Chapter 12

Negotiable Instruments Act 1881

Some Important Terminologies

Negotiable Negotiable Instruments is an instrument (the word instrument means a document) which
is freely transferable (by customs of trade) from one person to another by mere delivery
Instruments
or by endorsement and delivery. The property in such an instrument passes to a bonafide
meaning transferee for value.
Essential ➢ It is necessarily in writing
➢ It should be signed
Characteristics of
➢ It is free transferable from one person to another
Negotiable ➢ Holders title is free from defects
Instruments ➢ It can be transferred any number of times till its satisfaction
➢ Every negotiable instrument must contain either a promise or order to pay
money. Also, the promise or order must be unconditional.
➢ The promise or order to pay must consist of money only. Nothing should be
payable, whether in addition or in substitution of money. Also, the sum payable
must be certain.
“At Sight”, “On In a promissory note or bill of exchange the expressions “at sight” and “on presentment”
means on demand.
Presentment”,
“After Sight” The expression “after sight” means, in a promissory note, after presentment for sight, and,
[Section 21] in a bill of exchange after acceptance, or noting for non-acceptance, or protest for non-
acceptance.
Holder [Section The “holder” of a promissory note, bill of exchange or cheque means—
➢ any person
8]
➢ entitled in his own name to the possession thereof, and
➢ to receive or recover the amount due thereon from the parties thereto.

Example: An agent holding an instrument for his principal is not a holder: The reason being
that, although agent can receive payment of the instrument, he has no right to sue on the
instrument in his own name.
“Holder in due ” Holder in due course” means—
→ any person
course”
[Section 9] → who for consideration

→ became the possessor of a promissory note, bill of exchange or cheque (if payable
to bearer), or the payee or endorsee thereof, (if payable to order),

→ before the amount 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.

Example 1: A draws a cheque for Rs 5,000 and hands it over to B by way of gift. B is a
holder but not a holder in due course as he does not get the cheque for value and
 consideration. His title is good and bonafide. As a holder he is entitled to receive Rs 5,000
from the bank on whom the cheque is drawn.
Payment in due Payment in due course means: -
➢ Payment is made as per apparent tenor
course
➢ Payment is made in good faith
[Section 10] ➢ Payment is made without negligence
➢ Payment is made to the person who is in the possession of the negotiable
instrument under circumstances which do not afford a reasonable ground for
believing that he is not entitled to receive payment of the amount therein
mentioned

Concept 1:Cheques, Classification of NI-Order & Bearer Instruments and Endorsement of NI

Topic 1.1: Cheque [Section 6]

Definition ➢
A “cheque” is a bill of exchange
➢
drawn on a specified banker and
➢
not expressed to be payable otherwise than on demand and
➢
it includes
→ the electronic image of a truncated cheque and
→ a cheque in the electronic form.
Meaning of term It should be payable whenever the holder chooses to present it to the drawee
payable on
demand
Cheques inCheque in the electronic form-means a cheque drawn in electronic form by using any
computer resource, and signed in a secure system with a digital signature (with/without
electronic form
biometric signature) and asymmetric crypto system or electronic signature, as the case
may be;
A truncated 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,
cheque
immediately on generation of an electronic image for transmission, substituting the
further physical movement of the cheque in writing.
Parties to cheque 1. Drawer: The person who draws a cheque i.e. makes the cheque. His liability is
primary and conditional.

2. Drawee: The specific bank on whom cheque is drawn. He makes the payment of
the cheque. In case of cheque, drawee is always banker.

3. Payee: The person named in the instrument (i.e. the person in whose favour
cheque is issued), to whom or to whose order the money is, by the instrument,
directed to be paid, is called the payee. The payee may be the drawer himself or
a third party.

Essential According to the definition of cheque under section 6, a cheque is a species of bill of
exchange. Thus, it should fulfil:
Characteristics of
a cheque ➢ All the essential characteristics of a bill of exchange
 ➢ Must be drawn on a specified banker

➢ It must be payable on demand

Topic 1.2: Classification of Negotiable Instruments- Bearer and Order Instruments

Bearer Instrument:
It is an instrument where
➢ The name of the payee is blank or
➢ Where the name of payee is specified with the words “or bearer” or
➢ Where the last indorsement is blank.

Such instrument can be negotiated by mere delivery.

Order Instrument: It is an instrument which is

➢ payable to a person or
➢ payable to a person or his order or
➢ payable to order of a person or
➢ Where the last endorsement is fill
Such instrument can be negotiated by endorsement and delivery.

Concept 2: Promissory Notes, Classification of NI: Demand & Time Instruments

Topic 2.1: Promissory Notes

Definition According to section 4, “A “promissory note” is

➢ an instrument in writing (not being a bank-note or a currency-note)
[Section 4]
➢ containing an unconditional undertaking
➢ signed by the maker,
➢ to pay a certain sum of money
➢ only to a certain person, or to the order of a certain person, or to the bearer of
the instrument.
Parties to The person who makes the promise to pay is called the Maker. He is the debtor and must
sign the instrument. The person who will get the money (the creditor) is called Payee.
Promissory Note
Essential a. In writing- An oral promise to pay is not sufficient.
Characteristics of
b. There must be an express promise to pay. Mere acknowledgment of debt is
a Promissory Note insufficient.

c. The promise to pay should be definite and unconditional. Therefore, instruments

payable on performance or non-performance of a particular act or on the happening
or non-happening of an event, are not promissory notes. However, the promise to
pay may be subject to a condition, which according to the ordinary experience of
mankind, is bound to happen.

d. A promissory note must be signed by the maker otherwise it in incomplete and

ineffective.

e. Promise to pay money only.

 f. Promise to pay a certain sum

g. The maker and payee must be certain, definite and different persons. A promissory
note cannot be made payable to the bearer (Sec. 31 of RBI Act). Only the Reserve
Bank or the Central Government can make or issue a promissory note 'payable to
bearer'.

h. Stamping A promissory note must be properly stamped in accordance with the

provisions of the Indian Stamp Act and such stamp must be duly cancelled by maker's
signatures or initials or otherwise.

Example: Consider the following situations Then determine whether they are promissory note or not
I acknowledge myself to be indebted to B in Rs 1,000,
to be paid on demand, for value received.
Mr. B I.O.U Rs 1,000
I promise to pay B Rs 500 seven days after my
marriage with C
I promise to pay B Rs 500 on D’s death
I promise to pay B Rs 500 on D’s death, provided D
leaves me enough to pay that sum
I promise to pay B Rs 500 and to deliver to him my
black horse on 1st January next.
I promise to pay B Rs 500 and all other sums which
shall be due to him

Topic 2.2: Classification of Negotiable Instruments- Demand and Time Instruments

Demand Instruments (Section 19):

A promissory note or bill of exchange in which no time for payment is mentioned is payable on demand. Bills
and notes are payable either on demand or at a fixed future time. Cheques are always payable on demand. A
bill or promissory note is also payable on demand when it is expressed to be payable on demand, or "at sight"
or "presentment".

Time instrument (Section 22):

A bill or note which is payable:

a) After a fixed period or
b) After sight or
c) On a specified day or
d) On the happening of an event which is certain to happen is known as time instrument.

Topic 2.3: Maturity of a Negotiable Instrument

Where bill or note is payable at fixed period after sight, the question of maturity becomes important. The
maturity of a note or bill is the date on which it falls due.

Days of grace:
A note or bill, which is not expressed to be payable on demand, at sight or on presentment; is at maturity on
the third day after the day on which it is expressed to be payable. Three days are allowed as days of grace
(Section 22).

Calculation of maturity [Section 23]:

In calculating the date at which a promissory note or bill of exchange, made payable at stated number of months
after date or after sight, or after a certain event, is at maturity, the period stated shall be held to terminate on
the day of the month, which corresponds with the day on which the instrument is dated, or presented for
acceptance or sight, or noted for non-acceptance, or protested for non-acceptance, or the event happens or,
where the instrument is a bill of exchange made payable at stated number of months after sight and has been
accepted for honour, with the day on which it was so accepted. If the month in which the period would
terminate has no corresponding day, the period shall be held to terminate on the last day of such month.

Calculating maturity of bill or note payable so many days after date or sight [Section 24]

In calculating the date at which a promissory note or bill of exchange made payable at certain number of days
after date or after sight or after a certain event is at maturity, the day of the date, or of presentment for
acceptance or sight, or of protest for non-acceptance, or on which the event happens, shall be excluded.

When day of maturity is a holiday [Section 25]

When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument
shall be deemed to be due on the next preceding business day.
Explanation: The expression “Public Holiday” includes Sundays and any other day declared by the Central
Government, by notification in the Official Gazette, to be a public holiday.

Example: Ascertain the ‘date of maturity’ of a bill payable 120 days after date. The bill of exchange was drawn
on 1st June, 2005. [Nov 2005]
Example: A negotiable instrument dated 29th January, 2017, is made payable at one month after date. Calculate
the maturity date [ICAI SM Q]
A: The instrument is at maturity on the third day after the 28th February, 2017.

Example: A negotiable instrument, dated 30th August, 2019, is made payable three months after date [ICAI SM
Q]
A: The instrument is at maturity on the 3rd December, 2019.

Example: A promissory note or bill of exchange, dated 31st August, 2019, is made payable three months after
date. [ICAI SM Q]
A: The instrument is at maturity on the 3rd December, 2019.

Example: Bharat executed a promissory note in favour of Bhushan for ` 5 crores. The said amount was payable
three days after sight. Bhushan, on maturity, presented the promissory note on 1st January, 2017 to Bharat.
Bharat made the payments on 4th January, 2017. Bhushan wants to recover interest for one day from Bharat.
Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is liable to pay the
interest for one day. [ICAI SM Q]
A: Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that where a bill or note is
payable after date or after sight or after happening of a specified event, the time of payment is determined by
excluding the day from which the time begins to run.

Therefore, in the given case, Bharat will succeed in objecting to Bhushan’s claim. Bharat paid rightly “three days
after sight”. Since the bill was presented on 1st January, Bharat was required to pay only on the 4th and not on
3rd January, as contended by Bhushan.

Example: A promissory note is made on 23rd December 2025. It is payable one month after date. Calculate the
maturity date

Example: A promissory note is made on 31rd December 2025. It is payable one month after date. It is given that
3rd February 2026 was declared as emergency public holiday. Calculate maturity date.
 Concept 3:- Endorsements
Topic 3.1: Endorsement of Instrument [Section 15]

Meaning When the maker or holder of a negotiable instrument signs the same otherwise than as
such maker, for the purpose of negotiation, on the back or face thereof or on a slip of
paper annexed thereto known as allonge - he is said to endorse the same and called as
the endorser. The person to whom the instrument is endorsed is called the endorsee.
Endorsement When the maker or holder of a negotiable instrument signs the same (otherwise than as
such maker)—
➢ for the purpose of negotiation
➢ on the back or face thereof or on a slip of paper annexed thereto, or so signs for
the same purpose a stamped paper intended to be completed as a negotiable
instrument,
➢ he (maker/holder) is said to endorse the same, and is called the “endorser”.
Example X, who is the holder of a negotiable instrument writes on the back thereof: “pay to Y or
order” and signs the instrument. In such a case, X is deemed to have en­dorsed the
instrument to Y. If X delivers the instrument to Y, X ceases to be the holder and Y becomes
the holder.
Endorsement “in If the endorser signs his name only, the endorsement is said to be “in blank”, and if he
adds a direction to pay the amount mentioned in the instrument to, or to the order of, a
blank” and “in
specified person, the endorsement is said to be “in full”, and the person so specified is
full” called the “endorsee” of the instrument.
[Section 16]

Topic 3.2: Various kinds of endorsement

Endorsement in Where the endorser just puts his signature without specifying the endorsee, the
endorsement is said to be in blank (Section 16).
Blank (only
signature) The effect of such an endorsement is to render the instrument payable to bearer even
though originally payable to order (Section 54).
Endorsement in Where along with endorser's signature, the name of the endorsee is specified, the
endorsement is called 'endorsement in full' (Section 16). Thus, where the instrument
Full (name and
states, 'Pay X or order' and is signed by A, the payee, it constitutes 'endorsement in full'.
signature):
Partial An endorsement which purports to transfer only a part of amount of the instrument is
called as partial endorsement. As per section 56 such an endorsement is invalid under
endorsement
law.

Example: A is a holder of a bill for Rs 10000. A endorses it thus: “Pay B or order Rs 5000”.
This is partial endorsement and invalid for the purpose of negotiation.

Exception: Second part of section 56 states that if a bill has been paid in part, the fact of
the part payment may be endorsed on the instrument and it may then be negotiated for
the residue.

