Negotiable Instruments Act

Section 13 of Negotiable Instrument Act 1881 states Negotiable Instruments means a Promissory
Note, bill of exchange or Cheque payable either to order or to bearer. Promissory Note, bill of
exchange and Cheques are negotiable instruments by statute. However, there are also certain
Negotiable Instruments by the usage or custom of trade. Thus in India, Pay order / Banker’s Cheque,
Government Promissory Notes, Certificate of Deposit, Commercial Paper, Treasury Bills, Hundi, Bill of
Lading, Railway Receipt, Dock Warrant, Warehouse Receipt, Delivery Order and GRs issued by
transport operators approved by IBA have been held as Negotiable Instruments by usage or custom
of trade. (Bill of lading, Railway Receipts, Dock Warrant, Warehouse Receipt, GRs approved by IBA and
Wharfinger Certificate are also documents of title to goods under Sale of Goods Act).

Essential Characteristics of Negotiable Instrument:

(i) Transferability: The basic feature of a negotiable instrument is that it is easily transferable
from person to person by mere delivery or by endorsement and delivery. In the case of
bearer instrument, the property passes by mere delivery to the transferee and in the case
of an order instrument, it passes by endorsement and delivery. Though transferability is
an essential feature of a negotiable instrument, but all transferable instruments are not
negotiable instruments, but all negotiable instruments are transferable.
(ii) Good title to the transferee (Negotiability): A person (transferee) who takes delivery of
Negotiable Instrument in good faith and for value (i.e. a holder in due course) gets an
absolute title to the instrument notwithstanding any defect in the title of the transferor
or any prior party.
(iii) Right of Action: The holder of a Negotiable Instrument being a holder in due course, gets
the right of action to sue upon the instrument in his own name. Though a bill, a promissory
note or a cheque represents a debt, the transferee is entitled to sue on the instrument in
his own name in case of dishonor, without giving notice to the debtor that he has become
its holder.

Types of Negotiable Instruments:-

Promissory Notes: According to Section 4 of NI act, “Promissory note is an instrument in writing

containing an unconditional undertaking 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 two types of Promissory Notes. Demand Promissory Note i.e. payable on demand and
Usance Promissory Note i.e payable after a pre-decided definite period.

 Promissory Note required to be stamped as per Indian Stamp Act (except in J & K)
 Currency Notes, though fulfill certain conditions of Promissory Note, have been excluded from
Promissory Note as per Sec. 4 of NI Act.

Essentials of a Promissory Note:

 The instrument must be in writing.

 Mere acknowledgement of debt is not sufficient. There must be an undertaking of promise to
pay. An IOU (I Owe You) therefore is not a promise to pay.
 The promise to pay must be unconditional.

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  The instrument must be signed by the maker.
 The promise to pay must be a certain sum of money in legal tender.
 The payee must be certain.

Bills of Exchange: According to Section 5 of NI Act, “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.”

Bills of Exchange may be demand or usance. In case of cash sales in the commercial transactions,
normally demand Bills of Exchange are drawn and in case of credit sales, usance bills of exchange are
drawn by the seller on the purchaser.

Essentials of Bills of Exchange:

 The instrument must be in writing.

 It must contain an unconditional and express order to pay.
 There are three parties. Drawer, Drawee and Payee. Sometimes the drawer and Payee may
be the same person.
 It must be signed by the drawer.
 In case of time bills (payable after a specified period), the bill matures for payment three days
after the day on which the bill is expressed to be payable. These additional days are known as
days of grace. The drawee must testify his acceptance to pay the bill.
 In case of demand bills (payable on demand), instruments payable on demand, no acceptance
is required.
 The amount of money to be paid must be certain and the payment must be in legal lender.
 The bill may be payable to payee or his order. Such a bill is called order bill. When it is payable
to bearer, it is called a bearer bill.

Types of Bills:

01) Inland and Foreign Bills: Inland Bill – Drawn and payable within the same country; Foreign
Bills – Drawn in India but are payable by a person resident outside India and / or drawn outside
India but are payable in India. Bill in sets – Foreign bills may be drawn in parts (to avoid the
possibility of loss or delay). All parts together make a set and the whole set constitutes one
bill.
02) Clean and Documentary Bills: Clean Bills – Those unaccompanied by any document;
Documentary Bills – Those accompanied by the bill of lading, insurance policy etc.
03) Trade and Accommodation Bills: Trade Bills – Trade Bills are drawn in the course of trade
transaction; Accommodation Bills - Accommodation Bills are drawn and accepted without
consideration with a view to provide funds to one or more parties.
04) Fictitious Bills: Usually, the drawer and payee must be certain and definite persons. When
they are fictitious, the bills are called fictitious bills.
05) Ambiguous Instruments: Instruments which can be interpreted either as a bill of exchange or
as a promissory note are called ambiguous instruments.
06) Inchoate Instrument: Incomplete negotiable instrument.
07) Escrow: A bill delivered conditionally or for a special purpose is called Escrow.

