22. NI ACT (PART 1)

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NEGOTIABLE INSTRUMENTS ACT

INTRODUCTION

Negotiable instrument: There are certain documents which are freely used in commercial

transactions and monetary dealings. These documents, if they satisfy certain conditions, areknown as ‘negotiable Instruments’. The word ‘negotiable’ means “transferable from one

person to another in return for consideration” and “instrument” means a “written document

by which a right is created in favour of some person”.Thus, a negotiable instrument is a

document which entitles a person to a sum of money and which is freely transferable from

one person to another by mere delivery or by endorsement and delivery.

Negotiable Instruments Act, 1881: The law relating to negotiable instruments is contained in

the Negotiable Instruments Act, 1881. The Indian Negotiable Instruments Act is based on

English law then prevailing, with some minor modifications.

Scope & Extent of NI Act: The Act does not affect any local usage relating to any instrument

in vernacular language. However, local usage can be excluded by any words in the body of

the instrument.

Applicability of act: The ‘Negotiable Instruments Act’ specifies only 3 types of instruments

as ‘negotiable Instruments’ i.e. Bill of Exchange, Promissory Note and Cheque. In case of any

other documents the protection available under the Act (i.e. transferee can get title better

than that of transferor) is not available.

Document of title to goods: ‘Document of title to goods’ has some characteristics of

negotiable instruments. For example, according to Sec.27 of Sale of Goods Act, if mercantile

agent is in possession of document of title with the consent of owner, even unauthorized sale

made by him is valid if buyer acts in good faith. However, these documents of title to goods

are not ‘negotiable instruments’.

1. The act does not apply to:

a. Indian Paper Currency Act, 1871.

b. The local usage relating to any instrument in an oriental language (for e.g. hundies).

But where no custom is established, the act will apply to hundies also.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

The term ‘Negotiable instrument’ consists of two parts - ‘negotiable’ and ‘instrument’. The

word ‘negotiable’ means transferable by delivery and the word ‘instrument’ means a written

document by which a right is created in favour of some other person. Following are some of

the features of a negotiable instrument:

a. In writing: A negotiable instrument must be in writing. Under the Contract Law, it is

true that an oral promise to pay money is valid. However, in commercial world, where

large numbers of promises are made daily, the promises must be made in written form.

b. Unconditional promise or order:A promise to pay money in a note, or an order to paymoney in a bill of exchange, or a cheque must be unconditional.

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c. The signature: A negotiable instrument must be authenticated by the signature of the maker.

d. A sum certain in money: A negotiable instrument must represent certain sum of money and

money only i.e. in legal tender money. An agreement to do something in addition to or

other than the payment in money cannot constitute a promissory note.

e. Freehand transferability: In case of bearer instruments the property in a negotiable

instrument passes from one person to another by delivery. In case of order instruments,

the property in the instrument transfers by endorsement and delivery. The transfer of

property means transfer of ownership and not mere possession.

f. The holder in due course: On transfer of a negotiable instrument, the transferee who

receives it in good faith and for value is known as holder in due course. The holder in

due course is not affected by any defects in the title of the transferor.

g. Recovery: The holder of a negotiable instrument can sue in his own name for the

recovery of the amount represented by the instrument.

An instrument consisting of all the above features is a negotiable instrument. Otherwise it isnon-negotiable. The ‘Negotiable Instruments Act’ specifies only three types of instruments as

‘Negotiable Instruments’ i.e. Bill of exchange, promissory note and cheque. There are some

other instruments where property can be passed by delivery of documents e.g. transport

documents, warehouse receipts etc. However, since these are not covered in the Act, the

protection available under the Act is not available. In some cases, an instrument can be

assigned (For e.g. Insurance Policy can be assigned). However, it is not ‘negotiable’.

Following instruments are treated as negotiable instruments either by statute or by

mercantile usage or custom of trade - Bills of Exchange, Promissory Note, Cheque,

Government Promissory Note, Dividend Warrant, Bearer Debentures, Hundi, etc.

TYPES OF NEGOTIABLE INSTRUMENTS?

Bearer Instruments: A negotiable Instrument is payabletobearer when:

a. it is expressed to be so payableor

b. the only or last endorsement on the instrument is an endorsement in blank.

Any person who is in lawful possession of a bearer instrument can lawfully collect money due

on it. In such a case, he is required to acknowledge receipt of money on the instrument by

signing on it.

A promissory note or bill of exchange can’t be made payable to bearer on demand due to

restrictions imposed by RBI.

E.g.: ‘Pay’’’ to R or bearer

Order instruments:A negotiable Instrument is payable to order when:

a. When it is expressed to be payable to order.E.g., ‘Pay to A or order’ or ‘Pay to the order of A’.

In both the cases, the bill is payable to A or his order at his option.

b. When it is expressed to be payable to a particular person and does not contain any words

prohibiting or restricting its transfer.E.g. ‘Pay A one hundred rupees’.

E.g: ‘Pay to R or Order’, ‘pay to the order of R’, ‘Pay to R’.

Inland and foreign Instruments:

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a. Inland Instruments:

A promissory note, bill of exchange or cheque which is both drawn or made in India

and made payable in Indiaor

drawn upon any person resident in India

is deemed to be an Inland instrument (Sec.11).

A bill of exchange drawn upon a resident in India is an Inland bill irrespective of the

place where it was drawn.

Examples:

A bill is drawn in Delhi on a merchant in Bombay and accepted payable in Calcutta.

A bill is drawn in Delhi on a merchant in London and accepted payable in Calcutta.

b. Foreign instruments:An instrument which is not an inland instrument is deemed to be

foreign instrument.

Instruments payable on demand:

a. A cheque is always payable on demand and it cannot be expressed to be payable

otherwise than on demand.

b. A promissory note or bill is payable on demand when

no time for payment is specified in it or

When it is expressed to be payable ‘on demand’ or ‘at sight’ or ‘on presentment’.

The words ‘on demand’ are usually used in a promissory note. The words ‘at sight’ are

usually used in a bill. In a promissory note or bill the expression ‘at sight’ and ‘on

presentment’ mean ‘on demand’.

E.g.: I promise to pay B 500.

I promise to pay B`500 on demand.

Pay B` 500 at sight.

Pay B`500 on presentment.

Time Instruments:A bill or note which is payable:

a. after a fixed period or

b. after sight or

c. on a specified day or

d. on the happening of an event which is certain to happen is known as time instrument.

Note:

If the event is such as is bound to happen, even though the actual time of its happening

is uncertain (for example, the death of a certain person) then the bill or note is valid. But

if the event is probable but not certain to happen, the instrument does not become valid.

Similarly an order to pay on or before a specified date is not a bill.

The expression ‘after sight’ in a promissory note means after presentment for sight. This

means that payment cannot be demanded on a note till it has been shown to the maker.

The expression ‘after sight’ in a bill of exchange means after acceptance.

E.g.: I Promise to pay B`500 after 3 months.

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I promise to pay 500 on 1st June 2006.