Example: A bill may be endorsed: Pay A or order Rs 5000 being the unpaid residue of the
bill. It is a valid endorsement.
Restrictive An endorsement is restrictive when the endorser while making endorsement restricts or
excludes the right of the endorsee to further transfer the instrument or constitutes the
Endorsement
endorsee as an to endorse the instrument or to receive its content for the endorser or
for some other specified person (Section 50).

An endorsement is “restrictive” when it prohibits or restricts the further negotiability of

the instrument. It merely entitles the holder of the instrument to receive the amount on
the instrument for a specific purpose.
Conditional Section 52 gives power to an endorser to insert in the endorsement by express words, a
stipulation negating (excluding) or limiting his own liability to the holder by making such
endorsement
liability or the right of the endorsee to receive the amount due thereon upon the
happening of a specified event although such event may never happen.
Ways of Condition endorsement can be achieved by an endorser in any of the following ways:
conditional
(1) Sans recourse endorsement- By excluding his liability e.g. the holder of a bill may
endorsement endorse it thus: ‘Pay A or order without recourse to me, or Pay A or order sans
recourse, or Pay A or order at his own risk’. In these cases, the holder does not
incur any liability on the bill as an endorser.

(2) Liability dependent upon a contingency- By making his liability dependent upon
the happening of a specified event which may never happen, in such a case the
liability of the holder as an endorser, arises only upon the happening of the event
specified, and is extinguished if the event becomes impossible, or the conditions
specified are not fulfilled. But, the endorsee can sue the prior parties before the
happening of the event.

(3) Facultative endorsement – In it, an endorser by express words abandons some

right or increases his liability under an instrument. For example, the holder may
waive presentment of the instrument for acceptance or notice of dishonor by
the holder. An endorsement, ‘Pay A order. Notice of dishonor waived’ is a
facultative endorsement.

(4) ‘Sans frais’ endorsement – Where the endorser does not want the endorsee or
any subsequent holder to incur any expenses on his account on the instrument,
the endorsement is ‘sans frais’.
Conversion of The holder of a negotiable instrument endorsed in blank may without signing his own
name, by writing above the endorser’s signature a direction to pay to any other person
endorsement in
as endorsee, convert the endorsement in blank into an endorsement in full; and the
blank to holder does not thereby incur the responsibility of an endorser.
endorsement in
full According to Section 55, if a negotiable instrument, after having been endorsed in bank,
is endorsed in full, the amount of it cannot be claimed from the endorser in full, except
[Section 49]
by the person to whom it has been endorsed in full, or by one who derives title through
such person.

For example, A is the payee holder of a bill. A endorses it in blank and delivers it to B. B
endorses it in full to c or order. C without endorsement transfers the bill to D. D as the
bearer is entitled to receive payment or to sue drawer, acceptor, or A who endorsed the
bill in blank, but he cannot sue B or C. C can sue B as he received the bill form by
endorsement in full. If, however, C instead of passing the bill to D without endorsement
passes it by a regular endorsement, D can claim against all prior parties.
 Thus, if an endorsement in blank is followed by an endorsement in full, the instrument
still remains payable to bearer and negotiable by delivery against all parties prior to the
endorser in full, though the endorser is full is only liable to a holder who made title
directly through his endorsement, and person deriving title through such holder.

Topic 3.3: Essentials of valid endorsement

(1) Signature of endorser: The endorsement must be signed. The endorsement may be made by the
endorser either by merely signing his name on the instrument or by specifying in addition to his
signature, the person to whom or to whose order the instrument is payable. When, in a bill payable to
order, the endorsee’s name is wrongly spelled, he should when he endorses it, sign the name as spelled
in the instrument and write the correct spelling within brackets after his endorsement.

(2) Who may endorse or negotiate- Every sole maker, drawer, payee or endorsee, or all of several joint
makers, drawers, payees or endorsee’s of a negotiable instrument may endorse and negotiate the same
unless negotiability of such instrument has been restricted or excluded as mentioned in Sec. 50 and 51.

Explanation: It is however, necessary that such maker or drawer who wants to endorse is in lawful
possession of the instrument. (section 51)

Example: A bill is drawn payable to A or order. A endorses it to B, the endorsement not containing the
words “or order” or any equivalent words. B may negotiate the instrument.

(3) Effect of endorsement: The endorsement of a negotiable instrument followed by delivery transfers to
the endorsee the property therein with the right of further negotiation, but the endorsement may by
express words, restrict or exclude such right, or may merely constitute the endorsee an agent to
endorse the instrument, or to receive its contents for the endorser, or for some other specified person.

Examples: B signs the following endorsements on different negotiable instruments payable to bearer,—

➢ “pay the contents to C only”.

➢ “pay C for my use”.
➢ “pay C on order for the account to B”.
➢ “the within must be credited to C”.

These endorsements exclude the right of further negotiation by C.

➢ “pay C”.
➢ “pay C value in account with the Oriental Bank”.
➢ “pay the contents to C, bring part of the consideration in a certain deed of assignment executed by C
to endorser and others”.

These endorsements do not exclude the right of further negotiation by C. Endorser who excludes his own
liability or makes it conditional [Section 52]

The endorser of a negotiable instrument may,

➢ by express words in the endorsement,
➢ exclude his own liability thereon, or
➢ make such liability or the right of the endorsee to receive the amount due thereon depend upon the
happening of a specified event, although such event may never happen.
 ➢ Where an endorser so excludes his liability and afterwards becomes the holder of the instrument all
intermediates endorsers are liable to him.

Examples:
➢ The endorser of a negotiable instrument signs his name, adding the words “without recourse”. Upon
this endorsement he incurs no liability.

➢ A is the payee and holder of a negotiable instrument. Excluding personal liability by an endorsement,
“without recourse”, he transfers the instrument to B, and B endorses it to C, who endorses it to A. A is
not only reinstated in his former rights, but has the rights of an endorsee against B and C.

Concept No 4: Crossings
Crossing of Cheques [Section 123-131]

Introduction There are two types of cheques, open cheques and crossed cheques. A cheque which
can be presented to the banker and can be paid at the counter of the bank is called an
open cheque. If the drawer loses an open cheque, the finder of it may go to the bank
and get payment. It was to prevent the losses incurred by open cheques getting into the
hands of wrong person.
Meaning of Crossing of a cheque means an instruction to the drawee i.e. the paying bank that the
payment is not to be made at the counter but through a bank.
crossing
Objects of A crossing is a warning to the bank not to make payment of the crosses cheque over the
counter. Crossing operates as a caution to the paying banker.
crossing

➢ Crossing affects the mode of payment of cheque- An open or uncrossed cheque

is payable to the payee or holder at the counter of the bank. In such a case, if a
wrong person takes away the payment of cheque, it is difficult to trace him.

The payment of a cross cheque can be obtained only through a banker. Thus,
crossing is a mode of assuring that only the rightful holder (i.e. the person
entitled to receive money) gets payment.

➢ Crossing does not affect the transferability or negotiability of cheque-a crossed

cheque can be negotiated just the same way as an open cheque. A person
acquiring a crossed cheque in good faith becomes its holder in due course just
as in case of open cheque.

➢ Crossing is a material alteration but crossing of cheque by the holder does not in
any way affect his rights in respect of cheques (section 125).
General Crossing Where a cheque bears across its face two parallel, transverse lines without any words or
with words ‘and company’ or/and ‘not negotiable’ written in between these two parallel
[Section 126]
lines, it is called general crossing. Where a cheque is crossed generally, the banker on
whom it is drawn shall not pay it otherwise than to a banker.
Special Crossing Where the lines of crossing bear the name of a banker either with or without any
additional words. The effect is that its payment can be obtained only through particular
banker whose name appears between the lines.
 According to Sec. 127, where a cheque is crossed specially to more than one banker, the
banker on whom it is drawn shall refuse payment thereof except where the banker to
whom it is crossed may cross it specially to another banker, his agent for collection.
A/c Payee When the words “A/C payee” or “A/C payee only” are added to a general or special
crossing, it is called restrictive crossing.
Crossing

The effect of “Account payee” crossing is that the banker is supposed to collect the
cheque on behalf of that payee only whose name appears on the face of the cheque.

If banker collects this cheque from an endorsee (i.e. person other than named payee),
he can be held responsible in case that endorsee turns out to be a wrongful holder of
cheque. Thus liability of a banker enhances to a great extent. Such type of crossing is not
statutorily recognised.
Not negotiable This requires writing of words “not negotiable” in addition to the two parallel lines. These
words may be written inside or outside these lines. According to Section 130, a person
Crossing
taking a cheque crossed generally or specially, bearing in either case the word “not
negotiable” shall not have, and shall not be capable of giving a better title to the cheque
than that which the person from whom he took it. It is a statutory crossing. A cheque
with such crossing is not negotiable, but continues to be transferable as before.

Ordinarily, in a negotiable instrument, if the title of the transferor is defective, the

transferee, if he is a HDC, will have a good title. When the words ”not negotiable” are
written, even a HDC will get the same title as that of transferor. Thus, if the title of the
transferor is defective, the title of transferee will also be so.

Thus, the addition of the words not negotiable does not restrict the further
transferability of the cheque, but it entirely takes away the main feature of negotiability,
which is that a holder with a defective title can give a good title to the subsequent holder
in due course.
Who may cross a A cheque may be crossed by the following parties:
➢ By Drawer: A drawer may cross it generally or specially.
cheque [Section
125] ➢ By Holder: A holder may cross an uncrossed cheque generally or specially. If the
cheque is crossed generally, the holder may cross specially. If cheque crossed
generally or specially, he may add words “not negotiable”.

➢ By Banker: A banker may cross an uncrossed cheque, or if a cheque is crossed

generally he may cross it specially to himself. Where a cheque is crossed
specially, the banker to whom it is crossed may again cross it specially to another
banker, his agent, for collection.

Concept No 5: Paying Banker and Collecting Banker

Topic 5.1: Protection of liability of paying banker

Cheque payable A banker gets a discharge if payment is made in due course

to order [Section
The banker, can debit his customers account even though the endorsement by the payee
85(1)] might turn out to be forgery.
Cheque payable to A banker gets a discharge if
➢ payment in made in due course and
bearer [Section
➢ payment is made to bearer of the cheque.
85(2)]
Payment of Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it
otherwise than to a banker.
cheque crossed
generally:
Payment of 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.
cheque crossed
specially:
Exception If any drawee banks made the payment on a cheque on which drawer signatures were
forged then such bank shall be liable to the true owner and there is no protection
available.

Thus, the paying banker shall be liable if it makes the payment of the cheque on which
drawers signature was forged.

Topic 5.2: Liability of Paying Banker [Section 129]

Any banker shall be liable to the true owner of the cheque for any loss he may sustain in following 2 cases:-

➢ Where paying bank pays a cheque crossed generally otherwise than to a banker, or
➢ Where paying bank pays a cheque crossed specially otherwise than to the banker to whom the
cheque is crossed

Topic 5.3: Protection to liability of collecting banker [Section 131]

Meaning of The bank which receives the payment of a crossed cheque on behalf of its customer is
known as the collecting banker.
collecting banker
Non liability of Collecting banker shall not incur liability to true owner of cheque is following conditions
are satisfied: -
banker receiving
payment of (a) That the banker had received the payment of cheque crossed generally or
cheque [Section specifically to himself
131]
(b) That the collection was made by the bank on behalf of the customer

(c) That the collecting bank must have acted in good faith and without
negligence.

Concept No 6: Capacity of party to Negotiable Instrument

Topic 6.1: Capacity to make, draw, accepts etc. of instruments [Section 26]
Who can bind? Every person capable of contracting, according to the law to which he is subject, may
bind himself and be bound by the making, drawing, acceptance, endorsement, delivery
and negotiation of a promissory note, bill of exchange or cheque.
Position of minor A minor may draw, endorse, deliver and negotiate such instruments so as to bind all
parties except himself. A minors agreement is void and cannot be ratified when he
attains the age of maturity. A minor cannot bind himself under a negotiable instrument
as his contract is absolutely void.

