CMA FOUNDATION

NOTES

NEOTIABLE
INSTURMENTS ACT, 1881

NEW SYLLABUS 2022

 INDEX

CHAPTER NO. CHAPTER NAME PAGE RANGE

1 Characteristics of Negotiable 3-9
Instruments

2 Promissory Note, Bill of Exchange 10 - 14

and Cheque
3 Difference Between Various NI 15

4 Crossing of Cheques 16 - 21
5 Dishonour of Cheques 22 - 24

NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
 CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

INTRODUCTION
Negotiable Instrument Act, 1881 primarily contains the law relating to negotiable instruments of the
commercial world which facilitates the activities of trade & commerce. The main objective of this
Act is to legalize the system by which the instruments contemplated by it could freely pass from one
hand to another like any other goods. The term ‘negotiable’ means transferable and the term
‘instrument’ means ‘any written document creating a right in favor of some person.’ Thus, by
negotiable instrument we mean a written document by which a right is given to a person and
which is transferable in accordance with provisions of Negotiable Instrument Act, 1881.

WHAT IS NEGOTIABLE INSTUMENT?

In common parlance a negotiable instrument can be understood as a
piece of paper which entitles to a sum of money and which is
transferable from one person to another merely by delivery or by
endorsement and delivery. The person to whom it is so transferred
becomes entitled to the sum mentioned therein and also to the right
to further transfer it. Though there is a general principle that no one
can become owner of any property unless the person who sold the
property to him is the true owner of the said property, yet this rule is
not applicable in the case of Negotiable instrument. Now let us refer to the Act how the term
Negotiable instrument is defined in the section.
Sec. 13 of the Act defines a negotiable instrument as ‘a promissory note, bill of exchange or cheque
payable either to order or to bearer.’
Thus, a Negotiable Instrument means an instrument, the property in which is acquired by anyone
who takes a bona fide and for value, notwithstanding any defect in the title of the Transferor. It
need not necessarily be a promissory note, bill of exchange or a cheque.
A negotiable instrument may be payable to two or more persons jointly or it may be made payable
in the alternative to one of two or one or some of several payees.

CHARACTERISTICS OF A NEGOTIABLE INSTUMENT

The term negotiability may also be extended to other instruments like Bill of Lading; Hundies, etc.
provided it satisfies the following characteristics -
1. Free and Innumerable Transfers: A Negotiable Instrument may be transferred by Delivery, or by
Endorsement and Delivery. Also, a Negotiable Instrument can be transferred ad infinitum, i.e.,
transferred any number of times till its satisfaction on date of maturity.
2. Free From Defects: The Holder in due course obtains the good title to the instrument,
notwithstanding any defect in a previous holder’s title. A Holder in due course is one who
receives the instrument for Consideration, Before maturity, and without any notice as to the
defect in title of the Transferor.
3. Holder to Sue in His Own Name: The Holder in due course of a Negotiable Instrument can sue on
the instrument in his own name.
4. Presumptions: A Negotiable Instrument is subject to certain presumptions listed u/s 118 and 119
as to consideration, date, time of acceptance and transfer, endorsements, etc.
Note: Share Certificates with Blank Transfer Deeds, Deposit Receipts and Mate’s Receipts are not
Negotiable Instruments.

Until the contrary is provided, the following aspects are presumed in respect of Negotiable
Instruments –
Presumptions a to.. Description
Consideration Every Negotiable Instrument was made or drawn for consideration, and
such Negotiable Instrument was accepted, Endorsed, negotiated or
transferred for consideration.

Date Every Negotiable Instrument bearing a date was made or drawn on that
date.

Time of Acceptance Every Bill of Exchange was accepted within a reasonable time after the
date mentioned therein but before the date of its maturity.

Time of Transfer Every transfer of a Negotiable Instrument was made before its maturity.

Order of Endorsements Endorsements appearing on a Negotiable Instrument were made in the

order in which they appear thereon.

Stamp That a lost Promissory Note, Bill of Exchange or Cheque was duly stamped.

Holder in Due Course That the holder of a Negotiable Instruments is a holder in due course.

Fact of Dishonor In a suit for the dishonor of a Negotiable Instrument, the Court shall, on
[Sec.119] proof of protest, presume the fact of dishonor, unless and until it is
disproved.

Note:
✓ Where the Negotiable Instruments has been obtained from its lawful owner/custodian by means
of an offence/fraud or for unlawful consideration, the burden of proving that a Holder is a Holder
in due course, lies upon him.
✓ The NI Act will not affect Sec.21 of the Indian Paper Currency Act, 1871, or any local usage relating
to any instrument in a local language. [Sec. 1].

TYPES OF NEGOTIABLE INSTRUMENTS

Negotiable Instruments are of two types:
1. Negotiable by Statute: Section 13 of the Act, provides that a negotiable Instrument includes
promissory note, bill of exchange and cheque, whether payable to bearer or order.
2. Negotiable by Custom or Usage: Though the Act speaks of only three types of Negotiable
Instrument, but it does consider other kinds of instruments from being treated as a negotiable
 instrument provided, they possess the characteristics of a negotiable instruments. Accordingly
certain other instruments take the character of negotiable instruments by custom or usage.
Dividend warrant, circular notes, bearer debentures are some of them though they are not
specifically mentioned in the Act as negotiable instrument.

