Topic 05: Negotiable Instruments

Exam-Focused Revision Notes (Negotiable Instruments Act, 1881)

Course Instructor: Md. Uzzal Hossain

Exam Frequency at a Glance

Topic Asked? Exam Appearance
1. Definition & Essential Features of NIs Yes 28th Final, 27th Final, 11th Mid
2. Types & Specimen of NIs Yes 27th Final, 11th Mid
3. Parties of Negotiable Instruments Yes Slide Homework Case Study
4. Definition & Rights of a Holder Yes 27th Final, 26th Final, 26th Mid,
24th Mid
5. Holder in Due Course (HDC) & Privi- Yes 30th Final, 27th Final, 26th Final,
leges 21st Mid
6. Case Studies on HDC & Privileges Yes 27th Final, 26th Mid, 26th Final,
25th Mid, 11th Mid
7. Endorsement: Rules & Types Yes 30th Final (x2), 29th Mid, 28th Final
8. Payment in Due Course Yes 11th Mid
9. Dishonor of Negotiable Instruments No – (Highly Probable)

Note: Highly important chapter – appears in almost every final and midterm. Pay special attention to the 5
case studies in Topic 6.

1. Definition & Essential Features of NIs [ASKED – 4-mark]

ˆ Negotiable Instrument (NI): A written, signed document that represents a right to money. It
can be easily transferred from one person to another by delivery or endorsement.
ˆ Basic Definition (Slide 2, 3): A transferable document which passes freely from hand to hand
and forms an integral part of modern business. It contains an unconditional promise or order
that guarantees the payment of a certain amount of money on the spot or at a later set date.
ˆ The Governing Law (Slide 4): Covered under the Negotiable Instruments Act, 1881. Section
13 states that a negotiable instrument means a promissory note, bill of exchange, or cheque.
ˆ Custom and Usage (Slide 4): Section 13 does not prohibit other instruments from being treated
as negotiable if they satisfy the essential features of negotiability by custom or commercial usage.
ˆ Essential Features/Elements (Slide 5, 21):
ˆ 1. Written Document: Must be in writing (e.g., written cheque, paper promissory note).
ˆ 2. Unconditional Promise or Order: No conditions must be attached to the payment (e.g., “I
promise to pay Tk. 5,000” is valid; but “I promise to pay if I pass the exam” is invalid).
ˆ 3. Sum Certain (Certain Amount): The amount of money to be paid must be fixed and exact
(e.g., Tk. 10,000).
ˆ 4. Signed by Maker/Drawer: The person who creates the instrument must sign it.
ˆ 5. Payee must be Certain: The person receiving the money must be identifiable. It can also be
payable to more than one payee (e.g., “Pay Rahim and Karim”).

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ˆ 6. Payable to Order or Bearer: Must specify whether it is payable to a named person or to
whoever holds the paper.
ˆ 7. Easily Transferable: Can be transferred from person to person easily (by delivery for bearer
instruments, or by signature + delivery for order instruments).
ˆ 8. Absolute and Good Title: The person who buys/takes the instrument in good faith and for
value gets a complete, legally secure ownership (title), even if the previous owner had a defect in
their title.
ˆ 9. Right to Sue: The holder can sue the parties liable on the instrument in their own name to
recover the money.
ˆ 10. Delivery is Essential: The transfer is not complete until the document is actually handed
over (delivered) to the recipient.
Analysis: Are the following Negotiable Instruments? (27th Final Question)
ˆ (i) Bills of Lading: No. It is a document of title to goods, not an instrument for money. Although
it can be transferred by signature, the buyer does not get a better title than the seller if there is a
defect. It lacks an unconditional promise to pay money.
ˆ (ii) Railway Receipt: No. It is also a document of title to goods (Slide 16 / Slide 8). It does
not contain an unconditional promise to pay money and is not recognized as a statutory negotiable
instrument under the NI Act.
ˆ (iii) Life Insurance Policy: No. It is an actionable claim. It is a contingent contract where
payment depends on the death of the insured or maturity, not an unconditional payment of a certain
sum of money on demand or at a fixed time.
ˆ (iv) Share Certificate: No. It proves ownership of shares in a company. It is not an instrument
for the payment of money and cannot be negotiated by mere delivery to transfer a better title free
from defects.
ˆ (v) Promissory Note: Yes. It is a statutory negotiable instrument under Section 4 of the NI Act
1881. It fulfills all conditions: in writing, signed by the debtor, containing an unconditional promise
to pay a certain sum of money to a specified person or bearer.