Concept No 7: Consideration in a Negotiable Instrument

Negotiable instrument made, etc. without consideration [Section 43]

Liabilities of parties in A negotiable instrument—

➢ made, drawn, accepted, endorsed, or transferred without
case of no consideration
consideration, or
➢ for a consideration which fails,
creates no obligation of payment between the parties to the transaction.
Rights of Holder for If any such party has transferred the instrument to a holder for a consideration,
such holder, and every subsequent holder deriving title from him, may recover
consideration
the amount due on such instrument from the transferor for consideration or any
prior party thereto.
No right of No party for whose accommodation a negotiable instrument has been made,
drawn, accepted or endorsed can, if he has paid the amount thereof, recover
accommodated party to
thereon such amount from any person who became a party to such instrument
recover from for his accommodation.
accommodating party

Partial absence or failure of money-consideration [Section 44]

Partial absence of When the consideration for which a person signed a promissory note, bill of exchange or
cheque consisted of money—
consideration
➢ which was originally absent in part, or
➢ has subsequently failed in part,
the sum which a holder standing in immediate relation with such signer is entitled to
receive from him is proportionally reduced.
Example A draws a bill on B for Rs 500 payable to the order of A. B accepts the bill, but
subsequently dishonours it by non-payment. A sues B on the bill. B proves that it was
accepted for value as to Rs 400, and as an accommodation to the plaintiff as to the
residue. A can only recover Rs 400

Example: A owes a certain sum of money to B. A does not know the exact amount and hence he makes out a
blank cheque in favour of B, signs and delivers it to B with a request to fill up the amount due, payable by him.
B fills up fraudulently the amount larger than the amount due, payable by A and endorses the cheque to C in
full payment of dues of B. Cheque of A is dishonoured. Referring to the provisions of the Negotiable Instruments
Act, 1881, discuss the rights of B and C. [ICAI SM Q]
A: Section 44 of the Negotiable Instruments Act, 1881 is applicable in this case. According to Section 44 of this
Act, B who is a party in immediate relation with the drawer of the cheque is entitled to recover from A only the
exact amount due from A and not the amount entered in the cheque. However, the right of C, who is a holder
for value, is not adversely affected and he can claim the full amount of the cheque from B.

Concept 8: Inchoate Instruments

Inchoate Instruments [Section 20]

Meaning It means an Instrument that is incomplete in certain respects. The person gives
a blank instrument with authority to the holder to complete it with appropriate
amount
Essential characteristics of (a) A person signs a paper
(b) The paper is stamped
an inchoate instrument
(c) The paper is either wholly blank or is partially blank.
(d) The person signing such paper delivers it to another person.
Rights of inchoate The person signing and delivering the inchoate instrument is liable both to a
holder and holder in due course. However, there is a difference in their
instrument
respective rights

The holder of such an instrument cannot recover the amount in excess of the
amount intended to be paid by the person delivering said instrument.

The holder in due course can, recover any amount on such instrument but not
in excess of amount covered by the stamp.

Concept No 9 & 10: Holder and Holder in Due Course

Topic 9.1: Holder in Due Course

Holder in Due ”Holder in due course” means—

➢ any person
Course
➢ who for consideration
[Section 9] ➢ became the possessor of a promissory note, bill of exchange or cheque (if
payable to bearer), or the payee or endorsee thereof, (if payable to order),
➢ before the amount 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.
Essentials to a) The holder must have paid valuable consideration:
become a HDC
i) To become a holder in due course, a person must obtain a negotiable
instrument by paying valuable and lawful consideration for it.

ii) When given as a gift or has been inherited, the transferee cannot be a holder
in due course.
 b) A holder must acquire the instrument before its maturity in order to attain the
status of holder in due course.

c) The holder must have obtained the instrument in good faith

d) He must have received the instrument as a holder- ie. A HDC may be either
payee, or the possessor (if the instrument is payable to bearer), or the endorsee
(if the instrument is payable to order).
Privileges of a (i) In case of Inchoate Instrument: A person signing and delivering to another
a stamped but otherwise inchoate instrument (When you execute an
HDC
unfilled up but duly signed negotiable instrument such as a cheque or a
promissory note, it is an inchoate negotiable instrument) is debarred from
asserting, as against a holder in due course, that the instrument has not
been filled in accordance with the authority given by him, the stamp being
sufficient to cover the amount (Section 20).

(ii) In case of fictitious bill: In case a bill of exchange is drawn payable to the
drawer’s order in a fictitious name and is endorsed by the same hand as the
drawer’s signature, it is not permissible for acceptor to allege as against the
holder in due course that such name is fictitious (Section 42).
(iii) In case of conditional instrument or ‘escrow’: In case a bill or note is
negotiated to a holder in due course, the other parties to the bill or note
cannot avoid liability on the ground that the delivery of the instrument was
conditional or for a special purpose only (Sections 46 and 47).

(iv) In case of instrument obtained by unlawful means or for unlawful

consideration; The person liable in a negotiable instrument cannot set up
against the holder in due course the defences that the instrument had been
lost or obtained from the former by means of an offence or fraud or for an
unlawful consideration (Section 58). Thus, a holder in due course acquires a
title free from all defects.

(v) In case original validity of the instrument is denied; No maker of a

promissory note, and no drawer of a bill or cheque and no acceptor of a bill
for the honour of the drawer shall, in a suit thereon by a holder in due course
be permitted to deny the validity of the instrument as originally made or
drawn (Section 120). In short, a holder in due course gets a good title to the
bill.

(vi) In case Payee’s capacity to endorse is denied: No maker of a promissory note

and no acceptor of a bill payable to order shall, in a suit thereon by a holder
in due course, be permitted to deny the payee’s capacity, at the date of the
note or bill, to endorse the same (Section 121). In short, a holder in due
course gets a good title to the bill.

Example: On a Bill of Exchange for Rs 1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the Bill from his
customer for value and in good faith before the Bill becomes payable. State with reasons whether ‘A’ can be
considered as a ‘Holder in due course’ and whether he (A) can receive the amount of the Bill from ‘X’.
According to section 9 of the Negotiable Instruments Act, 1881 ‘holder in due course’ means any person who
for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer
or the payee or endorsee thereof, if payable to order, before the amount 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.

As ‘A’ in this case prima facie became a possessor of the bill for value and in good faith before the bill became
payable, he can be considered as a holder in due course.

But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a forged
instrument cannot enforce payment thereon. In the event of the holder being able to obtain payment in spite
of forgery, he cannot retain the money. The true owner may sue on tort the person who had received. This
principle is universal in character, by reason where of even a holder in due course is not exempt from it. A
holder in due course is protected when there is defect in the title. But he derives no title when there is entire
absence of title as in the case of forgery. Hence ‘A’ cannot receive the amount on the bill.

Topic 9.2: Negotiation of a Negotiable Instrument

Introduction One of the essential characteristics of a negotiable instrument is that it is freely

transferable from one person to another. The rights in a negotiable instrument
can be transferred from one person to another by

a. Negotiation under the N.I act

b. Assignment under Transfer of Property act

Definition of term When a negotiable instrument is transferred to any person with a view to
constitute the person holder thereof, the instrument is deemed to have been
Negotiation [Section 14]
negotiated. Thus, there is a transfer of ownership of the instrument.
Modes of Negotiation ➢ A promissory note, bill of exchange or cheque payable to bearer is
negotiable by the delivery thereof.

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

negotiable by the holder by endorsement and delivery thereof.
Negotiation by delivery A promissory note, bill of exchange or cheque payable to bearer is negotiable by
delivery thereof.
[Section 47]

Exception: A promissory note, bill of exchange or cheque delivered on condition

that it is not to take effect except in a certain event is not negotiable (except in
the hands of a holder for value without notice of the condition) unless such event
happens.
Negotiation by A promissory note, bill of exchange or cheque payable to order, is negotiable by
the holder by endorsement and delivery thereof.
endorsement
[Section 48]
Importance of Delivery Delivery of an instrument is essential whether the instrument is payable to bearer
or order for effecting the negotiation.
in Negotiation
[Section 46] The delivery must be voluntary and the object of delivery should be to pass the
property in the instrument to the person to whom it is delivered.
 Topic 9.3: Instrument obtained by unlawful means or for unlawful consideration [Sec 58]
When a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder thereof
by means of

➢ an offence or
➢ fraud, or
➢ for an unlawful consideration,

no possessor or endorsee who claims through the person who found or so obtained the instrument is entitled
to receive the amount due thereon

unless such possessor or endorsee is, or some person through whom he claims was, a holder thereof in due
course.

Topic 9.4: Rebuttable Presumptions as to Negotiable Instruments [Section 118]

Presumption of consideration
Presumption as to date
Presumption as to time of
acceptance
Presumption to time of
transfer
Presumption as to order of
endorsements
Presumption as to stamps
Presumption as to holder
every negotiable instrument was made or drawn for consideration
every negotiable instrument bearing a date was made or drawn on such
date
every accepted bill of exchange was accepted within a reasonable time
after its date and before its maturity
every transfer of a negotiable instrument was made before its maturity;
endorsements appearing upon a negotiable instrument were made in the
order in which they appear thereon
lost promissory note, bill of exchange or cheque was duly stamped.
the holder of a negotiable instrument is a holder in due course

Concept 11: Bouncing /Dishonour of cheques

Topic 11.1 & 11.2: Bouncing or Dishonour of cheques [Section 138-142A]

Dishonour of cheque
for insufficiency, etc.,
of funds in the account
[Section 138]
→ Where any cheque drawn by a person 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 the discharge, in whole or in part, of any debt or other liability,
→ is returned by the bank unpaid,
→ either because of the amount of money standing to the credit of that
account is insufficient to honour the cheque
→ such person shall be deemed to have committed an offence and
 → shall be punished with imprisonment for a term which may be extended to
two years, or with fine which may extend to twice the amount of the
cheque, or with both:
Conditions for Provided that nothing contained in this section shall apply unless—
attracting liability
(a) the cheque has been presented to the bank within a period of 3 months from
[Proviso to 138] the date on which it is drawn or within the period of its validity, whichever is
earlier;

(b) the payee or the holder in due course of the cheque, as the case may be,
makes a demand for the payment of the said amount of money by giving a
notice; in writing, to the drawer of the cheque, within thirty days of the receipt
of information by him from the bank regarding the return of the cheque as
unpaid; and

(c) the drawer of such cheque fails to make the payment of the said amount of
money to the payee or, as the case may be, to the holder in due course of the
cheque, within fifteen days of the receipt of the said notice.
Presumption in favour It shall be presumed, unless the contrary is proved, that the holder of a cheque
received the cheque of the nature referred to in section 138 for the discharge, in
of holder
whole or in part, of any debt or other liability.
[Section 139]
Defence which may not It shall not be a defence in a prosecution for an offence under section 138 that the
drawer had no reason to believe when he issued the cheque that the cheque may
be allowed in any
be dishonoured on presentment for the reasons stated in that section.
prosecution under
section 138 [Section
140]
Offences by companies If the person committing an offence under section 138 is a company, every person
who, at the time the offence was committed,
[Section 141]

➢ was in charge of, and was responsible to, the company for the conduct of
the business of the company,
➢ the company,
➢ Any director, manager or secretary with whose consent or connivance or
negligence offence is committed

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
Cognizance of offences (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2
of 1974), —
[Section 142]

(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:
Provided that the cognizance of a complaint may be taken by the Court after the
prescribed period, if the complainant satisfies the Court that he had sufficient cause
for not making a complaint within such period

(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..

(2) The offence under section 138 shall be inquired into and tried only by a court
within whose local jurisdiction, —

(a) if the cheque is delivered for collection through an account, the branch of the
bank where the payee or holder in due course, as the case may be, maintains the
account, is situated; or

(b) if the cheque is presented for payment by the payee or holder in due course,
otherwise through an account, the branch of the drawee bank where the drawer
maintains the account, is situated.
Validation for transfer ➢ If more than one case by the same payee/HDC against the same drawer is
pending in different courts, then, all such cases shall be transferred to the
of pending cases
court having jurisdiction u/s 142 (2).
[Section 142A]
➢ Notwithstanding anything contained in any order of any court, all Cases
transferred to the court having jurisdiction u/s 142(2) shall be deemed to
have been validly transferred.

Example: X issued a post- dated cheque to Y on the account of discharge of its liability. Further, X instructed to
the bank to make the stop payment due to unavailability of the adequate amount in the account. Whether X is
liable u/s 138. [ICAI SM Q]
A: In this instance section 138 of the Act is attracted as when a cheque is dishonoured on account of stop
payment instructions sent by the drawer to his banker in respect of a post- dated cheque irrespective of
insufficiency of funds in the account. A post-dated cheque is deemed to have been drawn on the date it bears
and the three months period for the purposes of section 138 is to be counted from that date. So, X will be liable
for dishonour of cheque. Once a cheque is issued by the drawer a presumption under section 139 must follow.

