Learning Objective Unit 4

Location Duration-20 HOURS

Classroom SESSION -1 DEFINITION & CHARACTERISTICS OF CHEQUES
Or Learning Knowledge Performance Teaching and
Banks Outcome Evaluation Evaluation Training Method
After studying this 1. Describe the 1. Evaluate the Classroom teaching
topic the learners definition of characteristic
would be able to cheques of cheques.
learn about the 2. Understand the 2. Detail
concept of a cheque various sections of description of
and its distinct NI act applicable NI Acts
features throughout life of applicable
the cheque from the time
of issuance till
paid
SESSION -2 BILLS OF EXCHANGE (BOE) & PROMISES NOTES (PN)
After studying this 1. Definition of 1. Explain the Classroom teaching,
topic the learners BOE & PN concept of PPTs
would be able to 2. Key elements of BOE & PN
learn about the BOE & PN 2. Describe the
distinct features of 3. NI Acts applicable NI Acts
these instruments & to BOE & PN applicable to
the difference BOE & PN
between them. throughout it
life
3. Usage of BOE
& PN
SESSION-3 CROSSINGS
After studying this 1. Meaning crossing 1. Describe with Classroom teaching,
topic the learners of cheques Illustrations PPTs
would be able to 2. Requisites of various forms
learn about the crossing of of crossings
concept of crossing cheques 2. Enlist the
& its significance 3. Various forms of persons who
Crossing can cross a
Special cheque
Crossing 3. Elucidate the
General significance of
Crossing Crossing of
Account Payee Cheques
Crossing
4. NI Acts applicable
to crossing of
cheques
SESSION-4 ENDORSEMENTS
After studying this 1. Meaning of List the types of Classroom teaching,
topic the learners Endorsement endorsements PPTs
would be able to 2. Use of Explain the impact
learn about the Endorsements of endorsement on
concept of 3. Essentials of Businesses
endorsement Endorsement
SESSION-5 DISHONOUR, NOTING & PROTESTING OF BE
Location Duration-20 HOURS
After studying this 1. Understanding of 1. Explain the Classroom teaching,
topic the learners process of acceptance PPTs
would be able to acceptance of bill process of BE.
know about the of exchange 2. List reason of
process of 2. Meaning of dishonour by
Dishonour, Noting dishonour by non non
and Protesting of acceptance & non acceptance
BE payment 3. Elucidate
3. Understanding what is noting
Noting & & protesting
Protesting
SESSION-6 LIABILITIES OF PARTIES
After studying this 1. Meaning of List the liabilities Classroom teaching,
topic the learners primary & of various parties PPTs
would be able to secondary
identify the liabilities
Liabilities of 2. Liabilities of
Parties various parties
 UNIT 4

LAWS RELATING TO NEGOTIABLE INSTRUMENTS

OBJECTIVES
After reading this unit, you will be able to:
Explain the definition & characteristics of cheque
Describe the features of Bill of Exchange & Promissory note
Understand what is Crossing and its advantages
Understand what is Endorsements and it uses
Explain about the process of Dishonour, Noting and Protesting of BE
Summarise the liabilities of parties to negotiable instrument

STRUCTURE
4.1. Definition & Characteristics of Cheques
4.2. Bills of Exchange& Promissory Notes
4.3. Crossings
4.4. Endorsement
4.5. Dishonour, Noting and Protesting of BE
4.6. Liabilities of Parties
4.7. Summary
4.8. Practice Questions
Introduction:

Exchange of goods and services is the basis of every business activity. Goods are bought and
sold for cash as well as on credit. All these transactions require flow of cash either
immediately or after a certain time. In modern business, large number of transactions
involving huge sums of money takes place every day. It is quite inconvenient as well as risky
for either party to make and receive payments in cash. Therefore, it is a common practice for
businessmen to make use of certain documents as means of making payment. Some of these
documents are called negotiable instruments. In this lesson let us learn about these documents

4.1. Definition & Characteristics of Cheques

Cheque is a very common form of negotiable instrument. If you have a savings bank account
or current account in a bank, you can issue a cheque in your own name or in favour of others,
thereby directing the bank to pay the specified amount to the person named in the cheque.
Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the
bank is always the drawee in case of a cheque. The Negotiable Instruments Act, 1881 defines
a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand. Actually, a cheque is an order by the account holder of the bank
directing his banker to pay on demand, the specified amount, to or to the order of the person
named therein or to the bearer.
Section 6 of the Act provides that a cheque is a bill of exchange drawn on a specified banker,
and not expressed to be payable otherwise than on demand. Simply stated, a cheque is a bill
of exchange drawn on a bank payable always on demand. Thus, a cheque is a bill of
exchange with two additional qualifications, namely:
It is always drawn on a banker, and
It is always payable on demand.

A cheque being a species of a bill of exchange must satisfy all the requirements of a bill; it
does not, however, require acceptance.

Note: By virtue of Section 31 of the Reserve Bank of India Act, no bill of exchange or hundi
can be made payable to bearer on demand and no promissory note or a bank draft can be
made payable to bearer at all, whether on demand or after a specified time. Only a cheque
can be payable to bearer on demand.

Parties to a cheque: The following are the parties to a cheque:

(a) The drawer: The person who draws the cheque.
(b) The drawee: The banker of the drawer on whom the cheque is drawn.
(c) The payee: one to whom the sum stated in the cheque is payable, either the drawer or any
other person may be the payee.
(d) The holder: is either the original payee or any other person to whom, the payee has
endorsed the cheque. In case of a bearer cheque, the bearer is the holder.
(e) The endorser: when the holder endorses the cheque to anyone else he becomes the
endorser.
(f) The endorsee: is the person to whom the cheque is endorsed.

