UNIT 3:

LAW RELATING TO NEGOTIABLE INSTRUMENTS

The law relating to negotiable instruments is the law of commercial world legislated
to facilitate the mercantile commercial activities, thereby making provision of giving sanctity
to the instruments of credit which could be deemed to be convertible into money and easily
exchangeable from one person to another as well as easily transferable from one banking
institutio n to another. The above quoted statement made before the Bills of Exchange Act,
1882, brings out clearly the process of evolution of mercantile law which includes the law of
negotiable instruments. The mercantile community found in such instruments an easy mode
of payment of money by way of endorsement and delivery or by mere delivery of such
instruments. With the expansion of trade and commerce, negotiable instruments have
assumed international importance. In the absence of such negotiable instruments, the trade
and commerce activities, in the contemporary world, are likely to be adversely affected as it
is impracticable, infeasible and unworkable for the trading community to carry with it the
bulk of the currency in force. Negotiable instruments are in fact the instruments of credit
being convertible , exchangeable and redeemable on account of legality of being negotiated
and are easily passable from one hand to another, from one state to another, from one country
to another. Out of the various kinds of neg otiable instruments recognized by law, cheque is
considered, by far, one of the most secure and reliable device of payment throughout the
world, particularly in the sphere of commercial transactions one cannot imagine survival
without this negotiable instr ument

Introduction to the Law Relating to Negotiable Instruments The law relating to

negotiable instruments is not the law of one nation or of one particular demographic area , it
is the law of the commercial world in general, for, it consists of certain principles of equity
and usages of trade which general convenience and commonsense of justice had established
to regulate the dealing of merchants and mariners in all the commercial co untries of the
civilised world. Even now the laws of several countries in Europe are, at least so far as
general principles are concerned, similar in many respects. Of course, on questions of detail,
different countries have solved the various problems in different ways, but the essentials are
the same, and this similarity of law is a pre-requisite for the vast international transactions
that are carried on among the different countries.

Negotiable Instrument is a ‘Thing’ A negotiable instrument is in more than one sense

a ‘thing’. In deciphering what is meant by a ‘thing’ under law, we must on one hand avoid the
metaphysical niceties about the conception of ‘thing’, and on the other, the peculiar
conception of the word in England, as in the phrases, ‘things in possession’ and ‘things in
action’. In jurisprudence , a ‘thing’ necessarily denotes an object of rights. In that sense every
instrument is a ‘thing’, in so far as the paper on which it is written is concerned. It is not only
in that sense is a negotiable instrument a ‘thing’ also in the sense that it is a p hysical
embodiment of rights. A person lawfully getting possession of such an instrument acquires
title to it, and the same cannot be said of other instruments. Again, it represents money and
possesses all the characteristics of money which it represents. For example, it is not tainted
by any defect or fraud in the source from which it flows, so long as its acquisition is bonafide
and for value. It also passes through delivery like cash, and the person in possession of the
instrument can sue on it in his ow n name. It also possesses the characteristics of a contract as
it embodies either an order or a promise to pay money. The capacity of the parties to it, the
liability of persons on it and the discharge of such liabilities are governed mostly by rules
belonging to the domain of contracts. It is also regarded as a chattel; and being so, it has been
held that the transfer of such instruments should be regulated by the law of the place where
the transfer takes place

Meaning of the Term ‘Negotiable’

The term ‘Negotiable’ is one of classification and does not of necessity imply
anything more than that the paper possesses the negotiable quality. Generally speaking, it
applies to any written statement given as security, usually for the payment of money, wh ich
may be transferred by endorsement or delivery, vesting in the party to whom it is transferred
or delivered a legal title on which he can support a suit in his name. The term signifies that
the note or paper writing to which, it is applied possesses the requisites of negotiability. A
negotiable instrument is one, therefore, which when transferred by delivery or by
endorsement and delivery, passes to the transferee a good title to payment according to its
tenor and irrespective of the title of the transferor, provided he is bona fide holder for value
without notice of any defect attaching to the instrument or in the title of the transferor, in
other words the principle nemo dat quod non habit does not apply.

Purpose and Origin of Law Relating to Negotiable Instruments

The introduction of negotiable instruments owes its origin to the bartering system
prevalent in the primitive society. The source of Indian law relating to such instruments is
admittedly the English Common Law. The main object of the Act was to legalise the system
by which instruments contemplated by it could pass from one hand to hand by negotiation
like any other goods. The purpose of the Act was to present an orderly and authoritative
statement of the leading rules of law relating to the negotiable instruments. The Act intends to
legalise the system under which claims upon mercantile instruments could be equated with
ordinary goods passing from hand to hand. It has, always to be kept in mind that section 138
of the Act creates an offence and the law relating to the penal provisions has to be interpreted
strictly so that no one can ingeniously and insidiously or guilefully or strategically be
prosecuted.

An attempt at the codification of mercantile usages was made in France as early as

1818 and the French Commercial Code was later adopted as a model by other countries on
the continent. In England, the movement for codification was not started till 1880 when Sir
McKenzie Chalmers drafted a bill on the subject. This was enacted as the Bills of Exchange
Act, 1882. In India, an effort in the same direction was made earlier, in 1867, when the (third)
Indian Law Commission prepared a bill. But, for various reasons it was kept in cold storage
for a number of years. In 1879 Mr Arthur Phillips, the then Law Secretary and a member of
the Calcutta Bar, redrafted the bill. Criticisms were invited on it from banks, chambers of
commerce and leading merchants. This bill, after passing through Select Committees more
than once, was again referred to a new Law Commission in 1879. The recommendations of
the Commission were considered by another Select Committee and eventually the bill, in a
modified form, became the Negotiable Instruments Act, 1881. The principal source for
codification of this law both in England and in India was the English common law of
contracts as modified by the law merchant. But, curiously, there has been a considerable

Negotiable Instrument, in law, a written contract or other instrument whose benefit can be
passed on from the original holder to new holders. The original holder (the transferor) must
countersign the instrument (as in the case of a cheque) or merely deliver it (as in the case of a
bank note) to the new holder; the new holder is then entitled to the benefit of the instrument
(in the case of a cheque, to the money from the bank; in the case of the bank note, to the sum
promised on the note).

Salient features of negotiable instruments act 1881

According to section 13 of the Negotiable Instruments Act, 1881, a negotiable

instrument means “Promissory note, bill of exchange, or cheque, payable either to order or to
bearer”.

Major features of negotiable instruments are;

 Easy Transferability- A negotiable instrument is freely transferable. Usually, when we

transfer any property to somebody, we are required to make a transfer deed, get it
registered, pay stamp duty, etc. But, such formalities are not required while
transferring a negotiable instrument. The ownership is changed by mere delivery
(when payable to the bearer) or by valid endorsement and delivery (when payable to
order). Further, while transferring it is also not required to give a notice to the
previous holder.

 Title- Negotiability confers absolute and good title on the transferee. It means that a
person who receives a negotiable instrument has a clear and undisputable title to the
instrument. However, the title of the receiver will be absolute, only if he has got the
instrument in good faith and for a consideration. Also the receiver should have no
knowledge of the previous holder having any defect in his title. Such a person is
known as holder in due course.
 Must be in writing- A negotiable instrument must be in writing. This includes
handwriting, typing, computer print out and engraving, etc.
 Unconditional Order- In every negotiable instrument there must be an unconditional
order or promise for payment.
 Payment- The instrument must involve payment of a certain sum of money only and
nothing else. For example, one cannot make a promissory note on assets, securities, or
goods.
 The time of payment must be certain- It means that the instrument must be payable at
a time which is certain to arrive. If the time is mentioned as ‘when convenient’ it is
not a negotiable instrument. However, if the time of payment is linked to the death of
 a person, it is nevertheless a negotiable instrument as death is certain, though the time
thereof is not.
 The payee must be a certain person- It means that the person in whose favor the
instrument is made must be named or described with reasonable certainty. The term
‘person’ includes individual, body corporate, trade unions, even secretary, director or
chairman of an institution. The payee can also be more than one person.
 Signature- A negotiable instrument must bear the signature of its maker. Without the
signature of the drawer or the maker, the instrument shall not be a valid one.
 Delivery- Delivery of the instrument is essential. Any negotiable instrument like a
cheque or a promissory note is not complete till it is delivered to its payee. For
example, you may issue a cheque in your brother’s name but it is not a negotiable
instrument till it is given to your brother.
 Stamping- Stamping of Bills of Exchange and Promissory Notes is mandatory. This is
required as per the Indian Stamp Act, 1899. The value of stamp depends upon the
value of the pronote or bill and the time of their payment.
 Right ot file suit- The transferee of a negotiable instrument is entitled to file a suit in
his own name for enforcing any right or claim on the basis of the instrument.
 Notice of transfer- It is not necessary to give notice of transfer of a negotiable
instrument to the party liable to pay.
 Presumptions- Certain presumptions apply to all negotiable instruments, for example
consideration is presumed to have passed between the transferor and the transferee.
 Procedure for suits- In India a special procedure is provided for suits on promissory
notes and bills of exchange.
 Number of transfer- These instruments can be transferred indefinitely till they are at
maturity.
 Rule of evidence- These instruments are in writing and signed by the parties, they are
used as evidence of the fact of indebtness because they have special rules of evidence.
 Exchange- These instruments relate to payment of certain money in legal tender, they
are considered as substitutes for money and are accepted in exchange off goods
because cash can be obtained at any moment by paying a small commission.

Essential Elements of Negotiable Instrument:

To be negotiable an instrument must have the following elements:

1. A negotiable instrument must be in writing, which includes typing, printing and

engraving.

2. The instrument must be signed by the maker or drawer.

3. There must be a promise if it is a promissory note or order to pay if it is a bill of
exchange.

4. The promise or order must be unconditional. If it is conditional the instrument is not

negotiable.

5. A negotiable instrument must call for payment in money. If the promise or order is for
anythingelse, the instrument is not negotiable.

6. The instrument must not only call for payment in money but also for a certain sum.

7. A negotiable instrument must be payable at a time which is certain to arrive which may
be payableeither on demand or at a particular time or at a determinable future time. If it is
payable when convenient,the instrument is not negotiable because the day of payment may
not arrive. The requirement that theremust be a time certain to arrive does not mean that the
instrument must specify a fixed date for payment.