I promise to pay B`500 after sight.

I promise to pay B`500 after C’s death.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTSSection 118 and 119 of the Negotiable instruments act states the following presumptions as

to negotiable instruments, unless the contrary is proved. In other words following things are

presumed by the court of law unless otherwise proved.

a. Consideration: The presumption is that every negotiable instrument was made or drawn

for consideration, and that every such instrument has been accepted, indorsed,

negotiated, or transferred for consideration. In case of ordinary contracts, consideration

must be proved by the party seeking to enforce it. But in case of negotiable instruments,

consideration need not be proved. It is presumed to be there. The person who challenges

the instrument has to prove the absence of consideration.

b. Date: The presumption is that every negotiable instrument bearing a date was made ordrawn on such date.

c. Time of acceptance: The presumption is that every accepted bill of exchange was

accepted within a reasonable time after its date and before maturity. But there is no

presumption as to the exact date of acceptance.

d. Time of transfer: Law presumes that every transfer of negotiable instrument was made

before its maturity. But there is no presumption as to the exact date of negotiation.

e. Order of endorsement: The endorsements appearing upon a negotiable instrument are

presumed to be made in order in which they appear on it.

f. Stamp:The presumption is that a lost promissory note, bill of exchange or cheque was

duly stamped.

g. Every holder is a holder in due course: This is a very important presumption. Holder of a

negotiable instrument is presumed to be a holder in due course.

h. Protest:In a suit upon a dishonoured instrument, the Court shall, on the proof of

protest, presume the fact of dishonour, unless and until such fact is disproved.

PROMISSORY NOTE

The term ‘promissory note’ denotes that it is a note containing certain promise.

Definition: Sec.4 of the Act reads - “A ‘promissory note is an instrument in writingcontaining 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.” Thus a

promissory note is a written and signed promise to pay a certain sum of money to some

person or to his order.

Bank notes and currency notes are not treated as promissory notes. The words “or to the

bearer of the instrument” in the definition of the promissory note are inoperative as they are

overruled by the provisions of RBI Act. They prohibit the issue of promissory note, payable

to bearer, by anybody other than the RBI and Central Government of India.

Parties to a Promissory note:

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a. Maker: The person who makes the promissory note and promises to pay the money stated

therein is called maker of the instrument.

b. Payee: The person to whom the amount of promissory note is payable i.e. to whom the

promise of payment is made is called payee of the instrument.

c. Endorser & Endorsee: The above two parties are original parties to the note. In the course

of negotiation, payee may indorse (i.e., transfer) the note to some other person and that

other may indorse the note to some other person and so on. The party endorsing the

instrument is known as ‘endorser’ and the party to whom the instrument has been

endorsed is known as ‘endorsee’.

Essentials of a valid promissory note:

1. It must be in writing: An oral agreement is not a valid promise. The writing may be on

any paper or book. It may be in pencil or in ink. Writing includes printing, photography,

etc. No particular form of words is necessary.

E.g.: ‘ A’ promises to pay ‘B’ a sum of`500 on telephone. This promise will not make a

promissory note because it is not in writing (Of course it may be a valid contract under the

contract act)

2. It must contain an express promise to pay:

a. The promise must be an express promise to pay.

E.g.:I promise to pay X a sum of 10,000. It is a valid promissory note.

b. An implied promise to pay does not constitute a promissory note.

E.g.: I am liable to pay X`10,000 - it is not a promissory note.

c. A mere acknowledgement of debt does not constitute a promissory note.

E.g.: I owe X 10,000 - it is not a promissory note.

d. However, an acknowledgement of debt accompanied by a promise to pay constitutesa Promissory note.

E.g.:I owe X` 10,000, and I promise to pay X the same on demand - it is a valid promissory

note.

e. Mere receipt of money is not a promissory note. Generally receipts are not intended

to be negotiable instruments.

E.g.:Received from X` 10,000 - it is not a promissory note.

3. The promise to pay must be unconditional: A promise to pay must be an unconditional

because certainty is absolutely necessary in commercial transactions.

Examples:

a. Z made a note - I promise to pay X` 10,000 seven days after my marriage with Y. It is anuncertain promissory note because Z may never marry Y.

b. I promise to pay Y` 10,000 as soon as possible. Here it is difficult to ascertain possibility of

making payment.

4. It must contain a promise to pay in terms of money only: The promise must be to pay

money and money only - that is in legal tender money. An agreement to do something in

addition to or other than the payment in money cannot constitute a promissory note.

E.g.:Following notes made by Z do not constitute promissory notes:

- “I promise to pay money and paddy to X within a month.”

- “I promise to deliver X 100 tons of iron”.

- “I promise to pay 10,000 and to deliver up a wharf to X”.

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5. It must contain a promise to pay a definite sum of money: The sum expressed to be

payable by the note must be certain and there should not be any chance of additions and

subtractions.

A negotiable instrument may be a cash instrument or a credit instrument. When it is

expressed in currency, there is no ambiguity about the sum. When it is used as a credit instrument, it may include (i) installments, or (ii) discount,

or (iii) rate of interest which may differ before or after due date.

According to Section 5, the sum payable under a promissory note is certain, although

it is required to be paid with interest, provided the rate of interest is stated.

E.g.: A promissory note expressed a promise to pay the sum mentioned therein “with interest at

10% p.a. with quarterly rests.” The court held that the note was for a certain sum.

When no rate of interest is specified in the instrument, interest on the amount due

thereon shall be calculated @ 18% per annum...”

E.g.:Z makes a note - I promise to pay X` 10,000 and interest thereon after a year. It is a valid

promissory note as the interest will be computed @ 18% in the absence of the specific rate.6. The maker of the note must be certain: It is of utmost importance that the note itself must

clearly point out the person who undertakes to pay. He may be described by his name or

designation (i.e. description of his status). A promissory note may be made payable

singularly, jointly or jointly and severally.

a. A note signed by one person and beginning “I promise….. is a singular note.

b. A note signed by more than one person may be a joint note or a joint and several

note.

Examples:

A promissory note contain the words - “We promise to pay..…”and is signed by two

persons. In this case both of them are jointly liable on the note. A promissory note contains the words - “I promise to pay….” but is signed by two

persons. In this case both of them are jointly and severally liable on the note.

7. The payee of the note must be a certain person: An instrument must clearly point out the

party who is to receive the money. To make a promissory note there must be a payee

ascertained by the name or designation.

Where an instrument fulfils other requirements of a note, except that the payee is not

mentioned, it cannot be treated as a promissory note.

E.g.: A debtor made an entry of receipt of money in his creditor’s book and stated that the money

borrowed by him would be repaid on a certain date, without specifying the payee. The court held

that such an entry did not amount to promissory note.

A promissory note cannot be made payable to the maker himself. Such a note is

nullity. The reason being that the same person is both promisor and promisee. But if it is

endorsed by the maker to some other person or indorsed in blank, it becomes a valid

promissory note.