1. Bearer and Order Instruments

A negotiable instrument is said to be payable to bearer when
✓ It is expressed to be so payable
✓ Only or last endorsement is a blank endorsement.
A negotiable instrument is said to be payable to order when
✓ It is expressed to be so payable
✓ Expressed to be payable to a particular person with restricting its transferability.
2. Inland and Foreign Instruments: A bill, promissory note or cheque if both drawn and payable in
India or drawn on a person resident in India is said to be an inland bill. A bill which is not an
inland bill is deemed to be a foreign bill. Foreign bill must be protested for dishonor if such
protest is required by the law of the place where it was drawn, this is not case with Inland bills
where protest for non-payment is optional as per section 104 of the Act.
3. Demand and Time Instruments: An instrument is payable on demand when it is expressed to
be so payable or when no time is specified on it. A cheque is always payable on demand. A note
or bill if payable after a specified period or happening of a specified event which is certain, it is
a time instrument. If a promissory note or bill of exchange bears the expression “at sight” and
“on presentation” means on demand (section 21). The words “on demand’ are usually found in a
promissory note, whereas the words “at sight’ are found in a bill of exchange.
4. Genuine, Accommodation and Fictitious Bill: When a bill is drawn, accepted, or endorsed for
consideration it is a genuine bill. When it is drawn, accepted, or endorsed without consideration
it is accommodation bill. When drawer or payee or both are fictitious the bill is called fictitious
bill. If both drawer and payee of a bill are fictitious person, the acceptor is liable to a holder in
due course, if the holder in due course can show that the signature of the supposed drawer and
that of first payee are in the same handwriting.
5. Clean and Documentary Bill: When no documents relating to goods are annexed to the bill, it is
clean bill. When documents of title or other documents relating to goods are attached, it is
documentary bill.
6. Ambiguous Instrument: When an instrument due to faulty drafting may be interpreted either
as bill or note, it is an ambiguous instrument. It is for holder to decide how he wants the bill to
be treated. Ambiguity may also arise when the amount is stated differently in words and figures.
In such case the amount stated in words will be taken into account.
7. Inchoate Instrument: An instrument incomplete in some respect is known as inchoate
instrument. When a person signs and delivers to another a blank or incomplete stamped paper,
he authorizes the other person to make or complete upon it a negotiable instrument for any
amount not exceeding the amount covered by the stamp. The effect of such signing is that the
person signing the instrument is liable upon such instrument in the capacity in which he signed it
to holder in due course of the instrument.
8. Escrow Instrument: When an instrument is drawn conditionally or for a special purpose as a
collateral security and not for the purpose of transferring property therein, it is called Escrow
 instrument. The liability to pay in case of an Escrow instrument does not arise if the conditions
agreed upon are not fulfilled or the purpose for which the instrument was delivered is not
achieved.

PARTIES TO A NEGOTIABLE INSTRUMENT

Parties Meaning
Drawer The Maker of a Promissory Note, Bill of Exchange or Cheque.

Drawee The person on whom the instrument is drawn and thereby directed to pay.

Drawee in case The person whose name is given in the bill or on any Endorsement thereof, in
of need addition to the name of the Drawee, who should be resorted to in case of need.
Where a Drawee in case of need is named in a Bill of Exchange or any
endorsement thereon, the Bill of Exchange is not dishonored, unless it has been
dishonored by such Drawee [Sec.115] A Drawee in case of need may accept and
pay the Bill of Exchange, without previous protest. [Sec.116]

Acceptor When the Drawee signs his assent upon the Bill, and delivers the same to the
holder or some other person on his behalf, he becomes the “Acceptor”.

Acceptor for Person accepting a Bill of Exchange (which has been noted or protested for non-
Honor acceptance or for better security) supra protest for honor of the drawer or of any one of
endorsers. Acceptor for Honor must specify as to whose honor he is accepting the
Bill of Exchange. Otherwise, it shall be deemed to be made for the honor of the
Drawer.

Payee Payee is the person to whom the amount is payable, which may be the Drawer
himself or any other person.

Holder Any person entitled in his own name to the possession thereof and to receive or
recover the amount due thereon from the parties thereto. Where the instrument
is lost or destroyed, its holder is the person so entitled at the time of such loss or
destruction. [Sec.8]

CAPACITY TO BECOME A PARTY

A person competent to contract can become a party to a negotiable instrument. If a party who
makes, draws, endorses, or negotiates a negotiable instrument is incompetent to do so, the
agreement is void as against him. But the contract is still valid against the other parties competent
to contract. The conditions under which certain categories of person like a Minor, Corporate body,
Agent and Legal representatives can be a party to a negotiable instrument are as under:
1. Minor: A minor person is not competent to contract; therefore, he cannot bind himself by
becoming a party to a negotiable instrument. But mere presence of a minor as one of the parties
in a negotiable instrument does not make it invalid. A minor can draw, indorse, deliver and
negotiate an instrument so as to bind all parties except himself.
 Example: A, B and C, a minor executed a promissory note in favor of P. Held, C’s immunity from
liability did not absolve A and B, other joint promisors, from liability.
A minor is not personally liable on a bill or note given by him for necessaries supplied to him. It is
only his estate which is liable for such a bill or note.
2. Corporation: Corporation can be a party to a negotiable instrument if authorized by its Article
of Association, otherwise it cannot.
3. Agent: As per section 27 an agent can bind his principal by acting on his behalf only in the
manner in which he is duly authorized to be become a party to a negotiable instrument. The
agent is required to make it clear that he is acting in representative capacity which must be
evidenced by the manner he signs such document. The form of signature must show that he does
not intend to incur personal liability. Otherwise, he becomes personally liable.
Example 1: Arun a manager of ABC ltd accepted a bill of exchange and signed a as manager. It was
held that Arun was personally liable.
Example 2: Arun a manager of ABC ltd accepted a bill of exchange and signed as for ABC ltd. It was
held that Arun was not personally liable.
4. Legal Representative: As per section 30 a legal representative of a deceased person who signs
his name to a negotiable instrument incurs personal liability unless by clear words, he limits his
liability to the extent of the assets of the deceased received by him as legal representative.

