Negotiable Instruments Act Short Notes by Amit Popli Sir

NEGOTIABLE INSTRUMENTS ACT, 1881
SECTION TO BE USED IN THIS ACT

SECTION TOPIC PARA No
Section 4 DEFINITION - PROMISSORY NOTE 23.4
Section 5 DEFINITION - BILL OF EXCHANGE 23.5
Section 6 DEFINITION - CHEQUE 23.6
Section 7 & 115 DEFINITION –DRAWEE IN CASE OF NEED 23.8(8)
Section 8 DEFINITION – HOLDER 23.10
Section 9 DEFINITION - HOLDER IN DUE COURSE 23.11
Section 10 DEFINITION - PAYMENT IN DUE COURSE 23.8(2)
Section 11 DEFINITION – INLAND INSTRUMENT 23.8(3)
Section 12 DEFINITION – FOREIGN INSTRUMENT 23.8(3)
Section 13 DEFINITION – ORDER AND BEARER INSTRUMENT 23.7(1)
Section 14 DEFINITION – NEGOTIATION AND METHODS 23.16
Section 15 DEFINITION – ENDORSEMENT AND METHODS 23.13
Section 16 ENDORSEMENT IN BLANK AND FULL 23.22
Section 19 INSTRUMENT PAYABLE ON DEMAND 23.7(2)
Section 20 DEFINITION – INCHOATE INSTRUMENT 23.8(1)
Section 20 SPECIAL PRIVILEGES OF HDC 23.12
Section 21 MEANING OF-AT SIGHT/AFTER SIGHT 23.7(3)
Section 22 MATURITY AND GRACE DAYS 23.9
Section 23/24/25 CALCULATION OF MATURITY 23.9
Section 26 CAPACITY OF PARTIES 23.15
Section 30 LIABILITY OF DRAWER 23.45(1)
Section 31 LIABILITY OF DRAWEE-CHEQUE 23.45(2)
Section 32 LIABILITY OF MAKER/DRAWEE-PN OR BE 23.45(3)
Section 35 LIABILITY OF ENDORSER 23.45(4)
Negotiable Instruments Act, 1881
Section 36 LIABILITY OF PRIOR PARTIES 23.45(5)
Section 42 FICTITIOUS PAYEE 23.8(9)
Section 43 INSTRUMENT WITHOUT CONSIDERATION 23.8(4)
Section 44 PARTIAL ABSENSE OF MONEY CONSIDERATION 23.8(5)
Section 45 PARTIAL FAILURE OF CONSID NOT CONSISTING OF MONEY 23.8(6)
Section 46 RIGHT OF HDC-CONDITIONAL DELIEVERY 23.12
Section 50 RESTRICTIVE ENDORSEMENT 23.22(4)
Section 52 CONDITIONAL AND SANS RECOURSE ENDORS 23.22(5 & 6)
Section 53 RIGHT OF HOLDER DERIVING TITLE FROM HDC 23.12
Section 56 PARTIAL ENDORSEMENT 23.22(3)
Section 82 DISCHARGE OF A PARTY-CANCELLATION AND RELEASE 23.27
Section 83 DISCHARGE OF A PARTY-BY ALLOWING > 48 Hrs 23.27
Section 84 EFFECT OF NON-PRESENTMENT OF CHEQUE WITHIN A 23.41
REASONABLE TIME:-
Section 85 POTECTION TO THE PAYING BANKER 23.39
Section 86 TYPES OF ACCEPTANCE 23.28
Section 87 EFFECT OF MATERIAL ALTERATION 23.33(5)
Section 90 NEGOTIATION BACK 23.23
Section 91 DISHONOUR BY NON-ACCEPTANCE 23.34
Section 92 DISHONOUR BY NON-PAYMENT 23.35
Section 98 NO REQUIREMENT OF NOTICE OF DISHONOUR 23.37
Section 99 NOTING 23.24
Section 100 PROTESTING 23.24
Section 108 MEANING- ACCEPTOR FOR HONOUR 23.43
Section 110 WHERE ACCEPTOR FOR HONOUR DOES NOT SPECIFY THE 23.43
NAME OF PERSON
Section 113 PAYMENT FOR HONOUR 23.44
Section 118 PRESUMPTION AS TO NEGOTIABLE INSTRUMENTS 23.3
Section 123 GENERAL CROSSING 23.29
Section 124 SPECIAL CROSSING 23.29
Section 126 PAYMENT OF CHEQUE DRAWN GENERALLY OR 23.30
SPECIFICALLY
Section 129 LIABILITY OF PAYING BANKER 23.38
Section 131 PROTECTION TO THE COLLECTING BANKER 23.40
Section 138 BOUNCING OF CHEQUES 23.42
Section 142 TIME OF LODGING A COMPLAINT FOR BOUNCING 23.42
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23.1 MEANING OF NEGOTIABLE INSTRUMENT
1.Instrument The Term Instrument means any written document by which a right is created in
favour of some person.
2.Negotiable The word negotiable means transfer of right in an instrument by one person to
another.
3.Negotiable Negotiable instrument may be defined as documents by which rights vested in a
Instrument person can be transferred to another person by following the provisions contained
under Negotiable Instruments Act, 1881.
4. Definition According to section 13(a) of this Act,
According to NI ▪ "Negotiable instrument" means,
Act ▪ a promissory note,
▪ bill of exchange or
▪ cheque
▪ payable either to
▪ order or
▪ to bearer."
23.2 ESSENTIAL FEATURERS OF NEGOTIABLE INSTRUMENTS

1. Freely In case payable to bearer Merely by giving delivery
transferable.
In case payable to Order By endorsement as well as delievery.
2. Title of Provided he gets instrument
transferee i.e. HDC ▪ before due date,
is good
▪ for value consideration and
▪ in good faith.
Thus even if the title of transferor is defective, still title of transferee would not be
affected.
3. NI can be transferred indefinitely
23.3 PRESUMPTION AS TO NI [Section 118]

1. Presumption of That it is drawn or made/on the date which appears on it.
Date
2. Presumption of That every negotiable instrument has been drawn accepted and transferred for value
Consideration consideration.
3. Presumption of That every lost bill and promissory note were duly stamped.
Stamp
4. Presumption of Endorsement is recorded on the instruments. Thus legally it is presumed that the
Order of instrument has been endorsed in that order, which appears on it.
endorsement
5. Presumption of it is presumed that every negotiable instrument is transferred before the date of
transfer maturity.
6. Presumption of It is presumed that, every holder of an instrument is a holder in due course.
Holder in due
course
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23.4 DEFINITION OF PROMISSORY NOTE

1. Meaning According to section 4 of this Act,
▪ "Promissory Note" is an instrument,
▪ in writing (not being bank note or currency note)
▪ containing an unconditional undertaking
▪ signed by the maker,
▪ to pay certain sum of money
▪ only to
▪ or to the order of
▪ certain person
▪ or to the bearer of the instrument".
Space for
Clarification by
RBI
Special Case Mr. X executes a promissory note in the following form, 'I promise to pay a sum of
`10,000 after three months'. Decide whether the promissory note is a valid
promissory note.
Hint
2. Characteristics of Promissory Note
(a) In writing It is not necessary that the word 'promise' should be used.
(b) Unconditional The promise to pay must be definite and unconditional.
undertaking to pay Exception ➔ A promise to pay is not conditional of it depends upon an even
which is certain to happen but the time of its occurrence may be uncertain.
(c) Must be signed The promissory note must be signed by the maker.
by the maker
(d) Amount must The amount payable must be certain and not subject to any contingency
be certain
(e) Promise to pay Any promise to pay in kinds or to pay money and partly in kinds is not valid.
money only
3. Parties to a PN
(a) Maker The person making the PN
(b) Payee Person to whom or to whose order the payment is to be made
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Exercise 1
Quest-1 State whether the following statements are promissory notes or not?
(a) "I acknowledge myself to be indebted to L in `20,000 to be paid on demand, for value
received".
Answer:-…………………………………………………………………………………….
(b) "Mr. Ravi, I.O.U. `15,000".
Answer:-…………………………………………………………………………………….
(c) "I promise to pay G `18,000 and all other sums which shall be due to him".
Answer:-…………………………………………………………………………………….
(d) "I promise to pay G `21,000 when he delivers the goods".
Answer:-…………………………………………………………………………………….
(e) "I promise to pay K `200 and deliver one quintal of paddy".
Answer:-…………………………………………………………………………………….
23.5 BILL OF EXCHANGE: [Section 5]

