an offence,
only if the cheque is returned by the bank unpaid
either because the amount of money standing to the credit of the drawers
account is insufficient to honour the cheque a.k.a. insufficiency of funds
or that the amount exceeds the amount arranged to be paid from that account
by an agreement with that bank.
Does it mean
that if a cheque is dishonoured due to reasons other than insufficient funds, then
it would not be an offence under Section 138 of NI Act,
and that the payee would have to go for an alternate remedy for the recovery
of his amount?
Well, that certainly could not have been the objective of the law makers when they
framed Section 138 of NI Act. But then, if the Section does not expressly include
stopped payment by drawer or account closed or signatures do not match or
other reasons due to which a cheque may get dishonoured, then what to do about
it?
Conclusion :
Section 138 of the Act protects the payee from any illegal act on the part of the
drawer.
As cheques are commonly used instruments in the business world, banking sector
needs to be protected.
It not only aims at speedy disposal of cases but also to bring a sanctity to the
system by seeking to clamp down on defaults in payments and has empowered the
payee against drawer to bring higher virtuousness to cheque transactions.

GO TO CONTENTS.
Explain : Importance of Mens Rea in cases of dishonour of Cheque. (Dec-2015)

ANSWER :

Refer :
http://www.legalservicesindia.com/article/article/dishonour-of-cheques-236-1.html
Search Civil or Criminal Wrong in https://blog.ipleaders.in/dishonor-of-cheques/
Intro :
Section 138 to 142 of chapter XVII, of the negotiable Instrument Act,1881, deals
with dishonoring of cheques.
The Parliament in its wisdom had chosen to bring section 138 on the statute book
in order to introduce financial discipline in business dealings.
Dishonour of cheque, a criminal liability :
Prior to insertion of 138 of NI, a dishonored cheque left the person aggrieved with
the only remedy of filing a claim.
The remedy available in civil court is a long drawn matter and an unscrupulous
drawer normally takes various pleas to defeat the genuine claim of the payee.
Section 138 has converted civil liability into criminal offence.
This has been inserted by the parliament with the object and purpose of holding
a person criminally responsible for his acts in commercial transactions trade and
business dealings with people carried out carelessly or without sense of
responsibility.
Mens Rea :
Guilty mind is the fundamental ingredient of any criminal offence.
However, in the case of the offence under 138 of the NI Act 1881,
it is an offence without necessity of any evil intention/ guilty mind/ mens rea.
Dishonour of cheque may or may not have mens rea,
hence in a sense, it is not a criminal offence in real sense.
To constitute an offence u/s 138 of the NI Act 1881, it does not require mens rea,
like few other criminal offences,
but since public interest is hampered by such offence so it has been made a
punishable offence.
Sec-138 includes strict liability. Creation of the strict liability is an effective
measure by encouraging greater vigilance to prevent usual callous attitude of
drawers of cheques in discharge of debts.
The circumstances under which such a dishonour takes place are not of much
importance.
Any reason for dishonour is an offence under section 138 of the NI Act.
Marginal Note, made by the Drawee bank, stating,
Stop Payment, or
Funds not arranged for, or

Account Closed, or
Signatures do not match, or
Referred to the Drawer, or
Insufficient Funds,
etc
cannot be considered to be an accident.
Following are the ONLY essential Ingredients to constitute an offence u/s 138 :
1. Drawing of a cheque by a person on an account of any debt or other liability.
2. Presentation of the cheque to the bank within a period of 6 months from date of
its drawing or within the period of its validity.
3. Returning of the cheque unpaid by the drawee bank.
4. Notice in writing to the drawer of cheque within 30 days of receipt of information
regarding return of cheque as unpaid in form of debit advance or return memo.
5. Failure of the drawer to make payment within 15 days of receipt of notice.
Conclusion :
The circumstances, including mens rea, if any, under which the dishonour took
place is irrelevant.
The law only takes cognizance of the fact that the payment has not been
forthcoming and it matters little that any of the manifold reasons may have caused
that situation.
Discuss following modes of Dishonour of Cheque and their consequences : (i)

Stop Payment, (ii) Funds not arranged for, (iii) Account Closed, (iv) Signatures do
not match, (v) Referred to the Drawer, (vi) Insufficient Funds, (vii) Post Dated
Cheque.
ANSWER :
Refer :
http://prashantghai.com/138-ni-act-cheque-dishonour/
(i) Stop Payment :
A cheque dishonoured due to stopped payment would come under the purview of
Section 138 of the NI Act.
However, if an Accused can prove that the instructions for stop payment to the
Bank was given due to a valid reason,
then an offence under Section 138 and a presumption under Section 139 of the
NI Act would not be attracted towards him