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Noting of Bills of Exchange (Section 99): Noting is a process of creating legal evidence of dishonour
through the Notary Public. Where a bill or promissory note is dishonoured by non-acceptance or non-
payment, the holder should get such fact noted on the bill or a paper enclosed to the bill, by a Notary
Public. Noting should provide date and reasons for dishonour. Where noting has taken place for an
inland bill, there is no need to send another notice of dishonour to the drawee, to make him liable.

Protesting (Section 100): After noting the bill could also be got protested. Protest is a certificate from
a Notary Public containing facts of the dishonour. Protest is considered an authentic and satisfactory
evidence of dishonour. Protesting is compulsory for foreign bill where the law of the place requires it
to be protested.

Drawee in case of need: A drawee in case of need is a person to whom the holder can look forward
in the event of the dishonour of instrument.

Acceptor for honour: After noting / protesting, any person who accepts for honour of the drawer /
endorsees.

Cheques: As per Section 6 of NI Act, “a bill of exchange drawn on a specified banker and not expressed
to be payable otherwise than on demand.” The Act covers Electronic Cheque i.e. a cheque which
contains the exact mirror image of a paper cheque, with the use of digital signatures.

The main characteristics of a cheque are:

01) It is an order of the customer without any conditions, i.e., an authorization.

02) It is drawn upon a certain banker.
03) The banker has always to pay it on demand.
04) It is payable to certain person or to his nominee or to the bearer of the instrument.

Other Instruments:

Demand Drafts: A Demand Draft is a payment order issued by one branch of a bank upon other
branch, instructing the drawee branch to pay the specified sum of money to the specified person or
to his order. A demand draft is always drawn, payable to order. A demand draft resembles a bill of
exchange, the only difference being that in the former, the drawer (bank) and the drawee (bank) are
same. The definition of bill of exchange in NI Act does not state that the drawer and drawee have to
be different. It merely states a bill of exchange should be signed by the maker and that the drawee
should be a ‘certain person’. A bank draft can therefore be treated as a bill of exchange and also a
cheque since it is payable on demand and is drawn on a banker. Demand drafts issued by the banks
are valid for a period of three months from the date of issue.

Instruments payable to bearer by persons other than Central Government & RBI: RBI Act 1934 (Sec
31) states that in India, person other than RBI or Central Government cannot draw, accept, make or
issue any bill of exchange or promissory note (or demand draft) payable to bearer on demand. Section
31(2) puts a restriction on making a promissory note payable to bearer by a person other than RBI /
Central Government.

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Other Essential features of Negotiable Instruments:

 The instrument should be in writing, though the form of writing is not stipulated.
 The cheque can be drawn only on the banker of the customer and on none else.
 The cheque should not be expressed to be payable otherwise than on demand.
 The instrument is always unconditional.
 In both at sight and usance instruments, the amount to be paid by the drawee must be an
amount certain, a definite amount.
 Every instrument has a drawee who is its addressee.
 The instrument may be payable “to order” or “to bearer”.
 The instrument must be payable to a definite person named or to anyone to whom he in turn
directs payment to be made.
 The person to whom the cheque is drawn payable should be certain.
 The instrument may be payable on demand or at a fixed or determinable future time.

Holder: Section 8 of NI Act defines a holder as a person entitled in his own name to the possession of
the instrument and to receive or recover the amount due thereon from the parties thereto.

Rights of Holder:

a) Holder can obtain a duplicate of the lost instrument (Section 45-A).

b) Holder can cross the cheque if not already crossed, convert a general crossing to a special
crossing, endorse and can negotiate, if the negotiation is not restricted.
c) Holder can sue in his own name in relation to the instrument.
d) Holder can complete an inchoate instrument.
e) Holder can give proper discharge to the person making the payment.