8. It must be signed by the maker: A promissory note must be signed by the maker. The

maker’s signature is usually found at the foot of the instrument, but it is sufficient if he

signs anywhere on the instrument. Generally signatures are made by writing name or

initial of the maker using a pen. A valid signature may be made in pencil also. An

illiterate person or any other person may sign by using ‘mark’.

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The purpose of signature is to authenticate the instrument. The signature can be made

on any part of the instrument.

9. Must be delivered to the payee: According to Sec.46 of the Act, a promissory note is

incomplete until it is delivered to the payee. If a person signs a promissory note in his

home and keeps it there, he does not become liable to anyone even if somebody’s name is

written on it. The maker becomes liable to pay only when the duly signed note is

voluntarily delivered to the payee.

10.Requirements under the Indian stamp Act 1899: A promissory note must be stamped

with adhesive stamp or engrossed on stamp paper of proper value. This requires the

cancellation of such stamp or initials with the date of his writing or in any other effectual

manner.

11.Other formalities: It is usual and proper to state in a promissory note, the place where it

is made and the date on which it is made. However, their omission does not render an

instrument invalid. For example, if an instrument is not dated, it is deemed to have been

dated on the date of delivery. If the words “value received” are not written on apromissory note, it does not make any difference, since consideration is presumed to

exist in every negotiable instrument, until the contrary is proved.

Note:

1. The omission of consideration received, place and date will not invalidate the

instrument.

2. An undated instrument will be deemed to be made on the date of delivery.

3. An ante-dated or post-dated instrument is not invalid.

4. A promissory note may be payable on demand or after a definite period of time.

5. The words ‘or to the bearer of the instrument’ have become inoperative in view of theprovision contained in Section 31(2) of the Reserve Bank of India Act, which provides

that no person in India other than Reserve Bank of India and The Central Government

can make or issue promissory note payable to the bearer of the instrument.

6. A bank note or currency note is not a promissory note because it is money itself.

7. Absence of the words ‘or order’ in a promissory note does not affect its validity. In fact,

Explanation (i) to sec.13 of the Negotiable Instruments Act provides that unless a promissory

note, bill of exchange or cheque contains words prohibiting transfer or indicating an

intention that it shall not be transferable (e.g., Pay A only), instrument payable to a specified

person shall also be payable to his order. Thus, if promise is to ‘pay A’ it also implies promise

to pay at the order of A to any other person specified by A.

BILL OF EXCHANGE

Def: Sec.5 of the Negotiable Instruments Act reads as “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.”

Parties to a bill of exchange: A bill of exchange is a 3 party instrument.

a. Drawer: The person who creates an instrument and orders the third party to pay is called a

drawer.b. Drawee: The person on whom the bill is drawn i.e. the person who is directed to pay the

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of the bill. When no documents relating to goods represented by the bill are attached, it is

called clean bill.

Escrow: When a negotiable instrument is delivered conditionally or for a special purpose as a

collateral security or for safe custody only, and not for the purpose of transferring property

therein, it is called an escrow. The liability to pay in case of an escrow arise if the conditionsagreed upon are not fulfilled, or the purpose for which the instrument was delivered is not

satisfied.

Ambiguous Instrument: When an Instrument, because of its fault drafting, may be

interpreted either as a promissory note or a bill of exchange, it is called an ambiguous

instrument. In other words, an instrument which is vague and cannot be clearly identified

either as a bill of exchange or as a promissory note is an Ambiguous instrument. Once for all

its holder has to elect, whether he wants to treat it as a promissory note or a bill of exchange.

Ex: 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 bill because the drawer (A) and the drawee (P) are the

same person.

If the amount is stated differently in figures and in words, the amount stated in words is the

amount undertaken or ordered to be paid (Sec. 18).

Inchoate Instrument (Sec.20): An Inchoate instrument is an incomplete Instrument in some

respect. When a person signs and delivers blank or incomplete stamped paper to another,

such other is authorised to complete it for any amount not exceeding the amount covered by

the stamp. The person so signing is liable upon such instrument, to any holder in due course

for any amount. But any other person can’t claim more than the amount intended by the

drawer of the instrument.

E.g.: A bill of exchange upto the value of 1,000 requires stamps worth 50 paise. A bill with a stamp

of 50 paise on it is duly signed but the amount is not filled in. It is agreed that the payee will not fill in

more than 500. Suppose, the payee fills in` 900, the person so singing shall be liable to any holder

in due course for the full amount of the bill i.e. 900, being the amount covered by the stamp.

However, an ordinary holder cannot claim more than 500 – the amount intended by the drawee.

Undated bills and notes: A negotiable instrument is not invalid by reason that it is undated. If all

legal requirements are fulfilled, the date of its execution can be proved by oral or other evidence.

However, A holder in due course may, insert the true date of issue or acceptance and the

instrument shall be payable accordingly. Such an insertion is not treated as material alteration.

Fictitious bill:When the name of the drawer or the payee or both is fictitious in a bill, it is a

‘fictitious bill’. The word fictitious denotes (i) non-existing person or (ii) pretended person.

Generally, a fictitious bill is issued when:

1. a dishonest employee deceives the employer (i.e. drawer of the bill) to sign an instrument,

payable to a party, who has no right to receive the payment or

2. the dishonest employee or agent has the authority to issue the instrument on behalf of the

drawer.

Bill in sets:A bill of exchange drawn in parts is known as bill in sets. When the drawer and

drawee are at distant places, there is a possibility that a bill of exchange send by post may be

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lost during the course of transmission. In order to avoid inconvenience and delay and ensure

safe transmission, law has provided an option to draw bill in several parts. All such parts

together constitute one set and the whole set is considered as one bill. Generally, each part is

sent by separate post so that in case any part is lost in transit, at least the other one can reach.

When payment is made on one part, the whole bill gets satisfied.

Essentials of such bills are:

a. Each part must be numbered.

b. Each part must contain a reference to the others; otherwise each part will constitute a

separate bill.

c. Each part must provide that it shall be payable only as long as the other parts remain

unpaid.

Accommodation bill:

a. A bill which is drawn, accepted or endorsed without any consideration is called an

‘Accommodation bill’. Such bills are not supported by genuine trade transactions and are

generally created to accommodate friends who are in immediate need of money.

b. The party who accommodates is termed as ‘accommodating party’ and the party who is

accommodated is termed as ‘accommodated party’.

Ex: A was in need of 15,000. He approached his friend B for the purpose. But B was not in a

position to lend money. However, B suggested that A can draw a bill upon him which he will accept

and B being a person of good reputation, the bill can be discounted with B’s banker. Thus A will be

able to raise money. This is an accommodation bill where B is an accommodating party & A is an

accommodated party.

c.In general, accommodating parties are liable on the bill to the same extent as that of anordinary bill. However, they are not liable to the accommodated party - the person for whose

benefit they signed the instrument.

d. An accommodation bill may also be drawn for accommodation of both drawer and acceptor.

In such a case both the parties share the proceeds of the accepted bill.

