DEPARTMENT OF

MANAGEMENT STUDIES
DR. RISHAM GARG
ASSOCIATE INDIAN INSTITUTE OF
PROFESSOR OF TECHNOLOGY DELHI
LAW
NATIONAL LAW BUSINESS LAW (MSL 706)
UNIVERSITY DELHI
NEGOTIABLE INSTRUMENTS
 • Common prototypes of bills of exchanges and
promissory notes originated in China in the 8th
century. During the reign of the Tang Dynasty they
HISTORY used special instruments called feitsyan for the safe
transfer of money over long distances.
• Later Arab merchants, used the prototypes of bills of
exchange – suftadja and hawala in 10th – 13th centuries
for money transfer.
• Similar prototypes were used by Italian merchants in
the 12th century.
• In Italy in 13th – 15th centuries bill of exchange and
promissory note obtained their main features and
further phases of its development were associated
with France (16th – 18th centuries, where the
endorsement had appeared) and Germany (19th
century, formalization of Exchange Law).
• In England (and later in the U.S.) Exchange Law was
different from continental Europe because of different
legal systems.
 • Before 1988 there being no effective legal provision to
restrain people from issuing cheques without having
sufficient funds in their account or any stringent
INDIA provision to punish them in the vent of such cheque
not being honoured by their bankers and returned
unpaid.
• 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 Miscellaneous Provisions)
Act, 2002.
• Governing law is Negotiable Instruments Act, 1881
(“the Act”)
 • Negotiable= transferable ; Instrument =
document
WHAT IS
NEGOTIABLE • It is a documentary evidence of a debt
INSTRUMENT? • Legal Definition: Negotiable instrument means a
promissory note, bill of exchange or cheque
(Sec 13(a).
• Negotiation: When a promissory note, bill of
exchange or cheque is transferred to any person,
so as to constitute that person the holder
thereof, the instrument is said to be negotiated
(sec.14).
• Negotiable instruments recognised by usage or
custom are: (i) Hundis (ii) Share warrants (iii)
Dividend warrants (iv) Bankers draft (v) Circular
notes (vi) Bearer debentures (vii) Debentures of
Bombay Port Trust (viii) Railway receipts (ix)
Delivery orders.
 Section 4 of the Act defines, “A
promissory note is an instrument in
writing

not being a bank-note or a currency

note

PROMISSORY
NOTE containing an unconditional
undertaking,
(PRONOTE)

signed by the maker,

to pay a certain sum of money to or to

the order of a certain person, or to the
bearer of the instruments.”
PROMISSORY NOTE
PROMISSORY
NOTE
 It must be in writing

It must certainly an express promise or clear

understanding to pay
• .

Promise to pay must be unconditional

ESSENTIAL
ELEMENTS It should be signed by the maker

OF The maker must be certain

PROMISSOR
Y NOTE The payee must be certain

The promise should be to pay money and

money only

The amount should be certain

 “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” Sec. 5.

BILL OF
A bill of exchange, therefore, is a written
EXCHANGE acknowledgement of the debt, written by the creditor
and accepted by the debtor.

There are usually three parties to a bill of exchange

drawer, acceptor or drawee and payee. Drawer himself
may be the payee.
BILL OF EXCHANGE
 (1) It must be in writing.

(2) It must be signed by the drawer.

ESSENTIAL (3) The drawer, drawee and payee must be

certain.
CONDITIONS
OF A BILL OF (4) The sum payable must also be certain.
EXCHANGE
(5) It should be properly stamped.