Essentials of a Cheque
It is always drawn on a banker.
It is always payable on demand.
It does not require acceptance. There is, however, a custom among banks to mark
cheques as good for purposes of clearance.
A cheque can be drawn on bank where the drawer has an account.
Cheques may be payable to the drawer himself. It may be made payable to bearer on
demand unlike a bill or a note.
 The banker is liable only to the drawer. A holder has no remedy against the banker if
a cheque is dishonoured.
A cheque is usually valid for 3 months in India. However, it is not invalid if it is post
dated or ante-dated.
No Stamp is required to be affixed on cheques.

Types of Cheque: Broadly speaking, cheques are of four types.

a) Open cheque, and

b) Crossed cheque.
c) Bearer cheque
d) Order cheque

a) Open cheque: at
the bank. The holder of an open cheque can do the following:
Receive its payment over the counter at the bank,
Deposit the cheque in his own account
Pass it to someone else by signing on the back of a cheque.

b) Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such

credited to the bank account of the payee. A cheque can be crossed by drawing two

c) Bearer cheque: A cheque which is payable to any person who presents it for payment at
heque can be transferred by mere
delivery and requires no endorsement.

d) Order cheque: An order cheque is one which is payable to a particular person. In such a
written.
The payee can transfer an order cheque to someone else by signing his or her name on the
back of it.
e) Ante-dated cheques: Cheque in which the drawer mentions the date earlier to the date of
presenting if for payment. For example, a cheque issued on 20th May 2015 may bear a
date 5th May 2015.

f) Stale Cheque: A cheque which is issued today must be presented before the bank for
payment within a stipulated period. After expiry of that period, no payment will be made
and it is then called Validity period of cheque in India is 3 months.

g) Mutilated Cheque: In case a cheque is torn into two or more pieces and presented for
payment, such a cheque is called a mutilated cheque. The bank will not make payment
against such a cheque without getting confirmation of the drawer. But if a cheque is torn
at the corners and no material fact is erased or cancelled, the bank may make payment
against such a cheque.

h) Post-dated Cheque: Cheque on which drawer mentions a date which is subsequent to the
date on which it is presented, is called post-dated cheque. For example, if a cheque
presented on 8th May 2015 bears a date of 25th May 2015, it is a post-dated cheque. The
bank will make payment only on or after 25th May 2015.

4.2. Bills of Exchange& Promissory Notes:

Specimen of Bill of Exchange

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. (Section 5)

The definition of a bill of exchange is very similar to that of a promissory note and for most
of the cases the rules which apply to promissory notes are in general applicable to bills. There
are however, certain important points of distinction between the two.

Parties to bills of exchange: The following are parties to a bill of exchange:

(a) The Drawer: the person who draws the bill.

(b) The Drawee: the person on whom the bill is drawn.
(c) The Acceptor: one who accepts the bill. Generally, the drawee is the acceptor but a
stranger may accept it on behalf of the drawee.
(d) The payee: one to whom the sum stated in the bill is payable, either the drawer or any
other person may be the payee.
(e) The holder: is either the original payee or any other person to whom, the payee has
endorsed the bill. In case of a bearer bill, the bearer is the holder.
(f) The endorser: when the holder endorses the bill to anyone else he becomes the endorser.
(g) The endorsee: is the person to whom the bill is endorsed.
(h) Drawee in case of need: Besides the above parties, another person called the "drawee in
case of need may be introduced at the option of the drawer. The name of such a person may
be inserted either by the drawer or by any endorser in order that resort may be had to him in
case of need, i.e., when the bill is dishonoured by either non-acceptance or non-payment.
(i) Acceptor for honour: Further, any person may voluntarily become a party to a bill as
acceptor. A person, who on the refusal by the original drawee to accept the bill or to furnish
better security, when demanded by the notary, accept the bill supra protest in order to
safeguard the honour of the drawer or any endorser, is called the acceptor for honour.

Essentials of a Bill of Exchange:

(1) It must be in writing.

(2) It must contain an unconditional order to pay money only and not merely a request
(3) It must be signed by the drawer.
(4) The parties must be certain.
(5) The sum payable must also be certain.
(6) It must comply with other formalities e.g. stamps, date, etc.

Promissory Notes:
Specimen of the Maker promises to pay a certain sum of money along with interest:

For value received, the undersigned jointly and severally promise to pay to the order of
____________________________________________ , the sum of Rs.____________ ,
together with interest of ___________% per annum on the unpaid balance. The entire unpaid
principal and any accrued interest shall be fully and immediately payable UPON DEMAND
of any holder hereof.

Place
Date: (Signature of the Promisors)
---------------------------------------------------------------------------------------------------------------
Specimen of Usance PN

30 days after date I, _____________________ S/o._____________________

promise to pay Sri.___________________ S/o.________________________
or order, the sum of Rs.______ (Rupees________________________only)

Place:
Date: Signature.

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
to, or to the order of, a certain person, or only to bearer of the instrument. (Section 4)

Parties to a Promissory Note: A promissory note has the following parties:

(a) The maker: the person who makes or executes the note promising to pay the amount
stated therein.
(b) The payee: one to whom the note is payable.
(c) The holder: is either the payee or some other person to whom he may have endorsed the
note.
(d) The endorser.
(e) The endorsee.

Essentials of a Promissory Note:

To be a promissory note, an instrument must possess the following essentials:
(a) It must be in writing. An oral promise to pay will not do.
(b) It must contain an express promise or clear undertaking to pay. A promise to pay cannot
be inferred. A mere acknowledgement of debt is not sufficient.
If A writes to B "I owe you (I.O.U.) Rs. 500", there is no promise to pay and the instrument is
not a promissory note.
(c) The promise or undertaking to pay must be unconditional. A promise to pay "when able",
or "as soon as possible", or "after your marriage to I?" is conditional. But a promise to pay
after a specific' time or on the happening of an event which must happen, is not conditional,
e.g. "I promise to pay Rs. 1,000 ten days after the death of B", is unconditional.
(d) The maker must sign the promissory note in token of an undertaking to pay to the payee
or his order.
(e) The maker must be a certain person, the note must show clearly who the person is
engaging himself to pay.
(f) The payee must be certain. The promissory note must contain a promise to pay to some
person or persons ascertained by name or designation or to their order.
(g) The sum payable must be certain and the amount must not be capable of
contingent additions or subtractions. If A promises to pay Rs. 100 and all other sums which
shall become due to him, the instrument is not a promissory note.
(h) Payment must be in legal money of the country. Thus, a promise to pay Rs. 500 and
deliver 10 quintals of rice is not a promissory note.
(i) It must be properly stamped in accordance with the provisions of the Indian Stamp Act.
Each stamp must be duly cancelled by maker's signature or initials.
(j) It must contain the name of place, number and the date on which it is made. However,
their omission will not render the instrument invalid, e.g. if it is undated, it is deemed to be
dated on the date of delivery.

