N e g o t i a t i o n Sec- 14

Negotiation is a transfer of an instrument from one person to another in such a manner

as to express title & to represent the transferee the holder thereof. In simple
words Negotiation means transfer of a NI by one person to another in order to make the
transferee the holder of the instrument.

Negotiation by delivery- Transfer of Bearer Negotiable Instrument by delivery which

should be Voluntary.

Negotiation by Endorsement & Delivery- An Order instrument can be negotiated

only by way of Endorsement & Delivery.

After Effect of Endorsement-

1. Property is transferred to the endorsee

2. Endorsee get right to negotiate the instrument, sue on instrument

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 1

E n d o r s e m e n t Sec- 15
When a maker or holder writes the person’s name on the face or back of the
instrument or on the slip of the paper annexed to NI
&
puts his signatures thereto for the purpose of negotiation, it is called ‘endorsement’.

For eg- When an employer signs a check, they are endorsing the transfer of money
from the business accounts to the account of the employee.

Essentials of valid
endorsement
1. On the back or face of the instrument. i.e Writing
2. Must be made by maker or holder. i.e Prepared by Holder
3. Must be properly signed by the endorser.i.e Signed

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 2

N e g o t i a t i o n B a c k - sec 9 0
If a NI is negotiated by the Holder but the Endorser again becomes the holder of
Such Negotiable Instrument again then it called Negotiation Back. For e.g

A B B C C D D B
Here B is the person who is the prior party to the Instrument.

The Holder cannot enforce payment against an Intermediary party to whom he was
previously liable thus B can not sue C or D but it can sue A

Assignment

Assignment of a NI means transfer of ownership of the instrument from one person to

another (assignor to assignee).

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 3

Basi Negotiation Assignment
s
Applicable Negotiable Instrument Transfer of Property Act
Act act’1881
Meaning Negotiation means transfer of a Assignment of a NI means
NI by one person to another in transfer of ownership of the
order to make the transferee the instrument from one person to
holder of the instrument. another (assignor to assignee).

Scop For Transferring NI For Transferring

e only Right
Notice No Notice Notice must be given by Assignee
Required to
Stamp No Stamp Duty Debtor
Stamp Duty Required
Duty Required
Presumptio It is Presumed that every No such
n Negotiation is made for some Presumption.
Consideration.
Manner It can be negotiated by way of Valid only if it is made in Writing
delivery or order or both and Signed
Burden of Proof The Other Party has to prove The Assignee has to prove that
that negotiation was without any there was some consideration.
consideration
© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 4
Holder-sec 8
The holder of a N.I. means any person entitle to the possession of the instrument
in his own name and to receive the amount thereon from the parties liable
thereto.
Basically we can say that
1 He must be entitled to Possession of Negotiable Instrument in his own name
2 He must be entitled to Receive or recover the amount due on such instrument.

H o l d e r i n D u e Course-sec 9
A Holder in Due Course means a holder- who takes the instrument bona fide- for
value -before it is overdue, and without any notice of defects in the title of
the person, who transferred it to him.
Basis Holder Holder in Due
Course
Consideration Not Necessary Only if he obtains NI
for Consideration
Maturity Before or After Maturity Only before
Right to Sue Cannot sue all prior Maturity
Can Sue all the prior
parties Privileges Less Privileges' than H D C Parties
More Privileges than
Good Faith Holder even if he obtains NI Holder
H D C only if he obtains NI in
other than in Good Faith good Faith
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P r i v i l e g e s of a H o l d e r i n D u e Course**IMPT
A Holder who derives title from HDC has the same right as that of HDC. (Sec 53)

Every prior party to NI is liable to a HDC. (Sec 36)

HDC can claim full amount of the NI (Not exceeding amount covered by Stamp) even
though such amount is in excess of the amount authorised by the person delivering an
Inchoate NI (Sec 20)

 No Prior party can allege that NI was delivered conditionally or for a special purpose
only. (Sec 46)

No prior party can set up a defence that the NI was drawn, made or endorsed by him
without any Consideration. (Sec 43)

The Person liable in NI cannot set up against the HDC the defences that the
instrument had been lost or obtained from the former by means of an offence or fraud or
unlawful consideration. (Sec 58)

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 6

M a n d a t o r y G ro u n d s f o r B a n k t o D i s h o n o u r C h e q u e
Stop Payment Signature Mismatch
Death of Customer Stale Cheque
Post Dated Cheque Closed Bank Account
Insolvency of Customer Insanity of Customer
Defect in Title Of Holder Altered Cheque
Undated Cheque Defect in Title of
Loss of Cheque Holder

