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The Negotiable Instruments Act, 1881

A negotiable instrument is a written order to pay a fixed sum of money on demand or at

a certain time. A negotiable instrument can be transferred from one person to another.
Once the instrument is transferred, the holder obtains full legal title to the instrument.

Characteristics of Negotiable Instruments:

Written instrument with signature: A negotiable instrument is a written document and

is considered as complete and effective only when it is duly signed.
Negotiable Instrument made or drawn for consideration: It is presumed by law that
every negotiable instrument is made or drawn for a consideration.
Transfer/negotiation by endorsement/ delivery

Promissory Note:
Essential Elements of a Promissory Note:

1. Must be in writing.
2. Promise to pay: The instrument must contain an express promise to pay.

3. Definite and unconditional: The promise to pay must be definite and

unconditional. If it is uncertain or conditional, the instrument is invalid.

4. Signed by the maker: The instrument must be signed by the maker, otherwise it is
incomplete and of no effect.

5. Certain parties: The instrument must point out who the maker is and who the
payee is.

6. Certain sum of money: The sum payable must be certain and must not be capable
of contingent additions or subtractions.
7. Promise to pay money only: The payment must be in the legal tender money of

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State, giving reasons, whether the following instruments are valid promissory
(i) X promises to pay Y, by a promissory note, a sum of ` 5,000, fifteen days
after the death of B.
(ii) X promises to pay Y, by a promissory note, ` 5000 and all other sums,
which shall be due.

In the first case, the payment is to be made in fifteen days after the death of B. Though
the date of death is uncertain, it is certain that B shall die. Therefore the instrument is
In the second case- the sum payable is not certain. Hence the Promissory Note is not a
valid one.

Bill of Exchange:
Essentials of a valid acceptance of a Bill of Exchange:

Acceptance must be written.

Acceptance must be signed: A mere signature would be sufficient for the

purpose. Alternatively, the words accepted may be written across the face of
the bill with a signature underneath; if it is not so signed, it would not be an
Acceptance must be completed by delivery: Acceptance would not be complete
and the drawee would not be bound until the drawee has either actually
delivered the accepted bill to the holder
Acceptance may be either general or qualified

Bank Draft: A bank draft is a bill of exchange drawn by one bank upon itself or another
bank for a sum of money payable to order on demand.

A draft is drawn either against cash deposited at the time of its purchase or against debit to
the buyers operational bank account with the banker. The buyer of the draft
generally furnishes particulars of the person to whom the amount thereof should be paid.
The banker charges for his services a small commission.

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A 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.

A Cheque shall be signed by the drawer and must contain an unconditional order on a
specified banker to pay a certain sum of money to or the order of the specified person or
to the bearer of the instrument.

Difference between Cheque and Bill of Exchange:

1) In the case of a cheque the drawee i.e., the person on whom the bill is drawn
must always be banker whereas in the case of a bill of exchange the drawee
may be any person.
2) A cheque is always payable on demand, whereas a bill which is other than a cheque may
be either a time bill or it may be payable on demand.
3) No days of grace are allowed in the case of a cheque, and a cheque is as a rule, payable
immediately on demand, whereas three days grace is allowed in the case of a
billwhich is not payable on demand.
4) A cheque may be crossed, whereas a bill cannot be crossed.
5) Cheques do not require to be stamped in India, whereas bills must be
stamped according to the law. In England and several other countries, cheques also
are required to be stamped.

Electronic Cheque Truncated Cheque

Paper is not used in any stage of an electronic A truncated cheque is nothing but a paper
cheque cheque, which is truncated during the
clearing process
Digital Signatures are used to create an Here, the signature is done with ink
electronic cheque

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Capacity of a MINOR to be a party to a Negotiable Instrument:

Question: Kumar is a major and his sister Kirti is a minor. Both executed a
promissory note in favour of Girish. Examine the validity of the promissory note
with reference to the Negotiable Instruments Act.

Answer: A Negotiable Instrument cannot be made invalid only on the reason that
one of the party is a minor. Since a minor is not liable to a negotiable instrument,
Kumar is liable to pay to Girish and the other party, who is a minor is not liable.

Maturity of a Negotiable Instrument:

It is the date on which the negotiable instrument falls due for payment. A negotiable
instrument is entitled to 3 days of grace.