8. A negotiable instrument must be payable to order or bearer: Without the words order or
bearer, theinstrument would not be negotiable because, if they were not there, no one but the
payee could presentthem for payment. If it is merely payable to Ram, it is not negotiable. It
is not necessary that theinstrument actually use the words‘order’ or ‘bearer’. And other words
indicating the same intention are sufficient.Pay to holder could be used in place of ‘order’ or
‘bearer’.

9. In the case of a bill of exchange or cheque, the drawee must be named or described with
reasonablecertainty. The purpose of this requirement is to enable the holder of the instrument
to know to whom hemust go for payment.

Objectives of the Study

In the backdrop of the above perspective, the present study has been undertaken with
the objective of in-depth contemplation and deliberation upon the following points:

 Need for strict implementation of penal provisions with deterrent hand,

keeping in view the burgeoning cases of dishonouring of cheques and escal
ating trends of litigation under Section 138 of the Act.
 Core problem areas in the spheres of dilatory procedure, ineffective
implementation of existing legal framework, bulk pendency and exponential
increase in fresh institution of cases, especially in light of the fact that the
 provisions pertaining to dishonouring of cheque under the Act, even after
extensive amendments, have failed to serve the objective of the statute.
 The law relating to dishonouring of cheques is inherently technical in nature
and ambit; therefore taking the benefit of technical infirmities, even the most
unscrupulous debtors escape unpunished leaving the destitute creditors with
no other option but to seek long drawn remedy of recovery before the civil
court, that too within the statutory period of limitation of three years and on
payment of ad-valorem court fees;
 The compensatory aspect is being given precedence over the punitive aspect
due to which the debtors can very well comprehend and surmise that even
after lapse of few years before the trial court, they would get an opportunity to
escape unblemished by just offering to make the payment of the cheque
amount to the complainant;
 This protective legislation is not only being misused by drawers but also by
holders of cheques and holders in due course to exploit genuine drawers and
even in such cases where the cheque has not been drawn for payment of any
legally recoverable debt, the statutory presumptions under sections 118 and
139 continue to favour the complainant.
 The continuous misuse of cheques as instruments of credit, has posed a real
threat to the sustainability, credibility and existence of negotiable instruments
in the commercial world.
 The law relating to dishonour of cheque, being closely and overpoweringly
guarded by v aried technical aspects at every stage, has failed to protect and
serve the interests of a common man. It is not only the drawer of the cheque
but also the holder and holder in due course of law, who are indulging in
active misuse of this protective legislation.
 The judicial view with regard to compensatory aspect andcompounding of
offence at any stage has diluted the deterrent effect of the statutory provisions
which were otherwise purported to be strongly punitive in nature.

In the light of the above core issues, a strong need has arisen to address these problems
urgently and suggest reformatory measures so that the provisions pertaining to dishonour of
cheque in India are not reduced to mere dead letters of law.

Negotiable Instrument – kinds

According to Black's Law Dictionary, Negotiable instrument is a written and

signed unconditional promise or order to pay a specified sum of money on demand or at
definite time payable to order or bearer.

       According to Section 13 of the Negotiable Instrument Act, 1881,  A “negotiable

instrument” means a promissory note, bill of exchange or cheque payable either to order or to
bearer )
Explanation 1:

        A promissory note, bill of exchange or cheque is payable to order which is expressed to

be so payable or which is expressed to be payable to a particular person and does not contain
words prohibiting the transfer or indicating an intention that it shall not be transferable.

Explanation 2:

        A promissory note, bill of exchange or cheque is payable to bearer which is expressed to

be so payable or on which the only or last endorsement is an endorsement in blank.

Explanation 3:

       Where a promissory note, bill of exchange or cheque, either originally or by

endorsement, is expressed to be payable to the order of a specified person, and not to him or
his order, it is nevertheless payable to him or his order at his option.

       A negotiable instrument may be made payable to two or more payees jointly, or it may
be made payable in the alternative to one of two, or one or some of several payees.

Kinds of Negotiable Instruments- 

There are two kinds of Negotiable Instrument namely-  (a)  Negotiable instrument by status
and (b) Negotiable instrument by custom for usage

1)  Negotiable instrument by status-

      According to Section 13 of the Negotiable Instrument Act 1881, there are three types of
instruments for viz, Cheque, Promissory note, Bill of exchange. these instruments are called
negotiable by status

2) Negotiable instrument by custom for usage

  According to Section 137 of the Transfer of Property Act, 1882 Instrument may be
negotiated by custom and their negotiability will be recognized by Courts.  It includes
banknote,  dividend warrant, postal order, Bank draft, Railway receipt etc.

Negotiable Instrument is a written document that guarantees to pay a certain amount

of money to the bearer of the document either on demand or by setting time. It is a method of
transferring liability from one person to the other. They are mainly used for commercial
transactions and financial dealings.
Examples of Negotiable Instruments include a cheque, a promissory note and a bill of
exchange.

The characteristics of Negotiable Instrument includes recovery, owing to order or bearer, can
be transferred voluntarily, no defects and considered to be presumption to the holder.
Negotiable Instrument is always transferred by a single process and it can be recovered at any
time. The document is drawn, accepted, endorsed and transferred for consideration.

Different types of Negotiable Instruments are:

Mainly there are two types of Negotiable Instruments: the instruments which can be
negotiated by statute and the instruments which can be negotiated by custom or usage.
Promissory Notes, Bills of Exchange and Cheques are the instruments which are negotiated
by statute. Circular notes, Bank notes, share warrants etc. are examples of instruments that
are negotiated by custom or usage.

Promissory notes

A promissory note is a legal instrument in which a party promises to pay a certain

amount of money to another party either at a fixed time or on demand of the payee. The
promissory note is unconditional which is signed by the maker. The maker is the person who
makes the promissory note and promises to pay the amount. The payee is the person to whom
the payment is made.

Some of the essential features of promissory note include, it must be in writing, it is

unconditional and it is payable to a definite person. A maker or payer need to sign the
promissory note. The amount can be paid on demand or at a fixed or determined date. The
document must bear a stamp that is prescribed by the law of the country.

Definition

PROMISSORY NOTE (Sec. 4)

Promissory note is defined by Section 4 of the Negotiable Instruments Act. A promissory

note is an instrument in writingcontaining an unconditional undertaking, signed by the maker,
to pay a certain sum of money only to or to the order ofa certain person or to the bearer of the
instrument.

An instrument to be a promissory note must possess the following elements :

(1) It must be in writing: Mere verbal promise to pay will not do. The method of writing is
important,but it must be in a media that can not be altered easily.
(2) It must contain an express promise or clear undertaking to pay: A promise to pay cannot
beinferred; it must be express. A mere acknowledgement is not enough. The following are
notpromissory notes, as there is no promise to pay:

(a) “Mr. A.I.O.U. Rs. 500”.

(b) “I am liable to pay you Rs. 1,000”.

(c) “I have taken from you Rs. 150; whenever you ask for it; I have to pay” But the
following is apromise to pay:

(a) “I promise to pay Ram or order Rs.1,500.”

(b) “Ram, I owe you Rs. 1,500 and promise to pay the same for value received.” (c) “I
promise to payRam 1,500 at Kanpur.”Although the promise to pay may be opposed to public
policy and unenforceable, once a promissory note is executed the promise to pay is
performed because a promissory note amounts in law to paymentand what vitiates a promise
does not vitiate a payment.

(3) The promise to pay must be unconditional: We have seen before that an instrument, to
be negotiable,must contain an unconditional promise or order. So a promise to pay contained
in a note must beunconditional. A conditional undertaking destroys the negotiable character
of an otherwise negotiableinstrument. But a promise to pay at a particular place or after a
specified time or on the happening of anevent which must happen is not conditional. For
example, I promise to pay B Rs.50 seven days after C’s death isnot conditional, for C is
certain to die some time or the other.

(4) The maker must Sign the promissory note: The person who draws the instrument and
signs it is knownas the maker and the person to whom the promise is made is called the
payee. The instrument will becomplete only when it is signed by the maker even when it is
written by him and his name appears in thebody of instrument. Signature may be in any part
of the instrument, and may be expressed by a thumb markor any other mark, if the executant
is illiterate.

(5) The maker must be a certain person: The note itself must show clearly who is the person
engaginghimself to pay, Where the promisors are more than one they may bind themselves
jointly or jointly andseverally but not in the alternative.
(6) The payee must be certain: A promissory note must contain a promise to pay to some
person orpersons ascertained by name or designation or to their order. A promissory note
made payable to themaker himself it nullity but if such a note is endorsed by him, it becomes
payable to bearer and is valid.

(7) The sum payable must be certain and the amount must not be capable of contingent
additions orsubstractions. Thus, if A promises to pay Rs.500 and all other sums which shall
become due to him or topay 180 and all fines according to rules, the instrument is not a
promissory note.

(8) Payment must be in legal money of the country. Thus an agreement to pay money or
grain or todeliver 100 tons of iron is not a promissory note.

(9) A bank note or a currency note is not a promissory note within the meaning of this
section. They areexpressly excluded from the definition, as they are treated as money and not
merely securities for money. A promissory note or a draft cannot be made payable to bearer,
no matter whether it is payable on demandor after a certain period.

(10) Other matters of form like number, place, date etc., are usually found given in notes, but
they are notessential in law.

Bill of Exchange

Bill of exchange is a written promissory document for a person to pay a certain

amount of money to the required payee. It also contains unconditional order which is signed
by the maker for directing a person to pay.

The essentials of the bill of exchange include amount which is payable are to be certain, the
payment is done by money and the bill must be paid at required time or on demand. Bill of
exchange is always paid by the creditor and it should be accepted by the drawee.

Definition

According to Section 5 of the Negotiable Instruments Act, A bill of exchange is an

instrument in writing containingan unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or tothe order of, a certain person or to
the bearer of the Instrument. The definition of Bill of Exchange is very similar tothat of a
promissory note and for most purposes the rules which apply to notes are in general
applicable to bills.The fundamental ingredients are the same. The drawer like the makers
must be certain, the order to pay must beunconditional, the amount of Bill and the payee and
the drawer, must be certain and the contract must be in writing.The maker of a note
corresponds to the acceptor of a bill, and when a note is endorsed it is exactly similar to abill,
for then it is an order by the endorser of the note upon the maker to pay the endorsee. The
endorser is, as itwere, the drawer, the maker, the acceptor and the endorsee is the payee. But
a bill differs from a note in someparticulars.The usual form of a bill of Exchange is given
below:

Essentials of a Bill of Exchange

1. It must be in writing and may be in any language.

2. It must be an order to pay by the drawer to the drawee.

3. The order to pay must be unconditional. If the order to pay is conditional, the bill
of exchangebecomes invalid.

4. There are three parties in a bill of exchange. (a) Drawer: The personwho makes
the bill.

(b) Drawee: The person who is ordered to pay or on whom the bill is drawn.