Previous Exam Questions: What are negotiable instruments and their characteristics? Would
you consider the following as negotiable instrument? Give reasons. (i) Bills of lading (ii) Railway
receipt (iii) Life insurance policy (iv) Share certificate (v) Promissory note. (27th Final)

Previous Exam Questions: What is a negotiable instrument? Explain the essential elements of
negotiable instruments. (28th Final)

Previous Exam Questions: Explain the commonly used negotiable instruments. (11th Mid)

2. Types & Specimen of Negotiable Instruments [ASKED –

4-mark]
ˆ Two Broad Categories of NIs (Slide 8):
ˆ 1. By Statute (Under the NI Act 1881): Promissory Notes, Bills of Exchange, and Cheques.
ˆ 2. By Custom or Usage: Government Promissory Notes, Delivery Orders, and Railway Receipts.

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ˆ Exceptions to Negotiability (Slide 9):
ˆ If a cheque is payable to a specified person only and not to their order or bearer, it cannot be
transferred and loses its negotiability (e.g., “Pay Rahim only”).
ˆ If a cheque is crossed “Not Negotiable”, it cannot transfer a better title to the transferee than what
the transferor had (it loses its fully negotiable status).

A. Promissory Note (Slide 10, 11, 12)

ˆ Definition: A written instrument containing an unconditional undertaking (promise), signed by
the maker (debtor), to pay a certain sum of money only to, or to the order of a certain person, or to
the bearer of the instrument.
ˆ Drawn and signed by the debtor (the person who owes money).

Specimen of Promissory Note (Slide 11)

Date: 10th November 2025 Place: Dhaka
Amount: Tk. 100,000
I, Abrar, promise to pay Badrul or order the sum of Taka One Lakh (Tk. 100,000)
only on 10th February 2026 (90 days from date) for value received.

Promisor (Drawer/Maker): Payee:

Signature: Name: Badrul
Name: Abrar Address: 45, Park Street, Dhaka
Address: 22, Green Road, Dhaka.

Valid vs. Invalid Promissory Notes (Abrar signs) (Slide 12):

ˆ Valid (a): “I promise to pay Bodrul or order Taka 500.” → Clear promise, certain sum, uncondi-
tional.
ˆ Valid (b): “I acknowledge myself to be indebted to Bodrul in Taka 1,000 to be paid on demand, for
value received.” → Implicit promise to pay is legally valid.
ˆ Invalid (c): “Mr. Bodrul, I O U Taka 1,000.” → Mere acknowledgement of debt (I Owe You), no
promise to pay.
ˆ Invalid (d): “I promise to pay Bodrul Taka 500 and all other sums which shall be due to him.” →
The sum is not certain.
ˆ Invalid (e): “I promise to pay Bodrul Taka 500, first deducting thereout any money which he may
owe me.” → Payment is conditional on deduction, sum is uncertain.
ˆ Invalid (f ): “I promise to pay Bodrul Taka 500 seven days after my marriage with Camelia.” →
Marriage is an uncertain contingent event; it may never happen.
ˆ Invalid (g): “I promise to pay Bodrul Taka 500 on Didar’s death, provided Didar leaves me enough
to pay that sum.” → While death is certain, Didar leaving enough money is highly uncertain (condi-
tional).

B. Bill of Exchange (Slide 13, 14, 15, 16)

ˆ Definition: A written instrument containing an unconditional order, signed by the maker (drawer),
directing a certain person (drawee) to pay a certain sum of money only to, or to the order of a certain
person (payee), or to the bearer of the instrument.