1. Meaning Section 5 of the Negotiable Instruments Act defines Bill of Exchange as
follows
▪ A BE is an instrument
▪ in writing
▪ Containing an
▪ unconditional order
▪ signed by the maker,
▪ Directing a certain person
▪ to pay certain sum of money,
▪ Only to
▪ or to the order of certain person
▪ or to the bearer of instrument"
2. Characteristics of bill of exchange
(a) It must be in writing
(b) It contains an Mere request or a reminder to pay money will not be considered as bill of
order to pay exchange.
(c) The order to Exception "A promise to pay is not conditional of it depends upon an even which is
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23.5 BILL OF EXCHANGE: [Section 5]
pay must be certain to happen but the time of its occurrence may be uncertain
unconditional
(d)The sum payable must be certain

(e) It must be signed by the maker
3. Parties to a BE
(a) Drawer The person who draws a BE
(b) Drawee The person on whom BNE is drawn.
(c) Payee The person named in the instruments to whom or to whose order the money is
directed to be paid by the instalment is called as payee.
Exercise 2
Quest-1 Which of the following is a bill of exchange? Give reasons.
(a) "To Ram, Dear Ram, We hereby authorise you to pay on our account, to the order of Jai,
the sum of six thousand rupees."
(b) "`500." "Pay to my order the sum of five hundred rupees, for value received." It is neither
signed by any person as drawer nor addressed to any person as drawee. It is accepted by
Jai.
Ans
Case a)…………………………………………………………………………………………
Case b)…………………………………………………………………………………………
23.6 DEFINITION OF CHEQUE [section 6]

1. Meaning-Cheque Section 6 defines cheque as follows:-
▪ "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 truncated cheque and a cheque in
electronic form".
2. Meaning-Cheque ▪ A cheque which contains exact mirror image of a paper cheque,
in Electronic Form ▪ and is generated, written and signed in a secure system ensuring the minimum
safety standards
▪ with the use of 'digital signature' (with or without biometrics signature)
▪ and asymmetric crypto system
3. Meaning- ▪ A cheque which truncated during the course of a clearing cycle
Truncated Cheque ▪ either by a clearing house or by the bank
▪ whether paying or receiving the payment
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▪ Immediately on generation of electronic image or transmission, substituting the
further physical movement of cheque in writing.
4. Parties which are involved in Cheque:-
(a) Drawer A person who issues a cheque
(b) Drawee A Person to whom cheque Is issued i.e. Bank
(c) Payee The person named in the instruments to whom or to whose order the money is
directed to be paid by the instalment is called as payee.
23.7 CLASSIFICATION OF NEGOTIABLE INSTRUMENT [Section 13, 19 & 21]

1. Bearer and order instruments
Bearer Instrument Any instrument is payable to bearer
(i) Which is expressed to be payable to bearer
or
(ii) On which the last endorsement is an 'endorsement in blank'
It can be negotiated simply by giving delivery of it to the party.
Order Instrument ▪ A negotiable instrument is payable to order,
▪ which is expressed to be so payable,
▪ or which is expressed to be payable to particular person
▪ or his order
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23.7 CLASSIFICATION OF NEGOTIABLE INSTRUMENT [Section 13, 19 & 21]

2. Time and Demand Instruments
Demand ▪ A promissory note or bill of exchange
Instruments ▪ where, no time of payment is specified and
▪ a cheque, are payable on demand.
▪ As soon as the holder gets its possession under demand instruments, he can
demand its payment.
Time Instruments An instrument said to be 'time instrument' if it payable at some time in future. Thus
a time for their payment is specified for them.
3. MEANING OF CERTAIN TERMS [Section 21]
At Sight/On They are used for PN or BE
presentment/On
Demand
After Sight The expression after sight under PN means "after presentment" for acceptance (i.e.
sight) and in a BE "after acceptance"
Important Points to ▪ A PN can not be made 'payable to bearer'.
be noted:- ▪ A BE can not be made payable to bearer on demand.
Exercise 3
Quest-1 State with reasons whether each of the following instruments is bearer or order:
(a) A bill is drawn payable to X or bearer.
(b) A bill is drawn payable to X who endorses it in blank in favour of Y.
(c) A bill is drawn payable to X.
(d) A bill is drawn payable to X or order.
Answer
Case a)…………………………………………………………………………………………
Case b)…………………………………………………………………………………………
Case c)…………………………………………………………………………………………
Case d)…………………………………………………………………………………………
23.8 SOME OTHER CRITICAL CONCEPTS

1. Inchoate Instrument [Section 20]
Meaning Section 20 of Negotiable Instruments Act defines it as follows:-
▪ " When one person signs and delivers to another
▪ a paper stamped, in accordance with the law relating to negotiable instru-
ments then in force in India
▪ and either wholly blank or having written thereon an incomplete
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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 not exceeding the amount covered by
the stamp.
▪ The person, so signing shall be liable upon such instrument, in the
capacity he signed the same to any holder in due course, for such amount
Provided that no person other than holder in course, shall recover from the person
delivering the instrument any thing in excess of the amount intended by him to be
paid there under."
2. Payment in Due Course [Section 10]
(a) Meaning Section 10 of NI Act:- 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
(b) Essential Characteristics
(i) Apparent tenor The payment of the instrument should be made according to the intention of the
of the instrument parties which appears on the face of the instrument.
(ii) Payment to the It should be made to the holder of the instrument or some other person, who is
holder authorized to get payment on his behalf
(iii) Payment in There should be no reasonable ground to believe that the person to whom the
good faith payment is made is not entitled to receive it.
[Allahabad Bank Ltd v Kul Bhushan]
In this case, the bank paid a cheque bearing forged signature of the drawer. It was
held that payment was not a payment is due course since paying banker is
required to verify the signatures of its customers
3. Forms Of Bill of Exchange [Section 11 & 12]
Inland Bill (Section A Bill of exchange is said to inland bill
11) ▪ if it is drawn and made payable in India or
▪ Drawn in India upon any person who is a resident of India even though
it is made payable in foreign country.
Foreign Bill "Foreign Instrument is one which is not a inland instrument"
(Section 12)
4. Instruments without Consideration [Section 43]
Meaning According to section 43 of this Act,
▪ "A negotiable instrument
▪ made, drawn, accepted, endorsed or transferred
▪ without consideration
▪ Creates no obligation of payment between the parties to the transaction.
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▪ But if any such party has transferred the instrument with consideration
to the holder for consideration,
▪ Such holder for consideration and
▪ every subsequent holder deriving title from him
▪ may recover the amount due on such instrument from
▪ Transferor for consideration or any prior party thereto".
Simple 1. In case any negotiable instrument is drawn without consideration, it creates
Interpretation no liability to pay between parties to transactions
2. If such instrument is obtained by Holder for consideration, he can recover
from Transferor for consideration and all prior parties
3. If HFC, further negotiate the same to any Holder whether with or without
consideration, then such Holder can also recover from his preceding
Transferor for consideration and all prior parties
Case No. 1 A draws a bill of exchange on B, payable to C or order. C endorsed it to D without
consideration. On maturity bill is dishonoured.Whether D can sue C for the
payment?
Ans No, since consideration is missing between both of them
Case No. 2 A draws a bill on B and B accepts it without consideration. A endorses that bill to C
without consideration. C endorses it to D for value consideration. TO whom D can
sue
Ans D being a Holder for consideration can sue all prior parties
5. Partial absence of money consideration [Section 44]
Meaning According to section 44 of this Act
▪ "when the consideration for which a person signed a promissory note, bill
of exchange or a cheque
▪ consisted of money
▪ and was originally absent in part or has subsequently failed in part,
▪ the sum, which a holder standing in immediate relation with such signor is
entitled from him is proportionately reduced".
Simple 1. If any NI was drawn where consideration was missing in part and only part
Interpretation amount consist of consideration.
2. Regarding immediate parties to such instrument, they can only recover the
amount for which consideration has been passed
3. However, if any such instrument later on transferred to HDC, such HDC is
entitled to recover from all prior parties
Case A draw a bill on B for `1000 payable to the order of A. B accept the bill but later
on dishonour it for non-payment. A sued B on the bill. B proves that it was
accepted for Value of `800 and as on accommodation for balance. How much A
can recover from B?
Ans Only `800 as both of them are in immediate relation, but if such instrument is
obtained by HDC, then such HDC can recover the entire amount of `1,000
Immediate Party As between "A" and "B", since transaction took place between both of them, thus
they are called immediate parties or parties in immediate relations.
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6. Partial Failure of Consideration not Consisting of Money [Section 45]
Meaning According to section 45 of this Act,
▪ "Where the consideration which has partly" failed
▪ consists of things other than money
▪ and the value of that failed consideration, can be ascertained without a
collateral enquiry,
▪ the parties, standing in immediate relation, can recover from each other
▪ only the proportionately reduced amount and not the whole amount of a
bill"
Further Provided that
▪ If the value of that failed consideration cannot be ascertained without
collateral enquiry
▪ the immediate parties to the bill are entitled to recover the full amount of
the bill from each other.
Agra and Masterman Bank v S. Leighton
In this case, A agrees to supply two bales of cotton to B. B accepts a bill for `1000
drawn by A, being the agreed price of two bales. Later on A delivers only one bale
of cotton to B. A sues B on the bill. B can take plea of partial failure of
consideration. It was held that A can recover only `500.
However the above rule applies only in case of immediate parties and the right
of holder in due course will not be affected.
7. Accommodation Bill
(a) Meaning An accommodation bill means a bill which is drawn, accepted without
consideration.
(b) [Explanation I ▪ The accommodated party
to Section 43] ▪ cannot,
▪ after he has paid the amount of the bill,
▪ recover the amount from accommodating party i.e. a person who became a
party to the bill for his accommodation
(c) Holder after The person who becomes the holder of such a bill in good faith and for
maturity Date consideration, after maturity, may recover the amount from any prior party
[Section 59]
8. Drawee in case of need [Section 7 AND 115]
Meaning ▪ Where in case of a bill
▪ Name of any person is given in addition to drawee
▪ To be resorted, in case of need
▪ Such a person is called as Drawee in case of need.
[Dore vs If a bill has been duly accepted but dishonoured when presented to drawee in first
Kanchiwalla] instance for payment, it cannot be validly presented for payment to the drawee in
case of need if it was not presented to him for acceptance.
9. Fictitious Payee [Section 42]
Meaning ▪ An acceptor of a bill of exchange
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▪ 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.
Exercise 4
Quest-1 State with reasons whether each of the following instruments is an Inland Instrument or a
Foreign Instrument:
(a) A bill drawn in Delhi upon a merchant in Agra and accepted payable in London.
(b) A bill drawn in Jaipur upon a merchant in London and accepted payable in Agra.
(c) A bill drawn in Jaipur upon a merchant in London and accepted payable in London.
(d) A bill drawn in London on a merchant in Agra and endorsed in Jaipur.
Case (a)…………………………………………………………………………………………
Case (b)…………………………………………………………………………………………
Case (c)…………………………………………………………………………………………
Case (d)…………………………………………………………………………………………
23.9 MATURITY OF NEGOTIABLE INSTRUMENT [Section 22, 23, 24 & 25]