Note: A promissory note cannot be made payable or issued to bearer, no matter whether it is
payable on demand or after a certain time
PN in Installments:
A PN can be drawn payable in installments also and a provision also can be made that on
default of one installment the entire amount mentioned in PN becomes payable.

Specimen of a PN payable in instalment:

I Sri.______________________ S/o._____________________ promise to pay to

Sri.______________________ S/o._____________________ the sum of
Rs._________ (Rupees ___________________only) by five equal installments,
the first installment of Rs.______ (Rupees________________only) to be paid on
the _______ day of __________, the second on the day of _________, the third on
the ________ day of __________ , the fourth on the__________ day of________and the fifth
on the__________ day of___________ with interest thereon at the rate of ________ per cent
per annum (the interest to cease on the installment paid) in consideration of full value
received.

Place:-
Date:- Signature.

Since a PN is transferable, when a PN is transferred to another party, the latter become the
. Any person who becomes a party to a NI should be capable of entering into a
contract.

Persons who are incapable of entering into a contract

Minor: As per Section 26 of the Act, a minor may draw, endorse, deliver and
negotiate a NI so as to bind all parties except himself. He does not incur any liability
but other adult parties do remain liable. He can be an endorsee or payee.
An insolvent person is not competent to draw, make, accept or endorse a NI
A person of unsound mind cannot enter into a contract when he is in that state. A
person in a drunken state of mind cannot enter into a valid contract
A company cannot incur liability under NI unless expressly or impliedly permitted
by the Memorandum of Association or Article of Association. However it can be a
payee or an endorsee.
 As per Section 27, every person capable of binding himself or being bound, by a
NI, may so bind himself or be bound by a duly authorised agent acting in his name.
As per Section 29, a Legal Representative can deal with the NIs belonging to the
deceased, to the same extent as the deceased could have done. While signing he must
use words to indicate that he is signing in the capacity of a legal representative, so as
to avoid being held personally responsible.
In the case of a Hindu Undivided Family (HUF) (also known as Joint Family), the
Karta (oldest member of the family) can bind the joint family by executing a NI
provided it is for the benefit of family. It should be noted that the other members are
not liable personally.

Similarities and Difference between Bill of Exchange and Cheque:

Similarities:

Three parties : Drawer, Drawee and Payee; Drawer and Payee may be the same person;

Written and signed, should contain an unconditional order to pay a certain sum of money
only;

Payee may endorse the instrument to another person.

BE ---------Differences----------- Cheques

Drawee may be anybody including a banker Drawee is always a banker

May be payable on demand or after the Always payable on demand

expiry of a specified period

Cheque is always payable on demand and so

making the payment in the case of bills no question of 3 days grace for payment
payable after the expiry of the specified
usance period

If dishonoured, it should be noted and A bank dishonours a cheque drawn on it only

protested for filing a suit when the cheque is not payable for some
reason like for want of balance in the account
of the drawer and so it cannot be protested

Stamp duty is applicable on bills payable Cheques being payable on demand stamp
after 90 days duty is not applicable

A PN or a BE cannot be crossed A cheque can be crossed

Differences between a PN and a BE:

Promissory Note Bill of Exchange

It contains a Promise to pay It contains an Order to pay

Primary liability is the maker of the PN Primary liability is that of the drawee. If the
drawee fails, the liability will fall on the
drawer

A PN has to be presented for payment

only (not for acceptance since the PN is payment.
itself issued by the person who has to pay)

acceptance and after acceptance it has to be

presented to the acceptor for payment on or
before the due date

Initially there are two parties the maker Initially there are three parties the maker
(promissor) and the payee (promisee). who is the drawer, the drawee who is ordered
Maker and payee have to be different to pay and the payee who has to get the
persons. money. The drawer and the payee may be the
same.

PN is drawn in a single copy of operative NI Act provides BEs to be drawn in sets. (One
NI of them being satisfied, the other is
automatically nullified).

PN cannot be drawn conditionally BE also cannot be drawn conditionally, but

the acceptor/ endorser can make it conditional
by restricting the effect of further
endorsements.
 Promissory Note Bill of Exchange

If a PN is dishonoured, notice of If a BE is dishonoured, the holder has to give

dishonour need not be given. notice of dishonour to all his prior parties
against whom he desires to take action.

How to distinguish between a holder and a holder in due course?

Holder Holder in due course

A holder may become the possessor of a NI A holder in due course acquires the
even without consideration possession of a NI for consideration

A holder in due course becomes the

possessor payee of the NI before it
becomes due

A holder in due course becomes the

A holder cannot get a better title to the NI A holder in due course can get a better
than the transferor title than the transferor
4.3. Crossings

A cheque is either "open" or "crossed". An open cheque can be presented by the payee to the
paying banker and is paid over the counter. A crossed cheque cannot be paid across the
counter but must be collected through a banker.
A crossing is a direction to the paying banker to pay the money generally to a banker or to a
particular banker, and not to pay otherwise. The object of crossing is to secure payment to a
banker so that it could be traced to the person receiving the amount of the cheque. Crossing is
a direction to the paying banker that the cheque should be paid only to a banker or a specified
banker. To restrain negotiability, addition of words "Not Negotiable" or "Account Payee
Only" is necessary. A crossed bearer cheque can be negotiated by delivery and crossed order
cheque by endorsement and delivery. Crossing affords security and protection to the holder of
the cheque.
Modes of Crossing (Sections 123-131A)
There are two types of crossing which may be used on cheque, namely: (i) General and (ii)
Special.