Example: A promoter who has borrowed a loan on behalf of company, who is neither a director nor a person-in-
charge, sent a cheque from the companies account to discharge its legal liability. Subsequently, the cheque was
dishonoured and the complaint was lodged against him. Is he liable for an offence under section 138? [ICAI SM
Q]
A: According to Section 138 of the Negotiable Instruments Act, 1881 where any cheque drawn by a person 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 discharging any debt or liability, and if it is dishonoured by banker on sufficient grounds,
such person shall be deemed to have committed an offence and shall be liable. However, in this case, the
promoter is neither a director nor a person-in-charge of the company and is not connected with the day-to-day
affairs of the company and had neither opened nor is operating the bank account of the company. Further, the
cheque, which was dishonoured, was also not drawn on an account maintained by him but was drawn on an
account maintained by the company. Therefore, he has not committed an offence under section 138.
Example: Mr. A holds an account in Navrangpura Branch, Ahmedabad of “XYZ” Bank, issues a cheque payable in
favor of B. B, who holds an account with the M.S University Road Branch, Vadodara of the “PQR” bank, deposits
the said cheque at Surat Branch of ‘PQR bank’ and the cheque is dishonored. State the jurisdiction of filing the
complaint [ICAI SM Q]
A: The complaint will have to be filed before the court having jurisdiction where the M.S University road branch
is situated.

Topic 11.3: Liability of drawee of cheque [Section 31]

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, drawee
must compensate the drawer for any loss or damage caused by such default.

The drawee of cheque must always be a banker. The drawee bank is bound to honour the customer’s cheque
if he has sufficient funds of the drawer applicable to the payment of such cheque. If the drawee bank wrongfully
dishonours the cheque it can be made liable for such default. The liability for such default is not towards the
payee or the holder but towards the drawer. A bank is liable for dishonour of the cheque, to the drawer (his
customer) only and not to the payee or the holder of the cheque as there is no privity of contract between the
bank and the payee or the holder.

Topic 11.4: Effect of non-presesnt [Section 84]

If a holder does not present a cheque within reasonable time after its issue, and the bank fails causing damage
to the drawer, the drawer is discharged as against the holder to the extent of the actual damage suffered by
him.

Example: “A draws a cheque for Rs 1000 and, when the cheque ought to be presented, has funds at the bank
to meet it. The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove
against the bank for the amount of the cheque”

Example: “A draws a cheque at Ambala on a bank in Kolkata. The bank fails before the cheque could be
presented in ordinary course. A is not discharged, for he has not suffered actual damage through any delay in
presenting the cheque”.

Concept No 12: Bills of Exchange

Topic 12.1: Bills of Exchange

Definition → A “bill of exchange” is an instrument in writing

[Section 5]
→ containing an unconditional order,
→ signed by the maker,
→ directing a certain person to pay
→ a certain sum of money only
→ to a certain person, or to the order of, a certain person or to the bearer of the
instrument.
Parties to bills of ➢ Drawer: The maker of a bill of exchange.
exchange
 ➢ Drawee: The person directed by the drawer to pay is called the 'drawee'. He is
the person on whom the bill is drawn. On acceptance of the bill he is called an
acceptor and is liable for the payment of the bill. His liability is primary and
unconditional.

Essential
characteristics of
bill of exchange
➢ Payee: The person named in the instrument, to whom or to whose order the
money is, by the instrument, directed to be paid.
➢ It must be in writing
➢ Must contain an express order to pay
➢ The order to pay must be definite and unconditional
➢ The drawer must sign the instrument
➢ Drawer, drawee and payee must be certain. All these three parties may not
necessarily be three different persons. One can play the role of two. But there
must be two distinct persons in any case. As per Section 31 of RBI Act, 1934, a
bill of exchange cannot be made payable to bearer on demand.
➢ The sum must be certain
➢ The order must be to pay money only
➢ It must be stamped.

Topic 12.2: Acceptance [Section 7 and 86]

Definition of acceptor → After the drawee of a bill has signed his assent on the bill and
[Section 7]
→ delivered the same, or given notice of such signing to the holder or to
some person on his behalf,
→ he is called the “acceptor”.
Parties not consenting → If the holder of a bill of exchange
discharged by qualified
→ acquiesces in a qualified acceptance
→ all previous parties whose consent is not obtained to such acceptance
acceptance
are discharged.
[Section 86]
Conditions for qualified An acceptance is qualified
acceptance
➢ where it is conditional, declaring the payment to be dependent on the
[Explanation to Section 86] happening of an event therein stated

➢ where it undertakes the payment of part only of the sum ordered to

be paid;

➢ where, no place of payment being specified on the order, it undertakes

the payment at a specified place, and not otherwise or elsewhere; or
where, a place of payment being specified in the order, it undertakes
the payment at some other place and not otherwise or elsewhere;

➢ where it undertakes the payment at a time other than that at which

under the order it would be legally due.
 Acceptance of bill drawn in fictitious name [Section 42]
→ An acceptor of a bill of exchange—
→ drawn in a fictitious name, and
→ payable to the drawer’s order
→ is not (by reason that such name is fictitious) relieved from liability to any holder in due course
→ claiming under an endorsement by the same hand as the drawer’s signature, and
→ purporting to be made by the drawer.

Example: X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill
is duly accepted by Y. M obtains the bill from X thus, becoming its holder in due course. Can Y avoid payment
of the bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881.[ICAI SM Q]
A: Bill drawn in fictitious name: The problem is based on the provision of Section 42 of the Negotiable
Instruments Act, 1881. In case a bill of exchange is drawn payable to the drawer’s order in a fictitious name and
is endorsed by the same hand as the drawer’s signature, it is not permissible for the acceptor to allege as against
the holder in due course that such name is fictitious. Accordingly, in the instant case, Y cannot avoid payment
by raising the plea that the drawer (Z) is fictitious. The only condition is that the signature of Z as drawer and as
endorser must be in the same handwriting.

Concept 13: Discharge and Dishonour

Discharge of a party/ Discharge of NI

By cancellation When the holder of a negotiable instrument cancels the name of a party on the
instrument with an intention to discharge him, such party and all subsequent
[Section 82 (a)]
parties are discharged from liability to the holder.
By release Where the holder of a negotiable instrument releases any party to the instrument
by any method other than cancellation, the party so released is discharged from
[Section 82 (b)]
liability.
By payment When payment on an instrument is made in due course, both the instrument and
the parties to it are discharged.
[Section 82 (c)]
By the holder allowing
If the holder of a bill of exchange allows the drawee more than forty-eight hours,
exclusive of public holidays, to consider whether he will accept the same, all
the drawee of a bill
previous parties not consenting to such allowance are thereby discharged from
more than 48 hours liability to such holder.
to accept
[Section 83]
By the holder agreeing If the holder of a bill agrees to a qualified acceptance all prior parties whose consent
is not obtained to such an acceptance are discharged from liability.
to a qualified
acceptance of bill of
exchange [Section 86]:
Negotiation Back In the course of Negotiation, if a negotiable instrument is circulated/negotiated
back by an Endorser to any of the prior party on the negotiable instruments it is
termed as negotiation back.

The person who becomes the holder in due course under this negotiation back
cannot make any of the intermediate Endorsers liable on the instruments
 But where an Endorser had excluded his liability, by the use of the words ‘sans
recourse’ and after that becomes the holder of the instrument in his own right
under the ‘negotiation back’ all intermediate Endorsers are liable to him and in case
of dishonour, he can recover the amount from all or any one of them.
Discharge by material Any material alteration (unless permitted by Act) of a negotiable instrument
discharges anyone who is a party thereto at the time of making such alteration and
alteration
who does not consent thereto.

Dishonour of a bill by non-acceptance

Introduction A bill may be dishonoured by:

➢ Non-acceptance, or
➢ Non- payment.

Promissory Note and Cheque cannot be dishonoured by non-acceptance as these

negotiable instruments don’t require any acceptance. However they can be dishonoured
by non payment.
Criteria for A bill of exchange is said to be dishonoured by non-acceptance is any one of the following
ways (Sec. 91):
dishonour of bill
by non- ➢ When a bill is duly presented for acceptance, and the drawee refuse acceptance
acceptance within forty-eight hours form the time of presentment, the bill is dishonoured.
[Section 91]
➢ In case of more than one drawee, if bill is not accepted by all drawees.

➢ Where the drawee is incompetent to contract, the bill may be treated as

dishonoured.

➢ When a drawee gives a qualified acceptance, the holder may treat the
instrument dishonoured.

➢ When the drawee is a fictitious person or after reasonably search cannot be

found, the bill may be treated as dishonoured
Effect of The effect of dishonoured by non-acceptance is that the holder of the bill can start an
action against the drawer and the endorsers and need not wait for maturity of the bill.
dishonour by non-
acceptance

Dishonour of negotiable instrument by Non-Payment

Dishonour by A promissory note, bill of exchange and cheque is said to be dishonoured by non-
payment when
non-payment
➢ the maker of the note
[Section 92] ➢ acceptor (or drawee, where bill requires no acceptance) of the bill or
➢ drawee of the cheque
makes default in payment upon being duly required to pay the same
 Instrument acquired after dishonour or when overdue [Section 59]
The holder of a negotiable instrument, who has acquired it after dishonour, whether by non-acceptance or non-
payment, with notice thereof, or after maturity, has only, as against the other parties, the rights thereon of his
transferor

Any person who, in good faith and for consideration, becomes the holder, after maturity, of a promissory note
or bill of exchange made, drawn or accepted without consideration, for the purpose of enabling some party
thereto to raise money thereon, may recover the amount of the note or bill from any prior party.

Illustration:- 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. A's title is subject to the same
objection as the drawer's title.

Concept 14: Material Alteration

Topic 14.1: Material Alteration

Meaning An alteration is material which in any way

➢ alters the operation of the instrument or
➢ affects the rights or liability of parties thereto
Alterations (a) Sec. 20 Inchoate Instruments – Incomplete instrument (e.g. column of sum left blank)
can be filled up by the holder.
permitted by Act

(b) Sec. 49 – It enables the holder of an instrument endorsed in blank to convert it into
endorsement in full (By writing above the endorser’s signature a direction to pay to any
other person as endorsee). Thus, addition of parties allowed here.

(c) Sec. 125- the holder of an uncrossed cheque may cross it, or may convert general into
special crossing or may make it ‘not negotiable’.

(d) Conversion of bearer instrument into an order instrument by deleting word “Bearer”
Effect of material Any material alteration (unless permitted by Act) of a negotiable instrument discharges
anyone who is a party thereto at the time of making such alteration and who does not
alteration
consent thereto.
Examples of Following are the examples of material alteration: -
material alteration
➢ Alteration of date e.g. time of payment postponed, or where date in the
instrument inserted subsequent to the execution of instrument (A. Subba Reddy
v Neelapa Reddy AIR 1966 A.P. 267).

➢ Alteration of rate of interest (if specified) [Seth Tulsidas Lalchand v Rajagopal

(1967) 2 MLJ 66].

➢ Alteration of the -sum payable, e.g. a bill for Rs 5000 altered into a bill for Rs 500.

➢ Alteration in the time of payment, e.g. a bill payable 3 months after date is
altered to be payable 1 month after date.
 ➢ Alteration by increasing or affixing stamps (Challamma v Padmanabhan Nair
1970 KLR 682).

➢ Alteration by erasure of an “account payee” crossing (J. Ladies Beauty v State

Bank of Indian AIR 1984 Guj33].
Examples of cases ➢ If the alteration is unintentional and due to pure accident (e.g. accidental
disfigurement of document).
that are not
material alteration ➢ Alteration made by a stranger without the consent of holder and without any
fraud and negligence on his part

➢ An alteration made to correct a clerical error or a mistake, thus, if instead of

18/02/03, the date entered was 18/03/02, the agent of drawer held entitled to
correct mistake [Brutt v pikard (1824) Ry & M 37]. Such correction is deemed to
be giving effect to the original intention of the parties.

➢ Alteration with the consent of the parties liable thereto.

Example: A promissory note was made without mentioning any time for payment. The holder added the words
“on demand” on the face of the instrument. [ICAI SM Q]
As per the above provision of the Negotiable Instruments Act, 1881 this is not a material alteration as a
promissory note where no date of payment is specified will be treated as payable on demand. Hence adding
the words “on demand” does not alter the business effect of the instrument.

Example: State whether the following alterations are material alterations under the Negotiable Instruments Act,
1881?
➢ The holder of the bill inserts the word “or order” in the bill,
➢ The holder of the bearer cheque converts it into account payee cheque [ICAI SM Q]
A: The following materials alterations have been authorised by the Act and do not require any authentication:
(a) filling blanks of inchoate instruments [Section 20]
(b) Conversion of a blank endorsement into an endorsement in full [Section 49]

Topic 14.2: Cancellation of endorsement [Section 40]

Where the holder of a negotiable instrument, without the consent of the endorser, destroys or impairs the
endorser’s remedy against a prior party, the endorser is discharged from liability to the holder to the same
extent as if the instrument had been paid at maturity.

Example: Arvind is the holder of a bill of exchange made payable to the order of Narendra, which contains the
following endorsements in blank-

First endorsement, “Narendra”.

