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 INDORSEMENT

-Indorsement means writing on an instrument , or writing of a

person’s name (other wise than as maker ) on the face or back of
a negotiable instrument or on a slip of paper (called allonge)
annexed thereto for the purpose of negotiation Sec 15 .

The person who so signs the instrument is called ‘indorser’ and the
person to whom the instrument is indorsed is called the ‘indorsee’

The first indorsement of an instrument can be made by the payee,

Subsequent indorsements may be made by any person who
become the holder of the instrument. Maker of the instrument
cannot indorse the instrument.
Essentials of a Valid Indorsement.

-It must be on the instrument itself if no space is left on the instrument is must be on
a separate slip of paper attached to the instrument called ‘allonge’

-It must be signed by the indorser for the purpose of negotiation

-It may be made by the indorser either by merely signing his name or by specifying
the name of person to whom he is endorsing

-It must be completed by the delivery of the instrument

 Types of Indorsement

Blank or general indorsement

Full or special indorsement

Restrictive indorsement ( When further negotiation is restricted )

Partial indorsement ( When part of amount is indorsed , it is not a Nego.Inst)

Conditional indorsement
Types of Indorsement

Blank or general indorsement

If the endorser signs his name only and does not specify
the name of the endorsee, the endorsement is said to be
in blank Sec. 16(1). The effect of a blank endorsement is
to convert the order instrument into bearer instrument
(Sec. 54), which may be transferred merely by delivery.
Types of Indorsement ……

Full or special indorsement

2. Endorsement in full or special endorsement:

If the endorser, in addition to his signature, also adds a direction to pay
the amount mentioned in the instrument to, or to the order of, a specified
person the endorsement is said to be in full [Sec. 16(1)].
If, for example, A, the holder of a bill of exchange, wants to make an
endorsement in full to B, he would write thus: “Pay to B or order, thereof”
After such an endorsement it is only the endorsee, i.e., B, who is entitled
to receive the payment of the instrument and to further negotiate the
instrument by his endorsement.

A blank endorsement can easily be converted into an endorsement in full,

According to Section 49, the holder of a negotiable instrument endorsed
in blank may, without signing his own name, by writing above the
endorser’s signature a direction to pay to any other person as endorsee,
convert the endorsement in blank into an endorsement in full; and since
such holder does not sign himself on the instrument he does not thereby
incur the responsibility of an endorser.
Types of Indorsement ……
Restrictive indorsement ( When further negotiation is restricted )
Stating the effect of endorsement, Section 50 provides that “the endorsement of
negotiable instrument followed by delivery transfers to the endorsee the property
herein with the right of further negotiation.” However, Section 50 permits restrictive
endorsement.
•An endorsement which, by express words, prohibits the endorsee from further
negotiating the instrument or restricts the endorsee to deal with his instrument as
directed by the endorser is called ‘restrictive’ endorsement.
•The endorsee under a restrictive endorsement gets all the rights of an endorser
except the right of further negotiation. In other words, such an endorsement entitles
the endorsee to receive the payment on due date and sue the parties for it but he
cannot further negotiate the instrument.
•Illustrations:
•(a) B, the holder of the bill, makes an endorsement on the bill saying “Pay C only.” It
is a restrictive endorsement as C cannot negotiate the bill further.2
•(b) B, the holder of the bill, makes an indorsement on the bill, saying “Pay C for my
use or “Pay C or order for the account of B.” In either case there is a restrictive
endorsement as the right of further negotiation by C has been excluded thereby.
•The person liable on the hill must pay by drawing a cheque in the name of the holder
(or the endorser) B. If he makes the payment to C on C’s own account, he will still be
liable to B, the endorser; Hence C cannot endorse the bill further in his own name.
 Types of Indorsement ……
Partial indorsement ( When part of amount is indorsed , it is not a Nego.Inst)
•3. Partial Endorsement:
•Section 56 provides that a negotiable instrument cannot be endorsed for a part of the
amount appearing to be due on the instrument. In other words, a partial endorsement which
transfers the rights to receive only a part payment of the amount due on the instrument is
invalid.
•Such an endorsement has been declared invalid because it would subject the prior parties
to plurality of actions (one action by holder for part value and another action by endorsee for
part value) “and will thus cause inconvenience to them.
•Moreover, it would also interfere with the free circulation of negotiable instruments. It may
be noted that an endorsement which purports to transfer the instrument to two or more
endorses separately, and not jointly is also treated as partial endorsement and hence would
be invalid.
•Thus, where A holds a bill for Rs 2,000 and endorses it in favour of B for Rs 1,000 and in
favour of C for the remaining Rs 1,000, the endorsement is partial and invalid.
•Section 56, however, further provides that where an instrument has been paid in part, a
note to that effect ma; be endorsed on the instrument and it may then be negotiated for the
balance.
•Thus, if in the above illustration the acceptor has already paid Rs 1,000 to A, the holder of
the bill, A can then make an endorsement saying “Pay B or order” Rs 1,000 being the
unpaid residue of the bill.” Such an endorsement would be valid.
 Types of Indorsement ……