1. Meaning of It means a date on which NI falls due for payment
Maturity of NI
2. The promissory ▪ On demand, or
note and bill of ▪ on a specified date, or
exchange may be
▪ after a specified period.
payable
3. Instrument Where the instrument is payable on demand or on presentation or at sight such as a
Payable on demand cheque becomes payable immediately and there is no need to work out its date of
maturity.
4. Time Instrument The need of calculating date of maturity arises in case of promissory note and bill
of exchange which are not payable on demand i.e. Time Instruments
5. Concept of According to section 22 of this Act,
Grace Days "Every promissory note, or bill of exchange which is not expressed to be payable
on demand, is at maturity on third day, after the day on which it is expressed to be
payable".
Thus, to calculate date of maturity three' days of grace' are added to the period
stated in the instrument.
How to calculate the Maturity of an Instrument
1. For PN/BE If a promissory note or bill of exchange is made payable a stated number of
payable after a months:-
stated number of ▪ After date or
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23.9 MATURITY OF NEGOTIABLE INSTRUMENT [Section 22, 23, 24 & 25]
month ▪ After sight or
[Section 23] ▪ After certain event,
it becomes payable three days after the corresponding date of month after the stated
number of months (section 23).
2. Situation, where If the month in which the period would terminate has no corresponding day, the
month does not period shall be terminating on the last day of such month.
have any
corresponding day
3. For PN/BE In calculating the date at which promissory note or bill made a certain number of
payable after a days:-
stated number of ▪ After date or
days [Section 24]
▪ After sight or
▪ After certain event,
is at maturity, the day of the date of presentation for acceptance or sight or of
protest for acceptance or on which the event happens shall be excluded.
4. Situation where When the day on which a promissory note or bill of exchange is at maturity is a
day of Maturity is a public holiday, the instrument is deemed to be due on preceding business day.
Public Holiday
[Section 25]
5. Where If an instrument is payable by installments, three days of grace are to be allowed on
Instrument is each installment.
payable in
installment
Exercise 5
Case No Date of Date of Payable Maturity Date
Drawing Acceptance
1 30th Jan 05 02nd Feb 05 2 months after date
2 31st Jan 05 02. Feb 05 1 month after date
3 29th Jan 05 03 Feb 05 30 days after date
4 12th July 05 14 July 05 1 month after date
5 28th Sept 05 01st Oct 05 2 months after sight
23.10 DIFFERENT PARTIES TO NEGOTIABLE INSTRUMENTS HOLDER [Section 8]

1. HOLDER According to section 8 of this Act,
[Section 8] ▪ The holder of a negotiable instrument means
▪ Any person,
▪ Entitled in his own name to the possession thereof
▪ And
▪ To receive or recover the amount due thereon
▪ From the party liable thereto."
2. Conditions (i) He should be entitled to possess the instrument in his own name.
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need to be (ii) He should have a right to receive or recover the amount due on the instrument
fulfilled before from the party liable to pay.
becoming a
Holder
Sarjoo Prasad ▪ S advanced a sum of `2500 under a promissory note.
Vs. Ram Pyari ▪ The note however was executed not in the name of S, but in the name of P who
Devi was 'Benamidar'.
▪ On maturity S sued to recover the amount from the debtor.
▪ It was held that he could not recover as he was not a holder having a right of
possession and payment.
23.11 HOLDER IN DUE COURSE [Section 9]

▪ "holder in due course means
▪ any person
▪ who for consideration, becomes the possessor of a negotiable instrument
▪ if payable to bearer or
▪ payee or endorsee thereof if payable to order
▪ before the amount mentioned in it became payable and
Without sufficient cause to believe that any defect existed in the title of a person from
whom he derived his title.
2. Conditions to be fulfilled before a person can claim to be a holder in due course
(a) He must he a 'Holder'
(b) He must he a 'Holder for consideration
(c) He must The holder must have acquired the instrument at or before the date of maturity. In
acquire the case he acquires it after the date of maturity, he will not get better title than that of
instrument transferor.
before maturity
Exception An accommodation bill can be negotiated even after the date of
maturity with all the benefits of a HDC to the transferee.
(d) Holder must The holder must take the instrument in good faith without any negligence.
take the
instrument in
good faith
23.12 SPECIAL PRIVILEGES OF HDC

1. Good title of an Once a NI passes through the hands of a holder in due course it become free from
instruments all defects.
2. Holder who Holder of a negotiable instrument who derives a title from a holder in due course
derives a title from has the right thereon of that holder in due course."
HDC [Section 53]:
3. Rights in inchoate Holder in due course can recover full amount as mentioned in that instrument
instrument [Section subject to the amount covered by stamp.
20]:-
4. Liability of prior Every prior party to a holder in due course in a negotiable instrument is liable to
parties [section 36]: him until the instrument is duly satisfied.
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23.12 SPECIAL PRIVILEGES OF HDC
5. Right in case of ▪ Where a negotiable instrument has been endorsed and delivered conditionally
conditional delivery or for a special purpose i.e. as collateral security
of an instrument ▪ and not with the intention of transferring property therein absolutely.
[Section 46]:
▪ Property in instrument does not pass to the endorsee and he is merely a bailee
having limited rights against that instrument.
▪ This however does not affect the right of holder in due course.
▪ If such an instrument is negotiated to him, the parties liable on the instrument
cannot escape liability.
23.13 DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE

1. Consideration ▪ For a holder it is not necessary that he must have given consideration for the
instrument.
▪ But to be holder in due course consideration must have been given by him
for acquiring an instrument.
2. Maturity ▪ A holder may acquire an instrument even after the date of maturity,
▪ But holder in due course must get it before' the date of maturity.
3. Title ▪ A holder of an instrument will get same title as the transferor had.
▪ But the holder in due course gets title better than that of transferor.
4. Privileged position ▪ A holder does not enjoy special position or right.
▪ While as, the position of a holder in due course is privileged and he gets
special rights.
23.14 RIGHT AND LIABILITIES OF PARTIES IN CASE OF NI WHICH IS OBTAINED

