Amit Bachhawat

Negotiable
Instrument
Act

Promissory Note : SEC.4

Bill of Exchange : SEC.5
Cheque : Sec. 6
Crossed Cheque
Type of Crossing
Payment of Crossed Cheque - Sec. 126 to 129
Acceptance
Holder : Sec 8
Holder in due Course : Sec. 9
Rights and Privileges of a Holder in due course
Nego a on : Sec 14
Endorsement : Sec 15
Conversion of Endorsement in blank into Endorsement in full
Other Terms
Maturity : Sec 22
Calcula on of Maturity
Based on Transfer Procedure, Based on Loca on, Others
Liablility of Agent Signing : Sec 28, Liability of Legal Representa ve : Sec 29, Minor
Dishonour of Cheque : Case 138
Discharge of Endorser's Liability : Sec 40
Liability under Accommoda on Bills / Without Considera on
Failure of Considera on
Presentment of Promissory note for Sight/Instrument for payment : Sec 131
Mode of Discharge of Instrument
Discharge of Party
Nothing and Protes ng
Amendments, Extra Notes Acceptor for honour etc.

Notes Questions Answer Examples

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NEGOTIABLE INSTRUMENT ACT
DeÞni on
The Nego able Instrument has not been deÞned under the Nego able Intruments Act 1881.However, Sec on
13 of the Act describes a nego able instrument to mean a promissory note or a bill of exchange or a cheque
payable to order or to bearer.
Features
a. Considera on
It is presumed that every Nego able Instrument is made or drawn for considera on. The considera on
need not be men oned in the Nego able Instruments.
b. Transferability
A Nego able instrument may be transferred by:
(i) endorsement and delivery, if it is an instrument payable to order, and
(ii) mere delivery, if it is a bearer instrument.
c. Title
The transferee, who takes the instrument bonaÞde and for valuable considera on, obtains a good tle
inspite of any defects in the tle of the transferor. To this extent, Nego able instrument is an excep on
to the maxim of law ie. nemo dat quod non-habet (no one can transfer a be!er tle than he himself
has).

PROMISSORY NOTE : SEC.4

A promissory note is an instrument in wri ng (not being a bank-note or a currency-note) containing
an uncondi onal undertaking, signed by the maker, to pay a certain sum of money only to the person
men oned therein, or to the order of a certain person or to the bearer of the instrument. The words ‘or
to the bearer of the instrument” is inopera ve in View of Sec on 31 of the Reserve Bank of India Act,
1934, which provides that no person in India other than Reserve Bank of India or Central Government
can make or issue promissory note payable to bearer of the instrument.
Characteris cs of Promissory Note
a. In wri ng
It must be in wri ng. An oral promise does not result in an instrument. Example: A promises to pay
` 70,000/- to “B”, over telephone. This promise is not a promissory note as it is not in wri ng.
b. Promise to pay
A mere acknowledgement of debt is not a promissory note.
a) A receipt of ` 50,000/- Not a Promissory Note.
b) A receipt of ` 50,000/- with a promise to pay in 5 monthly instalments beginning 1st April 2004 - It
is a Promissory Note.

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c. Uncondi onal
It is to be noted that a promise to pay will be uncondi onal where it depends upon an event which is
certain to happen but the me of its occurrence may be uncertain.
“I promise to pay to ‘A’ ` 1,000/- 10 days a!er the death of ‘B’.” — This is not condi onal as it is
certain that ‘B’ will die though the exact me of his death is uncertain.
The promissory note does not lose its character as such merely because it contains a promise to pay at a
certain place.
"I promise to pay to 'A' ` 1 Lac a!er the death of 'B' provided 'B' leaves enough money to pay."
d. Certain sum of money only
Amount promised must be certain and should be in terms of money.
The instrument must be payable in money and money only. If the instrument contains a promise to pay
something other than money or something in addi on to money, it will not be a promissory note.
‘I promise to pay ` 350 and all other sums which shall be due’ — It is not a valid promissory note.
'I promise to pay ` 1 Lac and 500 bags of rice is not a valid promissory note.'
In the event of rate of interest not being speciÞed, the amount which would be due on the due date
would not be certain.
e. Signed by the Maker
The maker must sign the instrument and it is incomplete ll it is so signed. The signature may be made
on any part of the document.
f. Certainty of Par es
The person by whose order and to whom the payment is to be made must be deÞnite. The payee must
be a certain person and where the name of the payee is not men oned as a party, the instrument
becomes invalid.
g. Not payable to maker himself
A promissory note cannot be made payable to the maker himself. However, it would become valid
when it is endorsed to the maker. This is so because it becomes payable to bearer, if endorsed in blank
or it becomes payable to endorsee or his order, if endorsed speciÞcally.