GYAANI’S ONE LINERS

✓ Negotiable Instrument Act, 1881 primarily contains the law relating to negotiable instruments of
the commercial world.
✓ The term ‘negotiable’ means transferable and the term ‘instrument’ means ‘any written
document creating a right in favor of some person.’ Thus, by
✓ Negotiable instrument means a written document by which a right is given to a person and which
is transferable in accordance with provisions of Negotiable Instrument Act, 1881.
✓ Sec. 13 of the Act defines a negotiable instrument as ‘a promissory note, bill of exchange or
cheque payable either to order or to bearer.’
✓ A negotiable instrument may be payable to two or more persons jointly or it may be made payable
in the alternative to one of two or one or some of several payees.
✓ A Negotiable Instrument may be transferred by Delivery, or by Endorsement and Delivery.
✓ Also, a Negotiable Instrument can be transferred any number of times till its satisfaction on date
of maturity.
✓ A Holder in due course is one who receives the instrument for Consideration, Before maturity,
and without any notice as to the defect in title of the Transferor.
✓ The Holder in due course obtains the good title to the instrument, notwithstanding any
defect in a previous holder’s title.
✓ The Holder in due course of a Negotiable Instrument can sue on the instrument in his own name.
✓ A Negotiable Instrument is subject to certain presumptions listed u/s 118 and 119 as to
consideration, date, time of acceptance and transfer, endorsements, etc.
✓ Share Certificates with Blank Transfer Deeds, Deposit Receipts and Mate’s Receipts are not
Negotiable Instruments.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
✓ Negotiable Instruments are of two types i.e., Negotiable by Statute and Negotiable by Custom or
Usage
✓ Dividend warrant, circular notes, bearer debentures are negotiable by custom though they are
not specifically mentioned in the Act as negotiable instrument.
✓ A negotiable instrument is said to be payable to bearer when it is expressed to be so payable and
only or last endorsement is a blank endorsement.
✓ A negotiable instrument is said to be payable to order when it is expressed to be so payable and
expressed to be payable to a particular person with restricting its transferability.
✓ A bill, promissory note or cheque if both drawn and payable in India or drawn on a
person resident in India is said to be an inland bill.
✓ A bill which is not an inland bill is deemed to be a foreign bill.
✓ An instrument is payable on demand when it is expressed to be so payable or when no
time is specified on it. A cheque is always payable on demand.
✓ A note or bill if payable after a specified period or happening of a specified event which is
certain, it is a time instrument.
✓ When a bill is drawn, accepted, or endorsed for consideration it is a genuine bill. When it
is drawn, accepted, or endorsed without consideration it is accommodation bill.
✓ When drawer or payee or both are fictitious the bill is called fictitious bill.
✓ When no documents relating to goods are annexed to the bill, it is clean bill.
✓ When documents of title or other documents relating to goods are attached, it is documentary
bill.
✓ When an instrument due to faulty drafting may be interpreted either as bill or note, it is an
ambiguous instrument.
✓ Ambiguity may also arise when the amount is stated differently in words and figures. In such case
the amount stated in words will be taken into account.
✓ An instrument incomplete in some respect is known as inchoate instrument.
✓ When an instrument is drawn conditionally or for a special purpose as a collateral security and
not for the purpose of transferring property therein, it is called Escrow instrument.
✓ The liability to pay in case of an Escrow instrument does not arise if the conditions agreed upon
are not fulfilled or the purpose for which the instrument was delivered is not achieved.
✓ The maker of the negotiable instrument is known as Drawer.
✓ The person on whom the instrument is drawn and thereby directed to pay is known as Drawee.
✓ The person whose name is given in the bill or on any endorsement thereof, in addition to the
name of the drawee, who should be resorted to in case of need is known as Drawee in case of
need.
✓ Where a drawee in case of need is named in a Bill of Exchange or any endorsement thereon, the
Bill of Exchange is not dishonored, unless it has been dishonored by such drawee.
✓ When the drawee signs his assent upon the bill and delivers the same to the holder on his behalf,
he becomes the Acceptor.
✓ Acceptor for honor is a person accepting a bill of exchange which has been noted or protested for
non-acceptance or for better security supra protest for honor of the drawer of any one of
endorsers.
✓ Payee is the person to whom the amount is payable, which may be the drawer himself or any
other person.
✓ Holder is the person entitled in his own name the possession to receive or recover the amount
due thereon form the parties thereto.
✓ A person competent to contract can become a party to a negotiable instrument.
✓ If a party who makes, draws, endorses, or negotiates a negotiable instrument is incompetent to
do so, the agreement is void as against him. But the contract is still valid against the other parties
competent to contract.
✓ A minor can draw, indorse, deliver and negotiate an instrument so as to bind all parties except
himself.
✓ A minor is not personally liable on a bill or note given by him for necessaries supplied to him. It is
only his estate which is liable for such a bill or note.
✓ Corporation can be a party to a negotiable instrument if authorized by its Article of Association,
otherwise it cannot.
✓ An agent can bind his principal by acting on his behalf only in the manner in which he is duly
authorized to be become a party to a negotiable instrument. The agent is required to make it clear
that he is acting in representative capacity which must be evidenced by the manner he signs such
document. Otherwise, he becomes personally liable.
✓ A legal representative of a deceased person who signs his name to a negotiable instrument incurs
personal liability unless by clear words, he limits his liability to the extent of the assets of the
deceased received by him as legal representative.

NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
PROMISSORY NOTE, BILL OF EXCHANGE AND CHEQUE

INTRODUCTION
A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable
or which is expressed to be payable to a particular person, and does not contain words prohibiting
transfer or indicating an intention that it shall not be transferable.

PROMISSORY NOTE
According to Section 4 of the Negotiable Instruments Act, 1881, “A Promissory note is an
instrument in writing (not being a bank note or a currency note) containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a
certain person, or to the bearer of the instrument.”

1. Maker: The person who makes the promissory note and promises to pay is called the maker.
2. Payee: The person to whom the payment is to be made is called the payee.

✓ It must contain date.

✓ The sum payable must be certain.
✓ The maker and payee must be certain.
✓ The promissory note must be in writing.
✓ The promise to pay should be unconditional.
✓ The promissory note must be signed by the maker.
✓ The instrument must contain a promise to pay money only.
✓ It must contain an undertaking to pay. There must be an express promise to pay.
✓ Stamping of Promissory Note is essential. An unstamped promissory note is not admissible in
evidence and no suit can be maintained.
✓ The limitation period for a promissory note to file a suit is three years from the date of execution
or from the date of acknowledgement.

BILL OF EXCHANGE
According to Section 5 of the Negotiable Instruments Act, 1881, “A bill of exchange is an
instrument in writing containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer
of the instrument”.

There are three parties to bill of exchange:

1. The drawer: The person who gives the order to pay or who makes the bill is called the drawer.
2. The drawee: The person who is directed to pay is called the drawee. When the drawee accepts
the bill, he is called the acceptor.
3. The Payee: The person to whom the payment is to be made is called the payee.

✓ It must be in writing.
✓ The drawer must sign the instrument.
✓ The amount to be paid should be certain.
✓ Every Bill of Exchange must be stamped.
✓ The order to pay must be definite and unconditional.
✓ The time of payment must be indicated in the bill with certainty.
✓ The consideration of a bill of exchange should be paid only by way of money only.
✓ All the parties i.e., Drawer, Drawee and Payee of a bills of exchange must be certain.

CHEQUE
According to Section 6 of the Negotiable Instruments Act, 1881, “A cheque is a bill of exchange
drawn upon a specified banker and payable on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic form.”
A cheque in the electronic form means “cheque which contains the exact mirror image of a proper
cheque, and is generated, written and signed in a secure system ensuring the minimum safety
standards with the use of digital signature and asymmetric crypto system.”
A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either
by the clearing house or by the bank whether paying or receiving payment, immediately on
generation of an electronic image for transmission, substituting the further physical movement of
the cheque in writing.
‘Clearing House’ means the clearing house managed by the Reserve Bank of India or a clearing house
recognized as such by the Reserve Bank of India [Sec. 6 as substituted by the Negotiable Instruments
(Amendment and Miscellaneous Provisions) Act,2002].
A cheque is a specie of a bill of exchange; but it has the following two additional qualifications:
✓ It is always drawn on a specified banker, and
✓ It is always payable on demand.

There are three parties to bill of exchange:

1. The Drawer: The customer who signs the cheque is called “drawer”.
2. The Drawee: The bank on whom the cheque is drawn is called “drawee”.
3. The Payee: The person to whom the payment is to be made is called the payee.

✓ Payee to be certain.
✓ The cheque must contain the date.
✓ A cheque must be an order in writing.
✓ It must contain an unconditional order.
✓ A cheque must be signed by the maker.
✓ A cheque may be drawn payable to order or bearer.
✓ The amount must be specifically mentioned in figures and words.

By crossing the cheque, the drawer instructs the banker to not to pay it over the counter but only
credit to the account of the person named therein. It adds to the security and thus ensures
payment to the payee or to his order. A cheque may be crossed by any of the following persons:
✓ The drawer of a cheque.
✓ The holder of a cheque. Where a cheque is issued uncrossed, it may be crossed by the holder
generally or specially.
✓ The banker in whose favor the cheque has been crossed specially may again cross it specially in
favor of another banker.