Holder in due course: Section 9 defines a holder in due course as ‘any person who, for consideration,
became the possessor of the promissory note, bill of exchange or cheque, if payable to bearer or the
payee or endorsee thereof if payable to order, before the amount mentioned in it became payable,
and without having sufficient cause to believe that any defect existed in the title of the person from
whom he derived his title.’

Rights of Holder in due course:

a) Every prior party to a negotiable instrument is liable thereon to a holder in due course until
the instrument is duly satisfied (Sec.36).
b) If a bill is drawn payable to the drawer’s order in a fictitious name, the acceptor is not relieved
from liability to any holder in due course, provided endorsement and the drawer’s signatures
are in the same handwriting (Sec.42).
c) If a bill of exchange or promissory note is negotiated to a holder in due course, the other
parties to the instrument cannot escape liability on the ground that the delivery of the
instrument was conditional or for a special purpose only (Sec.46).

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Holder for value: A banker becomes a holder for value of a cheque in the following circumstances:

01) When he pays the amount of the cheque to the customer in anticipation of collection.
02) When he permits the customer to draw against it before it is collected.
03) Where he receives a cheque in specific reduction of the amount owing to him by the customer.
04) Where the banker has a lien on the cheque.

When a banker becomes a holder for value, his rights are the same as of any other holder for value.
In other words, he will be entitled to receive the amount of the cheque from the drawee in his own
right and in case of dishonour, from one or all of the endorsers. In case one of the instruments is
forged, he will be liable to the true owner, but can recover the amount from the endorsers subsequent
to the forgery.

Differences between Holder and Holder in due course:

Holder in due course Holder

01 Consideration Holder in due course should obtain the In case of holder It is not
instrument for valuable consideration. essential to have
consideration
02 Possession The person entitled to be called holder in due In case of holder, neither
course must become the possessor of the actual possession nor
instrument before it became payable. That is, any time limit within
if it is obtained after the due date, the which it must be
possessor will not be called its holder in due acquired is required.
course.
03 Defect in the The person claiming to be a holder in due This condition is not
Transferor’s course should have obtained the instrument in essential in the case of a
Title good faith, i.e., without the knowledge of the holder.
defective title of the transferor.

Rights of parties in Special Cases:

01 Lost a) The finder of a lost instrument does not get a title over the instrument
Instruments and only the true owner is entitled to recover the instrument.
b) When the payment is made on the lost bill by an acceptor or maker,
he is discharged from all liability to the rightful owner.
c) When the lost instrument is transferred to a bona fide transferee for
value, the transferee acquires a valid title to it as the holder in due
course. He is entitled to receive the payment due from the parties
liable to him.
d) If the signature is forged and endorsement is made, such an endorsee
does not become a holder is due course
02 Stolen When an instrument is stolen, the holder (thief) does not get title to the
Instruments instrument. The true owner can recover it from him.

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Rights of parties in Special Cases (Continued):

03 Instruments obtained If a party gets the instrument by means of fraud, coercion or undue
by Fraud and Coercion influence, he gets defective title.
04 Instruments by When an instrument is obtained by unlawful considerations, the
unlawful person who gets the instrument does not get the title to the
considerations instrument.
05 Forged instruments The instrument carrying forged signatures does not confer any right
and Forged nor creates any liability. Endorsee gets no title if there is a forged
endorsements endorsement on the instrument.
06 Instruments without If the instruments are made, drawn, accepted or endorsed without
consideration. any consideration or for insufficient consideration there is no
obligation for payment, but in case of a holder in due course, this
rule does not apply.

CALCULATION OF DUE DATE

 Due date is required to be calculated for payment in case of usance promissory note and
usance bill of exchange. While calculating the due date three days of grace is required to be
added (Section 22 of NI Act).
 If the drawer has either already mentioned the due date or due date is already calculated by
the drawer then grace period is not to be given.
 In case of usance promissory note on each installment three days of grace are to be added.
 In case of CP and Certificate of Deposit even though they are usance promissory notes, grace
period need not be given because due date is already calculated by the drawer.
 If a usance period is mentioned in complete months while calculating the due date
corresponding date of the concerned month is to be taken and there after three days will be
added.
 If that concerned date is not available, then last date of the month is to be taken. Ex: If due
date is to be calculated for one month from 31st Jan, corresponding day works out to 31st Feb
and as that day is not available, we will have to take last day of the month i.e. 28th / 29th Feb
and after adding three days of grace, due date will be 3rd March.
 If the bill is drawn in days, then while calculating the due date, 1st day is to be excluded and
last day to be included.
 If the maturity date, falls on Public Holiday / Sundays, the bill will become payable on next
preceding business day. Public holidays are declared under Section 25 of NI Act by Central
Government only after making the notification in the Official Gazette.