Second endorsement, “Rahul”.
Third endorsement, “Lalu”.
Fourth endorsement “Mayawati”.

This bill Arvind puts in suit against Mayawati and strikes out, without Mayawati’s consent, the endorsements
by Rahul and Lalu. Thus, Arvind is not entitled to recover anything from Mayawati.
 Topic 14.3: Payment of instrument on which alteration is not apparent [Section 89]

No liability in Where an instrument has been materially altered but doesn’t appear to have been so
altered, the party paying it will be discharged by payment in due course.
case material
alteration is not
apparent
Duty of banker or Where the cheque is an electronic image of a truncated cheque, any difference in
apparent tenor of such electronic image and the truncated cheque shall be a material
clearing house in
alteration and it shall be the duty of the bank or the clearing house, as the case may be,
case of truncated to ensure the exactness of the apparent tenor of electronic image of the truncated
cheque cheque while truncating and transmitting the image.

Any bank or a clearing house which receives a transmitted electronic image of a

truncated cheque, shall verify from the party who transmitted the image to it, that the
image so transmitted to it and received by it, is exactly the same

Concept 15: Negotiation vs Assignability

Difference between Negotiation and Assignability
Basis Negotiability Assignability
Transfer of Right Transferee acquires all the rights of a holder Assignee (transferee) does not acquire the
in due course right of a holder in due course but has only the
right, title and interest of his assignor
Notice In negotiation, notice of transfer is not Notice of assignment must be served by the
necessary. Party shall be liable to pay even assignee on his debtor. Otherwise such an
without such notice. assignment is incomplete and ineffective

Consideration In negotiation, consideration is presumed In assignment, consideration must be proved as

Mode of transfer Instrument may be negotiated either by
delivery only in the case of “bearer” instrument,
or by endorsement and delivery in the case of
“order instrument”
in the case of any other contract
Instrument may be transferred by a document
to be reduced into writing and signed by the
transferor

Payment of Stamp Negotiation requires payment of stamp Assignability do not require payment of stamp
duty duty duty
 Concept 16: Notice of Dishonour
Notice of Dishonour [Section 93 and 98]

By and to whom When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance
or non-payment, the holder thereof, or some party thereto, who remains liable thereon,
notice should be
must give notice that the instrument has been so dishonoured to all other parties whom
given [Section 93] the holder seeks to make severally liable thereon, and to some one of several parties
whom he seeks to make jointly liable thereon.

It shall not be 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.
When notice of No notice of dishonour is necessary—
➢ when it is dispensed with by the party entitled thereto;
dishonour is
➢ when the party entitled to notice cannot after due search be found;
unnecessary ➢ when the party bound to give notice is, for any other reason, unable without any
[Section 98] fault of his own to give it;
➢ in the case of a promissory note which is not negotiable;
➢ when the party entitled to notice, knowing the facts, promises unconditionally
to pay the amount due on the instrument.

Concept 17: Notings

Noting and Protest [Section 99 and Section 100]

Noting When a promissory note or bill of exchange has been dishonoured by non-acceptance
or non-payment, the holder may cause such dishonour to be noted by a notary public
[Section 99]
upon the instrument, or upon a paper attached thereto, or partly upon each.

Such note must be made within a reasonable time after dishonour, and must specify the
date of dishonour, the reason, if any, or, if the instrument has not been expressly
dishonoured, the reason why the holder treats it as dishonoured, and the notary's
charges.
Protest When a promissory note or bill of exchange has been dishonoured by non-acceptance
or non-payment, the holder may, within a reasonable time, cause such dishonour to be
[Section 100]
noted and certified by a notary public. Such certificate is called a protest.

Concept 18: Liabilities of Parties to NI

Liability of Parties to Negotiable Instrument

Agency Every person capable of binding himself or of being bound, as mentioned in

section 26, may so bind himself or be bound by a duly authorized agent acting
[Section 27]
in his name.
Liability of agent signing An agent who signs his name to a promissory note, bill of exchange or cheque
without indicating thereon that he signs as agent, or that he does not intend
[Section 28]
thereby to incur personal responsibility, is liable personally on the instrument,
 except to those who induced him to sign upon the belief that the principal only
would be held liable.
Legal representative A legal representative of a deceased person who signs his name on a promissory
note, bill of exchange or cheque is liable personally thereon unless he expressly
[Section 29]
limits his liability to the extent of the assets received by him as such.
Liability of drawer 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
[Section 30]
dishonour has been given to the drawer.
Liability of maker of note 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
and acceptor of bill
[Section 32] 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.
Liability of endorser Whoever endorses and delivers a negotiable instrument before maturity,
without excluding or making his liability conditional, is bound thereby to every
[Section 35]
subsequent holder, in case of dishonour by the drawee, acceptor or maker to
compensate such holder for any loss or damage caused to him by such dishonour
provided due notice of dishonour has been given to, or received by, such
endorser.

Liability of prior parties to Every prior party to a negotiable instrument is liable thereon to a holder in due
course until the instrument is duly satisfied.
holder in due course
[Section 36]
Prior party a principal in As between the parties so liable as sureties, each prior party is, in the absence
of a contract to the contrary, also liable thereon as a principal debtor in respect
respect of each
of each subsequent party.
subsequent party [Section
38] Example: A draws a bill payable to his own order on B, who accepts. A afterwards
endorses the bill to C, C to D and D to E. As between E and B, B is the principal
debtor, and A, C and D are his sureties. As between E and A, A is the principal
debtor, and C and D are his sureties. As between E and C, C is the principal debtor
and D is his surety.
Acceptor bound, although An acceptor of a bill of exchange already endorsed is not relieved from liability
by reason that such endorsement is forged, if he knows or had reason to believe
endorsement forged
the endorsement to be forged when he accepted the bill.
[Section 41]

Concept 19: Trial in Court

Topic 19.1: Procedure for trial of cases

Power of Court to ➢ All offences under this Chapter shall be tried by a Judicial Magistrate of the first
class or by a Metropolitan Magistrate.
try cases
summarily ➢ In the case of any conviction in a summary trial under this section, it shall be
[Section 143] lawful for the Magistrate to pass a sentence of imprisonment for a term not
exceeding one year and an amount of fine exceeding five thousand rupees.
 ➢ When at the commencement of, or in the course of, a summary trial under this
section, it appears to the Magistrate that the nature of the case is such that a
sentence of imprisonment for a term exceeding one year may have to be passed
or that it is, for any other reason, undesirable to try the case summarily, the
Magistrate shall try case in normal trial.
Power to direct ➢ The Court trying an offence u/s 138 may order the drawer of the cheque to pay
interim compensation to the complainant
interim
compensation ➢ The interim compensation shall not exceed 20% of the cheque.
[Section 143A]
➢ The interim compensation shall be paid within 60 days (+30 days if sufficient
cause shown) from the date of the order of the Court

➢ If the drawer is acquitted, the Court shall direct the complainant to repay to the
drawer the amount of interim compensation, with interest at the bank rate as
published by the RBI, prevalent at the beginning of the relevant financial year,
within 60 days (+30 days if sufficient cause shown) from the date of the order
of the Court.
Offences to be Every offence punishable under this Act shall be compoundable.
compoundable
[Section 147]

Topic 19.2: Power of Appellate Court to Order Payment Pending Appeal [Section 148]

Discretion of If
➢ the drawer is conficted u/s 138 and
Appellate Court to
➢ the drawer prefers an appeal against such conviction;
order deposit of
20% or more of Then
fine or ➢ the Appellate Court may order the appellant (i.e. the drawer) to deposit at least
20% of the fine or compensation awarded by the trial Court and such amount
compensation
shall be paid to the complainant.
Deposit to be in The amount to be deposited u/s 148 shall be in addition to any interim compensation
paid by the appellant u/s 143A.
addition to
interim
compensation
Time limit for The amount to be deposited u/s 148 shall be deposited within 60 days (+30 days
extension) from the date of the order of the Appellate Court
deposit
Order of Appellate The Appellate Court may, at any time during the pendency of the appeal, direct the
release of the amount deposited by the appellant with the complainant.
Court to release
the amount
deposited
Situation where If the appellant is acquitted in the appeal, the Appellate Court shall direct the
complainant to repay to the appellant the amount so released, with interest at the bank
appellant is
rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant
acquitted financial year, within 60 days (+30 days extension) from the date of the order of the
Appellate Court.

Concept 20: Other important topics

Topic 20.1: Classification of Negotiable Instruments- Inland and Foreign instrument

Inland Instrument [Section 11]

A promissory note, bill of exchange or cheque drawn or made in India and made payable in, or drawn upon
any person resident in India shall be deemed to be an inland instrument.

Example: A promissory note made in Kolkata and payable in Mumbai.

Foreign instrument [Section 12]

Any such instrument not so drawn, made or made payable shall be deemed to be foreign instrument. In other
words,

➢ Bills drawn outside India and made payable in or drawn upon any person resident in any country outside
India,

➢ Bills drawn outside India and made payable in India, or drawn upon any person resident in India;

➢ Bills drawn in India made payable outside India or drawn upon any resident outside India, but not made
payable in India.

are foreign bills.

Topic 20.2: Classification of Negotiable Instruments- Inchoate and Ambiguous Instrument

Inchoate Instrument: - Refer Section 20

Ambiguous Instrument

An instrument which is vague and cannot be clearly identified either as a bill of exchange, or as a promissory
note, is an Ambiguous instrument. In other words, such an instrument may be construed either as promissory
note, or as a bill of exchange. Section 17 provides that the holder may, at his discretion, treat it as either and
the instrument shall thereafter be treated accordingly. Thus, after exercising his option, the holder cannot
change that it is the other kind of instrument.

Topic 20.3: Instrument negotiable till payment or satisfaction [Section 60]

A negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity) until
payment or satisfaction thereof by the maker, drawee or accepter at or after maturity, but not after such
payment or satisfaction.
 Topic 20.4: Difference between Promissory Notes and Bill of Exchange

Basis Promissory Notes Bill of exchange

Definition "A Promissory Note" is an instrument in writing “A bill of exchange” is an instrument in writing
(not being a bank-note or a currency-note) containing an unconditional order, signed by
containing an unconditional undertaking signed the maker, directing a certain person to pay a
by the maker, to pay a certain sum of money certain sum of money only to, or to the order of
only to, or to the order of, a certain person, or a certain person or to the bearer of the
to the bearer of the instrument. instrument.
Nature of In a promissory note there is a promise to pay In a bill of exchange there is an order for making
money. payment.
Instrument
Parties In a promissory note there are only 2 parties In a bill of exchange, there are 3 parties which
namely: are follows
i. the maker and i. the drawer
ii. the payee ii. the drawee
iii. the payee
Acceptance A promissory note does not require any The Bills of Exchange need a acceptance from
acceptance, as it is signed by the person who is the drawee.
liable to pay.
Payable to A promissory note cannot be made payable to On the other hand, a bill of exchange can be
bearer. drawn payable to bearer. However, it cannot be
bearer
payable to bearer on demand

Topic 20.5: Acceptance for honour and Payment for honour [Section 108 to 114]

Acceptance for honour When a bill of exchange has been dishonoured by non- acceptance and any
person accepts it for honour of the drawer or of any endorsers, such person is
called "an Acceptor for honour".
How acceptance for honour A person desiring to accept for honour must, by writing on the bill under his
hand.
must be made
Acceptance not specifying Where the acceptance does not express for whose honour it is made, it shall
be deemed to be made for the honour of the drawer.
for whose honour it is
made
Liability of acceptor for
An acceptor for honour binds himself to all parties subsequent to the party for
whose honour he accepts to pay the amount of the bill and such party and all
honour
prior parties are liable in their respective capacities to compensate the
acceptor for honour for all loss or damage sustained by him in consequence of
such acceptance.
When acceptor for honour An acceptor for honour cannot be charged unless
➢ the bill has at its maturity been presented to the drawee for payment,
may be charged
and

Payment for honour
Right of payer for honour
➢ the bill so presented has been dishonoured by him, and
➢ the bill has been noted or protested.
The payment which an acceptor for honour makes is known as “payment for
honour
Any person so paying is entitled to recover from the party for whose honour
he pays all sums so paid and with all expenses properly incurred in making such
payment.

Topic 20.6: Provisions with respect to presentment, payment and interest

[Section 61-65 and 72-83]

Presentment for ➢ A bill of exchange payable after sight must (if no time or place is specified
therein for presentment), be presented to the drawee thereof for
acceptance
acceptance
[Section 61]
➢ Drawee should be a person who could be found after reasonable search, by
a person entitled to demand acceptance, within a reasonable time , and

➢ It should be in business hours on a business day.