BILL OF EXCHANGE : SEC.5

A Bill of Exchange is an instrument in wri ng containing an uncondi onal order, signed by the maker,
direc ng 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. The words or to the bearer of the instrument is inopera ve in view of
Sec on 31 of the Reserve Bank of India Act, 1934, which provides that no person in India other than
Reserve Bank of India or Central Government make or issue promissory note payable to bearer of the
instrument.
Characteris cs of Bill of Exchange
1. In wri ng
It must be in wri ng.

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2. Order
It must contain an order to pay. Order to be made by drawer to drawee to pay money.
3. Uncondi onal Order
The order must be uncondi onal, ie., the order must not make the payment of the bill dependent on a
con ngent event.
Where a bill of exchange is in this form: ‘Three months a"er date pay to my order the sum of
` 8001- for value received’. This is not condi onal.
4. Money only — Certain sum
The Order must be to pay money and money only. The instrument must be payable in money and
money only. The sum of money payable must also be certain.
In the absence of the rate of interest, the amount which would be due on the due date would not be
certain or deÞnite.
5. Acceptance
The drawee must sign the instrument, without which the document is ine#ec ve.
6. Three Par es
The three par es to a bill viz., drawer, drawee and payee are to be speciÞed in the instrument with
reasonable certainty. All three persons need not speciÞcally be di#erent persons. One can play the role
of two persons, ie., a drawer can be a payee.
7. Stamping
It must be stamped.
Note : The maker of the bill of exchange is called the Drawer (Creditor). The person who is directed to pay is
called the Drawee (debtor). The person who will receive the money is called Payee. When the Payee has the
Custody of the bill he is called the holder.

CHEQUE : SEC.6
A Cheque is a bill of exchange drawn on a speciÞed banker and not expressed to be payable otherwise
than on demand and it includes “the electronic image of truncated cheque” and a ‘cheque in the
electronic form”.
• A Cheque, prima facie, is a bill of exchange and hence must sa sfy the essen al condi ons of bill
of exchange under Sec on 5.
• A Cheque is an excep on to the general rule that a bill of exchange cannot be drawn payable to
bearer on demand - Sec.31 of Reserve Bank of India Act, ie., payable only on demand.
• “A truncated cheque” means a cheque which is truncated during the course of a clearing cycle,
either by the clearing house or bank whether paying or recovering payment immediately on
genera on of an electronic image for transmission, subs tu ng the further physical movement
of cheque in wri ng.
A physical cheque deposited at Bank, scanned electronically for processing.

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• “A cheque in electronic form” means a cheque which contains the exact mirror image of a paper
cheque, and is generated, wri!en and signed in a secure system ensuring the minimum safety
standards with the use of digital signature and asymmetric crypto system.
On line payment instruc ons in net banking,

CROSSED CHEQUE
When a cheque bears across its face two parallel transverse lines, (usually on the top le" corner of
cheque) the cheque is said to be crossed.
1. Crossing a#ects mode of payment of cheque. Cheque is not payable to payee or holder at Bank.
Payment is to be obtained only through Bank. Crossed Cheque can be nego ated.
2. The objec ve of crossing is to help tracing the recipient of money, if an unauthorized person
receives it.

Difference between Bill Of Exchange & Promissory note? — 114

Difference between Bill Of Exchange & cheque? — 115

Types of Crossing
1. General Crossing : Sec. 123
Where a cheque bears across its face an addi on of —
• the words ‘and company’ or any abbrevia ons thereof between two parallel transverse lines, or
• two parallel transverse lines simply.
2. Special Crossing : Sec. 124
Where a cheque bears across its face an addi on of the name of a banker, either with or without the
words ‘not nego able’, that addi on shall be deemed a crossing, and the cheque shall be deemed to be
crossed specially.
Where a cheque is crossed specially, the banker on whom it is crossed shall not pay it, otherwise than to
the banker to whom it is crossed or his agent for collec on.
Di!erence : In general crossing the Name of the Bank is not men oned whereas in special crossing the
Name of the Bank is men oned.
3. ‘Not Negotiable’ Crossing : Sec.130
A person taking a cheque crossed generally or specially, bearing in either case the words ‘not nego able’,
shall not have, and shall not be capable of giving a be!er tle to the cheque other than that which the
person from whom he took it had. The tle of transferee of the cheque cannot be be"er than tle of
transferor of the cheque. It means that even if transferee has acquired in good faith s ll his tle cannot
be defect free if transferor’s tle is defec ve.
It may be noted that though it is men oned ‘Not Nego able’, the cheque can be transferred. The only
restric on is with regard to the tle passed.
In other words, the principle of nemo dat quod non habet (nobody can pass on a tle be!er than what
he himself has) will be applicable to a cheque with a ‘not nego able’ crossing, even though the cheque
is in the hands of a holder in due course.