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 ENDORSEMENTS

Section 15 of NI Act defines endorsement as follows. “When the maker or holder of a negotiable
instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back
or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as a negotiable instrument, he is said to have endorsed the same and is
called the endorser.”

Endorsement is made for the purpose negotiation of a negotiable instrument by the maker or holder
of a negotiable instrument, by signing on the face or backside of an instrument or on a slip of paper
called ‘allonge’.

 Types of Instruments that can be endorsed: Cheque, Bills of Exchange and Promissory notes.
 Who can endorse: An endorsement is made by maker or holder of an instrument.
 Number of endorsements: There can be any number of endorsements.
 Minor: A minor can endorse under section 26 of NI act, but he will not be liable as an endorser.

Types of Endorsements:

01 Blank If the endorser signs his name only, without adding any words or
Endorsements – directions, the endorsement is said to be blank. This makes the
Section 16 (1) instrument payable to bearer as per Section 54.
02 Endorsement in Where the endorser signs his name and adds the name of the endorsee
Full specifically, the endorsement is called full endorsement. Paying bank gets
valid discharge if the endorsement is regular.
03 Restrictive When the endorser adds words like “Pay the contents to ‘A’ only” etc. The
Endorsement endorsee cannot endorse the instrument further.
(Section 50)
04 Partial When an endorser transfers only a part of the amount of the negotiable
Endorsement instrument to the endorsee, It is not a valid endorsement for the purpose
(Section 56) of negotiation and such instrument should not be paid.
05 Conditional An endorsement which stipulates some conditions is called conditional
Endorsement endorsement. For example ‘Pay to ’A’ when he marries. The fulfilment of
condition is binding between endorser and endorsee only. The paying
bank is not bound to verify the fulfilment of such conditions.
06 Sans Recourse By adding the words like ‘Pay Rohit or order without recourse to me’ the
Endorsement endorser excludes his liability. It is a caution to endorsee.
07 Facultative Where an endorser waives the condition of notice of dishonour.
Endorsement
08 Forged Endorsement made by a person other than the holder, by signing the
Endorsement name of holder, is called forged endorsement. All endorsees including a
Holder or Holder in due course or Holder for value subsequent to the
forged endorsement do not derive any title the instrument. The paying
banker gets protection as per Sec. 85 (1) provided the endorsement is
regular.

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Endorsement on Bearer Cheques:

 Section 85 (1) protects a paying banker in case of payment of an Order Cheque and Sec. 85-A
in case of a Bank Draft, provided the endorsement is regular (which may be or may not be
genuine).
 A Paying Bank gets protection under section 85(2) in respect of a bearer cheque and he need
not verify the endorsement, as once a bearer is considered always a bearer. For such
endorsements the paying bank need not to take any cognizance.

CROSSING OF CHEQUES

Meaning and Object of crossing of cheques: Crossing of cheque means drawing two parallel
transverse lines on the left hand top corner of a cheque. Crossing on a cheque is a direction to the
paying banker by the drawer that payment should not be made across the counter. The payment on
a crossed cheque can be collected only through a banker. Therefore, crossing protects the holder of
the cheque and reduces the possibilities of fraud.

Parties eligible to cross the cheque: Drawer, Payee and Holder of the cheque.

(i) Drawer: The drawer of the cheque can make a general, special or restrictive crossing on a
cheque before issuing it.
(ii) Holder:
a) Where the cheque is uncrossed, the holder may cross it generally or specially.
b) Where a cheque is cross generally, the holder may cross it specially.
c) Where a cheque is crossed generally or specially, the holder may add the words ‘not
negotiable’.
(iii) Banker: Where a cheque is crossed specially, the banker to whom it is crossed may again
cross it specially to another banker, or his agent for collection. A cheque can be crossed
specially only once except where the second crossing is to a banker as agent for collection.
(Section 125)

Types of Crossing:

There are two types of crossings. General Crossing and Special Crossing.

General Crossing: Section 123 of NI Act, 1881 defines General Crossing as follows: “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”. As per Section 126 of NI Act, a general crossing is a direction to the paying banker
not to pay a cheque across the counter.

Special Crossing: Section 124 of NI Act, 1881 defines Special Crossing as follows: “Where a cheque
bears across its face an addition of the name of a banker 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”. In other words, a special crossing is a direction to the paying bank for
paying the amount of the cheque to the bank whose name is specified on the face of the cheque.