THROUGH UNAUTHORISED MEANS
1.In case of Lost instrument
1. Notice to all The holder of a lost negotiable instrument should give notice of the loss to all
concerned parties liable to the instrument.
2. Right of Finder The person who finds lost negotiable instrument has no right to sue thereon in his
own name.
3. Right of True The true owner is entitled to recover the instrument from the finder.
Owner
4. Liability of party Any acceptor, maker or drawee, who has made payment in due course of the lost
who has made the instrument, which was 'payable to bearer' to the finder, will be Discharged from
payment in good the liability.
faith
5. In case lost In case the instrument is 'payable to bearer' and the finder of that instrument
instrument was negotiates it to holder in due course. Such holder in due course, will get good title
payable to Bearer and will become rightful owner.
6. In case lost In case the instrument is 'payable to order' the finder of that instrument forges the
Instrument was endorsement and negotiates it to holder in due course. But such holder in due
payable to Order course will not get title to the instrument.
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23.14 RIGHT AND LIABILITIES OF PARTIES IN CASE OF NI WHICH IS OBTAINED
THROUGH UNAUTHORISED MEANS
In this case the golden rule that 'forgery confers no title in any case' will be
applied.
2. Instrument obtained by fraud
Effect ▪ In case, the maker or acceptor proves that an instrument was obtained from
him by fraud, the person defrauding is not entitled to recover the payment.
▪ In case such an instrument gets in to the hands of holder in due course, such
holder will acquire good title or a subsequent holder deriving title from such
holder will enjoy good title.
▪ In other words, if any instrument having defective title is obtained by HDC, it
become free from all defects
23.15 CAPACITY OF PARTIES [SECTION 26]

1. Minor A minor can be a drawer but not the drawee under BE, similarly he can be a
payee but not the maker under PN.
2. Person of unsound Same as Minor
mind
3. Agent Agent can bind his principal by the transactions on negotiable instrument
provided he has been given authority for that.
4. Legal The legal representative is entitled to recover the amount of the instrument due to
representative the deceased and can give a valid discharge.
23.16 NEGOTIATION- Meaning [Section 14]

▪ "when a promissory note a bill of exchange or a cheque
▪ is transferred to any person
▪ so as to constitute that person as the holder thereof,
▪ the instrument is said to be negotiated."
2. Negotiation- Negotiable instrument which is payable to bearer can be transferred only by giving
Bearer delivery of it to the party.
Instrument
3. Negotiation- If it is payable to order, it can be transferred by endorsement and delivery.
Order
Instrument
23.17 ASSIGNMENT
1. Meaning Assignment means
▪ Transfer of ownership of negotiable instrument
▪ through a written and registered document
▪ under the provisions of the Transfer of Property Act, 1882.
▪ Through making such document, the transferee becomes entitled to possess the
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instrument in his own name and recover its payment on due date.
2. Right of The assignee of such instrument will get same title as the assignor has. In other words
Assignee he does not get the right of HDC.
23.18 DIFFERENCE BETWEEN NEGOTIATION AND ASSIGNMENT

S No. Negotiation Assignment
1. In case of Negotiation, consideration is Here Consideration needs to be proved
always presumed
S No. Negotiation Assignment
2. Instrument payable to bearer are Assignment is always done by mean of a Written and
negotiated by delivery only, whereas Registered Docs under the Provisions of Transfer of
instrument payable to order are Property Right, 1882.
negotiated by endorsement and
delivery
3. Title of HDC is better than that of Title of assignee is subject to all equities in the title of
transferor assignor. In Other words, assignee gets the right of
assignor only
4. Negotiation can be done only in Assignment can be done in respect of other instrument
respect of negotiable instruments also, in addition to negotiable instruments
23.19 MODES OF NEGOTIATION

Negotiation by A negotiable instrument payable to bearer is negotiable by delivery thereof. Such an
mere delivery - instrument does not require signature of the transferor and the transferee becomes the
(Section 47) holder thereof by mere possession.
Negotiation by A negotiable instrument payable to order is negotiable by the holder by endorsement
endorsement and delivery thereof (Section 48).
and delivery-
(Section 48)
23.20 ESSENTIAL OF A VALID DELIEVERY UNDER NEGOTIATION

Significance of ➢ The process of transfer of negotiable instrument completes with delivery of an
Delivery in instrument to the person concerned.
Negotiation ➢ Under both the modes of negotiation, delivery of an instrument is involved.
Delivery of a negotiable instrument may be
1. Actual A Situation where the instrument is physically handed over by the transferor to the
Delivery transferee or to someone on his behalf.
2. Constructive A Situation where the delivery gets effected without any change of actual possession.
delivery
3. Conditional ▪ A Situation where the instrument is delivered with some condition attached, it is
Delivery called a conditional delivery e.g. Delivery of an instrument for security purpose.
▪ In such a-case the negotiation is not valid, i.e., the property in the instrument does
not pass to the transferee, till the condition is fulfilled.
▪ However, if it is subsequently negotiated to a holder in due course, he will get a
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good title to it and all prior parties shall be liable to him in spite of initial
conditional delivery.
Simple ▪ If "A" deliver a Cheque as security purpose to "B", this will be called conditional
interpretation of delivery and "B" shall be regarded as transferee.
Conditional ▪ However if "B" further negotiate the Cheque to any HDC, then such HDC can
Delivery recover the amount mentioned on cheque from all prior parties including "A"
▪ Thus "A" cannot plead in front of HDC that such cheque was delivered by him as
security purpose only
23.21 ENDORSEMENT [Section 15]

1. Meaning ▪ "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,
▪ he is said to endorse the same, and is called the endorser."
2. Endorser The person making the endorsement is called an 'endorser'
3. Endorsee the person to whom the instrument is endorsed is called an 'endorsee'
23.22 TYPES OF ENDORSEMENT [Section 16, 50, 52, 56]

1. Blank or If the endorser signs his name only and does not specify the name of the endorsee, the
general endorsement is said to be in blank.
endorsement
2. Endorsement If the Endorser, in addition to his signature, also adds a direction to pay the amount
in full or special mentioned in the instrument to, or to the order of, a specified person the endorsement is
Endorsement said to be in full.
3. Partial Any such endorsement which transfers the rights to receive only a part payment of the
Endorsement amount due on the instrument is invalid.
Exception Where an instrument has been paid in part, a note to that effect may be
endorsed on the instrument and it may then be negotiated for the
balance.
Example A makes a promissory note of `2000 in favour of B. B endorsed it to C.
A pays `1000 to C. and this fact is noted on the instrument. C can
negotiate it for remaining balance of `1000.
Pay to D or order `1000 being unpaid residue on the note.
S/d C
4. Restrictive An endorsement which, by express words, prohibits the endorsee from further
endorsement negotiating the instrument or restricts the endorsee to deal with the instrument as
directed by the endorser is called 'restrictive' endorsement.
5. Conditional If the endorser of a negotiable instrument, by express words in the endorsement, makes
endorsement his liability, dependent on the happening of a specified event, although such event may
never happen, such endorsement is called a 'conditional' endorsement.
6. Sans recourse When the endorser expressly excludes his own liability on the negotiable instrument to
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endorsement the endorsee or any subsequent holder in case of dishonor of the instrument, the
endorsement is known as 'sans recourse' endorsement.
Such an endorsement is made by adding the words 'sans recourse' or 'without recourse.'
7. Facultative When the endorser expressly gives up some of his rights under the negotiable
endorsement instrument, the endorsement is called a 'facultative' endorsement.
Example Pay to A or order, 'a notice of dishonor waived.'
S/d B.
▪ In case, such instrument is dishonored on the date of maturity A
or holder is not required to give notice of dishonor to B as to
make him liable.
▪ B will be liable as if notice of dishonor has been given to him.
23.23 NEGOTIATION BACK [Section 90]

1. Meaning If a negotiable instrument is during the course of negotiation re-endorsed by the last
endorsee to the original holder or any of previous endorser it is called as 'negotiation
back.'
2. Consequences Person who becomes the holder by reason of negotiation back cannot make any of the
intermediate endorsers liable on the instrument
Example A draws a bill of exchange on B amounting `2000. B Endorsed it to C. C endorses it to
D, D endorsed it to E and E to F. F has again endorsed to C. This is known as
negotiation back and as a result of it C has come back to his original position. And D,
E and F will not be liable to him.
3. Exception where any endorser excludes his liability by the use of the words 'sans recourse' .or
'without recourse to me,' and afterwards becomes the holder .of the instrument, all
intermediate endorsers are liable to him and in case of dishonor he can recover the
amount from all or anyone of them.
Example In the above case, suppose C endorsed the bill in favour of D, san recourse and again
the bill comes back in to the hand of C. Though C is not liable to D, E and F. but all of
them along with A and B will be liable towards C in case the bill gets dishonored.
23.24 NOTING AND PROTESTING [Section 99 TO 100]