DUE DATE OF A BILL OR NOTE

Every instrument payable, otherwise, then on demand is entitled to three days of grace.
Instruments not entitled to ‘period of grace’ are:
✓ a cheque
✓ a bill or note payable on demand,
✓ a bill or note in which no time is mentioned.
Instruments entitled to ‘period of grace’ are:
✓ a bill or note payable on a specified day,
✓ a bill or note payable ‘after sight’,
✓ a bill or note payable at a certain period on happening of a certain event.
So, in case of time bill or note, it becomes due on the last day of grace period. Where an instrument
is payable by installments, each installment is due 3 days after the date fixed for payment of the
installment. If the due date falls on a public holiday, the bill becomes due on immediately
preceding business day. If the month in which the period is to terminate has no corresponding
day, the period will terminate on the last day of the month.

PAYAMENT IN DUE COURSE

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. The payment to the
person in possession of the instrument must be under circumstances which do not afford a
reasonable ground for believing that he is not entitled to receive payment of the amount mentioned
in the instrument.
Payment in due course results in discharge of the instrument. A payment is said to be ‘payment in
due course’ if it satisfies the following conditions:
✓ It is in accordance with apparent tenor of the instrument. This means that payment must be made
according to the period mentioned on the face of the instrument. A payment before the maturity
date of an instrument will not be considered as a payment in due course.
✓ It is made on behalf of drawee or acceptor.
✓ It must be made in money term only which includes cheque and currency notes. The holder of
a negotiable instrument cannot be forced to accept payment in any other mode except with his
consent.
✓ Payment must be made to the person in possession of the instrument i.e., the lawful holder of
the instrument and also entitled to payment.
✓ Payment must be made in good faith, without negligence and under bona fide circumstances.
If a cheque bears forged signature of the drawer, the payment will not be payment in due course
if the banker fails to exercise the necessary care. For example, if a bill payable to bearer (Naman)
has been lost or stolen and a finder of the bill (Aman) presents it for the payment, a payment to
the finder i.e., Aman would not be a payment in due course, if the person paying (Chaman) knows
that the bill is a stolen bill and the person demanding payment i.e., Aman is not entitled to be
paid. But if Chaman has no idea and makes the payment to Aman in good faith, it would be a
payment in due course.
✓ There is no ground for believing that possessor is not entitled to receive payment.

GYAANI’S ONE LINERS

✓ According to Section 4 of the Negotiable Instruments Act, 1881, “A Promissory note is an
instrument in writing (not being a bank note or a currency note) containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a
certain person, or to the bearer of the instrument.”
✓ There are 2 parties to a promissory note i.e., Maker and Payee
✓ The person who makes the promissory note and promises to pay is called the maker.
✓ The person to whom the payment is to be made is called the payee.
✓ According to Section 5 of the Negotiable Instruments Act, 1881, “A bill of exchange is an
instrument in writing containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer
of the instrument”.
✓ There are three parties to bill of exchange i.e., Drawer, Drawee and Payee
✓ The person who gives the order to pay or who makes the bill is called the drawer.
✓ The person who is directed to pay is called the drawee. When the drawee accepts the bill, he is
called the acceptor.
✓ The person to whom the payment is to be made is called the payee.
✓ According to Section 6 of the Negotiable Instruments Act, 1881, “A cheque is a bill of exchange
drawn upon a specified banker and payable on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic form.”
✓ A cheque in the electronic form means “cheque which contains the exact mirror image of a proper
cheque, and is generated, written and signed in a secure system ensuring the minimum safety
standards with the use of digital signature and asymmetric crypto system.”
✓ A truncated cheque means a cheque which is truncated during the course of a clearing cycle,
either by the clearing house or by the bank whether paying or receiving payment, immediately on
generation of an electronic image for transmission, substituting the further physical movement
of the cheque in writing.
✓ A cheque is a specie of a bill of exchange; but it has the following two additional qualifications i.e.,
it is always drawn on a specified banker and it is always payable on demand.
✓ There are 3 parties to a cheque i.e., Drawer, Drawee and Payee
✓ The customer who signs the cheque is called “drawer”.
✓ The bank on whom the cheque is drawn is called “drawee”.
✓ The person to whom the payment is to be made is called the payee.
✓ By crossing the cheque, the drawer instructs the banker to not to pay it over the counter but only
credit to the account of the person named therein. It adds to the security and thus ensures
payment to the payee or to his order.
✓ A cheque may be crossed by the drawer of a cheque, the holder of a cheque and the banker.
✓ Every instrument payable, otherwise, then on demand is entitled to three days of grace.
✓ Instruments which are not entitled to ‘period of grace’ are cheque, a bill or note payable on
demand and a bill or note in which no time is mentioned.
✓ If the due date falls on a public holiday, the bill becomes due on immediately preceding business
day. If the month in which the period is to terminate has no corresponding day, the period will
terminate on the last day of the month.
✓ 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.
✓ Payment in due course results in discharge of the instrument.

NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
 DIFFRENCE BETWEEN VARIOUS NI

Difference Promissory Note Bills of Exchange Cheque

Parties 2 Parties - Maker 3 parties – Drawer, 3 parties - Drawer,

& Payee Drawee and Payee Banker and Payee

Nature Contains an Contains an Drawn on specified

unconditional promise unconditional order to Banker to pay on
by maker to pay the the drawee to pay the demand.
payee payee

Acceptance Not necessary Necessary if the bill is Not necessary.

payable after sight.