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‘Account Payee’ Crossing / Restric ve Crossing
The purpose of this crossing bearing the words “A/c Payee” is to obviate the risk of a wrong person obtaining
payment on a cheque.
It is a direc on to banker to credit the proceeds only to the account of the payee.
The cheque remains legally nego able but “A/c payee” crossing hinders the nego ability of the cheque in
prac ce’. Such cheque cannot be transferred further to any person.
PAYMENT OF CROSSED CHEQUE - Sec. 126 to 129
1. Banker is not liable if he pays in due course a cheque -
• crossed generally, then to any bank.;
• crossed specially, then to the banker to whom it is crossed or his agent for collection (also
a banker);
2. Where the banker has paid in due course the bank and drawer shall have the same right and be
placed in the same posi on in all respects as if the amount has been paid to and recovered by the
true owner.
3. If the payment has been made out of due course”, the banks shall be liable to the true owner of
the cheque for any loss the true owner may sustain.

ACCEPTANCE
A. MEANING
It is signifying one’s assent to the order of the drawer by delivery or no Þca on thereof. It is ordinarily
made by the drawee by signing of his name across the face of the bill and by delivery.
B. WHO CAN BE ACCEPTORS: SEC.33 & 34
a) Drawee i.e., person directed to pay.
b) All or some of the several drawees, when bill is addressed to more than one. However, if the several
drawers are partners, acceptance by one drawee would bind all other drawees, (as partnership is
based on principle of mutual agency).
c) Drawee in case of need.
d) An acceptor for honour.
e) When no drawee has been named in a bill but a person accepts it, then he may be estopped from
denying his liability as an acceptor.
f) Agent of any of the persons men oned above.
C. ESSENTIALS OF VALID ACCEPTANCE
1. Capacity- Every person capable of legally entering into a contract may make, accept or endorse
and nego ate a nego able instrument by himself or through a duly authorised agent.
2. Acceptance must be wri!en.
3. Acceptance must be signed.
4. Acceptance must be on the bill.

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5. Acceptance must be completed by delivery.

6. Acceptance may be general or qualiÞed.

HOLDER : SEC. 8
he ‘Holder’ of a promissory note, bill of exchange or cheque means any person en tled -
(i) in his own name, to the possession thereof i.e., he must be named in the instrument as payee or
endorsee or he must be the bearer of the instrument and
(ii) to receive or recover the amount due thereon from the par es thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person so en tled at the me of such
loss or destruc on.

HOLDER IN DUE COURSE : SEC. 9

‘Holder in due course’ means any person who for considera on became the possessor of a promissory
note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to
order, before the amount men oned in it became payable and without having su$cient cause to believe
that any defect existed in the tle of the person from whom he derived his tle.
Essen als are -
(i) The holder must have taken the instrument for value
(ii) He must have obtained the instrument before its maturity
(iii) The instrument must be complete and regular on its face
(iv) He must have taken the instrument in good faith and without no ce of any defect either in the
instrument or in the tle of the person nego a ng it to him

RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSE

1. Presump on
Every holder is deemed prima facie to be a holder in due course and the burden of proving his
tle is not on him. if it is proved that the history of the bill is tainted with fraud or illegality the
burden is shi"ed to the holder to prove that he is a holder in due course. (Sec. 118)
2. Privilege against inchoate stamped instruments
When one person signs and delivers to another, a stamped but otherwise inchoate (incomplete)
instrument, he is stopped from asser ng, as against a holder in due course, that the instrument
has not been Þlled in accordance with the authority given by him provided the amount Þlled is
covered by the stamp a$xed. (Sec. 20)
3. Fic ous drawer or payee
In case a bill of exchange is drawn payable to the drawer's order in a Þc ous name and is endorsed
the same that has drawer's signature, it is not permissible for the acceptor Þling against the holder
in the course that such name is Þc ous. (Sec. 42)
4. Instruments obtained by unlawful means or for unlawful considera on
The person liable in a nego able instrument cannot set up against the holder in due course the
defence that the instrument had been lost or obtained from him by means of an o#ence or fraud
or for an unlawful considera on. (Sec. 58)