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 Specimen of Bill of Exchange (Slide 14)
Bill of Exchange
Date: 10th November 2025 Amount: Tk. 75,000
Sixty days after date, pay to the order of Charles the sum of Taka Seventy-Five
Thousand only for value received.
To: Mr. Bodrul, 22, Green Road, Dhaka

Drawer (Issuer): Drawee (Acceptor): Payee (Receiver):

Name: Abrar Name: Bodrul Name: Charles
Address: Chittagong Address: Dhaka Address: Dhaka
Signature: Signature: Signature:

Kinds of Bill of Exchange (Slide 15, 16):

ˆ 1. Inland vs. Foreign Bill (Place-wise):
ˆ Inland Bill: Drawn and payable in Bangladesh, or drawn in Bangladesh upon a person residing in
Bangladesh (even if payable abroad).
ˆ Foreign Bill: Any bill of exchange that is not an inland bill.
ˆ 2. Time vs. Demand Bill (Time-wise):
ˆ Demand Bill: Payable immediately at sight or on demand. No grace days are allowed.
ˆ Time Bill (Usance Bill): Payable after a fixed or determinable future time (e.g., “60 days after
date”).
ˆ 3. Trade vs. Accommodation Bill (Nature-wise):
ˆ Trade Bill: Created out of a genuine commercial trade transaction (e.g., selling goods on credit).
ˆ Accommodation Bill: Drawn and accepted without any trade transaction, solely to provide tem-
porary financial help to one or both parties.
ˆ 4. Clean vs. Documentary Bill (Documents-wise):
ˆ Clean Bill: Drawn strictly under NI Act rules without any supporting documents of title of goods
attached. Used to clear debts.
ˆ Documentary Bill: Accompanied by documents of title to goods (e.g., Railway Receipt, Bill of
Lading, Warehouse Receipt) to claim the price of goods supplied.

C. Cheque (Slide 17)

ˆ Definition: A cheque is a bill of exchange drawn on a specified banker and is always payable on
demand without any grace period.

Previous Exam Questions: Explain the commonly used negotiable instruments. (11th Mid)

3. Parties of Negotiable Instruments [ASKED – 3-mark]

The key parties involved in negotiable instruments are defined under Slide 18 and 19:
ˆ 1. Drawer: The person who creates/makes the bill of exchange or cheque.
ˆ 2. Drawee: The person directed to pay the money (e.g., the bank in case of a cheque).

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ˆ 3. Acceptor: The drawee who signs their assent (agreement) on the bill of exchange and delivers it
back.
ˆ 4. Payee: The person named in the instrument to whom the money must be paid.
ˆ 5. Drawee in Case of Need (Slide 18): An additional person named in the bill to whom the
holder can go if the original drawee refuses to accept or pay.
ˆ 6. Acceptor for Honour (Slide 19): A third party who steps in to accept a bill after it has been
protested/noted for non-acceptance, in order to protect the credit and reputation of the drawer or
any endorser.
Case Study: Slide Homework Exercise (Slide 20) Solved

Scenario: ABC Traders buys goods worth BDT 500,000 from XYZ Suppliers on 3 months’ credit. XYZ
Suppliers draws a bill ordering ABC Traders to pay Eastern Bank after 90 days. The bill states if ABC
Traders refuses to pay, the holder can approach Prime Bank. ABC Traders signs the bill. Before maturity,
ABC Traders faces financial problems and refuses to pay, and Prime Bank closes down. After the bill is
protested, Woori Bank accepts the bill to protect XYZ’s credit.
Identify the Parties:
ˆ Drawer: XYZ Suppliers (They drew/issued the bill of exchange).
ˆ Drawee / Acceptor: ABC Traders (They were ordered to pay and signed indicating agreement).
ˆ Payee: Eastern Bank (The party designated to receive the payment).
ˆ Drawee in Case of Need: Prime Bank (Named as an alternative party to approach if ABC Traders
refused).
ˆ Acceptor for Honour: Woori Bank (They accepted the bill after protest to protect the drawer’s
credit).