E.g.: A and B, both were in the need of 15,000 each. B drew a bill of exchange for 31,000 On A

which he accepted. They got the bill discounted with the banker of A for 30,000 (banker charges some

money for discounting a bill of exchange) and divided the proceeds among themselves. On maturity of

the bill, A paid 31,000 to the banker, whereby B paid 15,500 to A for the money used by him.

It is to be noted that issue of such bills is not prohibited under the Negotiable Instruments

Act, but as per RBI instructions, Bankers are not permitted to discount such AccommodationBills. (Of course bogus invoices, bogus deliveries and bogus dispatches are made to get over

the restriction, but then technically and on the face of it, they will not be considered as

accommodation bills.

Bank draft:A bank draft is a bill of exchange drawn by one bank on another bank or on its

own branch, instructing the latter to pay a specified sum of money to a specified person or his

order. It is a negotiable instrument and is very much like cheque. It is also known as demand

draft.

BILL OF EXCHANGE VS. PROMISSORY NOTE.

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No. Difference Bill of Exchange Promissory Note

1.No.of Parties There will be 3 parties – drawer,

drawee and payee.

There are two parties – maker and

payee.

2.Promise/Order It contains an unconditional order

given by a creditor to a debtor.

It contains an unconditional promise

given by a debtor to a creditor.3.Nature of liability The liability of the drawer is

secondary and conditional.

The liability of the maker is primary

and absolute.

4.Acceptance It requires acceptance to become a

valuable instrument.

It does not require any acceptance since

it is a valuable instrument right from

the beginning.

5.Same identity of

payor and Payee

The drawer and payee may be the

same person.

The maker and payee cannot be the

same person.

6.Payable to bearer It can be payable to bearer. It

cannot be drawn as payable to

bearer on demand.

It cannot be payable to bearer.

7.Protest for

dishonour

It requires protesting on

dishonour.

It does not require any protesting.

8.Notice of dishonourNotice of dishonour must be

given to all persons (including

drawer) liable to pay.

Such notice is not required to be given

to the maker.

CHEQUE

Cheques are the most common form of payment through banks.

Def: Sec.6 of the Act reads as – “A cheque is a bill of exchange drawn on a specified banker

and not expressed to be payable otherwise than on demand.”

Section 6 of the negotiable instruments Act, as amended by the negotiable instrument Act,

2002 (w.e.f. 6.2.2002) defines a cheque as a bill of exchange drawn on a specified banker and

not expressed to be payable otherwise than on demand. Further, the expression includes the

electronic image of a truncated cheque and cheque in the electronic form.

This definition is very brief to give the full meaning of cheque, although it is clear that it is a

variant of bill of exchange, and to be valid it must be drawn on a banker. Taking the definition ofa bill of exchange and a cheque together, the cheque in law is an unconditional written order to a

bank (signed by the drawer) to pay a named person (or bearer) a specific sum of money on

demand.

Parties to a cheque:

a. Drawer: The person who issues a cheque.

b. Drawee: The banker on whom cheque is drawn. In case of cheque, drawee is always

banker.

c. Payee: The person to whom cheque is payable.

d. The person endorsing the cheque is endorser & the person to whom cheque is endorsedis endorsee.

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Essentials of a valid cheque:

1. It must have all the essentials of a bill of exchange:Since cheque is primarily a bill of

exchange drawn on a banker, it must fulfill all the essentials of a bill of exchange

discussed earlier. These may be summed up as follows:

a. It must be in writing.b. It must contain an unconditional order to pay.

c. The order to pay must be in terms of money only.

d. The order to pay must mention a definite sum of money.

e. The parties must be certain.

f. It must be signed by the drawer.

2. It must be drawn on a specified banker:A cheque has to be drawn on a banker only. Thus

it can be treated as a bill of exchange where the drawee must be a banker.

3. It mush be payable on demand:A cheque should always be payable on demand i.e. it

should be payable whenever the holder chooses to present it to the drawee (the banker).

Note: These two additional features distinguish a cheque from bill. That is why it is often

said that all cheques are bills while all bills are not cheques.

Notes:

(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 by a secure system ensuring the

minimum safety standards with the use of digital signature (with or without biometrics

signature) and asymmetric crypto system

(b) ‘A truncated cheque means a cheque which is truncated during the clearing cycle, either

by the clearing house during the course of a clearing cycle, or by the bank whether paying or

receiving, 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. ‘Clearing house’ means the house managed

by the Reserve Bank of India or a Clearing house recognized as such by the RBI [Sec.6].

CROSSING OF CHEQUE - DIFFERENT TYPES OF CROSSING

A cheque is said to be crossed when 2 parallel transverse lines, with or without any words, are

drawn across the face of a cheque. They can be drawn anywhere on the face of the cheque butusually they are drawn on the left hand top corner of the cheque. The purpose of crossing is to

give a direction to the banker not to pay the cheque across the counter but to pay it only to a

banker.

Meaning of Crossing: The Crossing of a cheque is an instance of an alteration which is

authorized by act. A cheque is said to be crossed when it bears across its face 2 parallel

transverse lines which are usually drawn on the left hand top corner of the cheque.

Purpose of Crossing:Purpose of crossing a cheque is to provide security to the system of

cheque payment. It is very easy to trace the payee if amount is deposited in his account because a banker is expected to check details of person before opening an account. Provision

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of crossing a cheque is only in respect of cheques and not in respect of Bills of exchange or

Promissory notes. Broadly, crossing can be categorised as follows:

General crossing:

a. General crossing with two parallel lines: This is made by drawing 2 parallel

transverse lines on the face of the cheque. The payee has to deposit it with his banker

in order to get payment thereon. He can also endorse it to any other person, who will

get better title than that of endorser.

b. General crossing containing words “& co.” within two parallel lines:This requires

writing of words “& Co,” between the two parallel lines. The

effect of this crossing is similar to that of crossing mentioned

above.

c. General crossing containing words “not negotiable’ alongwith two parallel lines:This requires writing of words “not

negotiable” in addition to the two parallel lines. These words

may be written inside or outside these lines. The only

difference is that the endorsee does not get a better title than that

of the endorser.

d. General crossing containing the words “not negotiable & co.”

within two parallel lines:This requires writing of words “not

negotiable & co.” between the two parallel lines. The effect of this

crossing is same as that of the “not negotiable” crossing.

Special crossing:

a. Special crossing containing the name of a banker:This requires

writing the name of banker across the face of the cheque. Drawing 2

parallel lines is not compulsory. The special effect of this crossing is

that cheque is payable through that banker only whose name appears

on the face of the cheque. For example, if the name of Canara Bank appears on the face of

the cheque, it can be deposited in the Canara bank only for the

purpose of collection.

b. Special crossing containing the words “not negotiable” in

addition to the name of banker:This requires writing

of the words “not negotiable” in addition to the name of the

collecting banker. The only difference from the above types of

crossing is that when a holder endorses this cheque, the

endorsee does not get a better title than that of transferor. A

special crossing makes the cheque safer than general crossing

because a wrongful holder has to deposit it into the account of a particular bank which is

comparatively difficult task.