(c) Payee: The person who is to receive the payment.

5. The bill must be signed by the drawer otherwise it will become an inchoate
instrument.

6. The order to pay must be of a certain sum and it must be in money only.

7. The payee and drawee must be certain.

8. It must be properly stamped under the Indian Stamp Act.

Distinction between Bill and Note

 The below given differences are enumerated from the above meanings of both
the instruments—

(1) In a note there are only two parties - the maker and the payee. In a bill there are
three partiesnamely, drawer, drawee, and payee; though two out of three capacities may be
filled by one andthe same person. In a bill the drawer is the maker who orders the drawee to
pay the bill to aperson called the payee or to his order. When the drawee accepts the bill he is
called the acceptor.

(2) A note cannot be made payable to the maker himself, while in a bill the drawer
and payee ordrawee and payee may be the same person.

(3) A note contains an unconditional promise by the maker to pay to the payee or his
order; in a billthere is an unconditional order to the drawee to pay according to the drawer’s
directions.

(4) A note is presented for payment without any prior acceptance to the maker. A bill
payable aftersight must be accepted by the drawee or some one else on his behalf before it
can be presentedfor payment.

(5) The liability of the maker of a note is primary and absolute, but the liability of
the drawer of a billis secondary and conditional. He will be liable only if the bill is not

accepted or paid by the drawer.

(6) The maker of the note stands in immediate relation with the payee. while the
maker or drawer of anaccepted bill stands in immediate relation with the acceptor and not the
payee.

(7) Foreign bills must be protested for dishonour when each protest is required to be
made by the lawof the country where they are drawn but no such protest is necessary in the
case of the note.
 (8) When a bill is dishonoured, due notice of dishonour is to be given by the holder
to the drawer andthe intermediate indorsers, but no such notice need be given in the

case of a note .

Types of Bill of Exchange

A bill of exchange may be an Inland bill or a Foreign bill. Originally, bill was a
means by which a trader in onecountry paid a debt in another country without the
transmission of coin. An Inland bill is drawn and payable in India or drawn in India upon
some person resident in India, even though it is made payable in a foreign country. A bill
which isnot Inland is a Foreign Bill (Sec. 12).

Accommodation Bill

Legitimately speaking, an accommodation bill is not a bill as such. It is simply a

mode of accommodating a friend inbusiness. For example, A may be in want of money
and approach his friend B and C who, instead of lending themoney directly, propose to draw
an‘Accommodation Bill’ in his favour. A promises to reimburse C before the period ofthe
billis up (which is generally 3 months). If the credit of B and C is good, this device enables A
to get an advancefrom his banker at the commercial rate of discount. The real debtor in this
case is not C, the acceptor, but A the payeewho has engaged to find the money for its ultimate
payment, and A is here the principal debtor and the others merelysureties. Thus, as between
the original parties to the bill the one who would prima facie be principal is in fact, thesurety
whether he be drawer, acceptor or indorser, that bill is an accommodation bill.

Rights to Duplicate Bill

Where the bill is not overdue but has been lost, the person who was holder of it may
apply to the drawer, to givehim another bill of the same tenor, giving security to the drawer if
required, to indemnify him against all personswhatever in case the bill alleged to have been
lost shall be found again. If the drawer refuses to give such duplicate billmay be compelled to
do so by means of a suit. Holder is the person who can ask for a duplicate.

Bank Draft

A demand draft is a bill of exchange drawn by a bank on another bank, or by itself on

its own branch, and is anegotiable instrument. It is like a cheque but differs in
certainrespects. First, it can be drawn only by a bank onanother bank and not by a private
individual as in the case of cheques. As against a cheque, it cannot becountermanded easily
either by its purchaser or by the bank to which it is presented. Finally, it cannot be
madepayable to bearer. These days it is a popular mode of making payments. Banks charge a
nominal amount of commissionfor this service.

Bill in Sets

Foreign bills are generally drawn in sets of three each. According to S. 132, bill of
exchange may be drawn inparts, each part being numbered and containing a provision that it
shall continue to be payable so long as the otherpart remains unpaid. All the parts together
make a set but the whole set constitutes one bill and is extinguished whenone of the parts, if a
separate bill, would be extinguished.The bills are drawn in sets, in foreign trade in
order to facilitate prompt and easy presentation for acceptance and payment. It also
reduces the risk of loss in course oftransit.

Cheque

A cheque can be defined as an order to the bank to pay the stated amount in the
document to the account of the drawer. It is payable on demand and it can be considered as a
bill of exchange. The cheque can be crossed to end its negotiability. The acceptance of
cheque is not always needed.

The cheque is always accepted into the account of the payee. A cheque bounce is a cheque
which cannot be able to process due to the insufficiency of funds in the account holder.
Banks will always return such cheques.

There are different types of cheques. Some of them are, order cheque, bearer cheque, marked
cheque, open cheque, crossed cheque, bad cheque, Ante-dated Cheque, Post-dated Cheque,
Stale Cheque, Mutilated Cheque, Digital Cheque- Cheques in Electronic form and Truncated
Cheques, Banker Cheque, Golden Cheque and Travellers Cheque.

Other Negotiable Instruments include Bill in sets, Accommodation Bill, Ambiguous

Instruments, Inchoate Stamped Instrument and Forged Instruments.

CHEQUES

A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than ondemand. It is like a bill of exchange always drawn on a bank payable on
demand. Therefore, it must satisfy all therequirements of a bill (section 6).It must be in
writing and signed by the drawer. It should contain an unconditionalorder to a specified
banker to pay a certain sum of money to a particular person or to his order or to the bearer
ondemand.

Distinction between Bills and Cheques

1. A cheque is always drawn on a banker, while a bill may be drawn on anyone, including a
banker.
2. A cheque’s payment is made when it has been demanded whereas in case of a bill its
nature may besuch that payment has to be made on demand or after the expiry of a certain
period after date or sight.

3. In case of a cheque a bearer can get payment on demand but a bill's payment can not be
demanded by the bearer.

4. Acceptance of bill is necessary for the demand of its payment, in case of cheque
acceptance isnot required and is aimed for quick payment.

5. In case of bills ordinarily a provision for grace days is made (which is generally of

3 days) whereas in case of cheques no such grace is allowed.

6. In the absence of presentment of a bill for payment the liability of bill’s drawer ceases,
whereasliability of cheque’s drawer ceases when the delay caused in presentment for
payment results in damages.

7. Notice must be served when the bill is dishonoured, but when a cheque is not honoured,
no such notice is necessary.

8. A cheque being a revocable order the authority may be revoked by countermanding

payment, andis determined by notice of the customer’s death or insolvency. In case of a bill
the position is different, itcan not be revoked.

9. A cheque may be crossed to secure its payment, no such crossing can be done in case of a
bill.

Liability of a Banker

A banker is one whose business is to honour cheques drawn upon him by persons and
for whom he receives money oncurrent accounts. If a person opens a current account by
depositing certain money with the banker, a relationship of creditor and debtor
emerges between the customer and the banker and the banker undertakes to honour
thecheques drawn by the customer so long it has sufficient funds to the credit of the
customer. If a banker withoutjustification, fails to obey his customer’s mandate which is
issued in the form of a cheque, he will be liable tocompensate the drawer for any loss or
damage suffered by him. But the payee or the holder of the cheque has nocause of action
against the banker as the obligation to honour cheques is only towards the drawer.The
customer may,however, be awarded very heavy damages, if he proves loss of credit on
account of the dishonour, and the rule is thesmaller the amount of a cheque dishonoured the
larger the amount the damages.There are numerous cases in whichthe banker must refuse to
honour his customer’s cheques :

1. When customer countermands payment. When a customer after issuing a cheque, issues
instructions not tohonour a cheque, the banker must not pay it. If the bank pays it, he will be
liable to make good the customer’sloss.
2. When banker receives notice of customer’s death. Notice of customer’s death terminates
banker’s authorityto honour cheques.

3. When customer becomes insolvent. When a customer has been adjudged an insolvent, all
his assetsvest in the Official Assignee or the Court, and the banker must thereafter refuse to
pay his cheques.

4. When banker receives notice of customer’s insanity, he must not honour his cheques.

5. When the banker receives a garnishee order from the court relating to the customer’s
money, the bankershould not honour cheques drawn against the customer’s account.

6. The banker should not honour his customer’s cheques after the customer has given notice
of assignment ofthe credit balance of his account.

7. When the holder ’s title is defective, and banker comes to know of the defect.

8. When the banker comes to know that the customer is drawing cheques for unlawful
purposes.

9. When the banker has received a notice from the customer for closing the account.

When banker may refuse payment. In the following cases the banker may, if he likes, refuse
tohonour the cheques :

1. Where the cheque is post-dated and is presented before the date noted on it. The banker is
required topay the cheque on the date which the cheque bears and not before. In fact,
payment before that date ismade by the banker at his own risk, for if the customer
countermands payment or issues another chequebearing an earlier date, the banker cannot
debit the customer’s account with the amount of the post-datedcheque.

2. Where the banker has not got sufficient funds of the drawer with him.

3. Where the funds in the hands of the banker are not properly applicable to the payment of
the customer’s cheque.For example, the funds are held by the customer in trust, and the
cheque is issued in breach of trust, the bankermay refuse to pay.

4. Where the cheque is of doubtful legality. The banker may refuse to pay if the cheque is
irregular orambiguous, materially altered or drawn in a doubtful legality.

5. Where the cheque is presented after office hours.

6. Where the cheque is presented at a branch where the customer has no account or where his
account isoverdrawn.

7. Where some persons have joint account and the cheque is not signed by all jointly, or by
the survivors of them. Butif the cheques are payable to Either or survivor then thechrque
signed by any of the two parties will be sufficientfor payment.
8. Where the cheque has been allowed to become stale, i.e., it has not been presented for
payment within a reasonabletime after the date mentioned in it. In India, a cheque presented6
months or more after the date is regarded as state.