➢ If the drawee cannot, after reasonable search, be found, the bill is

dishonoured.

➢ If the bill is directed to the drawee at a particular place, it must be

presented at that place; and if at the due date for presentment he cannot,
after reasonable search be found there, the till is dishonoured
Presentment of A promissory note, payable at a certain period after sight, must be presented to the
maker thereof for sight (if he can after reasonable search be found) by a person
promissory note for
entitled to demand payment, within a reasonable time after it is made and in
sight business hours on a business day. In default of such presentment, no party thereto
[Section 62] is liable thereon to the person making such default.
Drawee’s time for The holder must, if so required by the drawee of a bill of exchange presented to him
for acceptance, allow the drawee 2[forty-eight] hours (exclusive of public holidays)
deliberation
to consider whether he will accept it.
[Section 63]
Presentment for ➢ Promissory notes, bills of exchange and cheques must he presented for
payment to the maker, acceptor or drawee thereof respectively, by or on
payment
behalf of the holder. In default of such presentment, the other parties
[Section 64] thereto are not liable thereon to such holder.

➢ Where authorised by agreement or usage, a presentment through the post

office by means of a registered letter is sufficient.

➢ Where a promissory note is payable on demand and is not payable at a

Hours for presentment
[Section 65]
specified place, no presentment is necessary in order to charge the maker
thereof.
➢ Presentment for payment must be made during the usual hours of
business.
 ➢ If an instrument is presented for payment to a banker, it must be presented
within banking hours.
Presentment of cheque A cheque must, in order to charge the drawer, he presented at the bank on which
it is drawn before the relation between the drawer and his banker has been altered
to charge drawer
to the prejudice of the drawer.
[Section 72]
Presentment of cheque A cheque must, in order to charge any person except the drawer, be presented
within a reasonable time after delivery thereof by such person.
to charge any other
person [Section 73]
Presentment of A negotiable instrument payable on demand must be presented for payment within
a reasonable time after it is received by the holder.
instrument payable at
demand [Section 74]
Presentment by or to Presentment for acceptance or payment may be made to :
➢ the duly authorised agent of the drawee, maker or acceptor, or
agent, representative
➢ where he has died, to his legal representative, or
of deceased, or ➢ where he has been declared an insolvent, to his assignee.
assignee of insolvent
[Section 75]
Excuse for delay in
Delay in presentment for acceptance or payment is excused if the delay is caused
by circumstances beyond the control of the holder, and not imputable to his
presentment for
default, misconduct or negligence. When the cause of the delay ceases to operate,
acceptance or payment presentment must be made within a reasonable time.
[Section 75A]
When presentment No presentment for payment is necessary, and the instrument is dishonoured at
the due date for presentment, in any of the following cases:
unnecessary
(a)
[Section 76] ➢ If the maker, drawee or acceptor intentionally prevents the
presentment of the instrument. If the instrument being payable at
his place of business, he closes such place on a business day during
the usual business hours.

➢ If the instrument being payable at some other specified place,

neither he nor any person authorised to pay it attends at such place
during the usual business hours.

➢ If the instrument not being payable at any specified place, he

cannot after due search be found.

(b) As against any party sought to be charged therewith, if he has engaged to

pay notwithstanding non-presentment.

(c) As against any party if, after maturity, with knowledge that the instrument
has not been presented, he —
➢ makes a part payment on account of the amount due on the instrument; or
➢ promises to pay the amount due therein whole or in part; or
➢ waives his right to take advantage of any default in presentment for
payment.
 (d) As against the drawer, if the drawer could not suffer damage from the
want of such presentment.
Liability of banker for When a bill of exchange, accepted payable at a specified bank, has been duly
presented there for payment and dishonoured, if the banker so negligently or
negligently dealing
improperly keeps, deals with or delivers back such bill as to cause loss to the holder,
with bill presented for he must compensate the holder for such loss.
payment [Section 77]
To whom paymentPayment of the amount due on a promissory note, bill of exchange or cheque must,
in order to discharge the maker or acceptor, be made to the holder of the
should be made
instrument.
[Section 78]
Interest when rate When interest at a specified rate is expressly made payable on a promissory note
or bill of exchange, interest shall be calculated at the rate specified, on the amount
specified (Sec. 79)
of the principal money due thereon, from the date of the instrument.

Interest when no rate ➢ When no rate of interest is specified in the instrument, interest on the
amount due thereon shall, be calculated at the rate of 18% per annum
specified
[Section 80] ➢ When the party charged is the endorser of an instrument dishonoured by
non-payment, he is liable to pay interest only from the time that he receives
notice of the dishonour.
Delivery of instrument ➢ Any person liable to pay, and called upon by the holder to pay, the amount
due on a NI is
on payment or
→ before payment entitled to have it shown, and
indemnity in case of → on payment
loss ▪ entitled to have it delivered to him, or,
[Section 81] ▪ if the instrument is lost or cannot be produced, to be
indemnified against any further claim thereon against him.

➢ Where the cheque is an electronic image of a truncated cheque, even after

the payment the banker who received the payment shall be entitled to
retain the truncated cheque.
Discharge from liability The maker, acceptor or endorser respectively of a negotiable instrument is
discharged from liability thereon —
[Section 82]

➢ by cancellation
➢ by release
➢ by payment
Discharge by allowing If the holder of a bill of exchange allows the drawee more than 48 hours, exclusive
of public holidays, to consider whether he will accept the same, all previous parties
drawee more than 48
not consenting to such allowance are thereby discharged from liability to such
hours to accept holder.
[Section 83]
 Past Examination Questions
Theoretical Questions for self-practice
Q: Define the term ‘Cheque’ as given in the Negotiable Instrument Act, 1881. [Nov 2004]

Q: State the rules laid down by the Negotiable Instruments Act, 1881 for ascertaining the date of maturity of
a bill of exchange. [May 2018]

Q: What is meant by ‘Sans Recourse Endorsement’ of a bill of exchange? How does it differ from ‘Sans Frais
Endorsement’? [May 2015, May 2018]

Q: Explain the concept and different forms of Restrictive and Qualified endorsement [Nov 2015]

Q: Distinguish between Negotiation and Assignment [Nov 2003, May 2006 & May 2013]

Q: Describe in brief the advantages and protections available to a “holder in Due course” under the provisions
of the Negotiable Instruments Act, 1881. [Nov 2005, Nov 2008 and Nov 2012]

Q: What do you understand by ‘crossing of cheques’? What is the object of crossing? State the implication of
the following crossing:
➢ Restrictive crossing
➢ Not-negotiable crossing [Nov 2003]

Q: Explain as to why shall the combination of ‘not negotiable’ with ‘Account payee’ crossing be considered as
the safest form of crossing a cheque [Nov 2007]

Q: Whether a cheque marked ‘not negotiable’ is transferable? (Sec.130) [May 2007 and Nov 2015]

Q: State the grounds, on the basis of which a cheque may be dishonoured by a banker, inspite of the fact that
there is sufficient amount in the account of the drawer. [Nov 2003]

Q: State the case in which a banker is justified or bound to dishonour cheques.[May 2005]

Q: PQR Limited received a cheque for Rs. 50,000 from its customer Mr. LML. After a week, company came to
know that the proceeds were not credited to the account of PQR Limited due to some ‘defects’, as informed
by the Banker. What according to you are the possible defects? [May 2007]

Q: State in brief, the grounds on the basis of which a banker can dishonour a cheque under the provisions of
the Negotiable Instruments Act, 1881 [May 2007]

Q: State the circumstances on the basis of which a banker can dishonour a cheque under the provisions of
Negotiable Instruments Act, 1881. [Nov.2013]

Q: Explain the consequences if a cheque gets dishonoured for insufficiency of funds in the account. [May
2004, May 2007 and Nov 2018]

Q: Define material alteration under the Negotiable Instrument Act. 1881 and give examples.
[May 2006 and May 2013]

Q: Which are the essential elements of a valid acceptance of a Bill of Exchange? [May 2003]
 Q: Examine the validity of the following in the light of the provisions of the Negotiable Instrument Act, 1881:
(i) An oral acceptance
(ii) An acceptance by mere signature without writing the word ‘accepted’. [May 2003]

Q: When a bill exchange may be dishonoured by ‘non-acceptance’ and ‘non-payment’ under the provisions of
Negotiable Instrument Act. 1881? [Nov. 2002]

Q: What is meant by ‘Presentment’ of a bill of exchange under the Negotiable Instrument Act. 1881? When is
such a bill of exchange presented for payment? State when is the presentment no necessary. [May 2008]

Q: What are the circumstances under which a bill of exchange can be dishonoured by non-acceptance?
[Nov. 2018]

Theoretical Questions with answers

Q: Point out the difference between ‘Cheque’ and a ‘Bill of Exchange” under the Negotiable instrument Act.
1881. [May 2011]
A:
Basis of distinction Bill of exchange Cheque
1. 1. Drawee Any person (including a banker) can be a A cheque can be drawn only upon a banker,
drawee in case of a bill. i.e. only a banker can be a drawee in case of
a cheque.
2. Liability of The liability of drawer is secondary and The liability of drawer is always primary. The
conditional. However, until a bill is drawee bank is simply a custodian of
drawer
accepted, the liability of the drawer is moneys of the customer (i.e. drawer).
primary.
3. Payable to A bill cannot be made payable to bearer on A cheque can be made payable to bearer on
demand. demand.
bearer on
demand
4. Maturity date A bill may be payable on demand or A cheque is always payable on demand.
otherwise than on demand i.e. after certain
time.
5. Validity period There is no validity period in case of a bill The cheque remains valid only for 3 months
from the date of its issue. After validity
period, a cheque becomes a stale cheque,
and it cannot be paid.
6. Stamping A bill must be stamped A cheque does not require stamping.
7. Acceptance A bill requires acceptance if it is payable In no case, acceptance of a cheque is
certain period after sight, or it contains an required.
express term requiring acceptance.
8. Discharge by If the drawee gives a qualified acceptance, Since acceptance of a cheque is not required,
then, all the parties to the bill, not there is no question of qualified acceptance,
qualified
consenting to qualified acceptance, are and discharge of a party in case of qualified
acceptance discharged. acceptance.
9. Days of grace Three days of grace are allowed in case of Since a cheque is always payable on demand,
every bill payable otherwise than on no days of grace are allowed in case of a
demand. cheque. A cheque is to be paid immediately
on presentment for payment.
10. Crossing A bill cannot be crossed. A cheque can be crossed.
11. Noting or If a bill is dishonoured, it may be noted or If cheque cannot be noted or protested in
protested. case of dishonor.
protest
 12. Criminal liability In case of dishonor of a bill, Sec. 138 does The drawer of a cheque is criminally liable for
not apply. dishonor of a cheque, since Sec. 138 applies
for dishonor
in case of dishonor of a cheque.

Theoretical Questions with answers

Q: Examining the provisions of the Negotiable Instruments Act, 1881, distinguish between a 'Bill of Exchange' and
a 'Promissory Note'. [May 2012]
A:
Promissory Note Bill of Exchange
It contains a promise to pay It contains an order to pay
It is presented for payment without any previous If a bill is payable sometime after sight, it is required to be
acceptance by maker accepted either by the drawee himself or by someone else on
his behalf, before it can be presented for payment.
The maker of a promissory note stands in immediate The maker or drawer of an accepted bill stands in immediate
relationship with the payee and is primarily liable to the relationship with the acceptor and the payee
payee or the holder.

It cannot be made payable to the maker himself, that is In the case of bill, the drawer and payee or the drawee and
the maker and the payee cannot be the same person the payee may be the same person.

In the case of a promissory note there are only two parties, In the case of a bill of exchange, there are three parties, viz.,
viz. the maker (debtor) and the payee (creditor). drawer, drawee and payee, and any two of these three
capacities can be filled by one and the same person.

A promissory note can never be conditional A bill of exchange too cannot be drawn conditionally, but it
can be accepted conditionally with the consent of the holder.
It should be noted that neither a promissory note nor a bill of
exchange can be made payable to bearer on demand.

Q: Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following
Promissory Notes:
(i) I owe you a sum of Rs. 1,000. ‘A’ tells ‘B’.
(ii) ‘X’ promises to pay ‘Y’ a sum of Rs. 10,000, six months after ‘Y’ marriage with ‘Z’. [Nov 2002]
A: (i) It is not a valid promissory note - since A has not made any promise to pay Rs. 1,000 to B(mere
acknowledgement of indebtedness does not result in a valid promissory note). - since A has not made any
instrument in writing.

(ii) It is not a valid promissory note- since the promise is conditional (as Y’s marriage with Z is not certain to
happen).