Liability Liability of maker is Liability of drawer is Liability of drawer is

primary and absolute. conditional and conditional and
secondary upon non secondary upon non
payment by drawee. payment by banker

Notice of Dishonor Not necessary Necessary Not necessary

Payable On demand or after a On demand or after a On demand even to

specified time. Cannot be
specified time. Cannot be bearer if so made.
made payable to bearer made payable to bearer
on demand or even on demand.
after certain period.

Crossing Not possible Not possible Can be crossed.

Noting and protesting Not required Required to Establish the Not required
In case of dishonor fact of dishonor.

Grace Period Available if payable Available if payable after Not available.

after specified time specified time

Stamping Must be stamped. Must be stamped. Need not be stamped.

NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
 CROSSING OF CHEQUES

INTRODUCTION
Section 123 to 131-A of the Negotiable Instruments Act, 1881 explains about “Crossing”. A cheque
may be an ‘open cheque’ or a ‘crossed cheque’. The former may be presented across, the counter
for payment; the later will have to be presented through another banker. While, in the case of an
open cheque, payment may be obtained in cash, in the case of a crossed cheque, the amount will be
credited to the account of the customer of a bank.

MEANING OF CROSSING
The act of drawing two diagonal or transverse parallel lines on the face of a cheque is called
“crossing of the cheque”. In other words, a crossed cheque is one which has two transverse parallel
lines. Crossing is a direction to the banker not to pay the money across the counter. It means the
banker should pay the money only through banker.

OBJECTIVE OF CROSSING
The main object of crossing is to give protection and safeguard to the owner of the cheque. The
crossed cheque cannot be paid across the counter but it should be paid only through an account
with a bank, who may be either the drawee banker or a different one. If it is mis-utilized, it can be
traced very easily and the fraudulent person can easily be detected.

TYPES OF CROSSING
There are different kinds of crossing: General crossing and Special crossing.

Where a cheque bears across its face an addition of the words “and company” or any abbreviation
thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with
or without the words “Not negotiable” that addition shall be deemed a crossing, and the cheque
shall be deemed to be crossed generally.
✓ Two transverse lines are the essentials of general crossing.
✓ The lines should not occupy printed letters or numbers or any such written matters.
✓ The lines are generally drawn on the left-hand side.
✓ The words ‘and company’ / ‘& co.’ may be written between transverse lines. But these words
are not compulsory. The crossing itself is sufficient. However, it is the practice of the people to
write those words.
✓ The words ‘Not negotiable’ may be added to a crossing. But they themselves do not constitute
crossing.

NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
Forms of General Crossing

Effects of General Crossing

✓ It gives a direction to the paying banker.
✓ Sec. 126 of the NI Act, 1881 lays down that when a cheque is crossed generally, the banker on
whom it is drawn shall not pay it otherwise than to a banker. Therefore, this type of cheque cannot
be paid at counter. The payment should be made through an account only. Thus, the General
crossing gives protection and avoids fraudulent withdrawals.
✓ It is the liability of the paying banker to verify proper payment in proper account. The payment
does not constitute “Payment in due course”. The banker is answerable to his customer, if he
pays the money to a third person without the direction of his customer. He should not make any
contract with third party concerning the cheque generally crossed.

Where a cheque bears across its face an addition of the name of a banker, either with or without
the words “Not Negotiable”, that addition shall be deemed a crossing, and the cheque shall be
deemed to be crossed specially and to be crossed to that banker.

✓ Two parallel transverse lines are not essential.

✓ The name of the bank should be mentioned with or without crossing. The name of the bank itself
constitutes special crossing.
✓ The name of the bank should be written on the left side of cheque.
✓ The name of the bank and the words “Not Negotiable” or “A/c Payee” or “Not Negotiable” or
“A/c Payee Only”, may also be mentioned.
Effects of Special Crossing
✓ It prevents the fraudulent transactions and misappropriation.
✓ It is direction to the paying banker to pay the amount to the account holder of that bank, but not
to others.
✓ If a cheque is specially crossed on a particular bank, and if such cheque is presented in another
bank, the paying bank should refuse the payment.
✓ Special crossing gives more protection than general crossing. In the case of special crossing, the
banker’s name and payee’s name are mentioned, and the banker is well acquainted with the
payee’s name and signature. If there is any forgery, he can easily detect it.
Another type of crossing which is not defined in the Act but presents in usage is Restrictive Crossing
or Account Payee Crossing.
Account Payee Crossing
In the present-day transactions, we find the terms “A/c Payee”, “Account Payee”, “Account Payee
Only”, on the cheques. It has developed in the trade and in common to use these terms on the left
side of the cheque between the two transverse lines. But there is no law mentioned about this type
of crossing either in “The Bills of Exchange Act” of Great Britain or in “The Negotiable Instruments
Act, 1881” of India. The terms mean that the amount should not be paid at counter, but should be
credited into the account of the payee only. However, the meaning of other crossings is also the
same. This type of crossing only gives additional protection to the cheque.