(6) It must contain an express order to pay

money and money alone.
 • “A cheque is a bill of exchange drawn on a
specified banker, and not expressed to be
payable otherwise than on demand” Sec 6.
CHEQUES • A cheque is bill of exchange with two more
qualifications, namely,
• (i) it is always drawn on a specified banker,
and (ii) it is always payable on demand.
• all cheque are bill of exchange, but all bills are
not cheque.
• A cheque must satisfy all the requirements of
a bill of exchange; that is, it must be signed by
the drawer, and must contain an unconditional
order on a specified banker to pay a certain
sum of money to or to the order of a certain
person or to the bearer of the cheque. It
 • A cheque is a bill of exchange drawn on
specified banker and not expressed to be
ELECTRONIC payable otherwise than on demand and it
CHEQUE includes the electronic image of a truncated
cheque and a cheque in electronic form.
• sec.6 as amended by the NI (Amendment and
Miscellaneous Provisions) Act, 2002
• E-cheques work the same way as paper
cheques and are a legally binding.
• Truncated cheque: is the conversion of
physical cheque into electronic form for
transmission to the paying bank. Cheque
truncation eliminates cumbersome physical
presentation of the cheque and saves time
and processing costs.
 • document
• guaranteeing the payment of a specific amount of
money,
A NEGOTIABLE • either on demand, or
• at a set time.
INSTRUMENT • NI means a promissory note, bill of exchange or
cheque payable either to order or to bearer (S. 13)
(“NI”) IS A: • Cheque also includes Demand Draft (Section 85A)
• Following are not NI, although the law governing
obligations with respect to such items may be similar
to or derived from the law applicable to NI:
• Bills of lading and other documents of title
• Deeds/ documents conveying interests in real estate,
although a mortgage may secure a promissory note
• IOUs
• Letters of credit
• Securities, such as stocks and bonds
 CHARACTERISTICS
• Free Transferability
• A negotiable instrument may be transferred by delivery if it is a bearer instrument
or by endorsement and delivery if it is an instrument payable to order.
• A Fixed Deposit Receipt, which is marked as ‘not transferable’ is not a negotiable
instrument. On the other hand all instruments which are transferable are not
negotiable instruments e.g. share certificate. An instrument to be negotiable must
possess other features also.
• Further, a negotiable instrument may be transferred any number of times till it is
discharged.
• Title To Transferee
• The transferee, who takes the instrument bona fide and for valuable consideration,
obtains a good title despite any defects in the title of the transferor. Exception to
‘Nemo dat quod non habet’
• Entitlement To Sue
• The holder can sue in its own name
 PRESUMPTIONS
• Consideration: Every NI is made or drawn for a consideration and this need not necessarily
be mentioned.
• Date:The NI was drawn on the date shown on the face of it.
• Acceptance Before Maturity: The NI was accepted before its maturity, i.e., before it became
overdue.
• Transfer Before Maturity:The NI was transferred before its maturity.
• Order Of Endorsements: The endorsements appearing upon a NI were made in the order
in which they appear.
• Stamping Of The Instrument:The instrument which has been lost was properly stamped.
• Holder Is Holder In Due Course: The holder of a negotiable instrument is the ‘holder in due
course’, except where the instrument has been obtained from its lawful owner or its lawful
custodian by means of offence or fraud.
• Proof Of Dishonour: If a suit is filed upon an instrument which has been dishonoured, the
Court shall, on proof of the protest, presume the fact of dishonour unless it is disproved.
(Section 119)
 ESTOPPEL APPLICABLE TO NI
• Rules of estoppel applicable to negotiable instruments (Ss 120-122)
• Estoppel against denying original validity of instrument: The maker of
the note and drawer of the bill of exchange or cheque are directly responsible
for the bringing into existence of the instrument and, thus, cannot be allowed
afterwards to deny the validity of the instrument. (Section 120)
• Estoppel against denying capacity of the payee to endorse: The maker
of a promissory note or an acceptor of a bill shall not, in a suit by holder in
due course, be allowed to deny the capacity of the payee to endorse the bill.
(Section 121)
• Estoppel against denying signature or capacity of prior party: An
endorser of a negotiable instrument shall not, in a suit thereon by the
subsequent holder, be allowed to deny the signature or capacity to contract of
any prior party to the instrument.
 NI DISTINGUISHED FROM CONTRACTS
• NI conveys value, performing part of the contract, in terms inherent requisite offer
and acceptance and conveyance of consideration.
• NI facilitates the power to demand payment and right to be paid, movement of
Instrument ('bearer instrument‘), possession of the document itself attributes and
ascribes the right to payment.
• Certain exceptions exist, such as instances of loss or theft of the instrument,
wherein the possessor of the note may be a holder, but not necessarily a holder in
due course.
• Negotiation requires a valid endorsement of the negotiable instrument.
• The consideration constituted by a negotiable instrument is cognizable as the value
given up to acquire it (benefit) and the consequent loss of value (detriment) to the
prior holder; thus, no separate consideration is required to support an
accompanying contract assignment.
• In some instances, the negotiable instrument can serve as the writing
memorializing a Contract.
 HOLDER IN DUE COURSE
• Rights of a holder in due course of a NI superior to those provided by ordinary species of
contracts.
• The rights to payment are not subject to set-off, and do not rely on the validity of the
underlying contract giving rise to the debt (for example if a cheque was drawn for payment
for goods delivered but defective, the drawer is still liable on the cheque)
• No notice (except in case of a dishonour) need be given to any party liable on the
instrument for transfer of the rights under the instrument by negotiation.
• Transfer free of equities—the holder in due course can hold better title than the party he
obtains it from (as in the instance of negotiation of the instrument from a mere holder to a
holder in due course)
• The holder-in-due-course rule is a presumption that makes the free transfer of NI feasible in
the modern economy.
• A person or entity purchasing an instrument in the ordinary course of business can
reasonably expect that it will be paid when presented to, and not subject to dishonour by
the maker, without involving itself in a dispute between the maker and the person to whom
the instrument was first issued.
 PROMISSORY NOTES
• “A promissory note is an instrument (not being a bank note or a currency-note)
in writing containing an unconditional undertaking, signed by the maker to pay a
certain sum of money only to, or to the order of a, certain person, or to the
bearer of the instrument.” (Section 4)
• Essentials
• It must be in writing
• Promise to pay
• The promise to pay must be unconditional
• There must be a promise to pay money only
• A definite sum of money as to the amount and to the persons by whose order
and to whom payment is to be made
• The instrument must be signed by the maker
• The person to whom the promise is made must be a definite person
 .
• Two or more persons may make a promissory note and they may be liable
thereon jointly or severally (Joint family of MR Bhagwandas V. State Bank of
Hyderabad 1971 SC 449).