Conditional indorsement
•5. Conditional endorsement:
•If the endorser of a negotiable instrument, by express words in the
endorsement, makes his liability, dependent on the happening of a specified
event, although such event may never happen, such endorsement is called a
‘conditional’ endorsement (Sec. 52).
•The law permits a conditional endorsement and therefore it does not in any
way affect the negotiability of the instrument. Thus, endorsements can validly
be made in the following terms:
•(i) “Pay B or order on his marriage;”
•(ii) “Pay B on the arrival of Pearless ship at Bombay.”
•In the case of a conditional endorsement the liability of the endorser would
arise only upon the happening of the event specified. But the endorsee can sue
other prior parties, e.g., the maker, acceptor, etc., if the instrument is not duly
met at maturity, even though the specified event did not happen.
 Types of Indorsement ……

Conditional indorsement

Sans recourse indorsement

The holder of a bill may indorse by adding the words ‘Sans recourse ‘
means without recourse. Here if instrument is dishonored, the subsequent holder or the
indorsee cannot look to the indorser for the payment of the same.
Facultative indorsement
Where an indorser by express words abandons some right or increase
his liability under a instrument is called Facultative indorsement
Example Pay to A ‘ Notice of dishonour waived’ is a Facultative indorsment
Sans Frais Indorsment (Without expense)
Where an indorser does not want the indorsee, or any subsequent holder of the instrument
to incur any expense on his account on the instrument , the instrument is called ‘sans frais
(without expense) indorsment.
6. Sans recourse endorsement (Sec. 52):
When the endorser expressly excludes his own liability on the negotiable
instrument to the endorsee or any subsequent holder in case of dishonour
of the instrument, the endorsement is known as ‘sans recourse’
endorsement.
Such an endorsement is generally made by adding the words ‘sans
recourse’ or ‘without recourse.’ Thus, “Pay X or order sans recourse” or
“Pay X without recourse to me” or “Pay X or order at his own risk” is
examples of this type of endorsement.
7. Facultative endorsement:
When the endorser expressly gives up some of his rights under the
negotiable instrument, the endorsement is called a ‘facultative’
endorsement. Thus, “Pay X or order, notice of dishonour waived” is a
facultative endorsement.
As a result of such an endorsement the endorsee is relieved of his duty to
give notice of dishonour to the endorser and the latter remains liable to
the endorsee for the non-payment of the instrument, even though no
notice of dishonour has been given to him.

PROF. K.K.AGRAWAL - NOTES FOR STUDETNS ONLY

Instrument Obtained by unlawful means
-Stolen instruments

-Instrument obtained by coercion or fraud

-Instrument obtained for an unlawful consideration.