Negotiable Instrument made without consideration:

Where a negotiable instrument is drawn without any consideration, then it creates no
legal obligation between the parties to the transaction.

Question: P draws a bill on Q. Q accepts the bill for without any consideration. The
bill is transferred to R without any consideration. Explain whether C can demand any
payment from earlier parties?

Answer: Where a negotiable instrument is drawn without any consideration, then it

creates no legal obligation between the parties to the transaction. Therefore, R
cannot demand any payment from either P or Q.

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Question: P draws a bill on Q. Q accepts the bill for without any
consideration. The bill is transferred to R without any consideration. R
transfers the bill to S for certain consideration. Explain whether S can demand
any payment from earlier parties or he can only demand the payment from just
R?. What are the rights and liabilities of other parties [Nov 2004, May 2006,
May 2008].

Answer: S can recover the amount of the bill from all the prior parties as he the
holder for certain value/consideration.

No party except S can recover the amount of the bill from any prior party since
a negotiable instrument creates no legal obligation of payment if it is drawn,
accepted or endorsed or transferred without any consideration.

A legal term that refers to the signing of a document which allows for the legal transfer
of a negotiable from one party to another.

Kinds of Endorsements:

General Endorsement: It means an endorsement made by the endorser without

writing the name of the endorsee.
Special Endorsement: It is an endorsement where the endorser directs to pay a
specified sum to a specified person.
Restrictive Endorsement: It is the endorsement which restricts the right of
further negotiation.

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Differences between Negotiation and Assignment:

Negotiation Assignment
The applicable act is the Negotiable The applicable act is the Transfer of
Instruments Act, 1881 Property Act, 1882

Negotiation means transfer of a Assignment refers to transfer of any right.

negotiable instrument.
Notice of negotiation is not required to Notice of assignment must be given by
be given to any party. the assignee to the debtor.
It is presumed that every negotiable There is no such presumption in case of
instrument was negotiated for Assignment.

Holder and Holder in Due course:

Holder means any person entitled in his own name to the possession of the negotiable
instrument and to recover or receive the amount due thereon from the parties thereto.

A holder in due course on the other hand, means a holder who takes the instrument in
good faith for consideration before it is overdue and without any notice of defect in the
title of the person who transferred it to him.

Whether the person is Holder or not [May 2005, Nov 2008]?

X who obtains a cheque drawn by Y by way of gift.

Answer: X is is holder as he is entitled to the cheque in his own name.

A, the payable of the cheque, who is prohibited by a court order from

receiving the amount of the cheque.

Answer: A is not a holder as he is not entitled to the amount as per the court order

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State the privileges/Advantages of a holder in due course
Examine when holder shall be considered a holder in due course
Every prior party to negotiable instrument is liable to HDC .
A holder who derives title from HDC has the same rights as that of HDC.
HDC can claim full amount of negotiable instrument.
HDC gets a valid title to the negotiable instrument even though the title of the
transferor is defective.
No prior party can allege that the negotiable instrument was delivered conditionally.

Crossing of Cheques:
Any check that is crossed with two parallel lines, either across the whole check or
through the top left hand corner of the check.

Types of Crossing:-

General Crossing: The cheque must contain two parallel lines.

Special Crossing: The cheque must contain the name of the banker. Cheque can be paid
only to the banker to whom it is crossed.

Not negotiable crossing**: The cheque must contain the words Not negotiable. The
effect of such crossing is that the transferee cannot get a better title than the transferor.

A/c payee / Restrictive crossing**: The cheque must contain the words account payee
only. In this type of crossing, the banker is supposed to credit the amount of the
cheque to the account of the payee only.

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Whether collecting banker is liable if the endorsement is forged?

The drwawer, D is induced by A to draw a cheque in favour of P, who is an existing

person. A instead of sending cheque to P, forges his name and pays the cheque into
his own bank. Whether D can recover the amount from As banker? [Nov 2002, Nov
2004, May 2006]

Liability of Ds Banker: Ds banker is not liable. A paying banker is not liable even if it is
subsequently found that any endorsement on the cheque has been forged, provided
the paying banker made the payment in due course.

Liability of As banker: As banker is also not liable. Since a collecting banker is not
liable for any loss caused to the true owner due to defective title of the holder.
Provided, the collecting banker acted in good faith and without negligence while
collecting the amount from the cheque.