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As per Sec.127 - “Where a cheque is crossed specially to more than one banker, the

banker on whom it is drawn shall refuse the payment thereon.

However, two crossings with the names of two branches of the same bank are allowed. For

example, if a cheque is double crossed with the names of two different banks, namely “The

Bank of India”, and “Canara Bank”, it is not payable. But if the two crossings are “Canara

Bank, Gole Market branch”, and “Canara Bank, Karol Bagh branch”, the cheque remains

valid instrument and the payment can be obtained by depositing it into any of the given

branches.

But a Banker in whose favour a crossing is made, can once again cross it in favour of his

agent for collection.

Not negotiable crossing:The word “not negotiable” has no statutory effect. They are used

along with general crossing or special crossing resulting into “not negotiable crossing”.

The effect of “not negotiable” is that it can’t give to its transferee a better title than that of its

transferor. Even when the transferee of a “not negotiable” cheque is a holder in due course,

he cannot acquire any better title than its transferor.

Note: Generally it is misunderstood that “not negotiable” crossing makes a cheque non

transferable. It can very well be endorsed and transferred from person to person. If the

holder has a good title, he can still transfer the cheque with a good title. But if the transferor

has defective title, the transferee is effected by such defects.

Restrictive crossing:When the words “A/C payee” or “A/C payee

only” are added to a general or special crossing, it is called

restrictive crossing.

The effect of “Account payee” crossing is that the banker is supposed to collect the cheque on

behalf of that payee only whose name appears on the face of the cheque. If banker collects

this cheque for an endorsee (i.e. person other than named payee), he can be held responsible

in case that endorsee turns out to be a wrongful holder of cheque. Thus liability of a banker

enhances to a great extent.

It does not mean that the payee cannot transfer such cheque to anybody else. Legally a cheque

with “Account payee” crossing is negotiable like any other cheque but practically the banker

refuses to collect such cheques on behalf of any person other than

the named payee of the cheque.

An “Account payee” crossing can be combined with “not

negotiable” crossing resulting into a “Not negotiable A/C

payee crossing”. The A/C payee crossing is a

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direction to the collecting banker to collect it for the payee only and a warning that if he

collects for somebody else, he may be liable for damages.

Opening or cancellation of a crossing:

Sometimes drawer crosses a cheque while payee may be interested in taking the paymentover the counter of the bank. The crossing can be uncrossed to make the cheque an open

cheque again. But it can be done by the drawer only. He may do so either before the

cheque is delivered to payee or at the request of the payee after delivery.

The cheque is said to be “opened” by writing “please pay cash” within the cross lines,

and adding to it the signature of the drawer. This practice received sanction from the

decision in the case ofSmith v. Union Bank of London.

In the same way, drawer may also cancel crossing on the cheque. For example, he may

convert special crossing into general crossing or he may strike out the words “not

negotiable” from the face of the cheque.

Opening or cancellation of crossing by any person other than the drawer is considered as

a material alteration of the cheque and the instrument gets discharged.

WHO CAN CROSS A CHEQUE

Crossing by the drawer:Since drawer is the person who issues a cheque, it is his choice to

cross or not to cross the cheque. He may or may not cross the cheque.

Crossing by the holder:Sec.125 of the Act says that a holder can cross a cheque in the

following ways:

When a cheque is uncrossed, the holder may cross it generally or specially,

Where a cheque is crossed generally, the holder may cross it specially,

Where a cheque is crossed generally or specially, the holder may add the words “not

negotiable”.

Crossing by the banker:Where a cheque is crossed specially, the banker to whom it is

crossed may again cross it specially to another banker, his agent for collection. In addition to

it, like any other holder, he may cross it generally or specially to another banker, or to make it

non-negotiable. The above stated facts can be tabulated as follows:

Case Right to crossWhere a cheque is uncrossed.

Where a cheque is crossed generally.

Where a cheque is crossed generally or specially.

Where a cheque is crossed specially.

The holder may cross it generally or specially.

The holder may cross it specially by adding the

name of some banker.

The holder may add the word ‘Not Negotiable’.

The banker to whom it is crossed may again cross

it specially to another banker (his agent) for

collection.

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BILL OF EXCHANGE VS. CHEQUE.

Sec.4 of the Act reads as “A ‘promissory note is an instrument in writing 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.” Thus a promissory note is a

written and signed promise to pay a certain sum of money to some person or to his order.

Sec.5 of the Negotiable Instruments Act reads as “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.”

Following table highlights the fundamental differences between cheque and bill of exchange:

Cheque Bill of Exchange

Cheque must be drawn on a specified Banker. Bill of exchange may or may not be addressed to

banker. Drawee can be any person.

Cheque is required to be paid immediately. There

is no grace period.

If Bill of Exchange is not payable on demand, at

sight or on presentment; grace period of three

days is available.

Cheque can be crossed. There is no provision for crossing bill of exchange.

Presentment of cheque for acceptance is never

required.

Presentment for acceptance is compulsory.

Cheque is not required to be stamped. Bill of Exchange is required to be stamped.

In case of cheque, liability of drawer is primary.

Bank is not liable to holder of a cheque for

payment (Bank will pay only if there is balance inthe account of drawer and cheque is in order)

In Bill of Exchange, liability of acceptor is

primary.

There is no 'due date' for presentation of cheque.

If not presented within a reasonable period,

drawer is discharged only to the extent of damage

suffered by him.

Bill of Exchange is required to be presented by

holder for payment on due date. Otherwise,

parties other than those who are primarily liable,

get discharged.

Drawer can countermand cheque i.e. can issue

stop payment instructions after issue of cheque.

Maker of a Bill of exchange cannot countermand

the Bill.

Banker has to stop payment of cheque if drawer is

dead or insolvent or become insane and "Bank”

has notice of the same.

There is no provision to stop payment if party to

instrument is dead or insolvent or becomes insane

after signature.

Notice of Dishonour is not required, unless holder

intends to take criminal action u/s 138.

Notice of dishonour is usually required.

Noting and protesting of Cheque is not required.Bill of exchange can be noted and protested.

Statutory protection is available to drawee-banker

in certain cases U/S 85 (cheque payable to order)

and section 128 (payment of crossed cheque in

due course). Protection is available to collecting

banker U/S 131 (if he receives payment in good

faith).

No statutory protection is available to drawee or

acceptor in Bill of Exchange for payment in due

course.

Criminal liability is provided if cheque isThere is no criminally liability for dishonour of

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dishonoured. bill of exchange.

Q.NO.13. WRITE DOWN THE PROVISIONS RELATING TO MATURITY AND DAYS OF

GRACE FOR NEGOTIABLE INSTRUMENTS?

A promissory note or bill of exchange may be payable:

a. On demand or

b. On a specified day or

c. After a specified period.