This legal position was again confirmed by the Supreme Court in the cases of,
Modi Cements Ltd. vs. Kuchil Kumar Nandi, and
M.M.T.C. Ltd. and Anr. vs. M/s Medchl Chemicals and Pharma (P) Ltd. and Anr.
In the case of Modi Cements Ltd. vs. Kuchil Kumar Nandi, the simple issue before
the Courts was that the cheques were dishonoured with the remark payment
stopped by the drawer.
It was again contended by the Lawyer for the Accused Persons that stoppage of
payment due to instructions does not amount to an offence under Section 138,
therefore the ingredients in Section 138 had not been satisfied.
The High Court quashed the complaints, hence the matter came up before the
Apex Court.
The technical grounds taken at the time of quashing was that mere endorsement
of the Bank payment stopped was not sufficient to entertain the complaint as
that was not an ingredient of the offence under Section 138 of the Act.
The Supreme Court rejected the said contention, while relying upon the decision
in the case of Electronics Trade & Technology Development Corporation Ltd.,
Secunderabad vs. Indian Technologists & Engineers (Electronics) (P) Ltd. & Anr.
when a cheque is drawn by a person on an account maintained by him with
the banker for payment of any amount of money to another person out of the
account for the discharge of the debt in whole or in part or other liability is
returned by the bank with the endorsement like
(1) in this case, I refer to the drawer
(2) instructions for stoppage of payment and
(3) stamp exceeds arrangement,
it amounts to dishonour within the meaning of Section 138 of the Act.
The object of bringing Section 138 on statute appears to be to inculcate faith
in the efficacy of banking operations and credibility in transacting business on
negotiable instruments.
Despite civil remedy, Section 138 intended to prevent dishonesty on the part
of the drawer of negotiable instrument to draw a cheque without sufficient
funds in his account maintained by him in a bank and induce the payee or
holder in due course to act upon it.
Section 138 draws presumption that one commits the offence if he issues the
cheque dishonestly.
It is seen that once the cheque has been drawn and issued to the payee and
the payee has presented the cheque and thereafter, if any stop payment
instructions are issued to the Bank, it amounts to dishonour of cheque and it
comes within the meaning of Section 138.
(ii) Funds not arranged for :

(iii) Account Closed :

Where the drawer of the cheques closes his account before it could be encashed,
the cheque is dishonored with the remarks account closed.
Sec-140 : Defence which may not be allowed in any prosecution u/s 138 :
It shall not be a defence in a prosecution for an offence under section 138 that
the drawer had no reason to believe when he issued the cheque that the cheque
may be dishonoured on presentment for the reasons stated in Sec-138.
In the case of NEPC Micon Ltd. vs. Magma Leasing Ltd., the argument put forth by
the Lawyer for the Accused before the Supreme Court was that,
the Complaint does not make out any offence punishable under Section 138 of
the NI Act since the cheques were returned by the bank with an endorsement
account closed which is not covered by the section.
there are more than 40 kinds of eventualities where the bank may return the
cheque but the legislature in its wisdom has specified only the aforesaid two
situations and, therefore, return of the cheque on the ground that the account
being closed would not fall within Section 138.
However, the Supreme Court rejected the same while observing :
Section 140 provides that it shall not be a defence in prosecution for an
offence under Section 138 that the drawer has no reason to believe when he
issued the cheque that the cheque may be dishonoured on presentment for the
reasons stated in that Section.
Dishonouring the cheque on the ground that account is closed is the
consequence of the act of the drawer rendering his account to a cipher.
Hence, reading Section 138 and 140 together, it would be clear that dishonour
of the cheque by a bank on the ground that account is closed would be
covered by the phrase,
the amount of money standing to the credit of that account is insufficient to
honour the cheque.
(iv) Signatures do not match :
Dishonour of cheque on the ground that, the signatures on the cheque do not
match the specimen signatures with the bank,
would clearly attract the provisions of Section 138 of the NI Act , which is
punishable with imprisonment for up to 2 years.
In the case of Laxmi Dyechem vs. State of Gujarat and Ors. the Supreme Court
clarified legal position on Signatures do not match along with in all other
contingencies arising our of dishonor of cheque, while stating that :
We find ourselves in respectful agreement with the decision in NEPC Micon Ltd.
(supra) that,
the expression amount of money . is insufficient appearing in Section

138 of the Act is a genus,

and dishonour for reasons such as account closed, payment stopped,
referred to the drawer are only species of that genus.
Just as dishonour of a cheque on the ground that the account has been closed is
a dishonour falling in the first contingency referred to in Section 138,
so also dishonour on the ground that the signatures do not match or that
the image is not found,
These are contingencies arising out of deliberate acts of omission or commission
on the part of the drawers of the cheques which would inevitably result in the
dishonour of the cheque issued by them.
if after issue of the cheque the drawer closes the account it must be presumed
that the amount in the account was nil hence insufficient to meet the demand of
the cheque.
a similar result can be brought about by the drawer changing his specimen
signature given to the bank or in the case of a company by the company
changing the mandate of those authorised to sign the cheques on its behalf.
There is no qualitative difference between,
a situation where the dishonour takes place on account of the substitution by
a new set of authorised signatories resulting in the dishonour of the
cheques already issued
and another situation in which the drawer of the cheque changes his own
signatures or closes the account or issues stop payment instructions
to the bank.
So long as the change is brought about with a view to preventing the cheque
being honoured the dishonour would become an offence under Section 138
subject to other conditions prescribed being satisfied.
(v) Referred to the Drawer :
(vi) Insufficient Funds :
(vii) Post Dated Cheque :
Explain in detail provisions of criminal liability of the managements of the