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Important Aspects of Crossing:

01 Two transverse lines Two transverse lines across the face of the cheque are essential for
essential for General general crossing.
Crossing.
02 Two transverse lines Two transverse lines across the face of the cheque are not essential
not essential for for Special Crossing. The writing of name of the bank is legal
Special Crossing. requirement.
03 Crossing is applicable Crossing is applicable in case of cheques only and does not cover bill
in case of cheques. of exchange or promissory note.
04 Who can cross the Crossing can be done by a drawer (at the time of issue), a holder
cheque? (general to special or not negotiable crossing) and a banker who
receives the cheque for collection (special crossing).
05 General Crossing to A general crossing can be converted to a special crossing by the
Special Crossing and drawer or by a holder. However, a special crossing can be changed
vice versa. to a general crossing only under the signatures of the drawer since it
amounts material alteration.
06 Cheque crossed to If a cheque is crossed specially to more than one bank (unless one
more than one bank. bank is acting as collection agent to another), the payment shall be
refused.
07 Cheque crossed to two Cheque crossed to two or more branches of the same bank, is
or more branches of considered to be crossed to one bank only.
the same bank.
08 Not Negotiable In case of a cheque bearing non-negotiable crossing, it is warning to
Crossing (Section 130) the transferee of a cheque that he will not have a better title than
that of the transferor inspite of fulfilling all the requirements of
Holder in due course.
09 Protection to paying Protection is available to a paying bank, as per Section 128 of NI Act,
bank for crossed if the same is payment in due course as per Section 10 of NI Act.
cheque.
10 Account Payee It is not recognized by any act. It is outcome of custom and usage. It
Crossing is a direction to the collecting banker.

COLLECTION OF CHEQUES

Section 131 of NI Act provides protection to the collecting banker against conversion, i.e. interference
with the legal rights of the true owner. This protection is available in case of cheques only and not
available to Promissory Notes and Bills of Exchange.

A banker who has in good faith and without negligence received payment for a customer of a cheque
(not available for Promissory Note and Bills of Exchange) crossed generally or specifically to himself,
shall not in case the title of the cheque proves defective, incur any liability to the true owner of the
cheque by reason only of having received such payment. The present section gives protection
provided following condition are fulfilled.

a) The bank must have acted in good faith and without negligence.
b) The cheque collected must be crossed.
c) Bank has received the payment as agent for collection.
d) Bank has collected the cheque, only in duly introduced account of customer.

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Precautions to be taken by the Collecting Banker:

The collecting banker should take due precautions in collecting cheques of customers in order to avoid
the risk involved.

01) He must have received the payment only for a customer and not for a stranger.
02) He must receive payment in his capacity as an agent of his customer.
03) The title of the customer to the cheque should be closely examined by verifying the regularity
of endorsement and the correctness of other contents of the cheque.
04) He must have acted in good faith and without negligence.
05) The cheques must have been crossed before it came into the possession of the collecting
banker.

Therefore, to avoid personal liability in case of fraud, the collecting banker should fulfil the conditions
as per Section 131 of the NI Act.

Statutory Protection to a Collecting Banker: A Collecting Banker may obtain protection under the
Negotiable Instruments Act which states as follows: “A banker who has in good faith and without
negligence received payment for a customer of a cheque crossed generally or specially to himself shall
not, in case, the tile to the cheque proves defective, incur any liability to the true owner of the cheque
by reason only of having received such payment” (Section 131). The Act also gives protection in respect
of collection of crossed bank drafts.

Delays in Cheque Clearing:

Local Cheques: For Local Cheques, credit and debit shall be given on the same day or at the most the
next day of their presentation in clearing.

Outstation Cheques: Timeframe for collection of cheques drawn on State Capitals / Major Cities /
other locations to be 7 / 10 / 14 days respectively. If there is any delay in collection, interest shall be
paid at the rate applicable on Fixed Deposits for the corresponding maturity.

Return of cheques for Technical Reasons:

RBI had advised the banks (under section 18 of the Payment and Settlement Systems Act, 2007) that
the cheque return charges can be levied only in cases where the customer is at fault or is responsible
for such returns.

Further, the cheques should be re-presented in the immediate next presentation clearing not later
than 24 hours (excluding holidays) with due notification to the customer of such re-presentation
through SMS alert, e-mail etc.