Refusal by a banker to honour a customers cheque:


Grounds on which a cheque may be dishonoured by a banker

Death of Customer
Insanity of customer
Post dated cheque
Undated cheque
Insolvency of customer
Different signatures
Insufficient funds

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Bouncing or Dishonour of Cheques:
Section 138 lays the liability for dishonor of cheques. To attract this section, the
following conditions must be satisfied:

1. The section applies only if the cheque is given for a legally enforceable debt or
liability (for example, if a cheque is issued as a gift or charity, then this section
will not apply).
2. The dishonor is due to insufficiency of funds.
3. The cheque must have been presented to the bank within 3 months.
4. The holder must have given a notice in writing to the drawer within 30 days from
the date of dishonor, demanding/requiring him to pay the dues.
5. Within 15 days from the date of receipt of notice, the drawer has failed to pay
the full amount (even if part of the amount is paid, the section applies).
6. After the expiry of 15 days, if the drawer still fails to pay the dues, the holder of
the cheque must have made a complaint with the court within 30 days from the
end of 15th day.

If a cheque issued by the drawer and is dishounoured due to insufficiency of funds,

the drawer is punishable with,
upto 2 years imprisonment,
or with a fine of upto 2 times the amount of cheque
or both.

What if the offence is by a company?

If the person committing the offence under section 138 is a company, then every person
who was in charge and responsible to the company, at the time the offence committed,
shall be deemed to be guilty of offence.

Whether drawer Is liable if he asks the holder not to present the cheque and issues a
stop payment order to the bank?

The court in a judgement has stated that, the word Insufficiency of funds shall be
given a wider meaning and even though the drawer makes a stop payment request ,
it will have same effect as if it is dishounoured due to insufficiency of funds.

Modi Cements Ltd Vs Kuchil Kumar Nandi

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What do you understand by "Material alteration under the Negotiable
Instruments Act, 1881?

An alteration called material alteration if it alters the character (legal effect) or the
rights and liabilities of any of the parties of negotiable instrument. The following
material alterations has been authorized by the act:

Crossing of cheques or altering existing crossing

Filling blanks of an inchoate instrument
Conversion of Bearer instrument into order instrument by deleting the word
Conversion of blank endorsement into endorsement in full.

What do you mean by an acceptance of a negotiable instrument? Examine

validity of the following in the light of the provisions of the Negotiable
Instruments Act, 1881:
(i) An oral acceptance
(ii) An acceptance by mere signature without writing the word accepted.

Meaning of Acceptance: It is only the bill of exchange which requires acceptance. A bill
is said to be accepted when the drawee (i.e. the person on whom the bill is drawn), after
putting his signature on it, either delivers it or gives notice of such acceptance to the
holder of the bill or to some person on his behalf.

i) It is one of the essential elements of a valid acceptance that the acceptance

must be written on the bill and signed by the drawee. An oral acceptance is
not sufficient in law. Therefore, an oral acceptance of the bill does not stand
to be a valid acceptance.

ii) The usual form in which the drawee accepts the Instrument is by writing the
word accepted, across the face of the bill and signing his name underneath.
The mere signature of the drawee without the addition of the words
accepted is also a valid acceptance.

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Give the answer of the following:
(a) A draws a cheque in favour of M ,a minor. M endorses the same in favour of X.
The cheque is dishonoured by the bank on grounds of inadequate funds. Discuss
the rights of X.

(b) A promissory note was made without mentioning any time for payment. The
holder added the words on demand on the face of the instrument .Does this
amount to material alteration?

(c) A draws a cheque for ` 100 and hands it over to B by way of gift. Is B a holder in
due course? Explain the nature of his title, interest and right to receive the
proceeds of the cheque.

(d) A cheque is drawn payable to B or order. It is stolen and the thief forges Bs
endorsement and endorses it to C. The banker pays the cheque in due course. Can
B recover the money from the banker.

(a) A minor may draw, endorse, deliver and negotiate the instrument so as to
bind all parties except himself. Therefore, M is not liable. X can, thus,
proceed against A.

(b) As per the provision of the Negotiable Instruments Act,1881 this is not a
material alteration as a promissory note where no date of payment is
specified will be treated as payable on demand. Hence adding the words on
demand does not alter the business effect of the instrument.