Meaning of ▪ It refers to a mode of authenticating the fact that a bill or note has been
Noting dishonored.
▪ Noting is done by a person officially designated for this purpose and such person
is known as Notary Public. Notary Public is appointed by the Central Government
or State Government.
▪ A dishonored bill is handed over to a notary public who presents it again for
acceptance or payment as the case may be, and if the drawee or acceptor still
refuses to accept or pay the bill, the notary public records (a) the date of dishonor
(b) the fact of dishonor (c) the reason, if any, assigned for such dishonor and (d)
Notary's charges.
▪ The fee charged by Notary Public for noting is called Notary's Charges.
Meaning of It is a formal certificate issued by the Notary Public stating the dishonor of a bill or
Protest note. It must be done within a reasonable time.
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23.25 MEANING OF DISCHARGE OF AN INSTRUMENT
1. Meaning An instrument is said to be discharged only when the party who is ultimately liable
therein is discharged from liability.
2. Modes of Discharge of an Instrument
1. Payment in When a party primarily liable on NI makes the payment in due course.
due Course
2. Cancellation If the holder of an instrument cancels acceptor's or endorser's name with intent to
discharge him, the instrument is discharged.
3. Release If the holder of an instrument renounces his right against all the parties to the
instrument, the instrument is discharged.
4. Party If the acceptor of a bill of exchange becomes its holder at or after maturity in his own
Primarily Liable right, the instrument is discharged.
becoming Holder
23.26 HUNDIES
Meaning ▪ Hundi is a negotiable instrument drawn in an oriental or vernacular language.
▪ The Negotiable Instrument Act, 1881 is ordinarily not applicable to Hundies but
the parties to the Hundies may agree to be governed by the Negotiable Instrument
Act.
▪ A Hundi may be accepted orally as per local usage.
▪ A Hundi is assignable without any regular form of endorsement.
Types of Hundies
Shah Jog Hundi It is a hundi payable to Shah (i.e. a financier of repute) Shah
Nam Jog Hundi It is a hundi payable to the party named in the Hundi or his order. It is transferable
by endorsement and delivery.
Dhani Jog Hundi It is a hundi payable to the Dhani or owner a holder or bearer owner. It is
transferable by mere delivery.
Jokhmi Hundi It is a hundi drawn on or against goods shipped on the vessel mentioned in the
hundi and is payable only when the goods reach their destination safely. It is
combination of a bill of exchange and insurance policy.
Jawabee Hundi It is a hundi which is in the nature of a letter or recommendation to a banker for
payment of particular amount to a particular person.
Khoka Hundi which has already been discharged
23.27 MEANING OF DISCHARGE OF A PARTY

1. By Cancellation If the holder of an instrument cancels the name of any of the parties liable under
[Section 82] the instrument with the intention to discharge him, such party and any subsequent
parties deriving their title from such party are discharged from the liability to the
holder.
2. By Release If the holder of an instrument release any party liable on instrument (other than
[Section 82] the party primarily liable on NI), such a party and all parties subsequent to him
are discharged.
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23.27 MEANING OF DISCHARGE OF A PARTY
3. By Allowing If the holder of a BE allows the drawee more than 48 hour exclusive of public
drawee more than 48 holiday, all prior parties whose consent is not obtained are discharged from their
hours to Accept liability.
[Section 83]
4. By Qualified If a holder of a bill of exchange elects to take a qualified acceptance, all previous
Acceptance parties whose consent is not obtained to such acceptance are discharged from
liability.
5. By Material any material alteration of a negotiable instrument renders the same void as
Alteration against anyone who is a party thereto at the time of making such alteration and
does not consent thereto.
6. Negotiation Back If a bill of exchange which has been negotiated is, at or after maturity, held by
the acceptor in his own right, all right of action thereon are extinguished.
7. By Operation of under the Law of On the expiry of the period prescribed for
Law the Limitation Act the recovery of the amount due;
under the Law of On declaration of a party as an insolvent by an order of the
the Insolvency court.
23.28 ACCEPTANCE [Section 7 and 86]

Meaning The bill is said to be accepted, when the drawee signifies his intention for accepting
directions of payment by writing a word' accepted' and making his sign below it.
[Section 7]
Types of Acceptance [Section 86]
General An acceptance of a bill is said to be general, if it is accepted without any condition.
acceptance
Conditional or Where the drawee gives his consent for accepting the bill subject to some condition
qualified such acceptance is known as conditional acceptance.
acceptance
Effect of ▪ Where the acceptance is qualified, the holder of a bill, may at his option, treats
Qualified the bill as dishonored and after giving due notice of dishonor, sue the drawer and
Acceptance prior endorsers.
▪ However, If he accepts a qualified acceptance without obtaining the consent of
all prior parties thereto, all prior parties whose consent is not obtained are
discharged as against the holder and those deriving title from him.
23.29 CROSSING OF CHEQUE [Section 123 to 131A]

Meaning It refers to a direction which is being issued by a drawer upon the drawee bank not to
pay the cheque at the counter rather present it to the person who presents it through a
banker.
Objective It enables the tracing of a person who receives a payment, thus ensure safety of a
cheque.
Types of Crossing
1. General According to section 123 of this Act,
Crossing ▪ "where a cheque bears across its face two parallel transverse lines
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23.29 CROSSING OF CHEQUE [Section 123 to 131A]
▪ the cheque shall be deemed to be crossed generally".
Effect Any Cheque having General Crossing shall be payable to any banker only and not
over the counter i.e. Cash by Paying Banker
2. Special According to section 124 of this Act,
Crossing ▪ "Where a cheque bears across its face
▪ an addition of the name of banker,
▪ the cheque shall be deemed to be crossed specially".
Effect Any cheque having special crossing shall be payable to collecting banker only whose
name is mentioned in special crossing
3. Restrictive Where a cheque crossed generally or specially also contain the words' A/c Payee
crossing or A/c only' it is known as restrictive crossing.
Payee Crossing
Effect Restrictive crossing provides a direction to the paying banker that proceeds of a
cheque shall be deposited only in the account of 'payee' whose name is mentioned in
the cheque.
This crossing to be valid must be either with general crossing or with special
crossing
4. Not negotiable Where the cheque drawn by the drawer is made payable to payee and only to him, by
crossing mentioning the words 'not negotiable' between the parallel lines drawn for the
purpose of crossing, such crossing is known as not negotiable crossing.
Effect Where Not Negotiable Crossing is there in some instrument, it would means that the
right of endorsee is equivalent to the right of transferor
This crossing to be valid must be either with general crossing or with special
crossing
23.30 PAYMENT OF CHEQUE DRAWN GENERALLY OR SPECIFICALLY (SEC126)

1. Cheque having Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it
General Crossing otherwise than to a banker
2. Cheque having Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it,
Special Crossing otherwise than to a banker to whom it is crossed or his agent for collection.
23.31 WHEN THE BANKER MAY REFUSE TO HONOUR CUSTOMER'S CHEQUE

1. Insufficient funds
2. Stale Cheque: i.e. a period of 3 months has expired
3. Irregular Cheque
4. Undated Cheque
5. Where a cheque is presented at a branch other than where the customer has his account.
6. Where a cheque is not presented with in usual banking hours.
23.32 WHEN BANKER MUST REFUSE THE PAYMENT

1. Stop payment After having drawn a cheque, the drawer may instruct the banker to stop the payment
of such cheque which is technically knows as countermanding payment.
The banker making payment, after receiving such instruction from the customer, will
86
23.32 WHEN BANKER MUST REFUSE THE PAYMENT
be solely responsible for that.
2. Death or The banker, on receiving information that the customer has died or has become
insanity of insane or insolvent, must refuse the payment of cheques presented afterward.
customer
3. Garnishee On receiving, Garnishee order or any other order of the court, the banker must refuse
order to honour cheques presented after such order.
4. Defective title Where the banker is suspicious about the title of the holder, and has sufficient ground
of holder to believe that the holder, presenting a cheque has no title or his title is defective, the
banker must refuse to honour such cheques.
5. Closing of When the customer has already given a notice to the banker for closing his account.
account After receiving such notice the banker must not make payment of any cheque drawn
in that account.
6. Lost cheque Where the customer has lost the cheque and has already given information about it to
the banker; the banker is no more under obligation for paying the cheques drawn by
the customer. In case, the banker makes payment, it can be recovered from the payee
who has got the payment of the lost cheque.
23.33 MATERIAL ALTERATION