PAYMENT OF CHEQUES

The Paying Banker’s (Drawee) duties are laid down in Section 31 of NI Act as follows: “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 in default of such payment, must
compensate the drawer for any loss or damage caused by such default.”

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It is a statutory obligation of the banker to honour the cheques of a customer provided there is
sufficient balance and the cheque is otherwise in order.

Protection to Paying Banker:

01) Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the
drawee is discharged by payment in due course. (Section 85)
02) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by
payment in due course to the bearer thereof notwithstanding any endorsement thereon, and
not withstanding that any such endorsement purports to restrict or exclude further
negotiation. (Section 85)
03) The protection is extended to payment of bank drafts with the addition of Section 85A to the
Act. It reads ‘Where any draft that is an order to pay money drawn by one office of the same
bank for a sum of money payable to or order on demand, purports to be endorsed by or on
behalf on the payee, the bank is discharged by payment in due course.’
04) The protection is available for crossed cheques also “Where a banker on whom a crossed
cheque is drawn has paid the same in due course, the banker paying the cheque and (in case
such cheque has come to the hands of the payee), the drawer thereof shall respectively be
entitled to the same rights, and be placed in the same position in all respects as they would
respectively be entitled to and placed in if the amount of the cheque had been paid to and
received by the owner thereof” (Section 128).

Paying banker’s liability is to ensure the regularity of endorsement and is not concerned with
genuineness of endorsement. The genuineness of endorsement is the liability of collecting banker.
Therefore, protection is available to the paying banker in case of forged endorsements. (Section 85
(1).

PAYMENT IN DUE COURSE (Section 10)

Section 10 of NI Act defines Payment in Due Course, “as payment in accordance with the apparent
tenor of the instrument in good faith and without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for believing that he is not entitled to receive
payment of the amount therein mentioned.”

Thus, the essentials of payment in due course are:

a) The payment must be in accordance with the apparent tenor of the instrument. Thus a paying
banker cannot claim protection in case of post-dated cheques. Further, he should not honour
a cheque presented outside the banking hours.
b) The payment must be made in good faith and without negligence.
c) He should make the payment only to the person who is in possession of the instrument.
d) There should be no reasonable ground for believing that the person presenting the cheque is
not entitled to receive payment of the amount therein mentioned.

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When the bank should not pay:

01 Death of the The death of a drawer in case of individual accounts (such as individual /
drawer proprietorship, joint accounts, HUF, partnership firm) terminates the
contractual relationship.
02 Company in The balance lying with the banks vests with the official liquidator.
liquidation
03 Insane customers The insanity terminates the contractual capacity.
04 Insolvent drawers Where a customer is adjudged insolvent, the balance in the account is
vested with official receiver / assignee. Hence bank should stop the
operations in the account.
05 Countermanding On receipt of valid stop payment instructions from the drawer.
06 Others When the cheque is post-dated or bank has insufficient funds or cheque
is of doubtful legality, or the funds in the hands of the bank are not
properly applicable to the payment, or cheque or it is irregular,
ambiguous or otherwise materially altered or has become stale etc.

DISHONOUR OF CHEQUES (Section 138-147)

Cheques returned with the reason ‘insufficient balance’ – Punishment – Sequence of events

The following are the sequence of events, in case of non-payment of cheque due to financial reasons:

01) The cheque should have issued for discharge of lawful liability.
02) Cheque should be returned with the reason ‘insufficient balance’. (Due to different Judgments
of Supreme Court, reasons like ‘Refer to drawer’, ‘A/c Closed’, ‘Exceeds arrangement’,
‘Payment stopped by drawer’ and ‘effects not cleared’ are treated equal to ‘insufficient
balance’).
03) The payee or holder in due course should give notice to drawer within 30 days of return of
cheque with the reason ‘insufficient balance’ and demanding payment within 15 days of
receiving information of dishonor.
04) The drawer can make payment within 15 days of the receipt of notice and only if he fails to
do so prosecution could take place.
05) The complaint is to be made within one month of the cause of action arising i.e. expiry of
notice period.

Punishment:

In case of compounding offence (Summary trial or compromise case) the court can impose a fine up
to Rs.5000 or imprisonment up to 1 year or both.

In case of Regular Proceedings: Punishable with imprisonment for a term which may extend up to 2
years or with fine which may extend to twice the amount of the cheque or both.

Complaint after one month: Cognizance can be taken by court after the expiry of the stipulated period
of one month provided the complainant satisfies the court that he had sufficient cause for not making
the complaint within such period.