In case 1 the amount is payable on demand and in case 2, 3 date of maturity has to be calculated.

Date of Maturity: Date of maturity of a promissory note or bill of exchange is the date onwhich it falls due. Every instrument payable otherwise than ‘on demand’ is entitled to 3

grace days. These grace days were originally allowed as a gratuitous favour to the debtor.

But now the custom of merchants has made it a legal right.

The instruments which are not entitled to ‘days of grace’ are:

a cheque (as it is intended for immediate payment),

a bill or note payable ‘at sight’ or ‘on presentment’ or ‘on demand’ and

a bill or note in which no time is mentioned.

The instruments which are entitled to ‘days of grace’ are:

a bill or note payable on a specified day,

a bill or note payable ‘after sight’,

a bill or note payable at a certain period after date, and

a bill or note payable at a certain period after the happening of a certain event.

All those instruments which are entitled to grace days must be presented for payment on the

last day of grace. Where an instrument is payable by installments, each installment is payable

3 days after the day fixed for the payment of each installment.

Rules for finding out date of maturity:

a. If the instrument is payable after stated number of months after date or after sight or

after certain event, it becomes payable 3 days after the stated number of months.

E.g.: A bill of exchange, dated 30th August 1999, is made payable 3 months after date. The

instrument will mature on 3rd December 1999.

b. If the month in which the period would terminate has no corresponding day the period

is held to terminate on the last day of such month.

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E.g.: A bill, dated 30th January, 1991, is made payable one month after date. The date of maturity

falls on 3rd March, 1991.

E.g.: An instrument dated January 30, 1999 is payable one month after date. It falls due on 3rd

day after February 28, 1999 (the last day of month) i.e. on 3rd day of March 1999.

c. In the above cases, the day on which the instrument is drawn or presented for acceptance

or sight, or the day on which the event happens is to be excluded.

Ex: A bill payable thirty days after sight is presented for sight on 1st March, 1991. It falls due on

3rd April, 1991.

E.g.: A bill of exchange dated 1st November is made payable 15 days after date. The period of 15

days will be counted from 2nd November and the bill will be at maturity on 20th November.

d. If the maturity date is a public holiday, the instrument is deemed to be due on the next

preceding business day. The expression ‘public holiday’ includes Sundays and any other

day declared by the Central Government, by notification in the official gazette to be publicholiday.

E.g.: A bill, dated 11th January, 1991, is payable three months after date. It falls due on 14th April,

1991, which happens to be a Sunday. As such it will fall due on 13th April, 1991 i.e. the preceding

business day.

e. However, if the instrument matures on a day which is declared as an emergency holiday,

the instrument shall be deemed to be due on the next succeeding business day.

E.g.: An instrument matures for payment on 24th December. The Government declares the day as

holiday on account of the death of a political leader. The instrument shall fall due for payment on

26th December (25th December is Christmas day, being a public holiday)

Q.NO.14. WHO IS A HOLDER? STATE THE CONDITIONS TO BE SATISFIED TO BECOME A

HOLDER?

Holder of a negotiable instrument is the person who is capable of receiving the amount due

upon it.

Def: Sec.8 of the Act reads as - “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.”

Thus a person is a ‘holder’ when he satisfies two conditions:

1. He is entitled to possess the instrument in his own name. Such person may be-

a. Payee:The person to whose order the instrument is payable. If an instrument reads -

‘pay to the order of Ram’, Ram is the holder when he is in possession of the

instrument.

b. Endorsee:The person to whom the instrument has been endorsed. In the above

example, if Ram endorses the instrument to Sachin, then Sachin will become holderof the instrument.

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c. Bearer:If the instrument is payable to ‘Bearer’ then bearer of the instrument becomes

holder.

d. The legal heir of a deceased holder (entitled by operation of law) is a holder although

he is not the payee or endorsee or bearer thereof.

Note: Sometimes, a negotiable instrument is lost or destroyed. In such cases, the holder is

the person who was entitled to the instrument, in his own name, at the time of such loss

or destruction.

2. He is entitled to receive or recover the amount due thereon: The holder must have the right

to receive or recover the amount of the instrument and give a valid discharge to the payer.

Status of holder: A holder has the legal power to transfer the instrument to another person,

to enforce the payment of the instrument, or to discharge the instrument, which means to

release the maker or drawer from obligation of paying the instrument.

Who is not a holder? Sometimes a person may be in possession of a negotiable instrument,

still the law does not consider him a holder. Such instances are given below:

a. A person who finds or steals a bearer instrument or takes an instrument under forged

endorsement is not holder: The reason is that holder of a negotiable instrument must

have right to receive or recover the money thereon from the parties thereto.

b. A beneficial holder claiming through ‘BENAMIDAR’ is not a holder:

E.g.: A advanced 500 to B, B executed a promissory note in the name of “C”, a benamidar, for

the repayment of the same. On maturity, B failed to pay the amount due on the promissory note.

A brought an action against B for its recovery. Court held that A could not recover the money

because he was not a holder of the instrument.

c. An agent holding an instrument for his principal is not a holder: The reason being that,

although agent can receive payment of the instrument, he has no right to sue on the

instrument in his own name.

d. A payee prohibited by an order of court from receiving the amount of the instrument is not a

holder:

Thus holder means the bearer of the bearer instrument and the endorsee or payee of the

order instrument. He must be the owner thereof at law. It may be noted that under English

law, actual possession of the instrument is essential to be a Holder but such physical

possession is not necessary under the Negotiable Instrument Act.

E.g.:X advanced 10,000 to Y who executed a promissory note in the name of Z a benamidar. On

maturity Y failed to pay the amount due and X brought an action against Y. It was held that X could

not recover the amount because he was not entitled to the promissory note in his own name. [Sarjoo

Prasad v. Ramayapathi Debi]

Note:Only a holder can bring a legal action to recover the amount due on the instrument.

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Q.NO.15. WHO IS A HOLDER IN DUE COURSE? STATE THE PRIVILEGES AVAILABLE TO A

HOLDER IN DUE COURSE?

A ‘holder in due course’ is a ‘holder’ who satisfies certain conditions. They are:

Def: Sec.9 of the Act reads as - Holder in due course means any person who, for

consideration, became the possessor of a promissory note, bill of exchange or cheque, if

payable to the bearer, or the payee or endorsee thereof, if payable to the order, before the

amount mentioned in it became payable, and without having sufficient cause to believe that

any defect existed in the title of the person from whom he derived his title.”

E.g.: A cheque sent by general postage was robbed by robber. The next day the same note was received by P.

He received it for full and valuable consideration and in the usual course of his business and without any

notice that the cheque was robbed. Court held him to be holder in due course.