Previous Exam Questions: Identify the parties of the negotiable instrument based on the pro-
vided scenario. (Slide Homework / Practice Problem)

4. Definition & Rights of a Holder [ASKED – 4-mark]

ˆ Definition of Holder (Slide 22): A holder of a promissory note, bill of exchange, or cheque is any
person entitled in their own name to:
– The possession of the instrument, and
– To receive or recover the amount due thereon from the parties liable.
ˆ Lost or Destroyed Instrument (Slide 22): If the instrument is lost or destroyed, the person who
held possession of it at the time of loss/destruction continues to be legally regarded as its holder.
ˆ Conditions for Being a Holder (Slide 23, 24):
ˆ 1. Entitled to possession in their own name and under a legal title:

– Actual physical possession is not mandatory; having the legal right to possess is what counts.
– The title must be acquired lawfully (not through theft, fraud, or forgery). A finder of a lost cheque
does not become its holder.

ˆ 2. Entitled to receive or recover the amount in their own name:

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 – For an order instrument, the person’s name must appear as the payee or endorsee.
– For a bearer instrument, being in possession is sufficient; a specific name on the document is not
essential.
ˆ Rights of a Holder (Slide 30):
ˆ 1. Right to Claim Payment: Can present the instrument for payment and sue the parties in their
own name if it is dishonored.
ˆ 2. Convert Endorsements: Can convert a blank/open endorsement into a full endorsement.
ˆ 3. Crossing Cheques: Can convert an open/blank cheque into a crossed cheque, either generally
or specifically using the words “NOT NEGOTIABLE”.
ˆ 4. Negotiate further: Can transfer/negotiate the cheque to a third party (unless further negotia-
tion is strictly prohibited).
ˆ 5. Duplicate of Lost Cheque: Can demand a duplicate copy of a lost cheque from the drawer.

Previous Exam Questions: Explain that a holder in due course is a holder but a holder is not
a holder in due course. (27th Final, 26th Final)

Previous Exam Questions: What are the differences between holder and holder in due course?
(26th 1st Mid)

Previous Exam Questions: Every holder in due course must be a holder, but every holder may
not be a holder in due course. (24th 2nd Mid)

5. Holder in Due Course (HDC) & Privileges [ASKED –

4-mark]
ˆ Definition of HDC (Slide 25): A person who acquires a negotiable instrument in good faith (bona
fide), for valuable consideration, before it became payable, and without having any reason to believe
that any defect existed in the title of the person from whom they got it.
ˆ Five Conditions to Qualify as an HDC (Slide 26, 27):
ˆ 1. Possession of Instrument: Must have physical possession. For order instruments, their name
must appear on the document as payee or endorsee.
ˆ 2. Regular and Complete: The instrument must be complete on the face of it. An incom-
plete/blank document holder cannot be an HDC. Any alterations must be confirmed by signature.
Must be properly delivered. A post-dated cheque is regular.
ˆ 3. Obtained for Valuable Consideration: Must pay full value for the instrument (e.g., receiving
a cheque as a gift does not make you an HDC). Consideration must be legal and adequate (not from
gambling). If consideration falls short, they are HDC only to that extent.
ˆ 4. Without Knowledge of Defective Title: Must take it in good faith without knowing any
prior fraud, theft, or defect. Being negligent or failing to take reasonable care to discover a defect
disqualifies a person from being an HDC.
ˆ 5. Obtained Before Maturity: Must acquire the instrument before the amount becomes due/payable.
(Note: This applies only to time-based bills/notes, not to cheques which are always payable on de-
mand).

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Comparison: Holder vs. Holder in Due Course (HDC) (Slide 29)
Feature Holder Holder in Due Course (HDC)
1. Consideration Not essential (can receive as a gift). Essential (cannot be a gift).
2. Possession No time limit (can take after matu- Must acquire before the amount becomes
rity). payable.
3. Defective Title Gets no good title if prior title was Gets a good and valid title despite prior
defective. defects.
4. Recovery Can recover only from maker and im- Can recover from all prior parties li-
mediate transferor. able.
5. Presumption Not all holders are presumed to be Every HDC is legally presumed to be a
HDC. holder.
6. Privileges Enjoys no special legal privileges. Enjoys many special statutory privileges.