Mode of service of summons: The summons can be served by normal postal channels or by authorised
courier services and if not accepted, will be treated as duly served.

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Norms for return of Dishonoured Cheques: As per Goiporia Committee, dishonoured cheques to be
returned to the customers within 24 hours. Report of dishonour of cheques of Rs.1 Cr and above
should be made part of MIS. Previously, if from an account, 4 or more cheques of Rs.1 Cr and above
were returned for insufficiency of funds during a financial year, cheque book facility is to be
withdrawn. As per RBI directions dated 04.08.2016, the banks can determine their response on this
issue as per a Board approved policy.

Electronic Cheque: An Electronic Cheque is a cheque in electronic form as against the usual paper
instrument in writing – a cheque which contains the exact mirror image of a paper cheque and is
generated, written and signed with the use of digital signature (with or without biometrics signature
and asymmetric crypto system).

Keys in the electronic signatures: In digital signature (electronic signature), two keys namely public key
and private key are used. The private key is used for signing and the public key is used for verifying the
signatures.

Truncated Cheques: Defined in Section 6 of the NI Act as 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.

Cheques bearing a date as per National Calendar (Saka Samvat): Government of India had accepted
Saka Samvat as National Calendar wef March 22, 1957. All Government statutory orders, notifications,
Acts of Parliament, etc bear both the dates i.e. Saka Samvat as well as Gregorian calendar. Therefore,
a cheque written in Hindi and bearing a date in Hindi is a valid instrument.

CTS-2010 STANDARD CHEQUES:

On the recommendations of a Working Group, RBI decided to prescribe certain benchmarks towards
achieving standardisation of cheques known as “CTS-2010 Standard”, specifications.

01) Paper: Paper should have protection against alterations. It should be UV dull.
02) Watermark: All cheques shall carry a standardized watermark, with the words “CTS-INDIA”.
03) VOID pantograph: Pantograph with hidden / embedded “COPY” or “VOID” feature shall be
included in the cheques. This feature should be clearly visible in photocopies and scanned
colour images.
04) Bank’s logo: Bank’s logo shall be printed in ultra-violet (UV) ink to establish genuineness of a
cheque.
05) Prohibiting alterations / corrections on cheques: No changes / corrections should be carried
out on the CTS cheques.
06) Printing of account field: Cheques used in current accounts and corporate customers, should
be issued with the account number field pre-printed. Courtesy amount means – amount in
figures. Legal amount means amount in words.
07) Preservation: CTS instruments (including Government Cheques) are to be preserved for 10
years by presenting banks.

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Latest Developments:

Negotiable Instruments (Amendment) Bill, 2017:

Section 143-A has been introduced giving powers to a court trying an offence under Section 138 to
order the drawer of cheque to pay interim compensation to the complainant in summary trials /
summons case where he pleads not guilty to the accusations in the complaint. Furthermore, the
interim compensation shall not exceed 20% of amount of the cheque and shall be payable within 60
days from the date of the order.

Section 148, now empowers the appellate court, for appeals against conviction under Section 138, to
direct the appellant to deposit a minimum 20% of the fine / compensation awarded, in addition to
interim compensation paid under Section 143-A.

In case, the drawer is acquitted (during trial or by the appellate court), the court will direct the
complainant to return the interim compensation (or deposit in case of an appeal case), along with an
interest. This amount will be repaid within 60 days of the court’s order.

DEMAND DRAFTS

Demand draft is defined as per Section 85 (a) of NI Act 1881 as an order to pay money drawn by one
office of a bank upon another office of the same bank for a sum of money payable to order on demand.

Important features of Demand Draft:

 It is payable to order on demand (Section 85-A of NI Act)

 It cannot be issued as payable to bearer (Section 31 of RBI Act)
 If a bank fails to honour, it renders itself liable for damages. Omission of signatures or wrong
signatures can also make the bank liable.
 By prior arrangement, the paying bank could be a different bank also.
 DD of Rs.20000 or above – It is to be crossed as ‘account payee’ at the time of issue, itself.
 Purchase of DD in cash: Cash cannot be accepted to issue DD of Rs.50000 and above.
 Payment of DD in cash: Banks can pay DD in cash below Rs.20000 only.
 Validity Period: DD is valid for 3 months wef 01.04.2012.
 Purchaser’s name: Wef 15.09.2018, issuing banks are required to incorporate purchaser’s
name, on face of DD, Banker’s Cheque, and Pay Order etc.
 Issue of duplicate without no-payment advice: For amount up to Rs.5000, duplicate DD to be
issued by the issuing branch without seeking no-payment confirmation from drawee branch.
As per RBI directives (March 09, 2000) banks are to issue duplicate Demand Draft to the
customer within a fortnight from the receipt of such request. For the delay beyond the
stipulated period, banks need to pay interest at the rate applicable to fixed deposit of
corresponding maturity for such delay.