• A promissory note must point out with certainty the person who is entitled to
receive the money. Therefore, if any person has not been named in the
instrument but sufficient description of such person have been included
therein by which such person may be ascertained, the requirement is fulfilled
(Ponnuswami V. Velliamuthu AIR 1957 Mad 355). If the payee is mentioned as ‘you’,
it does not indicate any certainty about the person (Naraindas V. Purnidas AIR
1959 Orissa 176).
 OTHER POINTS:
• Consideration need not be mentioned
• Place and date of making it need not be mentioned.
• An ante-dated or post dated instrument is not invalid.
• Place of payment also need not be mentioned in the promissory note.
• It cannot be made payable to bearer on demand or payable to bearer after a
certain time. (Section 31 of the Reserve Bank of India Act).
• It may be made payable on demand or after a certain time. A demand
promissory note becomes time barred on expiry of three years from the date
it bears.
.
• It must be duly stamped as per the state laws in which it is executed, under
the Indian Stamp Act. A promissory note which is not stamped is a nullity.
Stamping may be before or after the execution.
• A promissory note cannot be made payable to the maker himself. Such a
note is nullity but if it is endorsed by the maker to some other person, or
endorsed in blank, it becomes a valid promissory note
• (Gay V. Landal (1848) LT CP 286).
• Where two or more persons sign the promissory note, their liabilities will be
joint as well as several. A note cannot be signed in alternative.
• A promissory note is not invalid by reason only that it contains any matter in
addition to promise to pay e.g. a recital that the maker has deposited the title
deeds with the payee as a collateral security.
S.31.ISSUE OF DEMAND BILLS, NOTES- RBI
ACT 1934
• 1) No person in India other than the Bank, or, as expressly authorised by this
Act the Central Government shall draw, accept, make or issue any bill of
exchange, hundi, promissory note or engagement for the payment of money
payable to bearer on demand, or borrow, owe or take up any sum or sums of
money on the bills, hundies or notes payable to bearer on demand of any such
person.
• Provided that cheques or drafts, including hundies, payable to bearer on demand
or otherwise may be drawn on a person's account with a banker, shroff or
agent.
• (2) Notwithstanding anything contained in the Negotiable Instrument Act, 1881
(26 of 1881), no person in India other than the Bank or, as expressly authorised
by this Act, the Central Government shall make or issue any promissory note
expressed to be payable to the bearer of the instrument.
S. 22. RIGHT TO ISSUE BANK NOTES-
RBI ACT 1934
• (1) The Bank shall have the sole right to issue bank notes in India, and may, for
a period which shall be fixed by the Central Government on the
recommendation of the Central Board, issue currency notes of the
Government of India supplied to it by the Central Government, and the
provisions of this Act applicable to bank notes shall, unless a contrary intention
appears, apply to all currency notes of the Government of India issued either
by the Central Government or by the Bank in like manner as if such currency
notes were bank notes, and references in this Act to bank notes shall be
construed accordingly.
• (2) On and from the date on which this Chapter comes into force the Central
Government shall not issue any currency notes.
S. 14 NEGOTIATION