Effects of Account Payee Crossing

✓ It is merely in the form of direction to the receiving bank that the drawer desires to pay the
particular cheque into bank which keeps the account of the payee.
✓ A/c Payee crossing cheque can also be transferable like other cheques.
✓ It gives further protection to the payee. The collecting banker should credit the cheque only to
the mentioned account of the payee.
✓ If the banker credits the cheque to another’s account and not to the account of the payee, the
banker shall be held responsible for his negligence, and shall be held liable to pay the
compensation.
✓ The safest method is to cross the cheque with the terms of ‘Not Negotiable’ and ‘A/c Payee only’.
Not Negotiable Crossing (Section 130)
Sections 123 and 124 of the Act permit the use of the words “Not Negotiable” in the crossing.
Section 130 of the Act clarifies the position.
Section 130: A person taking a cheque crossed generally or specially, bearing in either case the words
not negotiable shall not have, and shall not be capable of giving, a better title to the cheque than
that which the person from whom he took it had.
The words “Not Negotiable” do not mean “not transferable”. If it is so, the very meaning and
purpose of the cheque and its character of “Bill of Exchange” will die. “Transferability” is a
narrower term than the word ‘negotiability’. The cheque “not transferable” crossed can also be
transferred like any other cheque. But it gives more protection than General Crossing and Special
Crossing. It is a warning to the paying and collecting bankers. Both of them should be very careful
in the transaction of this type of cheques.
Object of Not Negotiable Crossing
The true owner is protected by this type of crossing more perfectly. If it is stolen, the finder cannot
cash it so easily. The good title cannot be passed to him. He will be compelled to return it to the
true owner. The owner’s right is preserved safely against any subsequent holder.

Effects of Not Negotiable Crossing

✓ It gives more protection and safe to the holder of the cheque.
✓ A third person cannot cash it so easily.
✓ It can be transferred like any other cheque.
✓ If the banker is negligent and transfers the amount of that cheque to another account, he will
be held responsible and he will be liable to make the compensation to the sufferer.
Double Crossing / Second Special Crossing (Section 125)
“Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially
to another banker, his agent for collection” is called Double Crossing. This is the only case where a
second special crossing is allowed by the Act, and that can be done only for the purpose of collection
and that too by a banker. Therefore, it is called “Double Crossing” or “Second Special Crossing”. The
private parties are not allowed to utilize double crossing.
Effects of Second special Crossing
✓ Double crossing is not permitted to general public. It is practiced only in case of transactions
between the bankers. Others are not allowed to use double crossing.
✓ In case of Double crossing, it is the regular practice to cross at the back side of the cheque, where
sufficient space is available.
✓ Sec. 127 lays down that where a cheque is crossed specially to more than one banker except
when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall
refuse payment thereof.
✓ According to Sec. 127, it is necessary, in all cases, to specify in the second special crossing that
the banker in whose favor it is made is an agent of the first banker for collection.

Generally, the maker of the cheque makes the crossing. If he does not cross, the holder of the
cheque can cross it, or in certain occasions the banker may also cross it. Sec. 125 states about
crossing after issue. According to Sec. 125 where a cheque is uncrossed, the holder may cross it
generally or specially.
✓ Where a cheque is crossed generally, the holder may cross it specially.
✓ Where a cheque is crossed generally or specially, the holder may add the words “not
negotiable”.
✓ Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another banker, his agent, for collection.

GYAANI’S ONE LINERS

✓ Section 123 to 131-A of the Negotiable Instruments Act, 1881 explains about “Crossing”.
✓ A cheque may be an ‘open cheque’ or a ‘crossed cheque’.
✓ The act of drawing two diagonal or transverse parallel lines on the face of a cheque is called
“crossing of the cheque”.
✓ Crossing is a direction to the banker not to pay the money across the counter. It means the banker
should pay the money only through banker.
✓ The main object of crossing is to give protection and safeguard to the owner of the cheque.
✓ Where a cheque bears across its face an addition of the words “and company” or any abbreviation
thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either
with or without the words “Not negotiable” that addition shall be deemed a crossing, and the
cheque shall be deemed to be crossed generally.
✓ Where a cheque bears across its face an addition of the name of a banker, either with or without
the words “Not Negotiable”, that addition shall be deemed a crossing, and the cheque shall be
deemed to be crossed specially and to be crossed to that banker.
✓ If a cheque is specially crossed on a particular bank, and if such cheque is presented in another
bank, the paying bank should refuse the payment.
✓ Special crossing gives more protection than general crossing.
✓ Sections 123 and 124 of the Act permit the use of the words “Not Negotiable” in the crossing.
✓ The words “Not Negotiable” do not mean “not transferable”. If it is so, the very meaning and
purpose of the cheque and its character of “Bill of Exchange” will die. “Transferability” is a
narrower term than the word ‘negotiability’. The cheque “not transferable” crossed can also be
transferred like any other cheque. But it gives more protection than General Crossing and Special
Crossing. It is a warning to the paying and collecting bankers. Both of them should be very careful
in the transaction of this type of cheques.
✓ “Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially
to another banker, his agent for collection” is called Double Crossing.
✓ Double crossing is not permitted to general public. It is practiced only in case of transactions
between the bankers.
✓ Sec. 127 lays down that where a cheque is crossed specially to more than one banker except when
crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse
payment thereof.
✓ According to Sec. 127, it is necessary, in all cases, to specify in the second special crossing that the
banker in whose favor it is made is an agent of the first banker for collection.
✓ Where a cheque is crossed generally, the holder may cross it specially.
✓ Where a cheque is crossed generally or specially, the holder may add the words “not negotiable”.
✓ Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially
to another banker, his agent, for collection.

NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
 DISHONOUR OF CHEQUES

INTRODUCTION
A cheque is said to be honored if the banks give the amount to the payee. While, if the bank refuses
to pay the amount to the payee, the cheque is said to be dishonored. In other words, dishonor of
cheque is a condition in which the bank refuses to pay the amount of the cheque to the payee.
Whenever the cheque is dishonored, the drawee bank instantly issues a ‘Cheque Return Memo’
to the payee banker specifying the reasons for dishonor. The payee banker provides the memo
and the dishonored cheque to the payee.

FIVE INGREDIENTS OF THE OFFENCE UNDER SEC. 138

The offence under Sec. 138 of the Act can be attracted, given sufficient components of the said
offence;
1. Drawing of the cheque,
2. Presentation of the cheque to the bank,
3. Returning the cheque unpaid by the drawee bank,
4. Giving notice in writing to the drawer of the cheque demanding payment of the cheque amount.
5. Failure of the drawer to make payment within 15 days of the receipt of the notice.
Upon such dishonor of an issued cheque, the payee can initiate legal proceedings under Section
138 of Negotiable Instruments Act, 1881.

SECTION 138 OF THE ACT

Dishonor of cheque for insufficiency 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 credit of
that account is insufficient to honor the cheque or that it exceeds 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 provisions of this Act, be punished
with imprisonment for a term which may be extended to 2 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 6 months (reduced to 3 months
after RBI circular dated 04,11.2011, effective from 01/04/2012) from the date on which it is drawn
or within the period of its validity, whichever 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 30 days of the receipt of information by him from the bank regarding the return of the cheque
as unpaid; and
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
(c) the drawer of such cheque 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 15 days of the receipt of
the said notice.

For the purposes of this section, “debt or other liability” means a legally enforceable debt or other
liability. Section 138 of the NI Act Marginal Note stating “Dishonor of cheque for insufficiency etc. of
funds in accounts” addition of word “etc.” cannot be considered to be an accident.”
In short, upon dishonor of cheque a payee can, in exercise of his dues, initiate a legal notice for
demand of the same within 30 days of receipt of the cheque dishonor memo. The said drawer of
the cheque is bound to pay within 15 days of the receipt of the said notice, or the right to sue, for
the payee arises from the same.

SECTION 143A OF THE ACT

Section 143A of the Act states that :-
(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Court trying
an offence under section 138 may order the drawer of the cheque to pay interim compensation to
the complainant—
(a) in a summary trial or a summons case, where he pleads not guilty to the accusation made in
the complaint; and
(b) in any other case, upon framing of charge.
(2) The interim compensation under sub-section (1) shall not exceed 20% of the amount of the
cheque.
(3) The interim compensation shall be paid within 60 days from the date of the order under sub-
section (1), or within such further period not exceeding 30 days as may be directed by the Court on
sufficient cause being shown by the drawer of the cheque.
(4) If the drawer of the cheque is innocent, the Court shall direct the complainant to repay to the
drawer the amount of interim compensation, with interest at the bank rate as published by the
Reserve Bank of India, prevalent at the beginning of the relevant financial year, within 60 days
from the date of the order, or within such further period not exceeding 30 days as may be directed
by the Court on sufficient cause being shown by the complainant.
In Rakesh Nemkumar Porwal vs. Narayan Dhondu Joglekar - Citation-(1993), the Honorable Bombay
High Court held that “Any reason for dishonor is an offence.”

GYAANI’S ONE LINERS

✓ A cheque is said to be honored if the banks give the amount to the payee.
✓ If the bank refuses to pay the amount to the payee, the cheque is said to be dishonored.
✓ Whenever the cheque is dishonored, the drawee bank instantly issues a ‘Cheque Return Memo’
to the payee banker specifying the reasons for dishonor.
✓ When a cheque is dishonor of cheque for insufficiency of funds in the account the person shall be
punished with imprisonment for a term which may be extended to 2 years, or with fine which
may extend to twice the amount of the cheque, or with both.
✓ Upon dishonor of cheque a payee can, in exercise of his dues, initiate a legal notice for demand
of the same within 30 days of receipt of the cheque dishonor memo. The said drawer of the
cheque is bound to pay within 15 days of the receipt of the said notice, or the right to sue, for the
payee arises from the same.
✓ Section 143A of the Act states that the Court trying an offence under section 138 may order the
drawer of the cheque to pay interim compensation to the complainant which shall not exceed
20% of the amount of the cheque.
✓ The interim compensation shall be paid within 60 days from the date of the order or within such
further period not exceeding 30 days as may be directed by the Court on sufficient cause being
shown by the drawer of the cheque.
✓ If the drawer of the cheque is innocent, the Court shall direct the complainant to repay to the
drawer the amount of interim compensation, with interest at the bank rate as published by the
RBI, prevalent at the beginning of the relevant financial year, within 60 days from the date of the
order, or within such further period not exceeding 30 days as may be directed by the Court on
sufficient cause being shown by the complainant.
✓ In Rakesh Nemkumar Porwal vs. Narayan Dhondu Joglekar - Citation-(1993), the Honorable
Bombay High Court held that “Any reason for dishonor is an offence. ”

NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.
NOTE – Video Lectures of This Notes are Available on “GYAANI ACADEMY” YouTube Channel.