Essentials to become holder in due course: The essential requirements for attaining the status

of a holder in due course are elaborated below:

a. He must be holder.

b. The holder must have paid valuable consideration:To become a holder in due course, a

person must obtain a negotiable instrument by paying valuable and lawful consideration

for it. One who takes an instrument without giving full value for it, for example, when

given as a gift or has been inherited, the transferee cannot be a holder in due course.

c. The holder must be possessor in case of bearer instrument:The word ‘possessor’ here

means a person in actual possession of the instrument.

d. The holder must be payee or endorsee in case of order instrument:If a negotiable

instrument is payable to order, no person can become holder in due course of the same

unless he is a payee or endorsee of the same.

e. He must become holder before the amount of the instrument became payable:A

negotiable instrument becomes payable at the time of its maturity. A holder must acquire

the instrument before its maturity in order to attain the status of holder in due course.

Thus when a person becomes a holder of the instrument after it gets matured, he does

not acquire the status of a holder in due course.f. The holder must have obtained the instrument without sufficient cause to believe that

any defect existed in the title of the person from whom he has derived his title: The law

requires a person to take due care and caution at the time of purchasing a negotiable

instrument. If a person has some suspicion about an instrument but has no actual

knowledge of irregularity, he must make an enquiry to confirm his suspicion. If he does

not enquire and accepts a bad instrument, he cannot be granted the status of a holder in

due course.

E.g.: A person purchases 5,000 bearer cheque issued by a big industrialist for 500 from a

stranger on street corner. He is not a holder in due course. The circumstances were suspicious tocall for enquiry.

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g. The instrument must be complete and regular on the face of it.Here the term ‘on the face’

includes back also. It is the duty of the person acquiring the instrument to examine its form

and content thoroughly. If it contains any material defect, he will not become holder in due

course.

Privileges of being a holder in due course:The Negotiable Instruments Act presumes that

every holder is a holder in due course unless contrary is proved. It has given certain

privileges to a holder in due course. These special privileges are:

a. Better title than that of transferor: A holder in due course gets the negotiable

instrument free from all defects in the title of the transferor or any of the previous

holders of the instrument. The ordinary holder (not being a holder in due course) does

not get better title than that of transferor.

E.g.:X obtains an instrument ‘payable to bearer’ by theft. He transfers the instrument to Y for

valuable consideration who buys it in good faith. Now Y has got a good title on the instrument,being the holder in due course, and can recover the amount of the instrument from its maker or

drawer. The drawer can sue against X for theft but they cannot proceed against Y, the holder in

due course.

b. Instrument cured of all defects: When a negotiable instrument passes through the hands

of a holder in due course, it is cured of all defects.

E.g.: X obtained a bill by fraud from A, and endorsed it to Y, a holder in due course. Y endorsed

the bill to Z ,an ordinary holder. Here Z can recover the amount of the bill from A.

Note:‘defect of title’ is different from ‘absence of title’. A holder in due course can purifya defective title but cannot create a title. Thus a forged instrument which does not have

any title cannot have any validity, even if it passes through the hands of a holder in due

course.

c. Right to recover money covered by stamp in case of an inchoate instrument [Sec.20]: An

‘inchoate instrument’ is an ‘incomplete instrument’. When a person puts his signature on

a stamped paper and delivers it to the other without filling the amount on it, he gives

prima facie authority to the other person to fill the amount. If a person is an ordinary

holder, he cannot claim anything more than what the maker or drawer of the instrument

intended to pay. But a holder in due course can claim any amount covered by the stampon the instrument irrespective of the amount intended to be paid by the maker of the

instrument.

d. No effect of conditional delivery [Sec.46]: When a negotiable instrument is delivered to a

person on the condition that it will be effective on the happening of certain event, it

cannot be enforced until such event happens. But if such instrument is transferred to a

holder in due course, his rights are not affected by such condition. The parties to the

instrument cannot escape their liability, on the ground that delivery of the instrument

was conditional. Similar treatment for a negotiable instrument delivered for some special

purpose.

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E.g.:X gives a promissory note to Y. It is agreed that the Y will demand the payment of the note

only at the time of the marriage of Y’s son. Before the marriage of his son, Y indorses the note to Z,

a holder in due course. Z can recover the amount of note from X irrespective of the time of

marriage of Y’s son.

e. Liability of prior parties [Sec.36]: Every prior party to a negotiable instrument (i.e. itsmaker or drawer, acceptor, and intervening endorsers) is liable to a holder in due course

until the instrument is duly satisfied. These parties are liable jointly and severally on the

instrument. The holder in due course may enforce payment against any or all these

parties.

In the event of dishonour, the holder in due course is not bound to sue all the parties

liable to him under the instrument. He may, at his option, select the parties as per his

convenience, for recovery of money.

f. Estoppel against denying the original validity of the instrument [Sec.120]: The maker of

a promissory note and the drawer of a bill of exchange or cheque, and the acceptor of a bill of exchange for honour are not permitted to deny the validity of the instrument as

originally made or drawn.

E.g.: A bought a car from B, and issued a promissory note worth` 1,00,000 in consideration.

Later on he realised that B misrepresented the condition of the car. In the meantime the promissory

note reached the hands of a holder in due course who claimed payment upon it from A. Here A

cannot refuse payment to holder in due course.

g. Negotiable instrument made without consideration:A negotiable instrument made,

drawn, accepted, or transferred without consideration, creates no obligation of payment

between parties to the transaction. But if such instrument comes into the hands of a

holder in due course, he can recover the amount from any prior party.

h. Instrument obtained by unlawful means or for unlawful consideration [Sec.58]: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, it

cannot be enforced by an ordinary holder but once such instrument reaches a holder in

due course, it can be enforced by him or by any holder thereafter.

Q.NO.16. HOLDER VS. HOLDER IN DUE COURSE.

Difference Holder Holder in due course

Consideration.

Possession and maturity.

Instrument obtained byunlawful means or

A holder need not necessarily become

a holder for consideration.

A holder may acquire the

instrument before or after its

maturity.

A holder cannot enforce such

A holder has to pay consideration

for becoming a holder in due

course.

To become a holder in due course,

an instrument has to be acquired

before its maturity.

A holder in due course can

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consideration.

Instrument originally issued

to incompetent payee.

Instrument issued under

vitiated contract.

Instrument delivered

conditionally.

Fictitious Bill.

Inchoate instrument.

Title.

instrument.

A holder can’t demand payment

against an instrument which has been endorsed by a person

incompetent to contract.

If an instrument is issued under

circumstances which vitiate the

contract say under fraud or coercion

etc. it can’t be enforced by a holder.

When an instrument is delivered with

the condition that it will be given affecton the happening of a certain event or

for a specific purpose, it can’t be affected

by a holder before such event or

otherwise than the specific purpose.

A holder cannot claim payment on

a fictitious bill.

When an inchoate instrument is

blank with respect of the amount, a

holder can fill and claim only that

much amount which the maker or

drawer intended to pay him.

A holder does not acquire a good

title to the instrument, if the tile of

any of the prior parties is defective.

enforce such instrument.





A holder in due course canenforce such instrument

irrespective of the condition or

specified purpose.

A holder in due course can claim

payment on a fictitious bill if he can

prove that the signature of drawer &the first endorsee are in same

handwriting.