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5. Prior defects
A holder of a nego able instrument who derives tle from a holder in due course has the rights
thereon of that holder in due course. Once a nego able instrument passes through the hands of a
holder in due course, it gets cleared of its defects. (Sec. 53)
6. Estoppel against denying original validity of instrument
No maker of a promissory note, and no drawer of a bill of exchange or cheque, and no acceptor of
a bill of exchange for the honour of the drawer shall, in a suit thereon by a holder in due course,
be permi!ed to deny the validity of the instrument as originally made or drawn. (Sec. 120)
7. Estoppel against denying capacity of payee to endorse
No maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a
suit thereon by a holder in due course, be permi!ed to deny the payee’s capacity, at the date of
the note or bill, to endorse the same. (Sec. I 21)
8. Liability of prior par es
Every prior party to a nego able instrument is liable thereon to a holder in due course un l the
instrument is duly sa sÞed. (Sec. 36)
9. Nego able Instruments without considera on
A Nego able Instrument made, drawn or accepted without considera on does not create any
obliga on on the par es to the transac on. But if the Nego able Instrument gets into the hands
of a holder in due course he can recover the amount from par es. The plea that there was no
considera on cannot be set up against him.

Even HIDC CANNOT Recover if the acceptance to instrument is FORGED.

Dis nc on Between Holder and Holder in Due Course

Particulars Holder Holder in due course

Consideration Holder may become possessor or Holder acquires possession only for
payee of instrument even without consideration
consideration
Time of possessing No restriction as in case of holder in Must possess instrument before amount
instrument due course thereon becomes payable
Good faith No restriction as in case of holder in Must become payee of instrument in good faith
due course ie. without sufficient cause to believe that any
defect existed in the transferor’s title.

Every holder is due course is a holder but every holder is not in due course.
Do example from page No. 198, 199.

A. NEGOTIATION: SEC.14
When a promissory note, bill of exchange or cheque is transferred to any person, so as to cons tute that
person the holder thereof, the instrument is said to be nego ated.

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B. ENDORSEMENT: SEC.15
When the maker or holder of a nego able instrument signs the same, otherwise than as such maker,
for the purpose of nego a on, on the back or a slip of paper a!ached thereto, Known as allonge or so
signs for the purpose as a stamped paper intended to be a nego able instrument, he is said to endorse
the same, and is called the ‘Endorser’. The person in whose favour the endorsement made is called
‘Endorsee’.
1. Endorsement in blank
It is an endorsement wherein the endorser signs his name only. A nego able instrument endorsed
in blank is payable to the bearer thereof. (Sec. 16 & 54). But name of endorsee is not wri"en.
2. Endorsement in full
It is an endorsement where the endorser signs his name and adds a direc on to pay the amount
men oned to, or to the order of, a speciÞed person and the person so speciÞed is called as
endorsee’ of the instrument. (Sec. 16)
3. Restric ve endorsement
It is an endorsement which has the e#ect of restric ng further nego a on and transfer. (Sec. 50)
B signs the following endorsements on di#erent nego able instruments payable to bearer:
(a) Pay to Z only.
(b) For the account of Y only.
4. QualiÞed Endorsement (Sec. 52)
B C D E F (Some Recourse)
a. Sans recourse endorsement : (Without Liability)
It is an endorsement where the Endorser excludes his own liability or makes it condi onal.
The endorser of a nego able instrument may, by express words in the endorsement, exclude
his own liability thereon or make such liability or the right of the endorsee to receive the
amount due thereon depend upon the happening of a speciÞed event, although such event
may never happen.
(i) “Pay F or order Sans Recourse.”
(ii) “Pay F or order without recourse to me.”
(iii) “Pay F or order at his own risk.”
Where an endorser so excludes his liability and a"erwards becomes the holder of the
instrument, all intermediate endorsers are liable to him.
A is the payee and holder of a nego able instrument. Excluding personal liability by an
endorsement ‘without recourse’, he transfers the instrument to B and B endorses it to C
who endorses it to A. A is not only reinstated in his former rights, but has the rights of an
endorsee against B and C.
b. Sans Frais endorsement
Such an endorsement indicates that endorser is not liable for expenses incurred on account
of the bill.
Pay X or order San Frais

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c. Faculta ve endorsement
It is an endorsement wherein certain rights are waived and suitable words to this e#ect are
indicated.
Waiver of a right to receive no ce of dishonour, wherein the endorsement would include
the words ‘no ce of dishonour dispensed with’. Pay Y or order, No ce of dishonour waived.
d. Con ngency based endorsement
Such endorsement combines an order to pay upon the happening or non happening of an
event.
Pay to A on safe receipt of goods.