• When a NI is transferred to any person,so as to constitute

the person the holder thereof, the instrument is said to be
negotiated
 ILLUSTRATIONS ON PROMISSORY NOTES:
A SIGNS INSTRUMENTS IN 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."
(c) Mr. B, I O U Rs. 1,000."
(d) I promise to pay B Rs. 500 and all other sums which shall be due to him."
(e) I promise to pay B Rs. 500, first deducting thereout any money which he may owe
me."
(f) I promise to pay B Rs500 seven days after my marriage with C.
(g) I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay that
sum."
(h) " I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January
next.”
 BILLS OF EXCHANGE
• A Bill of Exchange has been defined under S. 5 of the NI Act as “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
certain persons or to the bearer of the instrument.”
• Parties To The Bill Of Exchange:
• Drawer: The maker of a bill of exchange or cheque is called drawer.
• Drawee: The person who is directed to pay by the drawer.
• Acceptor: One who accepts the bill. Generally the drawee is the acceptor
but a stranger may accept it on behalf of the drawee.
• Payee: Person to whom the sum stated in the bills is payable.
 .
• Holder: Section 8 of the Negotiable Instruments Act states that “The ‘holder’
of a promissory note, bill of exchange or cheque means “any person entitled in
his own name to the possession thereof and to receive or recover the amount
due thereon from the parties thereto.”
• Holder in due course: A person who for consideration becomes the possessor
of a promissory note, bill of exchange or cheque (if payable to bearer).
• Endorser: Holder who endorses the bill in favour of any other person.
• Endorsee: Person in whose favour the bill is endorsed by the endorser.
• Drawee in case of need: When in the bill or in any endorsement thereon the
name of any person is given in addition to the drawee to be resorted to in
case of need such person is called as the ‘drawee in case of need’.
• Acceptor for honour: When a bill of exchange has been noted and protested
for non-acceptance or for better security, any other person accepts it supra
protest for honour of the drawer or of any of the endorsers, such person is
called the ‘Acceptor for honour’.
 KINDS OF BILLS
• Trade Bill
• Accommodation Bill (Sections 43-45)
• All bills are not genuine trade bills, as some times they may be drawn for accommodating a
party. An accommodation Bill is quite similar to that of a Bill of Exchange but it is distinguished
from an ordinary bill by the fact that such a bill is not supported by any consideration or
transaction. The drawer does not give any consideration to the drawee. The relationship
between the drawer and drawee are not that of a debtor and creditor.
• Fictitious Bill (Section 42)
• A Bill of Exchange in which the name of both the drawer and the payee are fictitious i.e.
imaginary. Such a bill cannot be enforced by law but it is good in the hands of a holder in due
course if it has been accepted by a genuine person. This is provided that he can show that the
first Endorsement on the bill and the signature of the supposed drawer (being the holder as
well) are in the same hand writing, and the acceptor is liable on the bill to him.
• Forged Bill
• A bill in which name of the drawer or the payee has been forged. Such a bill cannot be
enforced by law and does not hold good even in the hands of holder in due course.
 DIFFERENCES
• Cheques
• A Bill of Exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form (S 6).
• A cheque in the electronic form means a cheque which contains the exact mirror
image of a paper cheque, and is generated, written and signed in a secure system
ensuring the minimum safety standards with the use of digital signature (with or
without biometrics signature) and asymmetric crypto system.
• A truncated cheque means a cheque which is truncated during the course of a
clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.
• A clearing house means the clearing house managed by the Reserve Bank of India
or a clearing house recognised as such by the Reserve Bank of India.
 CHEQUES
• Characteristics
• A cheque is an unconditional order on a specified banker where the drawer
has his account.
• A cheque can be drawn for a certain sum of money.
• Cheque is payable by the banker only on demand.
• A cheque does not require acceptance by the banker as in the case of bill of
exchange.
• A cheque may be drawn up as Bearer; Order; Crossed.
• Cheque is a revocable mandate and the authority can be revoked by
countermanding payment.
• The cheque is determined by notice of death or insolvency of the drawer.
• All cheques are bills of exchange but all bills of exchange are not cheques.
 CROSSING OF CHEQUES
• A cheque may be a open cheque or a crossed cheque. An open cheque is one
that can be paid by the paying banker across the counter while crossed cheque
cannot be paid across the counter.
• Crossing on a cheque is a direction to the paying banker that the payment shall
not be made across the counter. The payment on a crossed cheque can be
collected only through a banker.
• Section 123 of the Act states:
• “Where a cheque bears across its face an addition of the words ‘and company’
or any abbreviation thereof, between two traverse lines, or of two parallel
traverse lines simply, either with or without the words ‘not negotiable’ that
addition shall be deemed a crossing, and the cheque shall be deemed to be
crossed generally”.