Q: S writes, “I promise to pay ‘B’ a sum of Rs. 500, seven days after my marriage with ‘C’. Is this a promissory
note? [May 2004]
Not valid- since the promise is conditional (as marriage of S with C is not certain to happen).

Q: A. a major, and B, a minor, executed a promissory note in favour of C. Examine with reference to the provisions
of the Negotiable Instrument Act, the validity of the promissory note and whether it is binding on A and B. [Nov
2005 and May 2015]
A: According to Section 26 of the Negotiable Instruments Act, 1881, every person competent to contract
(according to the law to which he is subject to) has capacity to bind himself and be bound by making, drawing,
accepting, endorsing delivering and negotiating an instrument. A party having such capacity may himself put
his signature or authorize some other person to do so.

A minor may draw, endorse, deliver and negotiate an instrument so as to bind all the parties except himself. A
minor may be a drawer where the instrument is drawn or endorsed by him. In that case he does not incur any
liability himself although other parties to the instrument can be made liable and the holder can receive payment
from any other party thereto.

Therefore, in the instant case, the promissory note is valid and it is binding on ‘P’ but not on ‘Q’, a minor.

Q: A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without
consideration. C transferred it to D for value. Decide
(i) Whether D can sue the prior parties of the bill, and
(ii) Whether the prior parties other than D have any right of action inter se?
Give your answer with reference to the Provision of Negotiable Intrument Act. 1881. [Nov 2004]

Rights of D D can recover the amount of the bill from all the prior parties since D is a holder
for value.
Rights of prior parties other No party prior to D can recover the amount of the bill from any prior party
than D since a negotiable instrument creates no obligation of payment between the
parties if it was made, drawn, accepted, endorsed, or transferred without
consideration.

Q: ‘A’ draws a bill of exchange payable to himself on ‘X’, who accepts the bill without consideration just to
accommodate ‘A’, ‘A’ transfers the bill to ‘P’ for good consideration. State the rights of ‘A’ and ‘P’. Would your
answer be different if ‘A’ transferred the bill to ‘P’ after maturity? [May 2008]
A:
A is not entitled to sue X -Since there is no consideration between A and X
-Since there is
P is entitled to sue A and X -Since P is a holder for consideration
-Since a holder for consideration can sue the transferor for
consideration and every party prior to him.
Even if A had transferred the bill - The answer would have remained same.
offer maturity - Since the right to sue the transferor for consideration and every party
prior to him, is available to ‘holder for consideration’, even though he
is not a ‘holder in due course’ (i.e. even if the holder for consideration
obtains the bill after maturity).
Q: P draws a bill on Q for Rs. 10,000, Q accepts the bill. On maturity the bill was dishonoured by non-payment.
P files a suit against Q for payment of Rs. 10,000. Q proved that the bill was accepted for value of Rs. 7,000 and
as an accommodation to the plaintiff for the balance amount i.e. Rs. 3,000. Referring to the provisions of the
Negotiable Instruments Act. 1881, decide whether P would succeeded in recovering the whole amount of the bill.
[Nov 2010]
A:

P is entitled to recover only Rs. Since the consideration was originally absent in a part (viz. for Rs. 3,000)
7,000 and so the holder is entitled to received only Rs. 7,000

Q: Y draws a bill of exchange on Z for Rs. 5,000 payable to his order, Z accepts the bill but subsequently
dishonours it by non-payment. Y sues Z on the bill. Z proves that bill was accepted for value of Rs. 3,000 and an
accommodation to the balance of Rs. 2,000. How much amout Y can recover from Z? [May 2018]
A: According to the provisions of Section 44 of the Negotiable Instruments Act,1881, when the consideration
for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally
absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with
such signer is entitled to receive from him is proportionally reduced.

The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory
note, bill of exchange or cheque stands in immediate relation with the payee, and the endorser with his
endorsee. Other signers may by agreement stand in immediate relation with a holder.

As per the facts, Z accepts the bill for value of Rs3000, so the parties standing in immediate relation to each
other, cannot recover more than the actual consideration paid. Accordingly, Y can recover only Rs3000.

Q: A owes a certain sum of money to B. A does not know the exact amount and hence he makes out a blank
cheque in favour of B. signs and delivers it to B with a request to fill up the amount due payable by him. B fills
up fraudulently the amount larger than the amount due payable by A and endorses the cheque to C in full
payment of dues of B. Cheque of A is dishonoured. Referring to the provisions of the Negotiable Instruments
Act, 1881, discuss the rights of B and C. [May 2007]
A:
B is entitled to recover only - Since B (i.e. payee) stands in immediate relation with A (i.e. drawer)
such amount as was payable by - Since the consideration consists of money.
A
- Since the consideration was originally absent in part.
C is entitled to recover the - Since a holder in due course is entitled to receive whole of the
whole amount of cheque amount of the negotiable instrument.

Q: Discuss with reasons, in the following given conditions, whether ‘M’ can be called as a “holder” under the
Negotiable Instruments Act, 1881:
(1) ‘M’ the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque.
(2) ‘M’ the agent of ‘Q’ is entrusted with an instrument without endorsement by ‘Q’ who is the payee.
[Nov 2016]
A: Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881, ‘holder’ of a
Negotiable Instrument means any person entitled in his own name to the possession of it and to receive or
recover the amount due thereon from the parties thereto.
On applying the above provision in the given cases-

(1) ‘M’ is not a ‘holder’ because to be called as a ‘holder’ he must be entitled not only to the possession of
the instrument but also to receive the amount mentioned therein.

(2) No, ‘M’ is not a holder. While the agent may receive payment of the amount mentioned in the cheque,
yet he cannot be called the holder thereof because he has no right to sue on the instrument in his own name.

Q: Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable
Instruments Act, 1881:
➢ X who obtains a cheque drawn by y by way of gift.
➢ A, the payee of the cheque who is prohibited by a court order from receiving the amount of the cheque.
➢ M, who finds a cheque payable to bearer, on the road and retains it.
➢ B, the agent of C, is instrument without endorsement by C, who is the payee.\
➢ B, who steals a blank of A and A’s signature. [Nov.2008]
A:
X is a holder since X is entitled in his own name to the possession of the cheque and to
receive the amount of the cheque.
A is not a holder since he is not entitled to recover the amount of the cheque as per court’s
order.
M is not a holder since the cheque was not negotiated to him.
since mere ‘possession’ does not make a person a holder; it is the
‘entitlement to possession’ which makes a person ‘holder’;
Since M is not entitled to the possession and is not entitled to receive or
recover the amount of the cheque (Sec.8);
Since a finder of a lost negotiable instrument has no right to receive the
amount of the negotiable instrument (Sec.58).
B is not a holder Since he is entitled to the possession of the negotiable instrument, but not
in his own name;
since he is entitled to receive the amount of the negotiable instrument, but
not in his own name
B is not a holder since he is in wrongful possession of the negotiable instrument;
since he is not at all entitled to the possession of the negotiable instrument;
since he is not entitled to receive or recover the amount of the negotiable
instrument;
since a cheque containing forged signature of the drawer is a nullity, and
does not confer any title to any person.

Q: Mr. A is the payee of an order cheque. Mr. B steals the cheque and forges Mr. A’s signatures and endorses
the cheque in his own favour. Mr. B then further endorses the cheque to Mr. C, who takes the cheque in good
faith and for valuable consideration.

Examine the validity of the cheque as per the provisions of the Negotiable instruments Act, 1881 and also state
whether Mr. C can claim the privileges of a Holder-in-Due course? [Nov 2015]
 ➢ Since forgery is nullity;
➢ Since Mr. C shall not derive any title under an endorsement made by Mr. B, as Mr. B had no title to the
cheque because of forged endorsement of Mr. A;
➢ Since Mr. B was neither the ‘payee’ nor the ‘endorsee’ of the cheque by reason of forged endorsement
of Mr. A, and so Mr. C cannot become the ‘payee or endorsee’ of such cheque under an endorsement
made by Mr. B;
➢ Since Mr. A continues to be the holder of the cheque because the ownership of the negotiable
instrument remains vested in the person who is the holder at the time when the forged signatures were
put on the negotiable instrument.

Q: B obtains A’s acceptance to a bill of exchange by fraud. B endorses it to C who is a holder in due course. C
endorses the bill to D who knows of the fraud, Referring to the provisions of the Negotiable Instruments Act,
1881, decide whether D can recover the money from A in the given case. [Nov 2006]
A:
D is HDC since all the conditions given u/s 9 are satisfied.
since D has acquired the negotiable instrument from C, and the title of C is not defective;
Since it is immaterial that D had knowledge of the fraud (provided D was not a party to
the fraud).
D can recover Since HDC has the right to receive or payment of the negotiable instrument from all the
payment from A prior parties.

Q: J accepted a bill of exchange and gave it to k for the purpose of getting it discounted and handing over the
proceeds to j. k having failed to discount it returned the bill to j. j tore the bill in two pieces with the intention
of cancelling it and threw the pieces in the street, k picked up the pieces and pasted the two pieces together, in
such manner that the bill seemed to have been folded for safe custody rather than cancelled. k put it into
circulation and it ultimately reached L, who took it in good faith and for value. Is j liable to pay the bill under the
provisions of the Negotiable Instruments Act, 1881? [May 2010]
A:
L is a holder in due course Since he acquired the bill in good faith and for value;
Since he became the possessor of the bill payable to bearer (assumed that the
bill was payable to bearer) (Sec.9)
J cannot deny the validity of Since no drawer or acceptor of a bill shall, in a suit by a holder in due course,
the bill be permitted to deny the validity of the bill as originally drawn, and thus, L
who is the holder in due course, acquires a good title to the bill (Sec. 120).
L is entitled to recover the Since a holder in due course has the right to sue all the prior parties (Sec. 36)
payment of the bill from J
and all prior parties
S cannot recover the money Since S was himself a party to the fraud;
from T Since S shall not have the same rights as that of ‘u’ from whom he (viz. s)
obtained the bill, since as per Sec. 53 a holder who derives his title from HDC
has the same rights as of that HDC only if he himself was not a party to the
fraud or illegality which affected the bill in some stage of its journey.

Q: S, by inducing T, obtains a bill of Exchange from him fraudulently in his (S) favour. Later, he enters into a
commercial deal and endorses the bill to u towards considerations to him (u) for the deal. U takes the bill as a
Holder-in-due-course. U subsequently endorses the bill to S for value, as consideration to S for some other deal.
On maturity the bill is dishonoured. S sues T for the recovery of the money. With reference to the provision of
the Negotiable Instrument Act, 1881 decide whether S will succeed in the case or not. [Nov. 2014]
OR
Q: ‘F’ by inducing ‘G’ obtains a Bill of Exchanges from him fraudulently in his (F) favour. Later, he enters into a
commercial deal with ‘H’ and endorses the Bill to him (H) towards Consideration for the deal. ‘H’ takes the bill
as a holder-in-due-course ‘H’ subsequently endorses the bill to ‘F’ for value as consideration to ‘F’ for some
other deal. On maturity the bill is dishonoured. ‘F’ sues ‘G’ for the recovery of the money. With reference to the
provisions of the Negotiable Instruments Act, 1881, explain whether ‘F’ will succeed in this case.
[ Nov. 2016]

S cannot recover the Since S was himself a party to the fraud;

money from T Since S shall not have the same rights as that of ‘u’ from whom he (viz. s) obtained the
bill, since as per Sec. 53 a holder who derives his title from HDC has the same rights
as of that HDC only if he himself was not a party to the fraud or illegality which affected
the bill in some stage of its journey.

Q: Mr. V draws a cheque of 11,000 and gives to Mr. B by way of gift. state with reason whether-
➢ Mr. B is a holder in due course as per the Negotiable Instrument Act, 1881?
➢ Mr. B is entitled to receive the amount of Rs. 11,000 from the bank? [May 2018]

Mr. B is not a holder in due
course
Mr. B is entitled to receive
the amount of Rs. 11,000
Since he did not became the holder of the for consideration (Sec.9).
Since he is a holder (Sec.8);
Since he is a holder deriving title from holder for considerations, as per Sec.43, a
holder deriving title from holder for consideration is entitled to receive the
amount due negotiable instrument.