It is in general crossing where a cheque bears across its face an addition of two parallel
transverse lines and/or the addition of the words "and Co." between them, or addition of "not
negotiable". As stated earlier, where a cheque is crossed generally, the paying banker will pay
to any banker. Two transverse parallel lines are essential for a general crossing (Sections 123-
126).

In case of general crossing, the holder or payee cannot get the payment over the counter of
the bank but through a bank only. The addition of the words "and Co." do not have any
significance but the addition of the words "not negotiable" restrict the negotiability of the
cheque and in case of transfer, the transferee will not give a better title than that of a
transferor.

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 constitutes a crossing and the cheque is
crossed specially and to that banker. The paying banker will pay only to the banker whose
name appears across the cheque, or to his collecting agent. Parallel transverse lines are not
essential but the name of the banker is the insignia of a special crossing.
In case of special crossing, the paying, banker is to honour the cheque only when it is
prescribed through the bank mentioned in the crossing or it's agent bank.

Account Payee's Crossing: Such crossing does, in practice, restrict negotiability of a

cheque. It warns the collecting banker that the proceeds are to be credited only to the account
of the payee, or the party named, or his agent. If the collecting banker allows the proceeds of
a cheque bearing such crossing to be credited to any other account, he will be guilty of
negligence and will not be entitled to the protection given to collecting banker under Section
131. Such crossing does not affect the paying banker, who is under no duty to ascertain that
the cheque is in fact collected for the account of the person named as payee.
Not Negotiable Crossing:
A cheque may be crossed not negotiable by writing across the face of the cheque the words
"Not Negotiable" within two transverse parallel lines in the case of a general crossing or
along with the name of a banker in the case of a special crossing.

Section 130 of the Negotiable Instruments Act provides "A person taking a cheque crossed
generally or specially bearing in either case with 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 crossing of cheque "not negotiable" does not mean that it is non-
transferable. It only deprives the instrument of the incident of negotiability.

The object of this Section is to afford protection to the drawer or holder of a cheque who is
desirous of transmitting it to another person, as much protection as can reasonably be
afforded to him against dishonestly or actual miscarriage in the course of transit. For
example, a cheque payable to bearer is crossed generally and is marked "not negotiable". It is
lost or stolen and comes into the possession of X who takes it in good faith and gives value
for it, X collects the cheque through his bank and paying banker also pays. In this case, both
the paying and the collecting bankers are protected under Sections 128 and 131 respectively.
But X cannot claim that he is a holder-in-due course which he could have under the normal
circumstances claimed. The reason is that cheque is crossed "not negotiable" and hence the
true owner's (holder's) right supersedes the rights of the holder-in-due-course. Since X
obtained the cheque from a person who had no title to the cheque, X can claim no better title
solely because the cheque was crossed "not negotiable" and not for any .other reason. Thus
"not negotiable" crossing not only protects the rights of the true owner of the cheque but also
serves as a warning to the endorsees' to enquire thoroughly before taking the cheque as they
may have to be answerable to the true owner thereof if the endorser's title is found to be
defective. "Not negotiable" restricts the negotiability of the cheque and in case of transfer; the
transferee will not get a better title than that of a transferor.

If the cheque becomes "not negotiable" it lacks negotiability. A cheque crossed specially or

negotiable instrument in the true sense. It does not restrict transferability but restricts
negotiability only.
the proceeds of a cheque crossed generally or specially to himself on behalf of his customer is
not liable to the true owner of the cheque if the tile of the cheque is proved to be defective.

According to section 131-A, these sections are also applicable in case of drafts. Thus not only
cheques but bank drafts also may be crossed.

4.4. Endorsement

Introduction: A negotiable instrument may be transferred by negotiation.

Negotiation can be effected by mere delivery if the instrument is a bearer one.
By endorsement and delivery in case it is an order instrument.

An order instrument means instrument payable to a specified person or to the order of that
specified person. If an instrument payable to order is transferred without endorsement, it is
merely assigned and the holder thereof is not entitled to the rights of a holder in due course.

Meaning of Endorsement: An endorsement is the mode of negotiating a negotiable

instrument. A negotiable instrument payable otherwise than to a bearer can be negotiated
only by endorsement and delivery. An endorsement, according to section 15 of the NI Act is

marker. For the purpose of negotiation on the back or face thereof or on a slip of paper
annexed thereto, he is said to endorse the same and is called the endorser. The person to
whom the instrument is endorsed is called the endorsee.

k of the instrument
though it may be even on the face of it. Where no space is left on the instrument, the
endorsement may be made on a slip of paper attached to it. This attached slip of paper is

Who may endorse?

The payee of an instrument is the rightful person to make the first endorsement. Thereafter
the instrument may be endorsed by any person who has become the holder of the instrument.
The maker or the drawer cannot endorse the instrument but if any of them has become the
holder thereof he may endorse the instrument (Section 51). The maker or drawer cannot
endorse or negotiate an instrument unless he is in lawful possession of instrument or is the
holder there of. A payee or indorsee cannot endorse or negotiate unless he is the holder
thereof.