• . Crossing of a cheque can be done by the Drawer, Holder or the Banker.
• Crossing may be either (1) general or (2) special:
• “Where a cheque is crossed generally, the banker on whom it is drawn shall
not pay it otherwise than to the banker” (Section 126).
• “Where a cheque is crossed specially, the banker on whom it is drawn shall
not pay it otherwise than to the banker to whom it is crossed, or his agent for
collection.” (S. 126)
• “Account Payee” crossing or restrictive crossing acts as a warning to the
collecting bankers that the proceeds are to be credited into the account of the
payee.
 BANK DRAFTS
• A bank draft is an order drawn by an office of a bank upon another of the same
bank instructing the latter to pay a specified sum to a specified person or his
order.
• A draft can be drawn either against cash deposited at the time of its purchase
or by debiting the buyer’s current/ savings account the banker maintains.
• It is only issued by a bank on another bank or on one of its branches.
• It cannot be made payable to bearer.
• In. Tukaram Bapuji Nikam V. Belgaum Bank Ltd. AIR 1976 Bom 185, it was opined as
follows:
• The relationship of the purchaser of draft and the bank from which the draft has
been purchased is that of debtor and creditor.
• The purchaser of the bank draft can call upon the bank from which he has
purchased it to cancel the draft and pay back the money to him at any time
before the draft has been delivered to the payee.
• If the sole object of the issue of the draft was to transit the money to another
person, a fiduciary relationship is created between the purchase of the draft and
the bank which issued it.
• Once the draft has been delivered to the payee or his agent, the purchaser is not
entitled to ask the issuing bank to stop payment of the draft to the payee on
other grounds such as matters relating to consideration.
• The issuing bank can after the issue of a draft pay back the amount of the draft
to the purchaser of the draft only with the consent of the payee.
 NEGOTIATION
• As per S. 51 a NI may be negotiated by Sole maker, Drawer, Payee, Endorsee, All
of several joint makers, drawers, payees or endorsees.
• A maker or drawer can negotiate only when the instrument is drawn to his own
order. Therefore, if negotiability is excluded by the respective endorsement, the
endorsee, as holder, cannot negotiate.
• Further, explanation to section 51 provides that a maker or a drawer or endorsee
or negotiate an instrument, only if –
• - the instrument falls into his possession in a lawful manner; or
• - he is the holder thereof.
• S.60 provides that a NI may be negotiated until the payment or satisfaction thereof
by the maker or drawer or acceptor or drawee, as the case may be, at or after the
maturity but not after the payment.
• Under the Act, negotiable instruments may be negotiated either
• - by delivery when these are payable to bearer; or (S 47,48)
• - by endorsement and delivery when these are payable to order.
 ENDORSEMENT
• As per section 15 of the NI Act Endorsement means –
• “When the maker or holder of a negotiable instrument signs the same,
otherwise than as such maker, for the purpose of negotiation, on the back or
face of or on a slip of a paper annexed thereto, or so signs for the same
purpose a stamped paper intended to be completed as a negotiable instrument,
he is said to endorse the same, and is called the endorser.”
• Endorsement is that the transferor shall use appropriate writing on an
instrument so as to transfer his right, title and interest therein to some other
person.
• Endorsement should be on the instrument, by the Endorser, Signed, Blank or
full, Intention to transfer rights, Delivery.
• .Endorsements may be Blank or general, Special or in full,
• Restrictive (S. 50 “Pay contents to C only”, “Pay C for my use”),
• Conditional, Sans Recourse ( “Pay to C without recourse to me”),
• Sans Frais (not to incur any expenditure on his account on the instrument, all
endorsers are liable to him),
• Facultative (“ notice of dishonour waived”),
• Contingent (“Pay X on his marriage to Y”).
• Under Section 35 that except in the case of a contract to contrary, every endorser
of a negotiable instrument is liable to every subsequent party to it provided due
notice of dishonour is given to or received by him.
• The endorsement of an instrument, followed by delivery, transfers to the endorsee
the property in the instrument with right of further negotiation i.e. the endorse
may further endorse it to some other person.
• A holder of an instrument deriving title from a holder in due course has rights
thereon of the holder in due course (S. 53).
 DISCHARGE
• An instrument is said to be discharged when –
• All the rights under it are extinguished, It ceases to be negotiable. Even a holder in
due course does not acquire any right under it. The right of action on a NI is
extinguished by the following methods :
• By payment in due course (Section 82),
• By cancellation of acceptor’s endorser’s name (S 82(a)),
• By release (Clause (b) of Section 82),
• By allowing more than 48 hours to the drawee for acceptance (S 83),
• Dissenting parties discharged by qualified or a limited acceptance, By payment,
alteration not being apparent (S. 89),
• By negotiation back (Section 90),
• By delay in presenting the cheque within a reasonable time, By operation of law (by
lapse of time, by merger, insolvency),
• By payment by drawee of cheque payable to order or bearer (S 85 85A)
• By material alteration without assent of all parties liable
 ILLUSTRATIONS