A holder in due course can claim

any amount covered by the stamp

affixed on the instrument.

A holder in due course acquires a

good title to the instrument not

with standing any defect in the title

of any prior party.

Q.NO.17. DISCUSS THE CAPACITY OF PARTIES TO BE A PARTY OF NEGOTIABLE

INSTRUMENT?

a. Capacity: Capacity here means competence to enter into a legal contract.

b. Who can Bind and be bound [Sec.26]: Every person capable of contracting, according to thelaw to which he is subject, may bind himself and be bound by the making, drawing,

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acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or

cheque.

c. Position of Minor [Sec.26]: A minor may draw, endorse, deliver and negotiate such

instrument so as to bind all parties, except himself. In order words, the instrument will

be valid and binding on all parties except minor.

Note:The estate of the minor is still liable for the debts arising out of the ‘Necessaries’

supplied to him.

d. Liability through an agent [Sec. 27]:Every person capable of binding himself or of being

bound, as mentioned in section 26, may bind himself or be bound by a duly authorised

agent acting on his behalf.

e. Agent’s General Authority does not include Authority to Accept or Endorse a Bill [Sec.27]:

General authority to enter into business transactions and to receive and discharge debts does

not give any power to accept or endorse bills of exchange so as to bind his principal.

f. Agent’s authority to draw a Bill does not include Authority to endorse [Sec.27]

g. Liability of an Agent [Sec.28]An agent who signs his name on a promissory note, bill of

exchange or cheque without indicating thereon that he signs as an agent, or that he does

not want to incur personal responsibility, is liable personally on the instrument.

Exception to the aforesaid rule: An agent is not personally liable to those who induced him

to sign upon the belief that the principal only will be liable.

Note:Mere signature of an agent in his own name with the word ‘agent’ added does not

exempt him from personal liability [Liverpool Bank v. Walter]

Example of agent’s signature:

When a a gent is personally liable When an agent is not personally liable

RAM

Partner

Ram & Co

For and on behalf of Ram & Co

Ram

Partner

Q.NO.18. WHAT IS MEANT BY PAYMENT IN DUE COURSE?

It is defined in section 10 of the NI Act, 1881.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 mentioned

therein.

Apparent tenor means the period of time, as expressed in the instrument, after which it is

payable. Further the circumstances should not create any doubt that the receiver is notentitled to receive amount represented by the instrument. Analysis of section 10 reveals that

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the following conditions must be satisfied before payment of a negotiable instrument can be

called as a payment in due course.

1. Payment must be in accordance with the apparent tenor of the instrument. Thus, a

payment before maturity is not payment in due course.

2. Payment must be in good faith and without negligence.

3. Payment must be made to the person in possession of the instrument i.e. a person

entitled to receive payment. For example, A thief is not said to be in possession of the

instrument.

4. Payment must be made under circumstances which do not afford a reasonable ground

for belief that he is not entitled to receive payment of the amount mentioned therein.

5. Payment must be made in money only. Money includes bank notes or currency notes but

does not include cheque, bill of exchange, promissory note and goods.

Q.NO.19. STATE THE PROVISIONS RELATING TO LIBILITY OF INTEREST IN NEGOTIABLE

INSTRUMENTS.

Payment of Interest[Section 79 to 80]:The payment of interest shall be calculated as under:

Case Interest

1. When the rate of interest is specified

[Section 79]

The interest shall be calculated at the rate

specified on the amount due:

(i) from the date of instrument until tender

of realization of such amount, or

(ii) from the date of the instrument until such

date after the institution of suit to recover

such amount as the court directs.

2. When no rate of interest is specified

[Section 80]

The interest shall be calculated at the rate of 18%

p.a. on the amount due from the date at which

the some ought to have been paid until tender or

realization of such amount or until such date as

the court directs.

Note: When the party charged is the endorser of an instrument, dishonoured by non-

payment, he is liable to pay interest only from the time that he receives notice of dishonour.

[Explanation to Section 80]

Q.NO.20. DISCUSS THE RULES REGARDING LIABILITY OF VARIOUS PARTIES TO A

NEGOTIABLE INSTRUMENT?

Liability of the drawer of the instrument [Sec.30]:The term ‘drawer’ is used in the context of

a bill of exchange and cheque.

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a. Drawer of a bill of exchange;The drawer of a bill of exchange is bound to make payment

to the holder of the instrument, as per its apparent tenor, in case it gets dishonoured.

The liability of the drawer of a bill is secondary because the primary liability is that of

the acceptor. The drawer of the bill becomes liable to pay the amount only on default by

the acceptor. However, where a bill is dishonoured because of ‘non-acceptance’, the

liability of the drawer is primary.

Sec.30 of the Act provides that the notice of dishonour is absolutely necessary to make

the drawer liable. Omission to give notice would discharge the drawer from the liability

upon the instrument as well as from the original debt.

b. Drawer of a Cheque:The drawer of a cheque is bound to pay the holder in case it gets

dishonoured, provided the notice of dishonour had been given to him. The liability of the

drawer of a cheque is primary. The reason being that the holder of a cheque had noremedy against the drawee i.e., the banker. His remedy is only against the drawer.

Liability of a banker as a drawee [Sec 31 & 77]: A cheque is a bill of exchange, drawn on a

specified banker. Thus drawee of a cheque is always banker. The banker is required to make

payment on the cheque drawn upon it by its customer if it does not have sufficient cause to

reject the payment. If, however, banker wrongfully refuses to make payment on a customer’s

cheque, it is liable to compensate the drawer for any damage caused to him by such non-

payment [Sec.31].

Liability of maker of note and acceptor of bill [Sec 32]: The maker of a promissory note andthe acceptor of a bill of exchange are bound to pay the amount of the instrument (i.e., note or

bill) on its maturity, according to its tenure (i.e. terms of the instrument).

The liability of maker and acceptor is primary in nature. The maker becomes liable as soon

as he signs and delivers the note and an acceptor becomes liable as soon as he signs his

acceptance on the bill and delivers it.

In case the maker or acceptor defaults in making payment to the holder of the instrument, they are

liable to compensate the party to whom the loss is caused by the reason of dishonour of the

instrument.

Liability of endorser [Sec 35]: Where a negotiable instrument is dishonoured by maker,

drawee or acceptor thereof, any person who has indorsed this instrument (before maturity)

is liable to all the parties who are subsequent to him, provided due notice of dishonour had

been given to him. Thus endorser stands in the same position as the drawer to all the parties

subsequent to him.

Liability of prior parties [Sec 36]: Any person, who is a party to a negotiable instrument,

prior to the holder in due course, is liable to him until the amount due on the instrument is

paid. Prior parties may include maker or drawer, the acceptor, and all the intervening

endorsers to a negotiable instrument.

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The liability of the prior parties to a holder in due course is joint and several. The holder in

due course may hold all or any party liable to pay the amount on the instrument.

22. NI ACT (PART 1)

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Transcript of 22. NI ACT (PART 1)