Essentials of a Valid Endorsement: An endorsement in order to operate as mode of

negotiation must comply with the following conditions, namely:
It must be written on the instrument itself and be signed by the endorser. The
simple signature of the endorser, without additional words, is sufficient. An
endorsement written on an allonge is deemed to be written on the instrument itself.
The endorsement must be of the entire instrument. A partial endorsement, that is
to say, an endorsement, which purports to transfer to the endorsee a part only of the
amount payable, or which purports to transfer the instrument to two or more endorsees
severally (i.e. separately), does not operate as a negotiation of the instrument.
Where a negotiable instrument is payable to the order of two or more payees or
endorsees who are not partners, all must endorse unless the one endorsee has authority
to endorse for the others.
Wherein a negotiable instrument payable to order, the payee or endorsee is
wrongly designated or his name is wrongly spelled, he should sign the instrument in
the same manner as given in the instrument. Though, he may add, if he thinks fit, his
proper signature.
Where there are two or more endorsements on an instrument, each endorsement is
deemed to have been made in the order in which it appears on the instrument, until
contrary is provided.
An endorsement may be made in blank or special. It may also be restrictive.

Types of Endorsement

According to the N.I. Act, 1881 endorsement may take any of the following forms:
Endorsement in blank or general endorsement.
 Endorsement in full or special endorsement.
Restrictive endorsement.
Partial endorsement.
Conditional endorsement.

Endorsement in Blank or General Endorsement: In case of an endorsement in blank, the

payee or endorser does not specify an endorsee and he simply signs his name (Section 16 of
NI Act).

Endorsement in Full or Special Endorsement: When the payee or endorser specifies the
person to whom or to whose order the instrument is to be paid, the endorsement is called
special endorsement or endorsement in full. The specified person i.e. the endorsee then
becomes the payee of the instrument.

Restrictive Endorsement: An endorsement is restrictive when it prohibits further

negotiation of a negotiable instrument. Sec. 50 of the NI Act 1881states:
may, by express words, exclude the right to negotiable or pay constitutes the endorsee an
agent to endorse the instrument or to receive its contents for the endorser or for some other
spec

For example, if B endorses an instrument payable to barer as follows, the right of C to further
negotiate is excluded
Pay the contents to C only
Pay C for my use

Partial Endorsement: If only a part of the amount of the instrument is endorsed, it is a case
of partial endorsement. An endorsement which purports to transfer to the endorsee only a part
of the amount payable, or which purports to transfer the instrument to two or more endorsees
severally, is not valid.

Conditional Endorsement: If the endorser of a negotiable instrument, by express words in

the endorsement, makes his liability or the right of the endorsee to receive the amount due
thereon, dependent on the happening of a specified event, although such event may never
happen, such endorsement is called a conditional endorsement (Section 52 of NI Act).
Such an endorser gets the following rights:

He may make his liability on the instrument conditional on the happening of a particular
event. He will not be liable to the subsequent holder if the specified event does not take place
to the instrument even before the particular event takes place.

only on the happening of a particular event, i.e. if he returns from London.

Effects of endorsement: The legal effect of negotiation by endorsement and delivery is:
(i) To transfer property in the instrument from the endorser to the endorsee.
(ii) To vest in the latter the right of further negotiation, and
(iii) A right to sue on the instrument in his own name against all the other parties (Section
50).

Cancellation of endorsement:
When the holder of a negotiable instrument, without the consent of the endorser destroys or
nst prior party, the endorser is discharged from liability to
the holder to the same extent as if the instrument had been paid at maturity (Section 40).

4.5. Dishonour, Noting & Protesting of BE

DISHONOUR OF A NEGOTIABLE INSTRUMENT

When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to
all the previous parties in order to make them liable. A negotiable instrument can be
dishonoured either by non acceptance or by non-payment. A cheque and a promissory note
can only be dishonoured by non-payment but a bill of exchange can be dishonoured either by
non-acceptance or by non-payment.
Dishonour by non-acceptance (Section 91)
A bill of exchange can be dishonoured by non-acceptance in the following ways:
1. If a bill is presented to the drawee for acceptance and he does not accept it within 48 hours
from the time of presentment for acceptance. When there are several drawees even if one of
them makes a default in acceptance, the bill is deemed to be dishonoured unless these several
drawees are partners. Ordinarily when there are a number of drawees all of them must accept
the same, but when the drawees are acceptance by one of them means acceptance by
all.
2. When the drawee is a fictitious person or if he cannot be traced after reasonable search.
3. When the drawee is incompetent to contract, the bill is treated as dishonoured.
4. When a bill is accepted with a qualified acceptance, the holder may treat the bill of
exchange having been dishonoured.
5. When the drawee has either become insolvent or is dead.
6. When presentment for acceptance is excused and the bill is not accepted. Where a drawee
in case of need is named in a bill or in any indorsement thereon, the bill is not dishonoured
until it has been dishonoured by such drawee.

Dishonour by non-payment (Section 92)

A bill after being accepted has got to be presented for payment on the date of its maturity. If
the acceptor fails to make payment when it is due, the bill is dishonoured by non-payment. In
the case of a promissory note if the maker fails to make payment on the due date the note is
dishonoured by non-payment. A cheque is dishonoured by non-payment as soon as a banker
refuses to pay.
An instrument is also dishonoured by non-payment when presentment for payment is excused
and the instrument when overdue remains unpaid (Sec 76).

Effect of dishonour: When a negotiable instrument is dishonoured either by non acceptance

or by non-payment, the other parties thereto can be charged with liability. For example, if the
acceptor of a bill dishonours the bill, the holder may bring an action against the drawer and
the indorsers. There is a duty cast upon the holder towards those whom he wants to make
liable to give notice of dishonour to them.

Notice of dishonour: Notice of dishonour means the actual notification of the dishonour of
the instrument by non-acceptance or by non-payment. When a negotiable instrument is
refused acceptance or payment notice of such refusal must immediately be given to parties to
whom the holder wishes to make liable. Failure to give notice of the dishonour by the holder
would discharge all parties other than the maker or the acceptor (Sec. 93).