1. Meaning of An alteration can be called a material alteration if it
Material ▪ Alters or attempts to alter the character of the instrument and
Alteration ▪ Affects or is likely to affect the contract which the instrument contains or is
evidence of.
2. Material 1 Alteration of date of instrument (e.g. if a bill dated 1st May 1998 is changed to a
alteration bill dated 1st June 1998)
2 Alteration of time of payment
(e.g., if a bill payable three months after date is changed to a bill payable four
months after date)
3 Alteration of place of payment (e.g., if a bill payable at Delhi is changed to bill
payable at Mumbai).
4 Alteration of amount payable (e.g., if bill for `1,000 is changed to a bill for
`2,000)
5 Addition of a new party to an instrument.
3. Non-material 1 Conversion of instrument payable to order into one payable to bearer.
alteration 2 Elimination of the words' or order' from an endorsement.
3 Addition of the words 'on demand' to a note in which no time or payment is
expressed.
4 Alteration of one of the clauses of the instrument containing a penal action.
4. Material 1 Filling blanks of inchoate instruments [Section 20]
Alterations 2 Conversion of a blank endorsement into an endorsement in full [Section 49]
Authorized by
the Act [Sections 3 Crossing of cheques [Section 125]
20, 49, 125]
5. Effect of An instrument which is materially altered becomes void against all persons who were
Material parties to it at the time of alteration and did not consent to it.
Alteration
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[Sections 87]
23.34 DISHONOUR BY NON-ACCEPTANCE [Section 91]

Meaning A BE is said to be dishonored by non acceptance, when the drawee makes default in
acceptance upon being duly required to accept the bill
Where the drawee is incompetent to contract or the acceptance is qualified the bill may
be treated as dishonored
A bill of exchange is said to be dishonored by non-acceptance in following circumstances
(a) If the drawee does not accept it within forty-eight hours from the time of Presentment.
(b) When the drawee is incompetent to contract.
(c) When the drawee cannot be found after reasonable search.
Analysis
88
Consequences of Dishonor by Non-acceptance
▪ Holder can sue all prior parties instantly
▪ No need for waiting till the maturity and prior parties can be sued immediately.
23.35 DISHONOUR BY NON-PAYMENT [Section 92]

When 1. When the party primarily liable (i.e., the maker of the note or acceptor of the bill
or drawee of the cheque) makes default in payment upon being duly required to,
pay the same.
2. When the presentment for payment is excused and the instrument when overdue
remains unpaid. [Section 76]
23.36 NOTICE OF DISHONOUR

1. Notice by It must be given by the holder or by a party liable on the instrument.
whom
2. Notice to To all parties (other than the maker of a note or drawee of a bill or cheque) whom the
whom holder seeks to make severally or jointly liable.
3. Contents of No specific format thereof is available, only requirement is that it must inform the
Notice party to whom it is given that the instrument has been dishonored and in what way and
that he will be held liable thereon.
4. Time limit of Notice must be given within a reasonable time after dishonor.
giving Notice
5. Consequences If notice is not given to any party to whom it is required to be given, within reasonable
of omission to time, such party is discharged from liability on the instrument.
give notice of
Dishonor
23.37 NO REQUIREMENT OF NOTICE OF DISHONOUR [Section 98]

1. Waiver by the A party to a bill or note may give up his right of getting notice of dishonor in favour of
party the holder, by writing the words 'Notice of dishonor is waived' at the time of making
endorsement.
2. Payment When the drawer of a cheque after having drawn the cheque, but before it is presented
stopped for payment countermanded payment.
3. Party not When the party to whom a notice of dishonor is required to be given could not be
found found after making a reasonable search.
4. Unavoidable Omission to give notice of dishonor is excused if the holder had been in unavoidable
circumstances situations may be death, illness, accident or under other natural calamites.
23.38 LIABILITY OF PAYING BANKER [Section 129]

In case of Where the generally crossed cheque has been presented for the payment and the banker
Cheque Crossed pays it at its counter, otherwise than to a banker, the holder is entitled to sue the bank
Generally for the recovery of loss sustained to him.
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In case of Where the Specially crossed cheque has been presented for the payment and the banker
Cheque Crossed pays it at its counter, otherwise than to a specified banker, the holder is entitled to sue
Specifically the bank for the recovery of loss sustained to him.
23.39 POTECTION TO THE PAYING BANKER [Section 85]

1. In case of Where the banker makes payment of an order cheque in due course, the banker is
Order cheque discharged form the liability
2. Bearer ▪ where a cheque is originally expressed to be payable to bearer, the drawee is
cheque discharge by payment in due course to the bearer thereof,
▪ Even if any endorsement is imposed on bearer instrument which tends to restrict
further negotiation, still paying banker shall be justified in releasing the payment in
favour of bearer.
CASES ON PARA 23.39

Case-1 A Cheque was issued as payable to Dev or order on Axis Bank. It was negotiated further to Ram
and later to Baba from whose custody it was stolen by Ajay who Brought the cheque to the bank
by forging the signatures of Baba and collected the payment.
Ans As per Section 85, Paying banker is not liable as they are not liable to verify signatures of every
endorser in case of an order instrument.
Case-2 Suppose in Case No-3 above, if Baba was the customer of Axis bank, than what would have
been the answer.
Ans As per Section 85, Paying banker is liable to verify signatures of Drawer i.e. a person issuing
cheque only and they are not liable to verify signatures of every endorser in case of an order
instrument.
Case-3 A Cheque was issued as payable to Dev or order on Axis Bank by ANNA, however the
signatures of ANNA were forged by Dev who brought the cheque to the banker and collected the
payment.
Ans Here paying banker is liable as this cannot be taken as payment in good faith
Case-4 A Cheque was issued as payable to R or Bearer on Axis Bank. It was stolen by Q from the
custody of R and it was brought to the bank, which cleared the cheque.
Ans As per Section 85, Paying banker is justified in releasing the payment in favour of Bearer and
they are not liable even if instrument was stolen provided payment was made in good faith
Case-5 Suppose in above case no 4, it was negotiated by R to A then to B, C and D. From custody of D
it was stolen by Q and brought to the bank which cleared the same. Assuming that at the time of
transfer by C to D, Restrictive Endorsement had taken place still Banker release the payment in
favour of Q.
Ans As per Section 85, Paying banker is justified in releasing the payment in favour of Bearer. In
case of a Bearer instrument, even if any endorsement is imposed, still instrument remains a
bearer instrument only.
23.41 EFFECT OF NON-PRESENTMENT OF CHEQUE WITHIN A REASONABLE TIME:-

[Section 84]
Drawer can be 1 Cheque cannot be presented within a reasonable time of its issue
absolved from if
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following 2 Drawer was having sufficient balance in his a/c and cheque should have been
condition are paid, in case the same is being presented within a reasonable time.
satisfied
3 After issue of cheque but prior to presentment for payment, drawee bank fails,
which result into actual damages to the drawer.
23.42 BOUNCING OF CHEQUES [Section 138 to 142]

Meaning of A cheque is said to be bounced or dishonored by non-payment when the drawee of
Bouncing the cheque makes default in payment upon being duly required to pay the same.
Consequences A drawer of a dishonored cheque shall be deemed to have committed an offence and
shall, without prejudice to any other provision of the Negotiable Instruments Act, be
punishable with
▪ Imprisonment for a term which may extend to 2 year, or
▪ with a fine which may extend to twice the amount of cheque or
▪ With both.
Requirements to 1 The cheque should have been dishonored due to insufficiency of fund standing
be satisfied before to the credit of the account on which the cheque was drawn or for the reason
imposing penalty that the amount of cheque drawn on the account exceeds the sanctioned limit
ANALYSIS
91
If accused is not one of the persons who falls under category of ‘persons who are responsible to
company for conduct of business of company’ as enumerated under section 2(60) of CA 2013,
read with section 179 of CA 2013, then merely by stating that ‘he was in-charge of day-to-day
management of the company’ or ‘responsible to company for conduct of business of company’, he
cannot be made vicariously liable under section 141 of Negotiable Instruments Act, 1881. The
settled position is that a Managing Director is, prima facie, in-charge of and responsible for the
company’s business and affairs and can be prosecuted for offences by the company within the
meaning of section 2(60) of CA 2013, read with section 179 of CA 2013 – National Small
Industries Corpn. Ltd. vs. Harmeet Singh Paintal (2010) 98 SC 407 (SC)
2 The cheque should have been issued by the drawer in favour of another person
for the discharge of legally enforceable debt or other liability, in whole or in
part.
ANALYSIS
3 The cheque should have been presented to the bank within a period of' 3
months from the date on which it is drawn
ANALYSIS
92
4 The payee or the holder in due course of the cheque should have made a
demand for the payment of money by providing a written notice to drawer
within 30 days of the receipt of intimation from bank regarding dishonor.
5 The drawer failed to make the payment to the payee or the holder in due course
within ……days of the receipt of the said notice.
6 The payee or the holder in due course should have lodged a written complaint of
the offence to a Court within one month of the date on which the cause of action
arose under the said provisions. [Section 142]
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23.43 ACCEPTOR FOR HONOUR [Section 108 TO 112]