(c) B is a holder but not a holder in due course as he does not get the cheque for
value and consideration. His title is good and bonafide. As a holder he is
entitled to receive ` 100 from the bank on whom the cheque is drawn.

(d) The drawee banker is discharged when he pays a cheque payable to order
when it is purported to be endorsed by or on behalf of the payee. Even
though the endorsement of Mr.B is forged, the banker is protected and he is
discharged. The true owner, B, cannot recover the money from the drawee

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A Bill of Exchange is dishonoured by the acceptor. Explain the provisions of Noting
and Protest under the Negotiable Instruments Act, 1881.

Noting: According to section 99, 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 on a paper attached to the
instrument. Such note must be made within a reasonable time after dishonour, and
must specify the date of dishonour, the reason for the dishonor.

Protest: When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment, the holder may within a reasonable time, cause such
dishonour to be noted and certified by a notary public. Such certificate is called a

Few Cases of Material Alterations:

Alteration of date
Alteration of time of payment
Alteration of place of payment
Alteration of amount payable
Conversion of blank endorsement into special endorsement
Addition of new party to the instrument

Types of Acceptance:
General: Acceptance of bill without any qualification.
Qualified: Acceptance of bill subject to some qualification:
Where a drawee accepts the bill only for a part of sum ordered to be paid.
Payment dependent on the happening of an event.
Where drawee agrees to make the payment at a time other than the time
stated in the bill.
Agreeing to make the payment at some other place than the place
specified in the bill

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J accepted a bill of exchange and gave it to K for the purpose of getting it
discounted and handing over the proceeds to J. K having failed to discount it
returned the bill to J. J tore the bill in two pieces with the intention of cancelling it
and threw the pieces in the street. K picked up the pieces and pasted the two
pieces together, in such manner that the bill seemed to have been folded for safe
custody, rather than cancelled. K put it into circulation and it ultimately reached L,
who took it in good faith and for value. Is J liable to pay the bill under the
provisions of the Negotiable Instruments Act, 1881 ?

The problem is based upon the privileges of a holder in due course, Section 120 of the
Negotiable Instruments Act, 1881 provides that No...... drawer of a bill shall in a suit
thereon by a holder in due course be permitted to deny the validity of the instrument as
originally drawn. ...... A holder in due course gets a good title of the bill.

Therefore in the given problem J is liable to pay for the bill. L is a holder in due course,
who got the bill in good faith and for value.

Bharat executed a promissory note in favour of Bhushan for ` 5 crores. The said
amount was payable three days after sight. Bhushan, on maturity, presented the
promissory note on 1st January, 2008 to Bharat. Bharat made the payments on 4 th
January, 2008. Bhushan wants to recover interest for one day from Bharat. Advise
Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether
he is liable to pay the interest for one day?

Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that where
a bill or note is payable after date or after sight or after happening of a specified event,
the time of payment is determined by excluding the day from which the time begins to
Therefore, in the given case, Bharat will succeed in objecting to Bhushans claim. Bharat
paid rightly three days after sight. Since the bill was presented on 1st January, Bharat
was required to pay only on the 4th and not on 3rd January, as contended by Bharat.

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In what way does the Negotiable Instruments Act, 1881 regulate the determination
of the Date of maturity of a Bill of Exchange. Ascertain the Date of maturity of a
bill payable 120 days after the date. The Bill of exchange was drawn on 1 st June,


The maturity of a bill, not payable on demand, at sight or on presentment, is at

maturity on the third day after the day on which it is expressed to be payable (Section
22, para 2 of Negotiable Instruments Act, 1881). Three days are allowed as days of
grace. No days of grace are allowed in the case of a bill payable on demand, at sight, or

When the last day of grace falls on a day, which is public holiday, the instrument is due
and payable on the next preceding business day

In this case the day of presentment for sight is to be excluded i.e. 1st June, 2005. The
period of 120 days ends on 29th September, 2005 (June 29 days + July 31 days + August
31 Days + September 29 days = 120 days). Three days of grace are to be added. It falls
due on 2nd October, 2005, which happens to be a public holiday. As such it will fall due
on 1st October, 2005 i.e., the next preceding Business Day.

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