Privileges of a Holder in Due Course (Slide 31, 32, 33, 34, 35)
An HDC enjoys the following 8 special privileges under the law:
ˆ 1. Better Title Free from Defects: Takes the instrument free from prior defects (like fraud,
duress) and can pass this clean title to any subsequent holder.
ˆ 2. Liability of Prior Parties: Every prior party (drawer, acceptor, previous endorsers) is individ-
ually and jointly liable to the HDC until the instrument is paid.
ˆ 3. Incomplete Instruments: If a person signs and delivers an incomplete blank instrument, and
it is later filled in for a larger sum than intended, the HDC can still recover the full amount written.
ˆ 4. Fictitious Bills: If a bill is drawn under a fictitious name, the acceptor is still liable to pay the
HDC, provided the drawer’s and endorser’s signatures match (same handwriting).
ˆ 5. Unlawful Means or Consideration: A person liable cannot use the defense of prior fraud, loss,
or illegal consideration (e.g., gambling debts) against an HDC.
ˆ 6. Estoppel Against Denying Original Validity: The maker of a note, drawer of a cheque/bill,
or acceptor for honour cannot deny the original validity of the instrument.
ˆ 7. Estoppel Against Denying Payee’s Capacity: The maker or acceptor cannot deny the payee’s
capacity to endorse the instrument at the time it was made.
ˆ 8. Estoppel Against Denying Prior Signature/Capacity: No endorser is permitted to deny
the signature or contract capacity of any prior party (e.g., even if a prior endorser was a minor).

Previous Exam Questions: What is meant by a ‘Holder in Due Course’ ? Discuss the essential
conditions required for a person to qualify as a Holder in Due Course. (30th Final)

Previous Exam Questions: Who is a holder in due course of a negotiable instrument? Explain
the privileges of a holder in due course. (21st 1st Mid)

Previous Exam Questions: Explain that a holder in due course is a holder but a holder is not
a holder in due course. (27th Final, 26th Final)

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6. Case Studies on HDC & Privileges (Solved) [ASKED –
4-mark]
Case Study 1: The Incomplete Cheque & Threat (Q10 - 26th 1st Mid)
Scenario: A issued a signed cheque to B for Tk 5,000 without writing payee’s name. B completed
the cheque by writing C’s name under threat from B. C posted it to D. D gave it to E for proper
consideration writing “sans recourse”. Drawer A countermanded payment.
Solution:
ˆ A is bound to pay E. E is HDC (took for proper consideration, in good faith, without notice of
B’s threat).
ˆ Under Privilege #3 (Incomplete Instrument), A is bound by the completed cheque even if B
filled it in after issue.
ˆ Under Privilege #5 (Unlawful Means), prior threat/duress between A and B cannot be used
against an HDC. Thus, A’s argument is invalid.
ˆ E can sue: Drawer A, endorsers B and C. D cannot be sued (D wrote “sans recourse”, excluding
personal liability).

Case Study 2: Striking out ’Bearer’ and Crossing (Q11 - 27th Final)
Scenario: A issues an open bearer cheque to B for Tk 3,000. B strikes out “bearer” and crosses it.
Negotiated to C and D. D gives it to E writing “sans recourse”. payment countermanded. A pleads
threat and alteration.
Solution:
ˆ A’s arguments are invalid. A is fully bound to pay E.
ˆ Threat: Same as Case 1, prior threat cannot be used as a defense against an HDC.
ˆ Alteration: Under Section 125 of the NI Act, converting open to crossed or bearer to order (by
crossing out “bearer”) are legally permitted actions to increase security. They are NOT unau-
thorized material alterations. Hence, the instrument remains valid.
ˆ E can sue A, B, and C. D is protected by “sans recourse”.

Case Study 3: Bearer to Order Conversion (Q12 - 27th Mid, 26th Final)
Scenario: Same as Case 2, but amount is Tk 5,000, negotiated to C, D, and E (without “sans recourse”
on D’s part).
Solution:
ˆ A’s arguments are invalid for the exact same reasons as in Case 2.
ˆ Since D did not write “sans recourse”, E can sue any or all prior parties (A, B, C, and D) to
recover the full Tk 5,000.