Crossing of Cheques

A cheque is either an “Open cheque” or a “crossed cheque”. An open cheque is

uncrossed and can be presented by thepayee to the banker on whom it is drawn and will be
paid over the counter. An open cheque is, however, liable togreat risk in course of circulation.
It may be stolen or lost and the finder may get it cashed. In order to avoid the lossesincurred
by open cheques getting into the hands of wrong parties the custom of crossing was
introduced.

A Crossing is a direction to the paying banker to pay the money generally to a banker or to a
particular banker, asthe case may be, and not to pay to the holder across the counter. A
banker paying a crossed cheque over the counterwill be liable to the customer if the holder
turns out to be a person not entitled to pet payment. The object ofcrossing is to secure
payment to a banker so that it could be traced to the person receiving the amount of the
cheque.

There are two types of crossing - General and Special. To these may be added another type-
Restrictive crossing. Ageneral crossing is one where a cheque bears across its face two
transverse lines with or without the words “andcompany” or “& Co.” or two parallel
transverse lines with or without the words “not negotiable”. If a cheque iscrossed generally;
the paying banker shall pay only to a banker.A special crossing is defined thus: “Where a
chequebears across its face an addition of the name of a banker, either with or without the
word “not negotiable” thataddition shall be deemed a crossing and the cheque shall be
deemed to be crossed specially and to be crossed to thatbanker.” In a general crossing the
parallel transverse lines are necessary although in a special crossing they need notbe there.
But in the later case, the name of the banker is essential to whom or to whose collecting agent
alone thepayment will be made. Restrictive crossing have been adopted by commercial usage
in order to obviate the riskof a their obtaining payment. They consist in addition to the
general or special crossing the words‘Account Payee’only. Such crossing vvarn the collecting
banker that the proceeds are to be credited only to the account of thepayee, of the party
named.

If a cheque is made payable to a payee and to him only, it becomes non-transferable in the
strict sense. He is theonly person who can get payment. But where a cheque is crossed and
bears the word ‘not negotiable’ it is transferable, but it loses its special feature of
negotiability. Such a cheque is like any goods, the transferee ofwhich does not get a better
title than that of the transferor, the transferee for value and in good faith is not aholder in due
course.A cheque may be crossed by the drawner or by the holder. The holder may add the
words‘notnegotiable’ to a crossing. The word not negotiable represent the desire of the
drawer that it should not be negotiatedfurther.

Examples of Crossing
A. General Crossing (Sec. 123)& Co.(i) Two parallel transverse lines with or without the
words ‘& Co.’ across the face of a cheque.Not Negotiable(ii) Two parallel transverse
lines across the face of a cheque with the words ‘not negotiable’.

State Bank of India

B. Special Crossing (Sec. 124)

State Bank of IndiaNot NegotiableTwo parallel transverse lines across the face of a
cheque with the name of a banker.

A/c Payee OnlyC. Restrictive Crossing

A/c Payee OnlyNot NegotiableAddition of words ‘account payee only’ to the words general
or special crossing.

Who can do crossing

According to Section 125 following persons can cross a cheque :

1. The drawer-generally or specially.

2. The holder who gets an uncrossed cheque can subsequently cross it. If he gets a
generallycrossed cheque, he may cross it specially. To generally or specially crossed cheques,
he may add thewords ‘not negotiable’.

3. Where a cheque is specially crossed to a banker the holder may again cross it specially
toanother bank or to his agent for collection.

4. Where a cheque is crossed specially the banker to whom it is crossed may again cross it
specially to another bank or his agent, for collection.

Protection of Paying Banker

The paying banker is in a privileged position as regards the payment of his customer’s
cheques. According to section 85 where a cheque payable to order signifies to be indorsed by
or on behalf of the payee, the banker is discharged by payment in due course. He can debit
the account of the customer with the amount even though the endorsement of the payee turns
out subsequently to have been forged, or the agent of the payee without authorityindorsed it
on behalf of the payee. It would seem that the payee includes indorsers. This protection is
granted because a banker cannot be expected to know the signatures of all persons in the
world. He is only bound to know the signatures of his own customers. Therefore the forgery
of drawer’s signature will not ordinarily protect the banker, but even in this case, the banker
may debit the customer’s account, if he can show that the forgery was intimately connected
with the negligence of the customer and was the proximate cause of loss. With regard to
bearer cheques the rule is ‘once a bearer cheque always a bearer cheque’. Therefore, where a
cheque is originallyexpressed by the drawer himself to be payable to bearer. The banker may
ignore any indorsements on the cheque.He will be discharged by payment in due course.
 But a cheque that becomes bearer by a subsequent indorsement in the blank is not
covered by this section (Section85).

Collecting Banker: By Sec.131, where a banker in good faith and without negligence receives
payment on behalf of a customer of a cheque crossed generally or specially to himself and the
customer has no title to the cheque, the banker is protected against the claims of true owner.
The banker will be protected only if he proves that :

(i) the cheque collected by him was crossed before it reached his hands,

(ii) the cheque was presented by or on behalf of the customer and that he received payment
forthe customer.

(iii) he acted in good faith and without negligence in collecting the money due on the
cheque.Therefore, if he collects an uncrossed cheque or a crossed cheque for a non-customer,
he gets no protection.

Instrument payable on demand — The following instruments are payable on demand :—

1. A cheque is always payable on demand.

2. A note or bill in which no time for payment is specified.

3. A note or bill expressed payable “on demand”, or “at sight”, or “on presentment”.
Instrument whichare not payable on demand are expressed to be payable at certain period
‘after sight’ or ‘after date’, or afterhappening of ‘an event’ which is certain to happen. Thus,a
bill or note may be made payable 30 days after sight,60 days after date, or 90 days after the
death of A, and payment can be demanded on presenting it on itsmaturity.Sometimes it may
happen that an instrument is so worded that it can be interpreted either as a bill ofexchange
or as a promissory note. Such an instrument is called an Ambiguous Instrument, and the
holder may treat iteither as a bill or a promissory note. A bill drawn by an agent on his
principal, or by one branch of a bank on anotheris an ambiguous instrument and the holder
may treat it as a bill or a note.Again, it may happen that a person signsand delivers to another
a paper stamped in accordance with the law relating to negotiable instrument, and
eitherwholly blank or having written thereon an incomplete negotiable instrument, he is said
to issue an Inchoate Instrument. He thereby gives authority to the holder of the instrument to
make or complete up on it a negotiable instrument, for any amount not exceeding the amount
covered by the stamp. A signs a promissory note without stating the amount payable, puts a
25 paise stamp on it and hands it to his clerk B for making certain purchases and asks him to
put the amount. B purchases goods worth Rs.400 but puts Rs.500 in the note. The note is
negotiated to C, who takes in good faith and for value. C can recover Rs.500 from A.
Maturity of an Instrument- The maturity of a bill of exchange or apromissory note is the date
on which it falls due. An instrument payable at a specified period after sight, or after date
orafter the happening of a certain event is entitled to three days of grace. Such a bill matures
or falls due on the lastday of grace, and must be presented for payment on that day. If it is
dishonoured, a suit can be filed on the next day after maturity. When a note or bill is
expressed to be payable at a stated number of months after sight, or after date; or after certain
event, the period of payment terminates on the day of the month which corresponds with
thedate of the instrument, or with the date of acceptance of the bill be accepted, or, presented
for sight or noted or protested for non-acceptance. If the month in which the period would
terminate has on corresponding day, the period shall be held to terminate on the last day of
such month. If the date of maturity falls on a public holiday, the instrument is payable the
preceding business day. Thus, if a bill is at maturity on a Sunday, it will be deemed due
onSaturday and not on Monday.

The Instruments entitled to days of grace are :

(a) A bill of exchange or promissory note payable at a specified day. (b) A bill or note
payableafter sight,

(c) A bill or note payable at a certain period after date, and

(d) A bill or note payable at a certain period after the happening of a certain event. The
Instruments which are not entitled to days of grace :

(a) A cheque,

(b) A bill or note payable at sight or on presentment or on demand and

(c) A bill or note in which no time is specified.

Parties to a Bill of Exchange

1. The Drawer: the person who draws the bill.

2. The Drawee: the person on whom the bill is drawn.

3. The Acceptor: the person who accepts the bill. Generally, the drawee accepts the bill,
but stranger may accept on behalf of the drawee.

4. The Payee: one to whom the sum stated in the bill is payable. Either the drawer or any
otherperson may be the payee.

5. The Holder is either the original payee or any other person to whom the payee has
endorsed thebill. In case of the bearer bill, any bearer is the holder.

6. The Endorser: when the holder indorses the bill to anyone else he becomes the endorser.

7. The Endorsee is the person to whom the bill is endorsed.

8. Drawee in case of need: Besides the seven parties, another person called the drawee in
case ofneed, may be introduced at the option of the drawer. The name of such a person is
added to thebill so that when the bill is dishonoured either by non- acceptance or by non-
payment, the billmay be accepted or paid.

9. Acceptor for Honour: a person who voluntarily becomes a party to a bill as an acceptor
to savethe honour of the drawer at any indorser.

Parties to a Promissory Note

1. The Maker: the person who makes or executes the note promising to pay the amount
stated therein (Debtor).

2. The Payee: one to whom the note is payable (Creditor).

3. The Holder: is either the payee or some to whom he may have endorsed the note.

4, The Endorser and Endorsees: Same as in the case of a bill.

Parties to a Cheque

1. The Drawer: the person who draws the cheque.

2. The Drawee is always the drawer’s banker on whom the cheque is drawn.

3, The payee, Holder, Indorser and Indorsee: same as in the case of a bill of exchange or
promissory note.

Holder and Holder in due course

A holder of negotiable instrument is a person who is entitled to be legally in

possession of the instrument and torecover or receive the amount due thereon from the
parties to the instrument (Sec.8). A person who has obtainedpossession of the instrument by
illegal means, e.g. by theft, or under a forged indorsement, is not a holder. He cannotrecover
amount from the parties thereto.A holder in due course is a person who obtained possession
of the instrument for valuable consideration before its maturity, (i.e. before the amount
mentioned in it becomespayable), and had no cause to believe that any defect existed in the
title of the person from whom he derived title (Sec.9)It follows from the above that a person
is a holder in due course if:

(a) he has obtained the instrument for valuable consideration. Where the instrument is
obtained by gift or byillegal means, the holder can not become a holder in due course.
(b) he has obtained the instrument complete and regular in all respects.

(c) he has become the holder before its maturity.