Notice by whom: Where a negotiable instrument is dishonoured either by non- acceptance or

by non-payment, the holder of the instrument or some party to it who is liable thereon must
give a notice of dishonour to all the prior parties whom he wants to make liable on the
instrument (Section 93). The agent of any such party may also be given notice of dishonour.
A notice given by a stranger is not valid. Each party receiving notice of dishonour must, in
order to render any prior party liable give notice of dishonour to such party within a
reasonable time after he has received it. (Section 95)
When an instrument is deposited with an agent for presentment and is dishonoured, he may
either himself give notice to the parties liable on the instrument or he may give notice to his
principal. If he gives notice to his principal, he must do so within the same time as if he were
the holder. The principal, too, in his turn has the same time for giving notice as if the agent is
an independent holder. (Section 96)

Notice to whom? Notice of dishonour must be given to all parties to whom the holder seeks
to make liable. No notice need be given to a maker, acceptor or drawee, who are the principal
debtors (Section 93). Notice of dishonour may be given to an endorser. Notice of dishonour
may be given to a duly authorised agent of the person to whom it is required to be given. In
case of the death of such a person, it may be given to his legal representative. Where he has
been declared insolvent the notice may be given to him or to his official assignee (Section
94). Where a party entitled to a notice of dishonour is dead, and notice is given to him in
ignorance of his death, it is sufficient (Section 97).
Mode of notice: The notice of dishonour may be oral or written or partly oral and partly
written. It may be sent by post. It may be in any form but it must inform the party to whom it
is given either in express terms or by reasonable intendment that the instrument has been
dishonoured and in what way it has been dishonoured and that the person served with the
notice will be held liable thereon.
What is reasonable time? It is not possible to lay down any hard and fast rule for
determining what is reasonable time. In determining what reasonable time is, regard shall be
had to the nature of the instrument, the usual course the dealings with respect to similar
instrument, the distance between the parties and the nature of communication between them.
In calculating reasonable time, public holidays shall be excluded (Section 105).

Section 106 lays down two different rules for determining reasonable time in connection with
the notice of dishonour (a) when the holder and the party to whom notice is due carry on
business or live in different places, (b) when the parties live or carry on business in the same
place. In the first case the notice of dishonour must be dispatched by the next post or on the
day next after the day of dishonour. In the second case the notice of dishonour should reach
its destination on the day next after dishonour.

Place of notice: The place of business or (in case such party has no place of business) at the
residence of the party for whom it is intended, is the place where the notice is to given. If the
person who is to give the notice does not know the address of the person to whom the notice
address. But if the party
entitled to the notice cannot after due search be found, notice of dishonour is dispensed with.

Duties of the holder upon dishonour

(1) Notice of dishonour. When a promissory note, bill of exchange or cheque is dishonoured
by non-acceptance or non-payment the holder must give notice of dishonour to all the parties
to the instrument whom he seeks to make liable thereon. (Sec. 93)
(2) Noting and protesting. When a promissory note or bill of exchange has been
dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be
noted by a notary public upon the instrument or upon a paper attached thereto or partly upon
each (Section 99). The holder may also within a reasonable time of the dishonour of the note
or bill, get the instrument protested by notary public (Section 100).
(3) Suit for money. After the formality of noting and protesting is gone through, the holder
may bring a suit against the parties liable for the recovery of the amount due on the
instrument.
Instrument acquired after dishonour: The holder for value of a negotiable instrument as a
rule is not affected by the defect of title in his transferor. But this rule is subject to two
important exceptions (i) when the holder acquires it after maturity and (ii) when he acquires it
with notice of dishonour. The holder of a negotiable instrument who acquired it after
dishonour, whether by non-acceptance or non-payment, with notice thereof, or after maturity,
has only, as against the other parties, the rights thereon of his transfer (Section 59).

As per Section 138, a person who issues a cheque which is unpaid by the bank for want of
funds / arrangement in the account is deemed to commit an offence and may be punished
with imprisonment and fine.

Section 138: Dishonour of cheque for insufficiency, etc., of funds in the account: Where
any cheque drawn by a person on an account maintained by him with a banker for payment of
any amount of money to another person from out of that account for the discharge, in whole
or in part, of any debt or other liability, is returned by the bank unpaid, either because of the
amount of money standing to the credit of that account is insufficient to honour 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 provision of this Act, be punished with imprisonment for a term which
may extend to one year, 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-
The cheque has been presented to the bank within a period of three months from
the date on which it is drawn or within the period of its validity, whichever is earlier;
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 fifteen days of the receipt of information by him
from the bank regarding the return of the cheque as unpaid; and
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 fifteen days of the receipt of the said notice.

Explanation-
enforceable debt or other liability.

NOTING AND PROTESTING

When a negotiable instrument is dishonoured the holder may sue his prior i.e. the
drawer and the indorsers after he has given a notice of dishonour to them. The holder may
need an authentic evidence of the fact that a negotiable instrument has been dishonoured.
When a cheque is dishonoured general1y the bank who refuses payment returns back the
cheque giving reasons in writing for the dishonour of the cheque. Sections 99 and l00 provide
convenient methods of authenticating the fact of dishonour of a bill of exchange and a

Noting
As soon as a bill of exchange or a promissory note is dishonoured, the holder can after giving
the parties due notice of dishonour, sue the parties liable thereon. Section 99 provides a mode
of authenticating the fact of the bill having been dishonoured. Such mode is by noting the
instrument. Noting is a minute recorded by a notary public on the dishonoured instrument or
on a paper attached to such instrument. When a bill is to be noted, the bill is taken to a notary
public who represents it for acceptance or payment as the case may be and if the drawee or
acceptor still refuses to accept or pay the bill, the bill is noted as stated above.
Noting should specify in the instrument, (a) the fact of dishonour, (b) the date of dishonour,
(c) the reason for such dishonour, if any (d) the

Noting should be made by the notary within a reasonable time after dishonour. Noting and
protesting is not compulsory but foreign bills must be protested for dishonour when such
protest is required by the law of the place where they are drawn. Cheques do not require
noting and protesting. Noting by itself has no legal effect. Still it has some advantages. If
noting is done within a reasonable time protest may be drawn later on. Noting without protest
is sufficient to allow a bill to be accepted for honour.