Case Study 4: Re-negotiation to Prior Party (Q15 - 25th 2nd Mid)

Scenario: Geralt owed Tk 20,000 to Yennefer. Geralt received a cheque from friend Vesemir of Tk
15,000. He endorsed it to Yennefer writing “Pay to Ms. Yennefer without recourse to me.” Yennefer
endorsed to Ciri, who endorsed it back to Geralt. Vesemir’s account has no money; cheque is dishonored.

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Geralt sues Ciri, Ciri sues Yennefer, Yennefer sues Geralt.
Solution:
ˆ General Rule: When an instrument is negotiated back to a prior party, that party cannot sue
intermediate parties to avoid circuity of action.
ˆ Exception (Sans Recourse): Geralt endorsed “without recourse”, excluding his liability. He was
never liable to Yennefer or Ciri.
ˆ Verdict: Geralt’s suit against Ciri is successful (Ciri liable for Tk 15,000). Ciri’s suit against
Yennefer and Yennefer’s suit against Geralt are both dismissed.

Case Study 5: Bill Endorsed to Minor (Q16 - 11th Mid)

Scenario: X draws a bill on Y in favor of Z. Z endorses it to A, a minor. A endorses it to B, and B to
C (who becomes HDC). Bill is dishonored.
Solution:
ˆ Under Section 26 of the NI Act 1881, a minor (A) can draw, endorse, and negotiate an
instrument to bind all other parties, but a minor can never be held personally liable.
ˆ Therefore, C cannot sue A (the minor).
ˆ However, A’s endorsement is legally valid to transfer a good title to B and C.
ˆ Under Privilege #8 (Estoppel against denying prior capacity), all other parties (X, Y, Z, B)
are fully liable and cannot deny A’s capacity.
ˆ Action C can take: C (as HDC) can sue the drawer X, the acceptor Y, and the endorsers Z and
B either individually or jointly for the full amount.

Previous Exam Questions: Case Studies: [Tk. 5,000 Incomplete Cheque] (26th 1st Mid) —
[Tk. 3,000 Bearer Crossing] (27th Final) — [Tk. 5,000 Bearer Crossing] (27th 2nd Mid, 26th
Final) — [Geralt, Yennefer, Ciri - Sans Recourse] (25th 2nd Mid) — [Minor Bill of Exchange]
(11th Mid)

7. Endorsement: Rules & Types [ASKED – 4-mark]

ˆ Definition of Endorsement (Slide 40): Endorsement literally means “writing on the back of
the instrument”. Under Section 15 of the NI Act, when the maker or holder of an instrument signs
their name on the back, face, or on a slip of paper attached thereto (called an allonge) for the purpose
of negotiation (transferring ownership), they are said to have endorsed it.
ˆ Endorser: The person who signs to transfer the instrument. Endorsee: The person to whom the
instrument is transferred.
ˆ General Rules / Provisions Regarding Endorsement (Slide 40):
ˆ 1. Signed on Instrument: Must be written and signed on the back, face, or an attached slip
(allonge).
ˆ 2. Intention of Negotiation: Must be signed specifically for the purpose of transferring/negotiating
the instrument.
ˆ 3. Delivery is Mandatory: A mere endorsement/signature on the back is not enough; the instru-
ment must be physically delivered to the endorsee to complete the transfer.