-Forged instruments

-Lost negotiable instrument

-Notice , finder acquires no title , duplicate of lost bill , indemnity in case
of loss,.

There is a great difference between a defect of title and entire absence of

title . In case of defect of title a holder in due course is protected , but in
case of absence of title as in the case of forgery, he is not protected as he
derives no title.
 Presentment of a Negotiable Instrument

-Presentment For Acceptance ( in case of bill of exchange )

-Presentment For Sight ( in case of promissory note )

-Presentment for Payment

-Time, date, place , payable on demand , to agent , delay in presentment,
Dishonor of Negotiable Instrument
 Dishonour of Negotiable Instrument

-Dishonour by non acceptance

-Dishonour by non payment

-Notice of Dishonour
-Notice by whom, to whom , object of Notice must be to demand , Form
of notice, reasonable time of notice,
Dishonour of Negotiable Instrument

-Dishonour by non acceptance

-Dishonour by non payment

-Notice of Dishonour
-Notice by whom, to whom , object of Notice must be
to demand , Form of notice, reasonable time of
notice,
S.91[14] of the Act speaks of dishonor by non-acceptance.
Presentment for acceptance is required only in the case of a bill
of exchange.

Usually acceptance and payment go together and this usually

happens in case an instrument is payable after sight, thus often
it is difficult to distinguish the two because dishonor by non-
payment is usually dishonor by non-acceptance, and thus it is
only this bill of exchange which can be dishonored by non-
acceptance and not a cheque as in the case of a cheque no
acceptance is required to be taken to the banker and cheques
are mainly instruments payable at sight.

The second kind of dishonor, is that of dishonor by non-

payment. A negotiable instrument is said to be dishonored by
non-payment when the drawee of a cheque makes default in
payment upon being duly required to pay the same.
Few important points to note relating to dishonor by Non-Payment
Payment countermanded:
When the drawer of the cheques issues instructions to the bank not to
make any payment of a particular cheque issued by him, the bank then
stands revoked from making payment on that cheque, this is known as
countermand of cheques by the drawer.
Insufficiency of funds:
When there are no funds to meet the cheque or the account of the
drawer does not hold sufficient funds to meet the whole credit amount of the
cheque, the banker is then justified in refusing the payment of such a
cheque. However where the account has sufficient funds, the banker is
under an obligation to its customer of honoring the cheque presented to it.
Non-applicability of funds:
Under S.31 of the Act it is the banker’s duty to honor the cheque when
funds which are lying in the account of the drawer are applicable for the
purpose. Thus when the funds in the account are lying for other purposes,
the will necessarily dishonor the cheque presented before it for payment.
Noting and protesting of Dishonour of Negotiable Instrument

-Notice of Dishonour
When a promissory note or bill of exchange is dishonoured, the
holder can after giving due notice of dishonour , sue any or all prior
parties liable thereon. But before he doses that , he may get the fact of
dishonour authenticated by ‘noting’ by a Notary Public Noting means
recording of the fact of dishonour by a Notary Public upon the
instrument, or upon a paper attached therto or partly upon each

-Protesting of Dishonour
When a promissory note or bill of exchange has been
dishonoured by non acceptance or non payment , the holder may within
a reasonable time cause such dishonour to be noted and certified by a
Notary Public. ‘Protest’ is the certificate issued by Notary Public
attesting the dishonour of a bill or note on the basis of noting .
Section 138 to 142 of Negotiable Instrument