(d) he has obtained the instrument in good faith. Good faith simply means that a person
takes the instrument without sufficient cause to believe that any defect existed in the title of
the person fromwhom it is received. So where an instrument was torn into pieces and then
pasted or the amount on the billwas erased, it should have arouse suspicion and the holder
may not be called holder in due course.

Special Rights or Privileges of a Holder in due course

According to Sec.53 of the Act, once a negotiable instrument passes through the
hands of a holder in due course, itgets cleansed of all defects, unless he himself was a party to
fraud or illegality committed regarding the instrument.Therights of a holder in due course
can be summed up as follows :

1. He gets a good title to the instrument even though the title of the transferor is defective.
Thus,he may get a better title than that of the transferor; e.g. if A steals a bill from B and
endorses to C,a holder due course, C can recover the amount from B, although A cannot
recover from B.

2. Every prior party to a negotiable instrument is liable thereon to a holder in due course
untill theinstrument is duly satisfied.

3. A holder in due course can sue all the parties liable to pay in his own name.

4. The holder in due course gets a good title even though the instrument was originally and
inchoatestamped instrument and the transferor completed the instrument for a sum greater
than what wasintended by the maker. He can recover the full amount provided the stamps
affixed were sufficientto cover the amount.
5. Where a bill is drawn payable to drawer’s order in fictitious name and endorsed by the
same asdrawer’s signature, the acceptor cannot plead, by way of defence, then the bill is
drawn in fictitiousname.

6. In the eyes of the law, every holder is a holder in due course unless proved otherwise.

7. Even though between the immediate parties to an instrument it was caused by fraud etc.,
oncethe instrument passes through the hands of a holder in due course, it is purged of all
defects, andany person acquiring it takes it free of all defects, unless he was himself apart to
the fraud.

8. The maker of promissory note, the drawer of bill of exchange or cheque, and
acceptor of abill for the honour of the drawer, in a suit thereon by the holder in due course, is
not permitted todeny the validity of the instrument as originally made or drawn. (A minor can
plead minority).

9. The indorser of a negotiable instrument, in a suit thereon by the holder in due course,
course,is not allowed to deny the signature or the capacity to contract of any prior party to
the instrument.

10. In case of forged instrument, a holder in due course will get no title because it amounts
tocomplete absence of title rather than a mere defect in title. (Sec.58).

Payment in due course

The payment of a negotiable instrument should be made to the right person by the
payjng banker or the acceptor of thebill, otherwise the latter shall be responsible for the same.
The payment of a negotiable instrument is not withoutcertain risks. Thus, the Negotiable
Instrument Act provides protection to the paying banker or the drawee of a bill,provided the
payment is made as required in the Act. Such payment is called as payment in due
course.According toSection 10 “payment in due course” is 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 areasonable ground for
believing that he is not entitled to receive payment of the amount mentioned therein.
A payment in due course has the following essential features :

1. The payment should be made according to the true intentions of the parties to the
negotiableinstrument, as is apparent from the document itself. Payment may be made either
in cash or through aclearing house or by a draft. If the banker makes payment of a post-dated
cheque before the datementioned therein or pays a crossed cheque at the counter, then he
acts against the true intentions of thedrawer and hence the payment will not be treated as
payment in due course.

2. The payment should be made in good faith and without negligence. The banker should
made thepayment in the good faith, i.e., honestly and not fraudulently. He should take all
necessary precautions andact as a reasonable person will act in the particular circumstances
of a case.

3. Payment must be made to the person in possession of the instrument in circumstances

which do notarouse suspicion about his title to posses the instrument and receive payment
thereof. The payment of theorder cheque should be made to the right person after proper
identification. Sometimes the appearanceand behaviour of the person presenting the cheque at
the counter may arouse a suspicion in the mind of the banker about the validity of the
formers’ authority to receive payment.

Capacity of Parties (who can be parties to negotiable instrument)

The capacity to make draw, accept, negotiate and indorse a negotiable instrument depends
upon the capacity to enterinto contracts. Therefore, every person competent to contract may
incur liability by becoming a party to a negotiableinstrument. Thus, a minor , lunatic or a
drunken person does not incur liability and can not become a party to thenegotiable
instrument, but he can acquire rights under it. So if a cheque is drawn in favour of a minor ,
i.e., he is a payee, he can recover the amount stated in the cheque. Also the absence of
capacity of one or more of the partiesto a negotiable instrument in no way diminishes the
liability of the competent parties.A draws a cheque in favour ofB, a minor. B endorses it in
favour of C, who in turn endorses it in favour of D. The cheque is dishonoured by thebank. D
can recover from C and A, but not from B, the minor; and C can recover from A but not
from B.An insolventperson cannot draw, make, accept or indorse a negotiable instrument,
although if he indorses it as payee to aholder in due course, the letter can recover from all
parties, except the insolvent.A corporation or companycan incur liabilities under a negotiable
instrument if it is so empowered by its memorandum of association. A tradingcompany has,
however an implied authority to execute a negotiable instrument, while a non-trading
company has no such implied authority.The Karta or manager of Joint Hindu Family can bind
the Joint Family by executing a negotiableinstrument, provided the transaction is for the
benefit of the family or is for legal necessity.

Liability of Parties
1. The maker of a promissory note and the acceptor of a bill of exchange are primarily
responsible for thepayment due.

2. The drawer of a bill or cheque is bound in case of dishonour by the drawee or acceptor
thereof, tocompensate the holder, provided due notice of dishonour has been given to, or
received by the drawer.

In consequence, the maker of a note, the drawer of a cheque, the drawer of a bill until
acceptance, and the acceptorare respectively liable on the instrument as principal debtor.
Theother parties i.e., the intermediate indorses anddrawer of a bill after acceptance, are liable
thereon as sureties for the maker, drawer or acceptor.In between partiesare liable as sureties,
each prior party is also liable thereon as a principal debtor in respect of each
subsequentendorsement.A draws a bill payable to his own order on B, who accepts it. A
afterwards indorses the bill to C, C to Dand D to E. As between E and B, B is the principal
debtor, and A, C and D are his securities. As between E and A, Ais the principal debtor and
C and D are his sureties. As between E and C, C is the principal debtor and D is
hissurety.The maker of a note and the acceptor before maturity of a bill are bound to pay the
amount at maturity tothe holder. The acceptor of a bill at or after maturity must pay the
amount to the holder on demand. The drawer ofa cheque (i.e., the paying banker) must pay it
when presented for payment if the drawer has sufficient funds to hiscredit with the banker.

PARITES TO NEGOTIABLE INSTRUMENTS AND THEIR LIABILITY:

Section 30 to Section 32 and Section 35 to 42 of the Negotiable Instruments Act deal

with the liability of parties to Negotiable Instruments.

Liabilities of parties to Negotiable Instruments are as follows :

1. Liability of Drawer

2 Liability of Drawee of Cheque

3 Liability of endorse

4 Liability of Makers of note and acceptor of bill

5.Liability of Prior Parties to a holder in due course

1. Liability of Drawer:

According to Section 30 of the Negotiable Instrument Act 1881, The drawer of a bill
of exchange or cheque is bound in case of dishonor by the drawee or acceptor thereof, to
compensate the holder, provided due notice of dishonor has been given to, or received by, the
drawer .

2 Liability of Drawee of Cheque

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 so to do,
and, in default of such payment, must compensate the drawer for any loss or damage caused
by such default (Section 31 of the Negotiable Instrument Act 1881)

3 Liability of Makers of note and acceptor of bill :

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, and the acceptor of a bill of exchange at or after maturity is bound to
pay the amount thereof to the holder on demand. In default of such payment as aforesaid,
such maker or acceptor is bound to compensate any party to the note or bill for any loss or
damage sustained by him and caused by such default.(Section 32 of the Negotiable
Instrument Act 1881)

4 Liability of endorse :

Liability of endorser In the absence of a contract to the contrary, whoever endorses

and delivers a negotiable instrument before maturity, without, in such endorsement, expressly
excluding or making conditional his own liability, is bound thereby to every subsequent
holder, in case of dishonor by the drawee, acceptor or maker, to compensate such holder for
any loss or damage caused to him by such dishonor, provided due notice of dishonor has been
given to, or received by, such endorser as hereinafter provided. Every endorser after dishonor
is liable as upon an instrument payable on demand.(Section 35 of the Negotiable Instrument
Act 1881)

5.Liability of Prior Parties to a holder in due course

Every prior party to a negotiable instrument is liable thereon to a holder in due course
until the instrument is duly satisfied.(Section 36 of the Negotiable Instrument Act 1881)
According to Section 26 of the Act, Every person capable of contracting,( who has completed
18 years of age and is of sound mind) according to the law to which he is subject, may bind
himself and be bound by the making, drawing, acceptance, indorsement, delivery and
negotiation of a promissory note, bill of exchange or cheque.

Minor — a minor may draw, indorse, deliver and negotiate such instruments so as to bind all
parties except himself. Nothing herein contained shall be deemed to empower a corporation
to make, indorse or accept such instruments except in cases in which, under the law for the
time being in force, they are so empowered.

1) Maker: The person who makes a promissory note is called a maker. Liability: In the
absence of a contract to the contrary, the maker of a promissory note is bound to pay the
amount thereof at maturity according to the apparent tenor of the note or acceptance
respectively. In default of such payment, the maker is bound to compensate any party to the
note for any loss or damage sustained by him and caused by such default.

2) Drawer: The person who makes a bill of exchange or cheque is called a drawer. Liability:
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 as hereinafter provided.

3) Drawee: The person directed to pay by the drawer is called a drawee. Liability: 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 so to do, and, in default
of such payment, must compensate the drawer for any loss or damage caused by such default.

4) Acceptor: After the drawee of a bill has signed his assent upon the bill, or, if there are
more parts thereof than one, upon one of such parts, and delivered the same, or given notice
of such signing to the holder or to some person on his behalf, he is called the “acceptor”.
Liability: In the absence of a contract to the contrary, the acceptor before maturity of a bill of
exchange is bound to pay the amount thereof at maturity according to the apparent tenor of
acceptance and the acceptor of a bill of exchange at or after maturity is bound to pay the
amount thereof to the holder on demand. In default of such payment as aforesaid, the
acceptor is bound to compensate any party to the bill for any loss or damage sustained by him
and caused by such default.

5) Payee: The person named in the instrument, to whom or to whose order the money is by
the instrument directed to be paid, is called the “payee”.