Meaning: - ▪ When a BE has been noted or protested for non-acceptance and
[Section ▪ any person accept it
108]:-
▪ for honour of drawer or of any of the endorser
▪ such person is called as Acceptor of Honour
Acceptor for The person who accepts the bill for the honour is called the acceptor, for honour.
Honour
The rights and 1 An acceptor for honour binds himself to all parties subsequent to the party for
liabilities of whose honour he accepts to pay the amount of the bill
acceptor for
2 Such party (i.e. a party for whose honour he accepted the bill) and all prior
honour are as
parties are liable to compensate the acceptor for honour for all loss or damages
follows (Simple
sustained by him in consequence of such acceptance.
Interpretation)
3 An acceptor for honour cannot be charged unless the bill has, at its maturity,
been presented to the drawee for payment, and has been dishonored by him,
and noted or protested for such dishonor.
Note [Section 110] Where the acceptance does not express for whose honour it is made, it shall be
deemed to be made for the honour of the drawer.
23.44 PAYMENT FOR HONOUR [Section 113 & 114]

Meaning ▪ When a BE has been noted or protested for non-payment
▪ Any person
▪ May pay the same
▪ For the honour of any party liable to pay the same
▪ Provided that the person so paying has previously declared before a
notary public the party for whose honour he pays
▪ And that such a declaration has been recorded by such notary public
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23.44 PAYMENT FOR HONOUR [Section 113 & 114]
The following The following conditions are essential for the payment of honour:
conditions are (1) The bill must have been noted or protested for non-payment.
essential for the
payment of (2) The person paying or his agent declares before Notary Public the party for
honour: whose honour he pays.
(3) Such declaration must have been recorded by the Notary Public.
(4) Payment must be made for the honour of any party liable on the bill or not
(Section 113).
Right of the Any person making payment for honour is entitled to all the rights, in respect of the
payer for honour bill, of the holder at the time of such payment. He may recover from the party for
whose honour he pays all sums so paid with interest thereon and all expenses
properly incurred in making such payment (Section 114).
23.45 LIABILITY OF PARTIES TO NEGOTIABLE INSTRUMENT

1. Liability of ▪ The liability of drawer in a bill of exchange is secondary in nature.
drawer ▪ However where, the instrument is dishonored by non-payment the drawer of a
[Section 30] such instrument will be liable to compensate the holder of the instrument,
provided due notice of dishonor has been given to him.
▪ But if the bill of exchange has been dishonored by non-acceptance by the
drawee, the drawer will be primarily liable to the holder. Similarly, in case of
cheque, the liability of the drawer is primary in nature.
2. Liability of ▪ A cheque is a bill of exchange which is payable on demand. Thus it is the prime
drawee of cheque responsibility of a banker to honour the cheque, when it is duly presented for
[Section 31] payment provided drawer's account has sufficient credit balance for that
purpose.
▪ If the banker wrongfully dishonors the cheque he can be made liable for
damages to the drawer.
▪ In case, the bank makes default regarding the payment of cheque, he is liable
only to the drawer and not to the holder of a cheque.
3. Liability of The maker of a promissory note and drawee of a bill of exchange are the person, who
maker of are primarily liable for making payment of the instrument.
promissory note
and drawee of bill
[Section 32]
4. Liability of The liability of a endorser in the instrument is secondary and conditional in nature.
Endorser The endorser of an instrument is liable to every subsequent holder, in case of
[Section 35] dishonor of instrument provided the following conditions are satisfied.
(i) The instrument has been dishonored by the party who is primarily liable to pay.
(ii) Due notice of dishonor must have been given to or received by such endorser.
(iii) He must have not excluded him from his liability by making "san recourse
endorsement."
5. Liabilities of According to the relevant provisions of this Act, every prior party in a negotiable
prior parties instrument is liable, thereon, to a holder in due course until the instrument is duly
[Section 36] satisfied.
95
23.47 PRESENTMENT FOR PAYMENT

1. Meaning of Presentment for payment implies presenting an instrument to the party for payment.
Presentment for
Payment
2. Provisions Relating to the Presentment for Payment
(a) Instruments for Presentment for payment must be made in respect of all instruments except a
which presentment promissory note payable on demand and which is not payable at a specified place.
required [Section
64]
(b) By Whom Presentment for payment must be made by the holder or his duly authorized agent.
(c) To whom (a) the maker, acceptor or drawee;
[Section 64 and 75] (b) the duly authorized agent of maker, acceptor or drawee;
(c) Legal representative in case of death.
(d) Assignee in case of insolvency.
(d) When No presentment for payment is necessary, and the instrument is dishonored at the
Presentment is due date for presentment in any of the following cases:
Unnecessary
1 If the maker, drawee or acceptor intentionally prevents the presentment of
[Section 76]
the instrument, or
2 If the instrument is not payable at any specified place, and he cannot after
due search be found;
3 If the instrument is payable at his place of business, and he closes such
place on a business day during the usual business hours, or
4 As against any party if, after maturity, with knowledge that the instrument
has not been presented, he makes a part-payment on account of the amount
due on the instrument, or promises to pay the amount due thereon in whole
or in part; or otherwise waive his right to take advantage of any default in
presentment for payment;
Exercise 5
Question 1 Dated-1st Jan 2013
I order Aman to pay ` 5.0 Lacs to me after 30 Days
Signatures of Drawer Signatures of Drawee

Vijay
Vijay negotiate the instrument to Kamal and instrument was further negotiated from Kamal
to ➔ Ravi➔ Sunny.
Now Sunny brought the instrument for acceptance to Aman, however Aman show his
willingness to put conditional acceptance as follow
Dated-1st Jan 2013
96
Exercise 5
I order Aman to pay ` 5.0 Lacs to me after 30 Days

Vijay Accepted only if payment to be made after 90 Days
Aman
Situation No-1:- If sunny do not want to accept this acceptance, then he can sue
…………………………………………………………
Situation-2:-Incase Sunny decide to go along with this acceptance, then solve the
following cases
Case-1- He accept the same without obtaining any consent from any prior party
In such a case, following parties shall be absolved from their liabilities
…………………………………………………………………………………
But, Sunny can still recover from……………………………………………………
Case-2- He accept the same after obtaining consent from Ravi
In such a case, following parties shall be absolved from their liabilities
…………………………………………………………………………………
But, Sunny can still recover from……………………………………………………
Question 2 Solve the following problem

Dated-1st Jan 2011
I order Ajay to pay ` 1.0 Lacs to me after 30 Days

Raj Ajay
Raj➔Mahesh➔Sunny➔Vineet
Vineet brought the instrument for payment to Ajay, however Ajay Refused to pay the
same. Discuss the right of following Parties
1. Vineet = ……………………………………………………………………….
2. Sunny = ………………………………………………………………………
97
Exercise 5
3. Mahesh = ……………………………………………………………………….
4. Raj = …………………………………………………………………………
Question 3 Discuss the right of Holder in following cases:-

Case No-1
Dated-1st Jan 2011
I order A to pay ` 5.0 Lacs to me 30 Days after sight

R
R➔X➔Y➔Z
Problem-1- How many time Z shall approach A
Solution :-…………………………………………………………………
Problem-2-Incase A refused to Accept the bill, discuss the right of Z
Solution :-…………………………………………………………………
Case No-2
Dated-11st June
I order Y to pay ` 15.0 Lacs to me after 30 Days

X
X➔A➔B➔C
Problem-1- How many time C shall approach Y
Solution:-…………………………………………………………………
Problem-2-Incase Y refused to pay, discuss the right of C
Solution:-…………………………………………………………………
Case No-3
Dated-18st June
98
Exercise 5

X Y
X➔A➔B➔C
Problem-1- How many time C shall approach Y
Solution:-…………………………………………………………………
Problem-2-Incase Y refused to pay, discuss the right of C
Solution:-…………………………………………………………………
Question 4 Discuss the right of parties in following cases:-

Case-1- X approached Y for assistance and Y agreed to accept BE for him
Dated-8st Aug

X Y
X Z➔Without Consideration
Z A➔Without Consideration
On due date Y refused to pay, discuss right of
1. A = ………………………………………………………….
2. Z = ………………………………………………………….
3. X = …………………………………………………………..
Dated-8st Aug