O P T I O N A L G ro u n d s f o r B a n k t o D i s h o n o u r C h e q u e
 Insufficient Funds
 Presentation at Different Branch
 Presentation after Banking Hours
 Funds Not Applicable.
N o n P r e s e n t a t i o n o f C h e q u e w i t h i n R e a s o n a b l e T i m e Sec 8 4
If the drawer has sufficient fund in his bank Account and issues a cheque in favour of
Creditor and the Creditor fails to present the cheque for payment within reasonable
time and in the meanwhile bank fails (Insolvent) then the Creditor cannot recover the
amount from the Drawer.
For e.g Mr Ram issue cheque of Rs. 1,00,000 to Miss Sita . Mr Ram had Sufficent Fund
in the account with Bank.The Cheque was not presented within reasonable time to the
Bank for paymment and the bank in themean time become insolvent. Thus is yhis case
Miss Sita cannot recover the money from Mr. Ram. 29
Bouncing of Cheque sec 138 to
142
Dishonour of Cheque due to Insufficient Fund is an offence. The Drawer is
Punishable with Maximum Imprisonment of 2 Years or Amount equal to the two
times(Maximum) of Cheque amount or both. However in order to attract following
Condition need to be satisfied-

Dishonour due to Insufficient funds;

Payment should be for discharge of liability;

Cheque must be present within validity period;

Notice- demanding payment within 15 days;

Complaint within 1 month to Court

If Payment is made otherwise than to Discharge Liability then it will not attract liability u/s
138 . For e.g. a person gift a cheque of Rs. 100000 s a gift and later on the Cheque get
bounced. Then it will not attract liability under this section.

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 8

M a t e r i a l A l t e r a t i o n - sec 87
An alteration (Cherkhani karna) is called as material alteration if it alters-
• The Legal Effect of NI
• The Rights and Liabilities of any of the parties of to a NI.

Alteration can be-

 Crossing of Cheque
 Filling Blanks of Inchoate Instrument
 Conversion of Blank Endorsement into Full.
 Conversion of Bearer Instrument into Order Instrument.
 Conversion of General Crossing into Special Crossing.

Effects-
All parties to the NI not consenting to the material alterations are discharged and jisne
kiya who gaya…

For eg- A bill payable to Mr A was converted to Payable to Mr A & Mr. B

The Holder of Bearer Cheque convert it into A/c Payee Cheque

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 9

A c c e p t a n c e - sec 7

When Drawee draws a bill and the Drawee delivers it to the holder of the bill or gives
notice of acceptance to the holder of the bill then it is termed as Acceptance.

It should be
 Written
 Signed
 Delivery or Intimation to the holder that the bill has been accepted.

General
•When the drawee, while accepting the bill, does not attach
any condition or qualification to it, it is called general
Acceptance: acceptance.

Qualified
•The acceptance is qualified when it is given subject to
some conditions or qualifications
Acceptance
:
The Holder of the bill may object to the Qualified Acceptance resulting in Automatic
Dishonour of Bill due to Non Acceptance.
If he give his consent to Qualified acceptance then all prior parties not giving consent will
be discharged.

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L i a b i l i t y i n c a s e of F i c t i t i o u s N a m e sec 4 2

An acceptor Of BOE which is drawn in FICTITIOUS NAME and

Payable to the Drawer’s Order IS NOT
Relieved from the Liability to any HDC by reason that such name is Fictitious.

Moti moti baate aisa samajha jaye ki Ram ne shyam ke upar bill draw kiya lkn ram ne
apna naam nhi likh kar Sita ka naam kar diya… yeh Bill Sita ke order pe payable tha…
Shyam ne yeh bill accept kar liya….Ram ne yeh bill Ravan ko Endorse kar diya….
Ab Shyam apni laibility se bhaag nhi sakta is fact pe ki yeh bill sita ke farzi naam pe
bana hai…kyk usne yeh bill accept kiya hai…aur ravan ko usse karz chukana padega

Suppose: X uses a fictitious name in drawing a bill upon Z. Then he endorses the bill in the
same fictitious name to Y, who presents the bill to Z for acceptance. Now if Z accepts the bill,
he will be liable for payment in spite of fact that the name of drawer is fictitious.

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 11

A c c e p t a n c e F o r H o n o u r sec 108

Acceptance for honour means the acceptance given by some stranger when the
original drawee refuses to accept or to give better security when demanded by a
notary. The stranger may accept the bill of the honour of any party already liable
thereto. Such stranger is called an acceptor for honour
or acceptor supra protest

Conditions-
That the bill has been noted or protested for non acceptance or better
security,

Acceptance has been made with the consent of holder,

The acceptor for honour is not already liable on the bill,

that the acceptance is for the honour of any party already liable on the bill, and

that the acceptance is by writing on the bill.

The party who accept the bill for honour will be liable to pay the amount if the person on
whose behalf he accepts the bill and he can recover the same form that party.
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P a y m e n t F o r H o n o u r sec 108
Just as a bill may be accepted for the honour of a party to bill, it may also be paid
for the honour of a party liable to pay the bill. After payments he can recover from
that person or any party prior to him.