• A draws a bill payable to B or order with Z, as the drawee. The bill was
successively endorsed to C, D, and H, holder. Z does not pay and H has duly
protested non-payment. P pays for the honor of C.
Which of the following statement is wrong?
a. D is discharged.
b. Z is discharged.
c. C is discharged.
d. P can ask reimbursement from C.

• sections 99, 100,113, 114.

• A (Drawer) sold goods to Z(Drawee/Acceptor), B(Payee) is supplier to A.
 SECTION 58
• Arun issued a note to Baldev. There was a total failure of consideration. Baldev
issued the note for consideration to Chetan who is a holder in due course.
Chetan indorsed the note to Dhavan who knew of the failure of
consideration. Can Dhavan successfully collect from Arun?

a. No, because Dhavan knew the failure of consideration.

b. No, although Dhavan acquired the rights of Chetan, a holder in due course
and he was not a party to any illegality.
c.Yes, because Dhavan acquired the note for consideration.
d. No, becuase Dhavan is not a holder in due course.
 S. 59
• The acceptor of a bill of exchange, when he accepted it, deposited with the
drawer certain goods as a collateral security for the payment of the bill, with
power to the drawer to sell the goods and apply the proceeds in discharge of
the bill if it were not paid at maturity. The bill not having been paid at maturity,
the drawer sold the goods and retained the proceeds, but indorsed the bill to
A.
• What is the remedy available to A?
 INTERNATIONAL LAW
• 134.Law governing liability of maker, acceptor or indorser of foreign
instrument. In the absence of a contract to the contrary, the liability of the
maker or drawer of a foreign promissory note, bill of exchange or cheque is
regulated in all essential matters by the law of the place where he made the
instrument, and the respective liabilities of the acceptor and indorser by the
law of the place where the instrument is made payable.
• A bill of exchange was drawn by A in California, where the rate of interest is
25 per cent., and accepted by B, payable in Washington, where the rate of
interest is 6 per cent. The bill is endorsed in India, and is dishonoured. An
action on the bill is brought against B in India
• . He is liable to pay interest at the rate of 6 per cent. only ; but if A is charged
as drawer, A is liable to pay interest at the rate of 25 per cent.
135.LAW OF PLACE OF PAYMENT GOVERNS
DISHONOUR.
• Where a promissory note, bill of exchange or cheque is made payable in a
different place from that in which it is made or indorsed, the law of the place
where it is made payable determines what constitutes dishonour and what
notice of dishonour is sufficient.
• Illustration
• A bill of exchange drawn and indorsed in India, but accepted payable in France,
is dishonoured. The indorsee causes it to be protested for such dishonour, and
gives notice thereof in accordance with the law of France, though not in
accordance with the rules herein contained in respect of bills which are not
foreign.The notice is sufficient.
PALE HORSE DESIGNS VS NATARAJAN RATHNAM ON 26 OCTOBER,
2010 MADRAS HC CRL.O.P.NOS. 20991, 20992 OF 2007

• A combined reading of Sections 1, 11, 12 and 134 to 137 of the Negotiable

Instruments Act, 1881, will make it clear that a cheque made/drawn in a foreign
country on a drawee bank functioning in the foreign country and made payable
therein shall be a foreign instrument and the law of the country wherein the
cheque was drawn or made payable shall be the law governing the rights and
liabilities of the parties and the dishonour of the cheque.
• As such the payee cannot select a country and present it through a bank
therein for collection to confer jurisdiction on a court functioning therein. If the
payee is given such a right to proceed criminally against the drawer by selecting
the jurisdiction, the same will encourage forum shopping making the payees to
go to a country wherein the dishonour of the cheque is made a criminal
offence and wherein the law is more favourable to the payee enabling him to
collect the amount covered by the cheque by way of fine or compensation by
resorting to criminal prosecution.
 OF NOTICE OF DISHONOUR
• 91.Dishonour by non-acceptance. A bill of exchange is said to be dishonoured by
non-acceptance when the drawee makes default in acceptance upon being duly
required to accept the bill
• 92.Dishonour by non-payment. A promissory note, bill of exchange or cheque is said
to be dishonoured by non-payment when the maker of the note, acceptor of the bill
or drawee of the cheque makes default in payment upon being duly required to pay
the same.
• 93.By and to whom notice should be given. When a promissory note, bill of
exchange or cheque is dishonoured by non-acceptance or nonpayment, the holder
thereof, or some party thereto who remains liable thereon, must give notice that the
instrument has been so dishonoured to all other parties whom the holder seeks to
make severally liable thereon, and to some one of several parties whom he seeks to
make jointly liable thereon.
• Nothing in this section renders it necessary to give notice to the maker of the
dishonoured promissory note or the drawee or acceptor of the dishonoured bill of
exchange or cheque.
 BANK