6) Holder: He is either the payee or the person to whom the instrument may have been
endorsed.

7) Holder in due course: “Holder in due course” means any person who for consideration
became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or
the payee or indorsee 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: Under section 36 of the Act, every prior party (i.e the maker, drawer, acceptor or
intervening indorser) to the negotiable instrument is liable thereon to a holder in due course
until the instrument is duly satisfied.

Indorsement: When the maker or holder of negotiable instrument signs the instrument
with the intention to negotiate it, it is called an indorsement and the person who signs is
called an “indorser”. The signature can be made on the back or face of the instrument or on a
slip of paper annexed to it or it may also be a signature on stamped paper. As per section 46,
indorsement is complete only after delivery of the indorsed instrument to the indorsee.
Indorsement confers the property in the instrument to the indorsee ( transferee) with right of
further negotiation

Difference b/w cheque and promissory note

No               
                   Cheque               Promissory Note 

1 Meaning of Cheque – Meaning of Promissory Note

      A cheque is an order
to a bank to pay a stated
sum from drawer's
account, written on a
specially printed form.
               
–
             A promissory note is
an unconditional promise in
writing made by one person to
another, signed by the maker,
engaging to pay on demand or
at a fixed or determinable
future time, a sum certain in
money to the order of a
specified person, or to bearer.

2 Definition – Definition –

     According to Section 6      According to Section 4 of

of Negotiable Instrument
Act 1881, a cheque is a
bill of exchange drawn on
a specified banker and not
expressed to be payable
otherwise than on
demand.
the Negotiable Instrument Act
1881 “Promissory Note” is an
instrument in writing (not
being a bank-note or a
currency-note) containing an
unconditional undertaking
signed by the maker, to pay a
certain sum of money only to,
or to the order of, a certain
person, or to the bearer of the
instrument.
3 There are three parties In Promissory Note, there
namely – are two parties namely –

1) Drawer, 1) maker and 

2) Drawee and 2) Payee

3) Payee

4 It can be drawn only by A promissory note can be

the account holder of a made by any person.
bank.            

5 In a cheque, an order for In a promissory note, there is a

payment is given to the promise to pay.
bank
6
A cheque is payable It may be payable on demand
always on demand. or after a specified time

7 Grace time – Grace time –

  Three days of grace are   Three days of grace are given

not given in a Cheque in promissory notes payable
after a specified time.

8 The drawer and payee The maker and the

may be the same person. payee/drawer may not be the
same person.

9 No stamps required to be In a promissory note, stamps

affixed. are required to be Affixed.

10 Cheque can be Crossing of the promissory

crossed.                note is not required.
No
          Promissory Note            Bill of exchange 

1 Promissory note contains         In a Bill of exchange one

a promise or undertaking person makes an order to
to pay a certain sum of another person to pay a certain
money.    sum of money  
  According to Section 4
of the Negotiable
Instrument Act, 1881, “A
“promissory note” is an
instrument in writing (not
being a bank-note or a
currency-note) containing
an unconditional
undertaking signed by the
maker, to pay a certain
sum of money only to, or
to the order of, a certain
person, or to the bearer of
the instrument.
  According to Section 5 of the
Negotiable Instrument Act
1881,  A “bill of exchange” is
an instrument in writing
containing an unconditional
order, signed by the maker,
directing a certain person to
pay a certain sum of money
only to, or to the order of, a
certain person or to the bearer
of the instrument.

Example

 ‘A’ signs instruments in

the following terms:

(a) “I promise to Pay B or

order Rs.500”.

(b) “I acknowledge myself

to be indebted to B in
Rs.1,000, to be paid on
demand, for value
received.”

2 In case of Promissory There are three parties –

Note, there are two parties 1.Drawer
– 2.Payee
1.Maker ; and 3.Acceptor
2.Payee

3 The maker of Promissory In case of bill of exchange The

Note is Debtor Maker is Creditor

4 In case of Promissory The drawer and payee may be

Note Maker and Payee the same person
cannot be the same
person  

5 Promissory Note is an Bill of Exchange is an

unconditional promise unconditional order
 6 Cannot be payable to Can be payable to bearer
bearer

7 Promissory Note can be Bill can be drawn in sets

drawn in sets

ENDORSEMENT

When the maker or holder of a negotiable instrument signs the same otherwise than as
such make for thepurpose of negotiation, on the face or back thereof, or a slip of paper
annexed thereto called allonge or so signfor the same purpose a stamped paper intended to be
completed as a negotiable instrument, he is said to endorsethe same and is called as
endorser. (Sec.15).

Classes of Endorsement

An endorsement may be (i) General or blank, (ii) Special or Full (iii)

Restrictive, (iv) Partial, or(v) Conditional or qualified.

1. An endorsement is blank or general where the endorser merely writes his signature
on the back of theinstrument, e.g., a bill payable to “Ram or order” and he writes on back of
its back “Ram”, it isendorsement in blank and the bill has become payable to bearer.

2. An endorsement is full or special where the endorser mentions the name of the
person to whom the money due onthe instrument is to be paid. Where a bill is payable to
“Ram or order” and Ram writes on the back of the instrument‘Pay to Sham’ or ‘Pay to Sham
or order’, and signs, it is a full endorsement.

3. An endorsement is restrictive if it restricts further negotiation of an instrument,

e.g.,‘Pay Sham only’, or‘Pay Sham for my use’ or ‘Pay Sham on account of Radha’.

4. An endorsement is Partial which purports to transfer to the indorsee a part only of

the amount payable on theinstrument; but a partial endorsement does not operate as a
negotiation of the instrument; e.g. , A sells a bill forRs.1000 endorses it thus: ‘Pay B or order
Rs.500’ or ‘Pay Rs.500 to Band Rs.500 to C’, the endorsement is partial andinvalid.

5. An endorsement is conditional or qualified which limits or negatives the liability of

the endorser. Forexample, where the indorser makes it clear that he does not incur the
liability of an endorser towards theindorsee or subsequent holders he makes a ‘Sans
Recourse’ or‘Without Recourse’ endorsement. He mayendorse thus: ‘Pay Sham or order Sans
Recourse’, or ‘Pay Sham or order without recourse to me’. In thesecases, if the instrument is
dishonoured he cannot be called upon to pay.

When the endorser by express words abandons some right or increase his liability
under a negotiable instrument iscalled Faculative : e.g., ‘Pay Sham or order. Notice of
dishonour not required’.

Requisities of valid endorsement

1. It should be done on the instrument or allonge.

2. It must be done by the maker/drawer/payee/holder/indorser of the instrument.

3. It must be signed.

4. Though no specific words are prescribed for endorsement yet the words used
must clear the intention of the indorser to transfer the ownership of the instrument.

5. It must be completed by subsequent delivery of the instrument to the endorsee.

Legal provisions regarding endorsements

The Negotiable Instrument Act contains many provisions regarding endorsement :

1. Effect of Endorsement. The endorsement of a negotiable instrument followed by

delivery, transfers tothe endorsee the property therein with the rights of further negotiation.
Thus the endorsee acquiresproperty or interest in the instrument as the holder. He can also
negotiate further if not restricted by arestricted endorsement by the endorser.

2. Who can endorse. According to section 51. ‘Every sole maker, drawer, payee or
endorsee or all ofseveral joint makers, drawers, payees or endorsees, of negotiable instrument
may endorse and negotiate thesame’. Thus, in case the instrument is held jointly by a number
of persons, endorsement by all of them isessential, one can not present the other.

3. Time. A negotiable instrument may be negotiated until its payment has been
made' by the makerdrawee or acceptor at or after maturity not after its payment.

4. Endorsement for a part of the amount. The instrument must be endorsed for its
entire amount: According to section 56 ‘no writing on a negotiable instrument is valid for the
purpose of negotiation if suchwriting purports to transfer only a part of the amount appearing
to be due on the instrument’. Thus anendorsement for a part of the amount of the instrument
is invalid. But in cases where an instrument hasbeen partly paid, it may be negotiated for the
balance of the amount provided a note to that effect is given on the instrument. If the endorser
intends to transfer the document to two or more endorses separately, itwill not constitute a
valid endorsement.

5. The legal representative of a deceased person cannot negotiate by delivery only a

promissory note,bill of exchange or cheque payable to order and endorsed by the deceased
but not delivered. Thus if theendorser dies after endorsing the instrument payable to order but
without delivering the same to theendorsee, the endorsement is not valid and his legal
representative cannot complete the negotiation bymere delivery thereof.

6. Unless the contrary is proved it is presumed under section 118 that ‘the
endorsements appearing upon anegotiable instrument were made in the order in which they
appear thereon’. It means that the endorsementwhich appears on the instrument first is
presumed to have been made earlier to the second one.

Once a Bearer Cheque, Always a Bearer Cheque

If a negotiable instrument is endorsed in blank or is payable to bearer, it is

bearer instrument. The holder maynegotiate by mere delivery. But if the holder endorses it
specially to a person and makes it payable to the order of suchperson, then the endorser in full
cannot be sued by any person except the person in whose favour he endorsed it. Butas regards
all parties prior to the endorser in full, the instrument remains tranferable by mere
delivery.A, the payeeof a bill, endorses it in blank and delivers it to B who endorses specially
to C, or order C without any endorsementtransfers it to D. D as the bearer is entitled to
receive payment. In case of dishonour D is entitled to sue the drawerand the acceptor of the
bill and also A and all indorsers prior to A, if any. He cannot, however, sue B or C.Where
acheque is originally drawn payable to bearer, the drawee (the paying banker) is discharged
by payment in due courseto the bearer, even if there are any subsequent endorsement. The
rule is ‘once a bearer cheque always a bearercheque’ which means that if a cheque is
originally drawn payable to bearer, it remains bearer, even though it issubsequently endorsed
in full. This rule is not applicable if a cheque originally made payable to order becomes
payable to bearer by blank endorsement.Where a, bearer negotiates an instrument by mere
delivery, and does not puthis signature thereon, he is not liable to any party to the instrument
in case it is dishonoured as he has not lent hiscredit to it.
 Forged Instruments and Forged Endorsements

The general law is that forger, confers no title, so that the forged signature of the
maker of a promissory note, or ofthe bill or of the cheque does not give to the forger any title
whatever, as the forged instrument is a nullity fromthe very beginning. Nobody has any title
to it and there is no holder in due course. A’s signature is forged on acheque as a drawer. A is
not liable on the cheque, nor does ally party acquire any right under it.If an instrument
ispayable to order or endorsed in full, it cannot be negotiated except by an endorsement
signed by the person to whomor to whose order the instrument is payable, for the endorsee
receives title only through his endorsement. Hence, ifthe signature of transferor is forged no
person claiming through that forged signature gets any title, even if heobtained it for value
and in good faith.A is the payee of a bill. It is stolen by B, who forges A’s signature and
transfersthe bill to C for value. C is not a holder in due course, even if he obtains the bill
without notice of the forgedendorsement, and cannot recover the amount on the bill. And if
the acceptor of the bill pays to C on maturity, he is notdischarged and A, as the holder in due
course, can recover the amount from the acceptor.