The Banking Public Financial and Negotiable Instrument

Laws Amendment Act 1988 has inserted a new Chapter
XVII in the Negotiable Instrument Act 1881 . This chapter
comprises Sec. 138 to 142 The important provision are
as under
Sec 138 Dishonour of cheque for insufficiency, etc., of funds in the account
Where any cheque drawn by a person on an account maintained by him with a banker for
payment of any amount of money to another person from out of that account for the
discharge, in whole or in part , of any debt or other liability is returned by the bank
unpaid, either because of the amount of money standing to the amount arranged to be paid
from that account by an agreement made with that bank, such person shall be deemed to
have committed an offence and shall without prejudice to any other provision of this Act, be
punished with imprisonment for a term which may be extended to two years or with fine
which may extend to twice the amount of the cheque or with both:
Provided that nothing contained in this section shall apply unless
(a) the cheque has been presented to the bank within a period of Three month form the date
on which it is drawn or within the period of its validity which ever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be makes a demand
for the payment of the said amount of money by giving a notice in writing to the drawer of
the cheque within the thirty days of the receipt of information by him from bank regarding
the return of the cheque as unpaid and
(c) the drawer of such cheques fails to make the payment of the said amount of money to the
payee or as the case may be, to the holder in due course of the cheque within fifteen
days of the receipt of the said notice
Explanation – For the purpose of this section “ debt or other liability means a legally
enforceable debt or other liability.
LIABILITY ON DISHONOUR OF CHEQUE

➢ Necessary Ingredients for Liability

➢ Civil Liability
➢ Criminal Liability
Necessary Ingredients for Liability:
1. The cheque must have been issued in favor of the payee.
2. The cheque so issued must have been issued in discharge, either in
whole or in part, of a legally enforceable debt or liability.
3. The cheque should have been presented for encashment within
three months of the date it bears or within its specific validity period
which is earlier;
4. The cheque should have been returned by the bank unpaid, because
the amount of money standing to the credit of the account is
insufficient or it exceeds the amount arranged or for other reason
5. The payee should have given a notice of dishonor to the drawer
within 30 days of the receipt of information by him from the bank
regarding dishonor of the cheque demanding payment of the cheque
amount.
6. The drawer should have failed to make payment within 15 days of
the receipt of notice.
Civil liability:
Civil Liability is also arises when the cheque is presented for
the payment to the bank gets dishonoured. Section 138 also
provides for civil liability which provides for fine twice the
amount of dishonoured cheque.

Criminal Liability:
A criminal liability is provided under section 138 of the Act,
which provides imprisonment for two years or with fine which
may extend to twice the amount of the cheque, or with both.
In case of dishonour of cheque the drawer of it may be
prosecuted under sections 417 and 420 of the Indian Penal
Code, 1960 (IPC). However, it all depends on the
circumstances of each case. Every dishonour of a cheque is
not cheating.
Sec 139 Presumption in Favour of holder-
It shall be presumed, unless the contrary is proved that the holder of a cheque received the
cheque, of the nature referred to in section 138, for the discharge, in whole or in part of any
debt or other liabilaity.

Section 140 Defence which may not be allowed in any prosecution under section 138

It shall not be a defence in a prosecution for an offence under section 138 that the drawer had
no reason to believe when he issued that cheque that the cheque may be dishonoured on
presentment for the reasons stated in that section.

Section 141 Offences by Companies

Section 142 Cognizance of offence

No court shall take cognizance unless the complaint is made in writing……………………
Sec 139 Presumption in Favour of holder-
It shall be presumed, unless the contrary is proved that the holder of a cheque received the
cheque, of the nature referred to in section 138, for the discharge, in whole or in part of any
debt or other liabilaity.

Section 140 Defence which may not be allowed in any prosecution under section 138

It shall not be a defence in a prosecution for an offence under section 138 that the drawer had
no reason to believe when he issued that cheque that the cheque may be dishonoured on
presentment for the reasons stated in that section.

Section 141 Offences by Companies

Section 142 Cognizance of offence

No court shall take cognizance unless the complaint is made in writing……………………
Discharge of Negotiable Instrument

- By Payment in due course

- By party primarily liable become holder

- By express waiver

- By Cancellation

- By discharge as a simple contract.

- By release

- By Non presentment of cheque

- By operation of Law

- By alteration in instrument
Classification of Negotiable instrument
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