Protest
Protest is a formal certificate of the notary public attesting the dishonour of the bill by non-
acceptance or by non-payment. After noting, the next step for notary is to draw a certificate
of protest, which is a formal declaration on the bill or a copy thereof. The chief advantage of
protest is that the court on proof of the protest shall presume the fact of dishonour. Besides
the protest for non-acceptance and for non-payment the holder may protest the bill for better
security. When the acceptor of a bill becomes insolvent or suspends payment before the date
of maturity, or when he absconds the holder may protest it in order to obtain better security
for the amount due. For this purpose the holder may employ a notary public to make the
demand on the acceptor and if refused, protest may be made. Notice of protest may be given
to prior parties. When promissory notes and bills of exchange are required to be protested,
notice of protest must be given instead of notice of dishonour (Section 102). Inland bills may
or may not be protested. But foreign bills must be protested for dishonour when such protest
is required by the law of the place where they are drawn (Sec. 104).
Where a bill is required to be protested under the Act within a specified time, it is sufficient if
The formal protest may be given at any time after
the noting (Section 104A)

Contents of protest
Section 101 of the Act lays down the contents of a regular and perfect protest which are as
follows:
1. The instrument itself or a literal transcript of the instrument; and of everything written or
printed thereupon.
2. The name of the person for whom and against whom the instrument has been protested.
3. The fact of and reasons for dishonour i.e. a statement that payment or acceptance or better
security, as the case may be, has been demanded of such person by the notary public from the
person concerned and he refused to give it or did not answer or that he could not be found.
4. The time and place of demand and dishonour.
5. The signature of the notary public.

4.6. Liabilities of Parties

The provisions regarding the liability of parties to negotiable instruments are laid down in
Sections 30 to 32 and 35 to 42 of the Negotiable Instruments Act. These provisions are as
follows:
Liability of Drawer (Section 30):

The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or
acceptor thereof, to compensate the holder, provided due notice of dishonour has been given
to or received by the drawer. The nature of drawer's liability is that by drawing a bill, he
undertakes that

(i) on due presentation, it shall be accepted and paid according to its tenor, and

(ii) In case of dishonour, he will compensate the holder or any endorser, provided notice
of dishonour has been duly given.

However, in case of accommodation bill no notice of dishonour to the drawer is required. The
liability of a drawer of a bill of exchange is secondary and arises only on default of the
drawee, who is primarily liable to make payment of the negotiable instrument.

Liability of the Drawee of Cheque (Section 31):

The drawee of a cheque having sufficient funds of the drawer in his hands properly
applicable to the payment of such cheque must pay the cheque when duly required to do so
and, or in default of such payment, he shall compensate the drawer for any loss or damage
caused by such default.

As a cheque is a bill of exchange, drawn on a specified banker, the drawee of a cheque must
always be a banker. The banker, therefore, is bound to pay the cheque of the drawer, i.e.,
customer, if the following conditions are satisfied:
(i) The banker has sufficient funds to the credit of customer's account.

(ii) The funds are properly applicable to the payment of such cheque, e.g., the funds are not
under any kind of lien etc. .

(iii) The cheque is duly required to be paid, during banking hours and on or after the date on
which it is made payable. If the banker is unjustified in refusing to honour the cheque of its
customer, it shall be liable for damages.

Liability of "Maker" of Note and ''Acceptor' of Bill (Section 32):

In the absence of a contract to the contrary, the maker of a promissory note and the acceptor
before maturity of a bill of exchange are bound to pay the amount thereof at maturity,
according to the apparent tenor of the note or acceptance respectively. The acceptor of a bill
of exchange at or after maturity is bound to pay the amount thereof to the holder on demand:

It follows that the liability of the acceptor of a bill corresponds to that of the maker of a note
and is absolute and unconditional but the liability under this Section is subject to the contract
to the contrary (e.g., as in the case of accommodation bills) and may be excluded or modified
by a collateral agreement. Further, the payment must be made to the party named in the
instrument and not to any-one else, and it must be made at maturity and not before.

Liability of endorser (Section 35):

Every endorser incurs liability to the parties that are subsequent to him. Whoever endorses
and delivers a negotiable instrument before maturity is bound thereby to every subsequent
holder in case of dishonour of the instrument by the drawee, acceptor or maker, to
compensate such holder of any loss or damage caused to him by such dishonour provided (i)
there is no contract to the contrary; (ii) he (endorser) has not expressly excluded, limited or
made conditional his own liability; and (iii) due notice of dishonour has been given to, or
received by, such endorser. Every endorser after dishonour, is liable upon the instrument as if
it is payable on demand.

He is bound by his endorsement notwithstanding any previous alteration of the instrument.

(Section 88) ·
Liability of Prior Parties (Section 36):

Every prior party to a negotiable instrument is liable thereon to a holder in due course until
the instrument is duly satisfied. Prior parties may include the maker or drawer, the acceptor
and all the intervening endorsers to a negotiable instrument. The liability of the prior parties
to a holder in due course is joint and several. The holder in due course may hold any or all
prior parties liable for the amount of the dishonoured instrument.

Liability interse

Various parties to a negotiable instrument who are liable thereon stand on a different footing
with respect to the nature of liability of each one of them.

Liability of Acceptor of Forged Endorsement (Section 41):

An acceptor of a bill of exchange already endorsed is not relieved from liability by reason
that such endorsement is forged, if he knew or had reason to believe the endorsement to be
forged when he accepted the bill.

Acceptor's Liability on a Bill drawn in a Fictitious Name:

An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer's order
is not, by reason that such name is fictitious, relieved from liability to any holder In due
course claiming under an endorsement by the same hand as the drawer's signature, and
purporting to be made by the drawer.

Surety ship: As per Section 39, when the holder of an accepted bill of exchange enters into
any contract with the acceptor which, under section 134 or 135 of the Indian Contract Act,
1872, (9 of 1872) would discharge the other parties, the holder may expressly reserve his
right to charge the other parties, and in such case they are not discharged.