Comment “Once an instrument is bearer it always remain bearer”.

Statement is false because blank endorsement is the a bearer instrument but lateron blank endoresement
can be converted into full endorsement.

E. CONVERSION OF ENDORSEMENT IN BLANK INTO ENDORSEMENT IN FULL

The holder of a nego able instrument endorsed in blank, may, without signing his own name, by wri ng
above the endorser’s signature a direc on to pay any other person as endorsee, convert the endorsement
in blank into an endorsement in full; and the holder does not thereby incur the responsibility of an
endorser.
The holder does not himself sign, but only adds the name of a person before an endorsement in blank.
The holder may then transfer the instrument to the person whose name be so speciÞed, but will not
incur the liability of an endorser.
Where A, the payee of a bill of exchange, endorsed it in blank and delivered it to B, and B wrote
above A’s endorsement, “pay the contents to C”, but did not sign the bill, B was held not liable to C as an
endorser of the bill.

F. OTHER TERMS
1. Par al Endorsement: Sec.56
Par al endorsement refers to endorsement of a bill partly paid.
An endorsement purpor ng to transfer only a part of the amount of instrument is invalid and the
endorsee therefore cannot nego ate it. But when the amount due has been paid in part and a
note to that e#ect has been made on the instrument, then the instrument may be nego ated for
the balance.
An instrument of ` 100/- cannot be endorsed for ` 50/- only. But if the amount due has already
been partly paid say ` 60/-, a note to that e#ect may be endorsed on the instrument and it may
then be nego ated for the balance of ` 40/-.
2. Nego a on Back
An instrument is said to have been nego ated back to him and he is said to have taken up or taken
back the nego able instrument when a person who has been a party to the nego able instrument
takes it again.
The endorsements on a nego able instrument are as under :
P, A, B, X, Y, A

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Here A is a person who is a prior party to the instrument. He nego ated it to B, B to X, X to Y and Y again
to this very A resul ng in ‘nego a on back’.
This will lead to a circuity of ac on. Thus A, in the above case cannot sue Y, X or B. But A can sue P since
the la!er is prior to A’s original endorsement. If however A, in original endorsement, had signed “sans
recourse” there could be no circuity of ac on and A could sue Y, X or B.

What will be your answer if endorsement are P, A, B, X, Y, P?

Instrument is discharged.
3. Nego a on of Dishonoured or Overdue Instruments: Sec.59
The holder of a nego able instrument, who has acquired it a!er dishonour, whether by non-
acceptance, or non-payment, with no ce thereof, or a!er maturity, has only, as against the other
par es, the right thereon of his transferor.
4. Accommoda on note or bill
Any person who, in good faith and for considera on, becomes the holder, a!er maturity, of a
promissory note or bill of exchange made, drawn or accepted without considera on, for the
purpose of enabling some party thereto to raise money thereon, may recover the amount of the
note or bill from any prior party.
5. Period of Nego a on: Sec. 60
Instruments remain nego able ll they are discharged by payment or by some other sa sfac on.
The e"ect is that where an instrument has reached its maturity, but has not been paid, it remains
nego able.
It is not the maturity, but the fact of actual payment at or a!er maturity which puts an end to the
nego ability of an instrument.
Even payment will not end the life of an instrument if it is not a payment “at or a!er maturity”.
Where payment is made before maturity, the instrument remains valid for further nego a on
unless the fact of payment is noted on it or it is withdrawn, cancelled or destroyed.

Assignment means transferring rights to another person.

Di!erence Between Nego a on and Assignment

Basis Negotiation Assignment

Notice of Transfer Not Necessary Notice must be served by assignor on
Consideration for his debtor To be proved
Presumed
Transfer
Mode • Bearer Instruments - Delivery, Document to be reduced into writing
• Order Instrument - endorsement & Delivery and signed by transferor
Rights Title Transferee acquires all rights of a holder in Assignee. has only the right, title and
due course. interest of the assignor. The title of the
The title of the transferee (i.e., the holder assignee is subject to the defects in the
in due course) is better than that of the title of the assignor.
transferor

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