DISHONOUR

A bill of exchange may be dishonoured either by non-acceptance or by non-payment.

A pronote or cheque isdishonoured by non-payment as acceptance is not required in their
case.

When an instrument is dishonoured the holder must give notice of dishonour to the
drawer or maker or hisprevious holders if he wants to make them liable.

Dishonour of a bill by non-acceptance (Sec.91) : A bill is said to be dishonoured by

not acceptancewhen :

1. the drawee does not accept it within 48 hours from the time of presentment for

acceptance;

2. presentment for acceptance as excused and the bill remains unaccepted;

 3. the drawee is incompetent to contract;

4. the drawee is a fictitious person;

5. the drawee, after a reasonable search, cannot be found; and

6. the acceptance is qualified and the holder opts to treat it as dishonoured.

Dishonour of an instrument by non-payment (Sec. 92) : A promissory note, a bill of

exchange or chequeIS said to be dishonoured by non-payment when the maker of the note,
acceptor of the bill or draweebanker of the cheque makes default in payment on being duly
required to pay the same.A negotiable instrument is also deemed to be dishonoured by
non-payment when presentment for payment is excusedand the instrument remains unpaid
on maturity; and instrument when overdue, remains unpaid.Effect of Dishonour :The drawer
and all the endorsers of the bill are liable to the holder if the bill is dishonoured either by
thenon-acceptance or by the non-payments provided the he gives them notice of dishonour.
The drawee isliable only when there is dishonour by non payment.Consequence of failure to
give notice: Any person towhom notice of dishonour is not given is discharged from his
obligations under the instrument. He is notliable to pay and no suit can be filed against him.

When notice of dishonour is excused: It is not necessary to give notice of dishonour in

the followingcases and to the following parties :

1. To the maker of a dishonoured promissory note.

2. To the drawee or acceptor of a dishonoured bill or cheque.

3. When it is dispensed with by the party entitled to it.

4. In order to charge the drawer of a cheque when he has countermanded payment.

 5. When the party charged could not suffer damage for want of notice.

6. When the party entitled to notice cannot be found.

7. To charge the drawer when the acceptor is also the drawer.

8. When the promissory note is not negotiable.

9. Where the party entitled to notice promises to pay the amount after the
dishonour.

10. When the omission to give notice is caused by unavoidable circumstances.

Mode of giving Notice of dishonour

1. A notice of dishonour may be given to a duly authorised agent of the person to

whom it isrequired to be given.

2. If the person on whom notice is to be served has died, it should be given to his
legal representative, or if he has been declared insolvent, to his assignee.

3. The notice may be oral or written. If it is written it may be sent by post.

4. The notice may be in any form but the party to whom it is given must be
informed, either in express terms or by reasonable intendment, that the instrument has been
dishonoured and inwhat way and that he will be held liable thereon.

5. It must be given within a reasonable time after dishonour.

 6. The notice of dishonour must be given at the place of business, or if the party has
no place ofbusiness, at the residence of the party for whom it is intended.

7. If the notice is duly directed and sent by post but is miscarried, such miscarriage
does not render the notice invalid.

8. When the party to whom notice of dishonour is despatched is dead but the sender
is ignorant of hisdeath, the notice given will be sufficient.

9. When the instrument is deposited with an agent for presentment, the agent is
entitled to the same timeto give notice to this principal as if he was the holder giving notice of
dishonour and the principal is entitledto a further like period to give notice of dishonour.

10. Any party receiving notice of dishonour, in order to render any party liable to
himself, should givenotice of dishonour to such party within a reasonable time, unless such
party otherwise receives duenotice.Noting (Sec. 99) : When a promissory note or a bill of
exchange is dishonoured. the holder isentitled, after giving due notice of dishonour, to sue the
drawer and the endorsers.In order to have the factof dishonour authenticated, the holder may
get it recorded on the instrument, or on a paper attached to it, by aNotary Public. Such
recording or notice must be done within a reasonable time after dishonour, and must contain
thefact of the dishonour, the date Of dishonour, the reason if any, assigned for such
dishonour. If the instrument has notbeen expressly dishonoured, the reason why the holder
treats it as dishonoured should be noted as well as the notary’scharges. Noting is optional. It
is to the advantage of the holder to get the notice done because it is an evidence
ofdishonour.Protest (Sec. 100) : When a pronote or bill has been dishonoured, the holder
may, within a reasonable time, cause such dishonour to be noted and certified by a notary
public, such certificate is called a protest.The difference between noting and protest is that
noting is merely a record of the fact of dishonour.When the notary public issues a certificate
stating the particulars regarding the dishonour, it is called a protest.Notingand protest are not
compulsory, in the case of an inland bill or note, but a foreign bill must be protested, if
sorequired by the law of the place where it is drawn.Protest for Better Security. When the
accepptor of a bill ofexchange has become insolvent, or his credit has been publicly
impeached, before the maturity of the bill,the holder may within a reasonable time, employ a
notary public to demand better security of the acceptorand on its request, may cause facts to
be noted and certified within a reasonable time. Such certificate iscalled a “Protest for better
security”.

Notary Public

The notary public is an officer appointed by the Government to exercise the functions
of noting and protest, etc.
 Discharge of Parties from Liabilites

The liability of a party to a negotiable instrument may be discharged or terminated in

any one of the followingways -

1. By payment in due course of the amount due.

2. By the holder discharging or releasing the maker, acceptor or endorser.

3. By cancellation of a party’s name by the holder.

4. By operation of law, e,g., by the insolvency of the debtor.

5. By the holder allowing the drawee more than 48 hours of accepting the bill.

6. By taking qualified acceptance all previous parties are discharged.

7. By non-presentment of a cheque for payment within a reasonable time of its

issue, if the bankfails, the drawer is discharged.

8. By endorsement of an order cheque by payee the banker is discharged by

payment in due course,even if the endorsement turns out to be a forgery.

9. By material alteration. Any material alternation of a negotiable instrument

renders the same void asagainst any one who is a party thereto at the time of alternation and
does not consent thereto. Someexamples of Material Alteration:

Alteration of

(1) the date of the instruments or indorsements

(2) the sum of payment,

 (3) the time of payment,

(4) the place of payment,

(5) the rate of interest,

(6) the addition of a new party,

(7) the tearing of the instrument in a material part, are material alteration.A correction
of a mistake, or an alterationmade to carry out the common intention of the parties made
before the instrument is issued or with the consent of theparties does not amount to a material
alteration. It does not make the instrument void. When a person accepts an altered instrument;
he can not afterwards raise objections to those alterations which existed at the time of
acceptingthe instrument. Where any material alteration is made by an endorsee it discharges
his endorser from all liability to himin repect of consideration thereof (Sec. 87).

Law regarding Material Alteration

Section 87 of the Negotiable Instrument act clearly states that

Effects of Material Alteration

The main effect of a material alteration is that it makes the instrument void, i.e.,
it discharges the instrument itself as against any person who was a party to such instrument at
the time of material alteration and did not give his approval to it.

All the prior parties to a negotiable instrument, which was altered subsequently
without their consent thereto, shall not be liable even to holder-in-due-course, having no
notice or knowledge of the material alteration.

It makes no discrimination whether the alteration was for the benefit or detrimental to
any party to the instrument. Moreover, it is also immaterial whether the holder himself altered
the instrument or any stranger altered it while the instrument was in the custody of the holder
because a party, who is in custody of an instrument, is bound to preserve it in its original
state.

It is, however, worth noting that a materially altered instrument is not absolutely
void, i.e., not unenforceable against all the parties thereto It is void only against those who did
not give their approval to the alteration, and can be enforced against those who consented to the
alteration or effected the alteration. Such an instrument is also operative against those who become
parties to the instrument subsequent to the alteration. There is, however, an exception to this rule.

An acceptor or endorser of a negotiable instrument is bound by his acceptance or

endorsement notwithstanding any previous alterations of the instrument.

On the other hand, Section 89 of the Negotiable Instrument Act provides protection to
a party who pays a materially altered bill of exchange or promissory note or cheque provided
that the alteration does not appear on the face of the instrument in-question and pays so in
good faith and without negligence on its part.
 Such a party shall stand discharged if it makes payment to a person in the possession
of the instrument under the circumstances, which do not afford a reasonable ground for
believing that it is dis entitled to such payment. Besides, the payer under the above
circumstances is also entitled to debit the party on whose account the payment was made with
the amount paid.

Example of Material Alteration

For instance, A drew a cheque of Rs 500 in favour of B, who altered the figure 500
into 5,000 without taking the consent of the maker. The instrument appeared to be drawn for
Rs 5,000 on the face of it. The drawee banker paid Rs 5,000 to B on the presentment of
cheque for payment. The banker did so according to the apparent tenor of the instrument and
in good faith. In this case, since the banker acted bona fide and without negligence, it is
entitled to debit A with Rs 5,000.

Affect of material alteration

Any material alteration of a negotiable instrument renders the same void as against
anyone who is a party thereto at the time of making such alteration and does not consent
thereto, unless it was made in order to carry out the common intention of the original parties;

Alteration by endorsee:

and any such alteration, if made by an endorsee, discharges his endorser from all
liability to him in respect of the consideration thereof.

The provisions of this section are subject to those of sections 20, 49, 86 and 125.

"87. Effect of material alteration.--Any material alteration of a negotiable

instrument renders the same void as against anyone who is a party thereto at the time of
making such alteration and does not consent thereto, unless it was made in order to carry out
the common intention of the original parties."