4.7. Summary:

A Negotiable instrument means

A promissory note,
Bill of exchange or
Cheque
Either to order or bearer.
 Negotiable instruments can be
Payable to Order
Payable to Bearer
Payable to Joint payee

Negotiable instruments are regulated by the Negotiable instruments Act which was passed in
1881.

Promissory note is an instrument in writing 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.

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.

Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a
cheque in the electronic form

Characteristics of Negotiable instrument are:

Instrument in writing
Unconditional order / promise
A cheque is drawn on a specific banker
The promise or acceptance to pay is for payment of money and money only
Certainty of the sum
Payable to order or bearer:
Payee must be a certain person
Delivery of the instrument
Currency note
Transferability
Confers absolute and good title on the transferee

Parties to Negotiable Instruments:

Bill of Exchange are Drawer, Drawee, Acceptor, Payee, Endorser, Endorsee, &
Holder
 Parties to a Promissory Note are maker, Payee & Holder
Parties to a Cheque are Drawer, Drawee & Payee

There are type of crossing of cheques General and Special. Crossing provides a protection
and safeguard to the owner of the cheque as by securing payment through a banker it can be
easily detected to whose use the money is received. A cheque can be crossed by the holder,
drawer and the Banker.

Negotiation of an instrument is a process by which the ownership of the instrument is

transferred by one person to another. There are two methods of negotiation: by mere delivery
and by endorsement. In its literal
instrument but in its technical sense, under the Negotiable Instrument Act, it means the
or on a slip of paper
annexed thereto, for the purpose of negotiation.

A bill may be dishonoured by non-acceptance (since only bills require acceptance) or by non-
payment, while a promissory note and cheque may be dishonoured by non-payment only.
Noting means recording of the fact of dishonour by a notary public on the bill or paper or
both partly. Protest is a formal notarial certificate attesting the dishonour of the bill.

in two senses, viz., (a)

discharge of one or more parties from liability thereon, and (b) discharge of the instrument.
When a person signs a negotiable instrument as maker, drawer, endorser or some other
capacity, the person becomes contractually liable on the instrument (i.e., to pay). Liability
also arises from improper transfer or presentment of an instrument, negligence in instrument
issuance, alteration, or endorsement, improper payment or conversion.

4.8. Practice Questions

I. Choose the correct answer:

1. The purpose of accommodation bill is :

a) To finance actual purchase or sale of goods
b) To facilitate trade transmission
c) When any one or both parties are in need of funds
d) None of these
2. If the due date is a public holiday, what will be the due date of the PN or BE :
a) Following Business day
b) Preceding Business day
c) The same day only
d) One month later

3. A cheque issued by a branch of a bank against consideration received is known as

a) Drawing Cheque
b) Banker's cheque
c) Clearing cheque

4. According to Negotiable Instrument Act, 1881, all of the following are types of the
cheque, EXCEPT:
a) Bearer Cheques
b) Pay Order cheques
c) Crossed Cheques
d) Blank Cheques

5.
NI Act?
a) Sec 128
b) Sec 131
c) Sec 138
d) Not punishable
6. Endorsement in blank is
a) writing nothing on the cheque
b) signing by the holder on the cheque
c) neither of them
d) both of them

7.
a) Ramesh Verma cannot further negotiate or transfer the cheque to another person
by delivery
 b) Ramesh Verma can further negotiate or transfer the cheque to another person by
endorsement & delivery
c) Cheque can be paid to Ramesh Verma only
d) None of these

8. In a PN / BE / cheque, the endorsers are

a) principals
b) sureties
c) neither of the above
d) both

9. Mr. Gupta issued a cheque in favor of a charitable trust for donation. Here, Trust is
a) Holder
b) Holder in due course
c) Both of the above
d) None of the above

10.
generally or specially crossed cheque?
a) Cheque becomes non-transferable
b) Cheque can be further transferred but the transferee cannot get the better title than
the transferor
c)
d) None of these

11. Which of the followings is not the feature of Negotiable Instrument?

a) It is transferable by mere delivery if payable to bearer
b) It is transferable by endorsement & delivery if payable to order
c) Both of the above
d) None of the above

Answer Keys: 1 c, 2 - b, 3 b, 4 b, 5 c, 6 - b, 7 -c, 8 - c, 9 - c, 10 a, 11 c,

II. Fill in the blanks:

 1. A PN payable by installments, grace period of __ days is allowed.
2. In a cheque, there is no grace period as the cheque is ____ instrument
3. Stamp duty is applicable on bills payables after ___ days
4. A bill of exchange is a _____ order to pay.
5. The bill has to be __________ to the payee to make it an effective BE/
cheque.
6. Maker of the BE / Cheque is called the _______
7. Where the drawee is incompetent to contract, or the acceptance is qualified, the BE
may be treated as ______.

Answer Keys: 1- 3, 2 demand, 3 90 days, 4 unconditional, 5 delivered,

6 drawee, 7 dishonored

III. Answer in detail:

1. What is negotiable instrument?

2.
3. What is payment in due course?
4. Compare the characteristics of Bills of Exchange and Promissory note?
5. Explain the difference between Demand and Usance Promissory Note?
6. Explain how to distinguish between a holder and a holder in due course?
7. Explain what is protest?
8.
9. What is the notice of dishonor?
10. Explain what is the noting and protest?
11. What are the types of endorsements available as per NI act?++
12. Explain briefly the cheque clearing process?
13. What is Surety ship?

IV. Activities:

1. Prepare a chart showing the different negotiable instrument?

2. Explain the class the different ways a cheque can be crossed and it implications?
3. Prepare a chart showing the characteristics, differences and usage of Bill Payable,
cheque and Promissory Note?
4. Carry out a role play on the parties involved in Bills of Exchange, Promissory note
and cheque?

*****