X Y
99
Exercise 5
A B➔With Consideration
1. B = ………………………………………………………….
2. A = ………………………………………………………….
3. Z = …………………………………………………………..
Dated-8st Aug

X Y
B C➔With Consideration
1. C= ………………………………………………………….
2. B= ………………………………………………………….
3. A= …………………………………………………………..
4. Z= …………………………………………………………..
Dated-8st Aug

X Y
100
Exercise 5
B C➔With Consideration
C D➔Without Consideration
On due date Y refused to pay, discuss rights of
1. D = ………………………………………………………….
2. C = ………………………………………………………….
3. B = …………………………………………………………..
4. A = …………………………………………………………..
5. Z = …………………………………………………………..
Question 5 Discuss the right of Parties

X had several times sold the goods to Y, however suddenly Y decided to pay through
PN and provide the following to X
Dated-8st Aug
I promise to pay ` ………….to X after 30 Days
Signatures of Promisor
Y
Problem-1-Whether the PN is valid

Answer-
Problem-2-Suppose X decided to fill ` 10,000 as against the Actual Liability of ` 6,000,
discuss the right of X
Answer-X Can Recover…………………………………………………..
Problem-3-Suppose X transfer the instrument to Z, who obtain it in good Faith and
for consideration, discuss the right of Z if Actual liab was ` 6,000 as against ` 10,000
as filled on instrument
Answer-Z Can Recover…………………………………………………..
Problem-4-Suppose X decided to fill ` 8,000 as against the Actual Liability of ` 6,000,
however at the time of making the note Y placed a stamp of ` 5, which was covering
an amount of ` 10,000 assuming rate of stamp duty as 0.05%. Discuss the right of X
101
Exercise 5
Answer-X Can Recover…………………………………………………..
as filled on instrument and amount covered by stamp was ` 20,000
as filled on instrument and amount covered by stamp was ` 8,000
Question 6 Discuss as to whose favour court will take and to whom it will be directed to prove their
point(Quest on Para 4.3)
1. Case of Ravi Kumar v Narayanmurthy
Fact of Case:- A BOE was drawn payable to R and it was accepted by N. No
consideration was involved. R sued N for payment and contended that
consideration was involved
Answer: …………………………………………………………………………
2. Case of Martin v Jasmeen
Fact of Case:- A PN was drawn payable to J after 1 month(Actual date of drawn
was 17th Oct 2007), Date was kept as blank and J filled the date as 17th Sept and
presented the Instrument for payment on 20th Oct treating it as Maturity Date, M
Refused to pay and challenged the Date
Answer:…………………………………………………………………………
3. Case of Hari lal v Rastogi
Fact of Case:- A Cheque was drawn payable to J, it was endorsed to R. H obtained
the possession by applying coercion. Later on R refused to pay by contending that
the title of H was Defective. H Lodged a case against R.
Answer:-……………………………………………………………………………
Question 7 Following are some alteration imposed on Instruments as stated below. Analyze them
and Discuss, whether they can be classified into Material Alteration or not.
Case Prior After Alteration by Holder
No
1
Dated-17th June-12 Dated-17th April-12
I promise to pay ` 1.0 Lacs to X I promise to pay ` 1.0 Lacs to X

after 90 Days after 90 Days
Signatures Signatures
102
Exercise 5
Y Y
2
Dated-17th June-12 Dated-17th June-12
I promise to pay ` 1.0 Lacs to X I promise to pay ` 1.0 Lacs to X

Y Y
3
I promise to pay ` 1.0 Lacs to X I promise to pay ` 1.0 Lacs to X or

after 90 Days Z after 90 Days
Y Y
4
Pay X or Bearer Pay X or Bearer
` 5,00,000 ` 5,00,000
Axis Bank Signatures Axis Bank Signatures
Karol Bagh Branch Y Karol Bagh Branch Y
5
Pay X or order Pay X or order
` 5,00,000 ` 5,00,000
Case Prior After Alteration by Holder
No
6
I promise to pay ` ….Lacs to X I promise to pay ` 1.0 Lacs to X
103
Exercise 5
Y Y
7
Pay X Pay X
` 5,00,000 ` 5,00,000
8
I promise to pay 1,00,000 Lacs to I promise to pay 1,00,000 Lacs to

X on demand X on demand
Y Y
104

Negotiable Instruments Act Short Notes by Amit Popli Sir

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Negotiable Instruments Act Short Notes by Amit Popli Sir

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NEGOTIABLE INSTRUMENTS ACT, 1881

SECTION TO BE USED IN THIS ACT

23.2 ESSENTIAL FEATURERS OF NEGOTIABLE INSTRUMENTS

23.3 PRESUMPTION AS TO NI [Section 118]

23.4 DEFINITION OF PROMISSORY NOTE

(b) "Mr. Ravi, I.O.U. `15,000".

(d) "I promise to pay G `21,000 when he delivers the goods".

23.5 BILL OF EXCHANGE: [Section 5]

(d)The sum payable must be certain

23.6 DEFINITION OF CHEQUE [section 6]

23.7 CLASSIFICATION OF NEGOTIABLE INSTRUMENT [Section 13, 19 & 21]

23.7 CLASSIFICATION OF NEGOTIABLE INSTRUMENT [Section 13, 19 & 21]

23.8 SOME OTHER CRITICAL CONCEPTS

23.9 MATURITY OF NEGOTIABLE INSTRUMENT [Section 22, 23, 24 & 25]

23.10 DIFFERENT PARTIES TO NEGOTIABLE INSTRUMENTS HOLDER [Section 8]

23.11 HOLDER IN DUE COURSE [Section 9]

23.12 SPECIAL PRIVILEGES OF HDC

23.13 DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE

23.14 RIGHT AND LIABILITIES OF PARTIES IN CASE OF NI WHICH IS OBTAINED

23.15 CAPACITY OF PARTIES [SECTION 26]

23.16 NEGOTIATION- Meaning [Section 14]

23.18 DIFFERENCE BETWEEN NEGOTIATION AND ASSIGNMENT

23.19 MODES OF NEGOTIATION

23.20 ESSENTIAL OF A VALID DELIEVERY UNDER NEGOTIATION

23.21 ENDORSEMENT [Section 15]

23.22 TYPES OF ENDORSEMENT [Section 16, 50, 52, 56]

23.23 NEGOTIATION BACK [Section 90]

23.24 NOTING AND PROTESTING [Section 99 TO 100]

23.27 MEANING OF DISCHARGE OF A PARTY

23.28 ACCEPTANCE [Section 7 and 86]

23.29 CROSSING OF CHEQUE [Section 123 to 131A]

23.30 PAYMENT OF CHEQUE DRAWN GENERALLY OR SPECIFICALLY (SEC126)

23.31 WHEN THE BANKER MAY REFUSE TO HONOUR CUSTOMER'S CHEQUE

23.32 WHEN BANKER MUST REFUSE THE PAYMENT

23.33 MATERIAL ALTERATION

23.34 DISHONOUR BY NON-ACCEPTANCE [Section 91]

23.35 DISHONOUR BY NON-PAYMENT [Section 92]

23.36 NOTICE OF DISHONOUR

23.37 NO REQUIREMENT OF NOTICE OF DISHONOUR [Section 98]

23.38 LIABILITY OF PAYING BANKER [Section 129]

23.39 POTECTION TO THE PAYING BANKER [Section 85]

CASES ON PARA 23.39

23.41 EFFECT OF NON-PRESENTMENT OF CHEQUE WITHIN A REASONABLE TIME:-

23.42 BOUNCING OF CHEQUES [Section 138 to 142]

23.43 ACCEPTOR FOR HONOUR [Section 108 TO 112]

23.44 PAYMENT FOR HONOUR [Section 113 & 114]

23.45 LIABILITY OF PARTIES TO NEGOTIABLE INSTRUMENT

23.47 PRESENTMENT FOR PAYMENT

I order Aman to pay ` 5.0 Lacs to me after 30 Days

Signatures of Drawer Signatures of Drawee

Dated-1st Jan 2013

I order Aman to pay ` 5.0 Lacs to me after 30 Days

Signatures of Drawer Signatures of Drawee

In such a case, following parties shall be absolved from their liabilities

But, Sunny can still recover from……………………………………………………

Case-2- He accept the same after obtaining consent from Ravi

In such a case, following parties shall be absolved from their liabilities

But, Sunny can still recover from……………………………………………………

Question 2 Solve the following problem

I order Ajay to pay ` 1.0 Lacs to me after 30 Days

Signatures of Drawer Signatures of Drawee

Question 3 Discuss the right of Holder in following cases:-

Dated-1st Jan 2011