There is no case for the defendant that either his signature or the amount or the
payee's name has been altered in the cheque. He has no case that the cheque has not been
issued. It is his only case that the plaintiff has put the date, and that would amount
to material alteration. In order to appreciate the contention of the parties, we have to
examine what is material alteration under the Act. The words "material alteration" have not
been defined in the Act. The Supreme Court in Loonkaran Sethia v. Ivan E. John, AIR 1977
SC 336, explained "material alteration" as follows (headnote) :

When a cheque is issued for valid consideration, with no dispute regarding the
signature, amount and name, it cannot be said that putting a date on the cheque by the payee
who is the holder of the cheque in due course would amount to material alteration rendering
the instrument void. In fact, there is no material alteration. When a cheque is admittedly
issued with a blank date, and when the payee has no objection with regard to the name,
amount and signature, it can be presumed that there is an implied consent for putting the date
as and when required by the beneficiary, and get it encashed. In other words, when the date is
put by the payee or the drawer on the cheque the presumptions under Section 118 of the Act
would arise.

Set of bills

Section 132. Set of bills

Bills of exchange may be drawn in parts, each part being numbered and containing a
provision that it shall continue payable only so long as the others remain unpaid. All the parts
together make a set; but the whole set constitutes only one bill, and is extinguished when one
of the parts of a separates bill, would be extinguished.

Exception: When a person accepts or endorses different parts of the bill in favor of

different person, he and the subsequent endorsers of each part are liable on such part as if it
were a separate bill.

PENAL PROVISIONS UNDER NI Act

Advent of cheques in the market have given a new dimension to the commercial and
corporate world, its time when people have preferred to carry and execute a small piece of
paper called Cheque than carrying the currency worth the value of cheque. Dealings in
cheques are vital and important not only for banking purposes but also for the commerce and
industry and the economy of the country. But pursuant to the rise in dealings with cheques
also rises the practice of giving cheques without any intention of honoring them. Before 1988
there being no effective legal provision to restrain people from issuing cheques without
having sufficient funds in their account or any stringent provision ot punish them in the vent
of such cheque not being honoured by their bankers and returned unpaid. Of course on
dishonour of cheques there is a civil liability accrued.

However in reality the processes to seek civil justice becomes notoriously dilatory and
recover by way of a civil suit takes an inordinately long time. To ensure promptitude and
remedy against defaulters and to ensure credibility of the holders of the negotiable instrument
a criminal remedy of penalty was inserted in Negotiable Instruments Act, 1881 in form of the
Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act,
1988 which were further modified by the Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002. This article endeavours to elucidate the penal provision
light of the amendments and the judicial interpretations.

Scope:

Of the ten sections comprising the chapter of the Act, section 138 creates statutory
offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the
account maintained by a person with the banker. Section 138 of the Act can be said to be
falling either in the acts which are not criminal in real sense, but are acts which in public
interest are prohibited under the penalty or those where although the proceeding may be in
criminal form, they are really only a summary mode of enforcing a civil right. Normally in
criminal law existence of guilty intent is an essential ingredient of a crime. However the
Legislature can always create an offence of absolute liability or strict liability where ;mens
rea; is not at all necessary.

While elucidating on this aspect the Kerala High Court in K. S. Anto v. Union of
India held that:

"Knowledge or reasonable belief, that pre requisite could be statutorily dispensed with
in appropriate cases by creating strict liability offences in the interest of the Nation."

Further the creation of the strict liability is an effective measure by encouraging

greater vigilance to prevent usual callous or otherwise attitude of drawers of cheques in
discharge of debts or otherwise attitude of drawers of cheques in discharge of debts or
otherwise. The words as appearing in clause (b) of S. 138 cannot be construed even to imply
failure without reasonable cause in view of the explicit language in which the provision is
couched, the principle of strict liability incorporated in the main enacting clause.

Circumstances of dishonour:

The circumstances under which dishonour of cheque takes place or that may
contribute to the situation would be irrelevant and are required to be totally ignored.

In Rakesh Nemkumar Porwal v. Narayan Dhondu Joglekar the Bombay High Court
held that:

"A clear reading of Section 138 leaves no doubt in our mind that the circumstances
under which such a dishonour takes place are required to be totally ignored. In such case, the
law only takes cognizance of the fact that the payment has not been forthcoming and it
matters little that any of the manifold reasons may have caused that situation.

Ingredients and requirements of the penal provisions:

Section 138 creates an offence for which the mental elements are not necessary. It is
enough if a cheque is drawn by the accused 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 discharge
in whole or in part, of any debt or other liability due. Therefore, whenever the cheques are on
account of insufficiency of funds or reasons referable to the drawer;s liability to provide for
funds, the provisions of section 138 of the Act would be attracted, provided the following
conditions are satisfied:
 1. Existence of a live account

Existence of a "live account" at the time of issue of cheque is a condition precedent

for attracting penal liability for the offence under this section. A cheque cannot be issued de
hors an account maintained by its drawer with the banker. When the cheque is returned by the
bank unpaid because of the account of money standing to the credit of the cheque, to make
demand for payment as provided for payment as indicated in clause (b) of the proviso. The
words "that account" in the section denote to the account in respect of which the cheque was
drawn. No doubt if any person manages to issue a cheque without an account with the bank
concerned its consequences would not snowball into the offence described under section 138
of the Act. For the offence under section 138 of the Act there must have been an account
maintained by the drawer at the time of the cheque was drawn.

2. Issue of Cheque in discharge of a debt or liability

The cheque issued unpaid by the bank must have been issued in discharge of a debt or
other liability wholly or in part. Where a cheque is issued not for the purposes of discharge of
any debt or other liability, the maker of the cheque is not liable for prosecution under section
138 of the Act. A cheque given as a gift or for any other reasons and not for the satisfaction
of any debt or other liability, partly or wholly, even if it is returned unpaid will not meet the
penal consequences.

If the above conditions are fulfilled, irrespective of the mental conditions of the
drawer he shall be deemed to have committed an offence, provided the other three requisites
are fulfilled:

a) Presentation of the cheque within six months or within the period of its validity

The cheque must have been presented to the bank within a period of six months from
the date on which it is drawn or its period of validity, whichever is earlier. Thus if a cheque is
valid for three months and is presented to the bank within a period of six months the
provisions of this section shall not be attracted. However if the period of validity of the
cheque is not specified or prescribed the cheque is presented within six months from the date
the cause of action can arise. The six months are taken from the date the cheque was drawn.

b) Return of the cheque unpaid for reason of insufficiency of funds

The cheque must be returned either because the money standing to the credit of that
account is insufficient to honour the cheque or that it exceeds the arrangement made to be
paid from that account by an agreement with the bank. Even if the cheque is returned with the
endorsement "account closed" section 138 is attracted
 c) Issue of the notice of dishonour demanding payment within thirty days of receipt
of information as to dishonour of the cheque.

The payee or the holder in due course of the cheque has to give a notice in writing
making a demand for payment of the said amount of money to the drawer of the cheque. Such
notice must be given within 30 days of information from the bank regarding the return of
cheque as unpaid.

d) Failure of the drawer to make the payment within fifteen days of the receipt of the
payment

After the receipt of the above notice the drawer of the cheque has to make payment of
said amount of money to the payee or to the holder in due course of the cheque within 15
days of the receipt of the notice. If the payment is not made after the receipt of the notice
within stipulated time a cause of action for initiating criminal proceedings under this section
will arise.

Constitutional validity of the provisions

In B. Mohana Krishna v. Union of India, the question came up for consideration that
whether the presumption raised in section 139 that the holder of the cheque received the
cheque of the nature referred to in section 138, unless the contrary is established is violative
of Article 20 (3) of the Constitution of India. The Court while answering negative held that:

"Unless a person is compelled to be a witness against himself Article 20 (3) has no

application. The person charged under section 138 is not compelled to be a witness against
himself. The presumption of the nature incorporated in section 139 is a common feature in
criminal statutes for example section 12 of the Protection of Civil rights Act. The
presumption under section 139 in favour of holder of cheque would not, therefore be
violative of Article 20 (3)."

Further such imposition of strict liability was put to judicial scrutiny on grounds of
unreasonableness and arbitrariness in Mayuri Pulse Mills v. Union of India where the
Bombay High Court held that:

Normally in Criminal law existence of a guilty intent is an essential ingredient of a

crime and the principle is expressed in the maxim ;actus non facit rum nisi mens sit rea;. This
is a general principle. However the legislature can always create an offence of absolute
liability or strict liability are justified and cannot be said to be unreasonable.

Section 138 was also put to test in Ramawati Sharma v. Union of India in light of
Article 21 of the Constitution of India where the court held that;

Mere taking of loan is not, thus, made punishable under certain circumstances and
after following certain conditions. It may not, therefore, be stated that the liberty of a person
was being curtailed by an arbitrary procedure or that such a provision is violative of Article
21 of the Constitution

In K.S. Anto v. Union of India the question of double jeopardy as enshrined in Article
20 (2) in light of section 138 and section 420 of the Indian Penal Code where the court held
that:

Offences under section 138 of the Negotiable Instruments Act and section 420 of the
Penal Code are different and the ingredients are different and the ingredients are also
different. Convictions for different offences separately is not barred under article 20 (2). In
spite of prosecutions and convictions under section 138, there will be no constitutional bar in
prosecution for an offence punishable under section 420 of the Penal Code and a prosecution
will be if such an offence is made out.

Question of maintainability of criminal charge with a civil liability:

There is nothing in law to prevent the criminal courts from taking cognizance of the
offence, merely because on the same facts, the person concerned might also be subjected to
civil liability or because civil remedy is obtainable. Civil and criminal proceedings are co
extensive and not exclusive. If the elements of the offence under section 138 of the
Negotiable Instruments Act are made out on the face of the complaint petition itself,
enforcement of the liability through a civil court will not disentitle the aggrieved person from
prosecuting the offender for the offence punishable under section 138 of the Act.

Though insertion of the penal provisions have helped to curtail the issue of cheque
lightheartedly or in a playful manner or with a dishonest intention and the trading community
now feels more secured in receiving the payment through cheques. However there being no
provision for recovery of the amount covered under the dishonoured cheque, in a case where
accused is convicted under section 138 and the accused has served the sentence but, unable to
deposit amount of fine, the only option left with the complainant is to file civil suit. The
provisions of the Act do not permit any other alternative method of realization of the amount
due to the complainant on the cheque being dishonored for the reasons of "insufficient fund"
in the drawer;s account. The proper course to be adopted by the complainant in such a
situation should be by filing a suit before the competent civil court, for realization/ recovery
of the amount due to him for the reason of dishonoured cheque which the complainant is at
liberty to avail of if so advised in accordance with law.