PART-4

Negotiable Instruments
ACCEPTANCE
 A bill of exchange is accepted when the drawee puts his
signature on it. Thereby acknowledging his liability under
the bill.
 Writing the word accepted is not essential but the signature
is.
 Acceptance is not necessary in the case of bills of exchange
payable on demand or at sight unless specifically mentioned.
 Only the following persons can accept the bill of exchange:
the drawee of the bill
The drawee in case of need
The legal representative, when the draweee is dead.
The official assignee official receiver etc.
NEGOTIATION
 It is the process by which the ownership of the instrument is
transferred from one person to another.
 It can be done by following ways:
Negotiation by delivery: a promissory note, bill of exchange
or cheque payable to bearer is negotiable by delivery
thereof.
Negotiation by indorsement: a promissory note, bill of
exchange or cheque payable to order is negotiable by
indorsement and delivery thereof.
INDORSEMENT
 It means signature of the holder made with the object, of
transferring the document. The person who makes the
endorsement is called the Indorser
 Types of indorsement:
endorsement in full
 when the indorser mentions the name of the person to
whom the money due on an instrument is to be paid .
Endorseement in blank.
 where the name of party is not mentioned.
LIABILITY OF THE PARTIES
The liability of the parties to a negotiable instrument is
determined by the following rules:

Maker & acceptor

Drawer

Drawee of a cheque

Indorser
 LIABILITY OF THE PARTIES
 Maker & Acceptor:
The maker of a promissory note and the acceptor of the bill of exchange
are primarily responsible for the payment due.
The money must be paid at or after maturity to the holder as required. In
default of such payment, the maker and the acceptor is bound to
compensate.
 Drawer:
The drawer of a bill of exchange or cheque is bound in case of dishonor
by the drawee or acceptor thereof, to compensate the holder.
Before acceptance, the drawer’s liability is primary; after acceptance, the
drawee’s liability is primary & the drawer’s liability is secondary. Drawer
is liable to pay only if the acceptor fails to pay.
 LIABILITY OF THE PARTIES
 Drawee of a Cheque:
The drawee of a cheque having sufficient funds of the drawer, in
his hand, properly applicable to the payment of such cheque and
in default of such payment must compensate the drawer for the
loss or damage caused by such default.
 Indorser:
The indorser of a negotiable instrument is liable to all subsequent
parties in case of dishonour of the instrument.
DISHONOUR OF A NEGOTIABLE
INSTRUMENT
 Mode of Dishonour:
A negotiable instrument may be dishonoured in two ways:
1) By non-acceptance: only bill of exchange can be
dishonoured by non-acceptance, since only bills require
acceptance.
2) By non-payment: promissory notes, bills of exchange &
cheque can be dishonoured by non-payment.
 DISHONOUR BY NON-ACCEPTANCE
 A bill of exchange is dishonoured by non-acceptance in the following
cases:
1. “When after due presentation, the bill is not accepted by the drawee”.
When there are several drawees, refusal by any one of the drawee will
amount to dishonour.
2. In cases where presentation for acceptance is excused, the bill is treated
as dishonoured if it is not accepted without presentation.
3. Where the drawee is incompetent to contract, the bill may be treated as
dishonoured.
4. If the acceptance is qualified, the bill may be treated as dishonoured.
5. Drawee in case of need: where a drawee in case of need is named in a
bill, or in any indorsment thereon, the bill is not dishonoured until it
has been dishonoured by such drawee.
DISHONOUR BY NON-PAYMENT:
 Promissory notes, bills of exchange & cheque can be
dishonoured by non-payment when the maker of the note or
acceptor of the bill o f exchange or the drawee of the cheque
makes default in payment.
CONSEQUENCE OF DISHONOUR
 Steps to be taken by the holder: when a negotiable instrument
is dishonoured, the holder:
1. Becomes entitled to file a suit for the recovery of the
amount due from the parties liable to pay
2. He must, give notice of dishonour to parties against whom
he intends to proceed.
3. He may also have the instrument noted & protested before
a notary public.