N o t i c e OF D i s h o n o u r Sec 93
Notice Of Dishonour need to be given by the holder or any of the parties to the
instrument. Any party receiving notice must also transmit the same to all prior
parties. Otherwise he can not sue any prior party, if has not
notice
transmitted.
Dispensed with by an express waiver,

Party charged would not suffer damage

Party not found after due search,

Cases where Notice for
When drawer is accepter,
Dishonour is not
Accidental omission, Required-

In the case of a PN which is not negotiable,

Party promises to pay unconditionally.

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N o t i c e to Be Given to
To all parties (other than the maker of a note, acceptor of a bill, or drawee of a
cheque) to whom the holder seeks to make liable or to their duly authorized agents
Where there are two or more persons jointly liable as drawer or endorsers, notice to
any one of them is sufficient.
In case of death of person, to legal representative and to official assignee in case of
insolvency (Sec 97).

Noting
Noting is the process of recording the fact and reasons of dishonour of a NI by the
notary public. It should be done within Reasonable time after dishonour of NI. It is not
mandatory.
The Dishonoured Bill is presented to Notary Official who in Turn again represent it for
acceptance/payment. If the party again refuses then Notary Public records the fact of
Dishonour.
Protesting
Protest is a formal certificate of dishonour issued by the notary public to the holder
of a bill or note on his demand.

Difference between Noting & Protesting is that noting consists of recording the fact
and reasons of dishonor of NI upon the instrument; whereas Protest is the certificate
as to the fact that instrument has been dishonoured.
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D i s c h a r g e of N e g o t i a b l e I n s t r u m e n t
When the party makes the payment in due course at or after maturity
(u/s78)
,
When the holder cancels the instrument with intention to release the
party.

If it becomes Time Barred- it is Discharged by operation of Law

In the case of Negotiation Back

When the holder releases or renounces his right against the party
primarily
on the NI.

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 Discharge of One Or More
Parties
By cancellation

By release

By allowing drawee more than 48 hours to accept (Sec 83)

By taking qualified acceptance (Sec 86)

By not giving notice of dishonour

By not presentment for acceptance of bill (Sec 61)

By delay in presenting cheque (Sec 84)

By negotiating back of a bill
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Hundi
Hundi means a BOE drawn in an Local Language.

Darshani hundi Payable at

Sight
Miadi hundi or Payable after Specified period Of
Muddati hundi Time

Shah Jog hundi Payable at

Shah
Nam Jog hundi Payable to a Party named in Hundi or to his
order.

Jokhmi hundi Hundi Drawn in respect of goods shipped on the vessel and is payable
only
when the goods reach their destination.

Dhani Jog Hundi Payable to the Bearer.

Hundi

© 2013 Gurukul CA/CS Prepared by CA. Mayank Mittal 17

 #1: The undertaking contained in a
note, to pay a certain sum of money
promissory
is----

(a) Conditional

(b) Unconditional

(c) May be conditional or unconditional depending upon the

circumstances

(d) None of the above.

Answer : (b) Unconditional

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 # 2: Which of these is not a
negotiable as per the Negotiable
Instrumen
Instrument t
Act,1881

(a) Bill of exchange

(b) Delivery note

(c) Bearer Cheque

(d) Share certificate

Answer: (d) Share

Certificate

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 # 3: Which of the following is not a payment
in course under NI Act
due
1881?
a)Payment should be made in accordance with the apparent tenor of the
instrument

b) A payment is made on instrument before the date of maturity

c) Payment is made to the possessor of the instrument

d) Payment made in good faith & without negligence

Answer: b) A payment is made on instrument before the date of maturity

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 a)Y signs on bill and keeps it with him

b) He writes “accepted” on the back of bill but does not put his signature on
bill

c) He puts his signature on face of bill and returns it to X

d)He write ‘accepted on the face of bill but does not put his signature

Answer: c) He puts his signature on face of bill and returns it to X

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 # 5: In which of the following situations could
bill
a of exchange not be
negotiated?

a) The time to pay is not determinable.

b) The promise to pay is conditional.

c) The amount to be paid is “the amount owing on account."

d) All of the above.

Answer: d) All of the above

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 #6: X made a note payable to the order of his son Y as
birthday
a gift
payable after one month. Y presented the note after 3
months and X
refused to pay. Can Y sue for payment?

a) Yes, because a note, unlike a cheque, cannot become stale dated

b) Yes, because the note is a negotiable instrument that is required to pay

c) No, because a note, like a cheque, can become stale dated.

d) No, because the note was gratuitous so it is not binding for a lack of consideration.

Answer: d) No, because the note was gratuitous so it is not binding for a lack of consideration

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 # 7: Which of the following is NOT a part the
of
criteria for a holder in due
course?
a) The instrument is held by a party immediate to the promisor.

b) The instrument is taken by someone, or through someone, who

has given consideration for it.

c) The instrument is taken complete and regular on its face.

d) The instrument is taken before it is overdue and without notice of

any dishonour.

Answer: a) The instrument is held by a party immediate to the promisor.

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 a) S can recover money from B

b) B is discharged from his liability.

c) S can recover from official assignee of the bank

d) S can sue B and Bank jointly

Answer: b) B is discharged from his liability

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