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ˆ 4. Must be of Entire Sum: Partial endorsement is invalid (e.g., endorsing Tk. 3,000 out of a Tk.
5,000 cheque is invalid).
ˆ 1. Blank (General) Endorsement: The endorser signs their name only, without specifying any
endorsee. The instrument becomes payable to bearer. Example: Signature only: Abrar.
ˆ 2. Full (Special) Endorsement: The endorser specifies the name of the person (endorsee) to whom
or to whose order the money must be paid, followed by their signature. Example: “Pay to Bodrul or
order. (Signed) Abrar”.
ˆ 3. Sans Recourse (Without Recourse) Endorsement (Slide 12, 15): The endorser excludes
their personal liability in case the instrument is later dishonored. Example: “Pay to Ms. Yennefer
without recourse to me. (Signed) Geralt”.
ˆ 4. Restrictive Endorsement: Restricts any further transfer or negotiation of the instrument.
Example: “Pay to Bodrul only” or “Pay Bodrul for my use”.
ˆ 5. Per Pro (Procuration) Endorsement (Slide 39): Signed by an authorized agent on behalf
of the principal. The bank must check if the agent has proper authority. Example: “Per pro ABC
Traders. (Signed) Kabir, Manager”.
ˆ 6. Conditional Endorsement: Makes the payment or liability dependent on a contingent event.
Example: “Pay Bodrul on his marriage with Camelia”.

Previous Exam Questions: What do you mean by endorsement? What are the legal provisions
regarding endorsements? (28th Final)

Previous Exam Questions: According to the Negotiable Instruments Act, 1881, what is an
endorsement? What are the different types of endorsement? Explain with suitable examples. (30th
Final)

Previous Exam Questions: Define endorsement in the context of negotiable instruments. Discuss
the various types of endorsement with appropriate examples. (30th Final)

Previous Exam Questions: What does Endorsement mean, and what are the general rules re-
garding the form of Endorsements? (29th 1st Mid)

8. Payment in Due Course [ASKED – 4-mark]

ˆ Definition (Slide 36, 37): Under Section 10 of the 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 arouse reasonable
suspicion that they are not entitled to receive it.
ˆ Drawee/Banker Protection (Slide 37): The NI Act protects the paying banker or drawee if they
make payment in due course. If the payment is not made in due course, the banker/acceptor is held
fully responsible.
ˆ Three Essential Features of Payment in Due Course (Slide 38, 39):
ˆ 1. Made in Accordance with Apparent Tenor (Slide 38): Must be paid in line with the true
intention and text of the instrument (e.g., cash, clearing house, or draft). Example: A banker paying
a post-dated cheque before its date is NOT a payment in due course, because it violates the clear
instructions of the drawer.

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ˆ 2. Made in Good Faith and Without Negligence (Slide 39): If the banker suspects fraud but
fails to check, the payment is not in good faith. For Per Pro endorsements, the banker must verify
if the signatory has proper authorization. Paying a forged cheque is considered negligent; the bank
must bear the loss.
ˆ 3. Made to the Person in Possession of Instrument (Slide 39): Payment must be made to the
actual holder whose possession does not raise any suspicion about their title. Proper identification
must be taken from the payee.

Previous Exam Questions: What are the essential features of payment in due course? (11th
Mid)

9. Dishonor of Negotiable Instruments [UNASKED – 3-mark]

Under the NI Act (Slide 41), an instrument can be dishonored in two ways:
ˆ A. Dishonor by Non-Acceptance:
ˆ Occurs when the drawee refuses to accept a bill of exchange when presented.
ˆ Also arises if the drawee’s acceptance is qualified (e.g., changing the amount) or conditional.
ˆ Note: Applies only to Bills of Exchange (promissory notes and cheques do not require accep-
tance).
ˆ Can also occur if the drawee is legally incompetent (e.g., insane/minor) or cannot be found after a
reasonable search.
ˆ B. Dishonor by Non-Payment:
ˆ Occurs when the maker (of a promissory note), acceptor (of a bill), or drawee (of a cheque) fails to
pay when the instrument matures and payment is demanded.
ˆ Applies to all three statutory instruments: promissory notes, bills of exchange, and cheques.
ˆ Arises when payment is refused or cannot be obtained.
ˆ Covered under Section 92 of the Negotiable Instruments Act. Proper presentment for payment is
mandatory to hold the prior parties liable.

Previous Exam Questions: Explain the ways a negotiable instrument can be dishonored under
the Negotiable Instruments Act. (Unasked Slide Topic)

— End of Revision Notes —

Tip: Focus heavily on the 5 case studies (Topic 6) and the Holder vs. HDC table (Topic 5). They cover over
60% of past exam marks!

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