• In respect of a crossed cheque it is presumed that the banker, on whom it is

drawn, has made payment to the true owner of the cheque, though in fact, the
amount of the cheque may not reach the true owner. In other words, the
banker making payment in due course is protected, whether the money is or is
not, in fact, received by the true owner of the cheque (Section 128).
• Section 126 of the Act states that:
• in the case of generally crossed cheque the banker shall not pay it otherwise
than to a banker, and in the case of a specially crossed cheque it shall not be
paid by the banker otherwise than to the banker to whom it is crossed or to
his agent for collection.
• Where the drawee banker pays a crossed cheque otherwise than in
accordance with the provisions of S. 126 it shall be liable to the true owner of
the cheque for any loss he may have sustained (S. 129)
 .
• Per Section 85(2) when a banker makes payment on an uncrossed cheque in
due course he is authorized to debit the account of his customer with the
amount so paid irrespective of the genuineness of the endorsement thereon.
• The protection is available if the payment has been made in due course i.e.
• - according to the apparent tenor of the instrument,
• - in good faith and without negligence,
• - to any person in possession thereof,
• - in circumstances that do not incite any suspicion that he is not entitled to
receive payment of the cheque.
A BANKER WILL BE BOUND TO DISHONOUR A
CHEQUE IN THE FOLLOWING CASES:
• The cheque is undated.
• The cheque is stale i.e. it has not been presented within the validity period of the cheque.
• The instrument is inchoate (unclear or unformed or tentative) or not free from reasonable doubt.
• The cheque is post-dated and presented for payment before its ostensible date.
• Customer’s funds in the banker’s hands are not ‘properly applicable’ to the payment of cheque drawn by the former.
• The customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank
in which either he has account or his account is overdrawn.
• A garnishee/ legal court order attaching the money in the hand of the banker, is served on the banker.
• Authority of the banker to honour a cheque of his customer is determined by the notice of the drawer’s death,
lunacy and insolvency. However, any payment made prior to the receipt of the notice of death is valid.
• Notice in respect of closure of the account is served by either party on the other.
• The cheque contains material alterations, irregular signature of irregular endorsement.
• The customer has countermanded payment.
• Any ambiguity in the material part of the cheque including the defects resulting from the crossing of the cheque.
• Any difference between the amount of cheque in words and in figures.
• Any irregular endorsements.
• The cheque is mutilated.
• Signature of the drawer has been forged.
 DISHONOUR OF CHEQUES

• Section 92 of the Act reads as under –

• “A promissory note, bill of exchange or cheque is said to be dishonoured by
non-payment when the maker of the note, acceptor of the bill or drawee of
the cheque makes default in payment upon being duly required to pay the
same.”
• If on presentation the banker does not pay then dishonour takes place and the
holder acquires at once the right of recourse against the drawer and the other
parties on the cheque.
• Upon dishonour of a cheque, its negotiability is lost.
DISHONOUR OF CHEQUE CAN BE DIVIDED INTO
TWO CATEGORIES:
• - Rightful dishonour: Dishonour of cheque by the drawee banker for any of
the reasons specified above or for any other rightful reason. In this case there is
no remedy available against the banker but the holder in due course has remedy
both civil and criminal against the drawer.
• - Wrongful dishonour: Dishonour of cheque by the banker due to negligence
or carelessness by its employees. The drawer may bring an action against the
bank for losses suffered by him. The payee has no action against the banker in
this case.
 DISHONOUR OF CHEQUES
DISHONOUR OF CHEQUE IS AN OFFENCE
• S. 138 states that the return of a cheque due to insufficient funds, is a criminal offence.
• The drawer shall be deemed to have committed an offence and such offence will be punishable
with imprisonment for a term up to two years imprisonment or with a fine twice the amount
of the cheque or both.
• Provisions of section 138 of the Act are applicable only if –
- The cheque in question has been issued in discharge of a liability only. Unless contrary is
proved (S. 139) a cheque is presumed to have been received by the holder in discharge of a debt or
liability. A cheque given as gift will not fall in this category.
- The cheque is presented to the bank for payment within three months or its specific validity
period, whichever is earlier.
- Payee or holder in due course has given notice demanding payment within thirty days of receiving
information of dishonour which should not be for a reason other than insufficiency of funds.
- The drawer does not make payment within fifteen days of the receipt of the notice. The complaint
can be made only by the payee/holder in due course, within one month.
- Thereafter u/s 142 of the Act, a complaint may be filed with a Magistrate.
DISHONOUR OF CHEQUES
SECTION 131 OF THE ACT PROVIDES THAT –
• “A banker who has in good faith and without negligence received payment for a
customer of a cheque crossed generally or specially to himself, shall not, in case
the title to the cheque proves defective, incur any liability to the true owner of
the cheque by reason only of having received such payment.”
• If the following conditions do not co-exist, this protection would be denied to
the collecting banker :
• - The collecting banker should have acted in good faith and without
negligence: In Lloyds Savouy Co. (1933) A.C. 201, the court held that if the banker
receives payment of a cheque to which the customer has no title, the onus is
on him to disprove negligence. The test of “negligence” is whether the
transaction of paying in any given cheque coupled with the circumstances
antecedent and present was so flagrantly out of the ordinary course that it
ought to have aroused suspicion in the mind of the banker and caused him to
make enquiry (B.Prem Chand v.Nath Bank 48 Bom. L.R.393).
 CASE READINGS:

1). Ashok Y. Baldev v. Surendra M.

Nighojakhar, AIR 2001 SC 1315
2). U. Ponappa v. Catholic Syrian Bank
Ltd., (1999) 1 SCC 113
3). Indian Overseas Bank v. Industrial
Chain Concern, (1990) 1 SCC 484
•
CASE READINGS- DISHONOUR OF
CHEQUES:
• 4). S.L. Construction v. A.S. Rao,
(2009) 1 SCC 500
• 5). Harman Electronics v. National
Panasonic India Ltd AIR 2009 SC 1168
• 6). K. Bhaskaran v Sankaran Vaidhyan
Balan (1999) 7 SCC 510
• 7). Pale Horse Designs, rep. Karen
Chansky, USA v Natarajan Rathnam; 2010
S. 142.COGNIZANCE OF OFFENCES.
• Notwithstanding anything contained in the Code of Criminal Procedure, 1973
(2 of 1974),-
• (a)no court shall take cognizance of any offence punishable under section 138
except upon a complaint, in writing, made by the payee or, as the case may be,
the holder in due course of the cheque;
• (b)such complaint is made within one month of the date on which the cause of
action arises under clause (c) of the proviso to section 138;
• (c)no court inferior to that of a Metropolitan Magistrate or a Judicial
Magistrate of the first class shall try any offence punishable under section 138.]
 ILLUSTRATIONS

• A. Amount on cheque was Rs. 1,00,000 whereas the actual

debt was Rs 80,000. it was verbally agreed that Rs. 20,000
would be interest.
• After dishonour Drawer claims amount on cheq did not
constitute ‘debt’.

• B. Cheque taken as security for loan advanced.

• Liability of drawer upon dishonour?
 S.141 OFFENCES BY COMPANIES
• (1) If the person committing an offence u/s 138 is a company, every person who, at the time the
offence was committed, was in charge of, and was responsible to, the company for the conduct of the
business of the company, as well as the company, shall be deemed to be guilty of the offence and shall
be liable to be proceeded against and punished accordingly:
• Provided that nothing contained in this sub-section shall render any person liable to punishment if he
proves that the offence was committed without his knowledge, or that he had exercised all due
diligence to prevent the commission of such offence.
• "Provided further that where a person is nominated as a Director of a company by virtue of his
holding any office or employment in the Central Government or State Government or a financial
corp oration owned or controlled by the Central Government or the State Government, as the case
may be, he sh all not be liable for prosecution under this Chapter.".
• (2)Notwithstanding anything contained in sub-section (1), where any offence under this Act has been
committed by a company and it is proved that the offence has been committed with the consent or
connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer shall also be deemed
to be guilty of that offence and shall be liable to be proceeded against and punished accordingly,
• Explanation.-For the purposes of this section,- (a)"company" means any body corporate and includes
a firm or other association of individuals; and
• (b) "director", in relation to a firm, means a partner in the firm.
 SMS PHARMA V NEETA BHALLA (2005) 8SCC 89
• It is necessary to specifically aver in a complaint under S. 141 of NI Act, 1881
that at the time the offence was committed, the person accused was in charge
of, and responsible for, the conduct of business of the company. This averment
is an essential requirement of S. 141 and has to be made in a complaint. A
director in a company cannot be deemed to be in charge of and responsible to
the company for conduct of its business.
• The Managing Director or Jt. MD would be admittedly in charge of the co. and
responsible to the co. for conduct of its business. When that is so, holders of
such positions in a co. become liable under S. 141. By virtue of the office they
hold as MD or Jt. MD, these persons are in charge of and responsible for the
conduct of business of the co. Therefore, they get covered under S. 141. So far
as signatory of a cheque, which is dishonoured is concerned, he is clearly
responsible for the incriminating act and will be covered S. 141(2).