Bank’s relationship with the purchaser of a draft is that of Debtor and Creditor and the relationship
with the payee is that of trustee and beneficiary.

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 Important Sections in Negotiable Instruments Act, 1881

Section Contents
4 Definition of Promissory Note
5 Definition of Bill of Exchange
6 Definition of Cheque
8 Definition of Holder
9 Definition of Holder in Due Course
10 Payment in Due Course
13 Meaning of Negotiable Instrument
15 Definition of Endorsement
18 In case of difference in amount between the words and figures, the amount in words is
to be treated as the amount ordered by the drawer to pay.
20 Inchoate instrument i.e., incomplete instrument.
22 Three days of grace for calculating the maturity date of usance instrument.
25 If Maturity date is a holiday usance instrument is payable on next preceding business day.
26 Minor may draw, endorse and accept a negotiable instrument so as to bind all parties
except himself.
31 Liability of Drawee Banker – Banker to compensate for wrongful dishonour.
45A Holder’s right to get a duplicate of a lost bill.
63 The drawee of a Bills of Exchange has to accept it within 48 hours of presentation
80 If no rate of interest is mentioned in the Promissory Note, interest @ 18% p.a. to be paid.
85-A Protection to Paying Banker in case of Bank Drafts.
85-(1) Protection to the Paying Banker, if the payment is made in due course of an order cheque,
which is properly endorsed by the payee or his agent.
85-(2) Protection to the Paying Banker in case of a bearer cheque.
87 Material alteration of Negotiable Instrument renders it void.
89 Paying Banker gets protection where a cheque is materially altered but does not appear
to have been altered.
99 Noting
100 Protest
118 Presumptions as to negotiable instruments of consideration.
123 Cheques crossed Generally
124 Cheques crossed Specially
128 Payment in due course of crossed cheque.
130 Not Negotiable Crossing – The transferee cannot have a better title to the cheque than
that of the transferor.
131 Collecting Banker’s protection in respect of crossed cheques.
138 Dishonour of cheque for insufficiency, etc. of funds in the account.

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 PAYMENT AND SETTLEMENT SYSTEMS ACT, 2007 (PSS ACT, 2007)

With a view to ensure regulation and supervision of payment systems in India, The PSS Act, 2007 was
passed by both houses and it received the assent of the President on 20th December 2007 and it came
into force with effect from 12th August 2008. The Act provides and designated the Reserve Bank of
India as the authority to deal with all related matters.

Section 2(1) of the PSS Act, 2007 defines certain terms such as payment obligation, payment
instructions, and settlement.

a) “Payment obligation” is defined as what is owed by one participant in a payment system to

another such participant which results from clearing of settlement or payment instructions
relating to funds, securities or foreign exchange or derivatives or other transactions.
b) “Payment Instruction” is defined as any instrument, authorization or order in any form,
including by electronic means, to effect a payment by a person to a participant in a payment
system or from one participant in such a system to another participant in that system.
c) “Settlement” means the settlement of payment instructions received and these include
settlement of securities, foreign exchange or derivatives or other transactions.

Section 2(1)(i) of the PSS Act, 2007 includes payment to be effected between a payer and a beneficiary,
involving clearing, payment or settlement service or all of them, but does not include a stock exchange.
Payment system includes the systems enabling credit card operations, debit card operations, smart
card operations, money transfer operations or similar operations.

As per the Act, for commencement of a payment system, an entity will have to obtain prior
authorization from RBI by applying along with a fee of Rs.10,000/-.

With a view to discourage dishonour of electronic payment instructions, similar to what has been
provided in Negotiable Instructions Act, in Section 25 of PSS Act, 2007, it has been stated that
dishonour of an electronic fund transfer instruction due to insufficiency of funds in the account etc.,
is an offence punishable with imprisonment or with fine or both, similar to the dishonour of a cheque
under NI Act, 1881. Subject to complying with the procedures laid down under the PSS Act, 2007,
criminal prosecution of defaulter can be initiated in such cases.

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