company and partners of the firm in case of Dishonour of Cheques with case laws.
(Apr-2016)
Discuss : Offence committed against a company or firm, persons competent to file
criminal complaints, prior formalities.
Explain : Liability of Directors of a company nominated by the Government in
the event of dishonour of cheque. (Dec-2015)

Explain : Liabilities of Partner of a firm in case of dishonour of cheque. (Dec-2015)

ANSWER :
Refer : <work on this from following URLs>
http://www.vakilno1.com/legal-faq/dishonour-of-cheque-section-138-of-the-
negotiable-instruments-
act.html#OTHER_NOTABLE_ASPECTS_OF_OFFENCE_UNDER_138_NI_Act
Search Offence by Companies in https://taxguru.in/corporate-law/dishonor-
cheque-negotiable-instrument-act-1881.html
https://www.legallyindia.com/views/entry/vicarious-liability-of-director-of-a-
company-in-an-offence-under-section-138-of-negotiable-instruments-act-1881-
the-present-position
https://indiacorplaw.in/2017/08/supreme-court-prosecuting-company-cheque-
dishonour.html

Discuss : Delay in filing of criminal complaint u/s 138 of the Act and its
consequences.
ANSWER :
Refer :

Explain : Power and Jurisdiction of court in a case punishable under section 138
of the Negotiable Instruments Act, 1881. (Nov-2014)
Discuss : Compounding of offences under the Act : Powers of the Magistrate.
ANSWER :
Refer :


*** End-of-Compilation ***

Source : Public domain print/ internet contents.
URLs of some such resources are listed herein above.
Credits/ copyrights duly acknowledged.
Suggested Readings :
Avtar Singh, Negotiable Instruments Act, 1881 : Eastern Book Company
Bhashyam & Adiga, Negotiable Instruments Act, 1881, Bharat Law House, Delhi
Tannan's Banking Law & Practice in India, India Law House
Avtar Singh, Law of Banking & Negotiable Instruments, Central Law Publication
P. L. Malik, Negotiable Instruments Act, Eastern Book Company
Saharay, Negotiable Instruments Act with Special Emphasis on Dishonour of Cheques,
Central Book Agency, Kolkotta
R. K. Suri, Dishonour of Cheques (Prosecution & Penalties), ALT Publications, Hyderabad
K. S. Gopala, Dishonour of Cheques (Law, Practice & Procedure), ALT Publications
P. S. Narayan, Law of Negotiable Instruments and Dishonour of Cheques, Asia Law
House
Khcrgauwala, Negotiable Instruments Act, Butterworths S. N. Gupta, Dishonour of
Cheques-Liability - Civil and Criminal, Universal Law Book Co.
R. K. Bangia, Negotiable Instruments Act, Allahabad Law Agency
S. M. Chaturvedi, Negotiable Instruments Act, Central Law Agency
R. Swaroop, A Case Book on Dishonour of Cheques, Jain Book Depot.

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This is PREFACE. Menu ---> CONTENTS | Module-1 | Module-2 | Module-3

Refer : Bare acts are a good source, in any subject of law :

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Module-2 Various terms and phenomenon under the Act. 34

Module-3 Special provisions relating to Dishonour of Cheque and its 63

Objectives of the course :

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Discuss various terms under the NI Act 1881. <Just definitions>

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Discuss various terms under the NI Act 1881. <Just definitions>

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especially a cheque. However, even in financial documents, endorsement is

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or which is expressed to be payable to a particular person,

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and the person so specified is called the indorsee of the instrument.

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Explain the provisions of Bill of Exchange and distinguish between Bill of

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The term Negotiable means transfer by endorsement or delivery

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it is nevertheless payable to him or his order at his option.

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"A negotiable instrument is one,

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the relations between them.

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any offense, fraud or unlawful consideration.

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specified is an instrument payable on demand.

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(c) The promise or undertaking to pay must be unconditional.

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the time for payment of the amount or any installment thereof

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(a) A cheque in the electronic form means

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banker if a cheque is dishonoured.

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(a) A promissory note is a two-party instrument, with a maker (debtor) and a

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while a bill may be drawn on anyone, including banker.

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Discuss : Capacities of various parties to the NI and their rights, duties,

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delivery and negotiation of a promissory note, bill of exchange or cheque.

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the following conditions are satisfied :

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(Section 88) He is bound by his endorsement notwithstanding any previous

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Holder in Due Course :

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