Q: Mr. S Venkatesh drew a cheque in favour of M who was sixteen years old. M settled his rental due by endorsing
the cheque in favour of Mrs. A the owner of the house in which he stayed. The cheque was dishonoured when
Mrs. A presented it for payment on grounds of inadequacy of funds. Advise Mrs. A how she can proceed to,
collect her dues. [Nov 2018]
A:
Mrs. A is a holder in Since she became the holder of the cheque for consideration (Sec.9).
due course
Mrs. A is entitled To recover the amount of the cheque from Mr. S venkatesh, since every prior party to
a negotiable instrument is liable to a holder in due course (Sec.36)
Mrs. A is not entitled To recover the amount of the cheque from N since a minor is not liable on any
negotiable instrument (Sec.26).
Mrs. A is entitled to make a complaint with the court against Mr. S venkatesh in accordance with the
provisions of sec. 138 read with sec. 142 and the Court may order Mr. Venkatesh to
suffer imprisonment upto 2 years or pay fine upto 2 times the amount of the cheque or
both (Sec.138)
Q: The drawer, ‘D’ is induced by ‘A’ to draw a cheque in favour of p, who is an existing person. ‘A’ instead of
sending the cheque to ‘p’ , forges his name and pays the cheque into his own bank. Whether ‘D’ recover the
amount of the cheque from ‘A’s banker. Decide. [Nov 2002]
A:
D’ s banker isSince a paying banker is not liable even if it is subsequently found that any endorsement on
not liable the cheque has been forged;
provided the paying banker made the payment in due course in accordance with the
provisions of Sec.10 (Sec.85).
A’s banker is Since a collecting banker is not liable for any loss caused to the true owner due to defective
not liable title of the holder;
provided the collecting banker acted in good faith and without negligence while collecting the
amount of the crossed cheque as an agent (Sec.131).

Q: A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged C’s endorsement
and collected proceeds to the cheque through his banker. B, the drawer, wants to recover the amount from C’s
banker.
Decide in the light of the provisions of Negotiable Instruments Act, 1881-
➢ Whether B, the drawer, can recover the amount of the cheque from C’s banker?
➢ Whether C is the fictitious payee?
Would your answer be still the same in case C is a fictitious person? [Nov 2004]
A:
B’ s banker is notSince a paying banker is not liable even if it is subsequently found that any endorsement
liable on the cheque has been forged;
provided the paying banker made the payment in due course in accordance with the
provisions of Sec.10 (Sec.85).
A’s banker is not Since a collecting banker is not liable for any loss caused to the true owner due to
liable defective title of the holder;
provided the collecting banker acted in good faith and without negligence while
collecting the amount of the crossed cheque as an agent (Sec.131).
C’s banker is not Since it has neither collected nor paid the cheque.
liable
C is not the fictitious Since C, in fact, exists.
payee
If were a fictitiousSince protection is available to a collecting banker u/s 131 and paying banker u/s 85,
payee, the answer irrespective of the fact that the payee is a fictitious person or not;
would have remained
Since C’s banker would have neither collected nor paid the cheque.
same

Q: Mr. Muralidharan drew a cheque payable to Mr. Vyas or lost the cheque and was not aware of the loss of the
cheque. The person who found the cheque forged the signature of Mr. Vyas and endorsed it to Mr. parshwanath
as the consideration for goods bought by him from Mr. Parshwanath encashed the cheque, on the very same day
from the drawee bank. Mr. Vyas intimated the drawee bank about the theft of the cheque after three days.
Examine the liability of the drawee bank. [Nov 2018]
A:
The drawee Since a paying banker (i.e. drawee bank) is not liable even if it is subsequently found that any
bank is not endorsement on the cheque has been forged;
liable
provided the paying banker made the payment in due course in accordance with the
provisions of Sec.10

Q: A issues a cheque for Rs. 25,000 in favour of B.A has sufficient amount in his account with the Bank. The
cheque was not presented within reasonable time to the Bank for payment and the Bank, in the meantime,
became bankrupt. Decide under the provisions of the Negotiable Instruments Act, Whether B can recover the
money from A?
Or
‘A’ draws a cheque for Rs.50,000. When the cheque ought to be presented to the drawee bank, the drawer has
sufficient funds to make payment of the cheque. The bank fails before the cheque is presented. The payee
demands payment from the drawer. What is the liability of the drawer?
Or
B issued a cheque for Rs. 1,25,000 in favour of S.B had sufficient amount in his account with the bank. The cheque
was not presented within reasonable time to the Bank for payment and the Bank in the meantime, became
insolvent.
Decide, under the provisions of the Negotiable Instrument Act, 1881 whether S can the money from B.
Or
‘A’ issued a cheque for Rs. 5,000/- to ‘B’. ‘B’ did not present the cheque for payment within reasonable period.
The Bank fails. However, When the cheque was ought to be presented to the bank, there was sufficient fund to
make payment of the cheque. Now, ‘B’ demands payment from ‘A’ under the Negotiable Instruments Act, 1881.
[May 2003, May 2005, May 2008, May 2014]
A:
The drawer is ➢ the drawer has sufficient balance when the cheque ought to be presented for
discharged payment;
since
➢ the holder has defaulted in presenting the cheque for payment within a reasonable
time;
➢ the drawer has suffered actual damages due to the failure of the bank after issue
of cheque but before presentation of the cheque.

Q: X draws a bill of exchange on Y. Y authorises his agent Z to sign the bill on his behalf to signify acceptance
of the same. Z while signing the bill did not indicate that he is signing it on behalf of Y. will Z be personally
liable? Discuss with reference to the provisions of the Negotiable Instruments Act, 1881. [Nov 2018]
A:
Z is personally Since an agent who signs his name on a negotiable instrument without indicating thereon that
liable he signs as an agent, is liable personally on the instrument, except to those who induced him
to sign upon the belief that the principal only would be held liable.

Q: J, a shareholder of a company purchased for his personal use certain goods from a Mall (Departmental store)
on credit. He sent a cheque drawn on the company’s account to the Mall (Departmental store) towards the full
payment of the bills. The cheque was dishonoured by the company’s Bank. j, the shareholder of the company
was neither a director nor a person in-charge of the company. Examining the provisions of the Negotiable
Instruments Act, 1881 state whether j has committed an offence under Sec.138 of the Act and decide whether he
(j) can be held liable for the payment, for the goods purchased from the Mall (Departmental store).
Company has committed an ➢ since a company is held liable for dishonour of a cheque issued to
offence u/s 138 discharge the debt or liability of any other person (sec.138).
Persons liable where ➢ In case of dishonour of a cheque issued by a company, company
offence u/s 138 is as well as every officer in charge of the company is liable u/s 138
committed by a company
(Sec. 141).

J has not committed any ➢ since j is not a director or an officer in charge of the company (HNB
offence u/s 138 Mulla Firoze V C Y Somaya julu)
J is liable for the payment ➢ since j purchased the goods on credit, and contracted to pay the
of goods purchased price of the goods to the Mall (Departmental Store).

Q: Mr. Bean is a promoter who has taken a loan on behalf of company but he is neither a director nor a person-
in-charge of the company. He sent a cheque from the company’s account to discharge its legal liability.
Subsequently the cheque was dishonoured and a complaint was lodged against him. Can he be held liable for an
offence under section 138 of the Negotiable Instruments Act, 1881? [May 2016]
Company has committed an ➢ since a company is held liable for dishonor of a cheque issued to
offence u/s 138 discharge the debt or liability (Sec.138).
Persons liable where ➢ In case of dishonour of a cheque issued by a company, company as
offence u/s 138 is well as every officer in charge of the company is liable u/s 138 (Sec.
141).
committed by a company
Mr. Bean has not ➢ since Mr. Bean is not director or an officer in charge of the company.
committed any offence u/s o (HNB Mulla Firoze v C Y Somaya julu)
138

Q: Examine, whether there is an offence under the Negotiable Instruments Act, 1881, if a drawer of a cheque
after having issued the cheque, informs the Drawee not to present the cheque as well as informs the Bank to
stop the payment. [May 2007]
Or
X draws a cheque in favour of Y. After having issued the cheque he informs Y not to present the cheque for
payment. He also informs the bank to shop payment. Decide, under provisions of the Negotiable Instruments
Act, 1881, whether the said acts of X constitute an offence against him?
[May 2008]
Or
A drawer of a cheque after having issued the cheque, informs the drawee not to present the cheque as well as
informs the bank to stop the payment. Decide whether it constitutes an offence against the drawer under the
Negotiable Instruments Act, 1881? [May 2017]
Or
Bholenath drew a cheque in favour of Surendar . After having issued the cheque, Bholenath requested not to
present the cheque for payment and gave a stop payment request to the bank in respect of the cheque issued
to Surendar. Decide, under the provisions of the Negotiable Instruments Act, 1881 whether the said acts of
Bholenath constitute an offence?
[May 2018]
A:
Drawer has committed an ➢ Since the words ‘the cheque is returned by the bank unpaid due to
offence u/s 138 insufficiency of funds in the account of drawer’ have to be given a wide
interpretation to include dishonour of cheque due to issue of stop
payment order given by the drawer to the bank, and also where the
drawer asks the holder not to present the cheque. (Modi Cements Ltd.v
Kuchil kumar Nandi).

Q: V makes a gift of Rs. 10,000 to W through a cheque issued in favour of W. Later he (V) informs W not to present
the cheque for payment and informs the bank also to stop payment. Examining the provisions of the Negotiable
Instruments Act, 1881, decide whether V’s above acts constitute an offence. [June 2009]
A:
V is not liable for ➢ since the drawer of a cheque is liable u/s 138 only if a cheque is issued to
an offence u/s 138 discharge a legally enforceable debt or other liability;
➢ since in the present case, the cheque has been issued by V as a gift to W, and
not for discharge of a legally enforceable debt or other liability (Sec.138)
Presumption of ➢ since it can be proved that the cheque was given as a gift (Sec. 139).
consideration is not
applicable

Q: State whether the following alteratations are material alterations under the Negotiable Instruments Act, 1881?
(i) The holder of the bill inserts the word “or order” in the bill.
(ii) The holder of the bearer cheque converts it into account payee cheque.
(iii) A bill payable to X is converted into a bill payable to X and Y. [Nov 2007]
A:
(i) It is not a material - Since even after insertion of the words ‘or order’, the negotiable instrument
alteration continues to be an order instrument.
(ii) It is a material - Since it restricts the right o the holder to obtain the payment of the cheque
alteration in cash and to negotiate it;
- But such alteration is authorized by the Act, and so no party is discharged.
(iii) It is a material - Since the right to receive the payment has been altered (before the
alteration alteration, the right to receive was with X, but offer the alteration, the right
is with X and Y jointly)
Q: A issues on open ‘bearer’ cheque for Rs. 10,000 in favour of B who strikes out the word ‘bearer’ and puts
crossing across the cheque. The cheque is thereafter negotiated to C and D. When it is finally presented by D’s
banker, it is returned with remarks ‘payment’ countermanded’ by drawer. In response to this legal notice from
D, A pleads that the cheque was altered after it had been issued and therefore he is not bound to pay the cheque.
Referring to the provisions of the Negotiable Instrument Act. 1881, decide whether A’s argument is valid or not?
[June 2009]
A:
Effects of striking off the - It amounts to a material alteration.
word ‘bearer’ - However, such material alteration is authorized by the Act.
- Therefore, the cheque is not discharged; it remains valid

Effects of crossing the - It amounts to a material alteration.

cheque - However, such material alteration is authorized by the Act.
- Therefore, the cheque is not discharged, it remains valid.
A’s argument is not valid - Since the reason for dishonour of cheque is not ‘material alteration’, but
‘payment countermanded by drawer’.

- Therefore, A is liable for the payment of the cheque, and he shall also be liable
for dishonour of cheque in accordance with the provisions of Sec. 138.

Q: Mr. ‘Wise’ obtains fraudulently from ‘R’ a crossed cheque ‘Not Negotiable’. He transfers the cheque to ‘V’,
who gets the cheque encashed from ANS Bank Limtied which is not the drawee bank. ‘R’ on coming to know
about the fraudulent act of Mr. ‘Wise’ sues ANS Bank for the recovery of money. Examine with reference to the
relevant provisions of The Negotiable Instrument Act. 1881, whether ‘R; will succeed in his claim? Would your
answer be still the same in case Mr. ‘Wise’ does not transfer the cheque and gets the cheque encashed from ANS
Bank himself? [June 2009]
OR
‘K’ is an employee of ‘Sumit’. He fraudulently obtains from Sumit a cheque crossed ‘not negotiable’. He later
transfers the cheque to ‘D; who gets the cheque encashed from XYZ Bank, which is not the drawee bank. Sumit
comes to know about the fraudulent act of ‘K’, sues XYZ Bank for the recovered of money. Examine with reference
to the relevant provisions of the Negotiable Instruments Act. 1881, whether Smit will be successful in his claim?
Would your answer be still the same in case ‘K’ does not transfer the cheque and gets the cheque encashed from
XZY Bank himself? [Nov. 2017]
A: According to Section 130 of the Negotiable Instruments Act, 1881 a person taking cheque crossed generally
or specially bearing in either case the words ‘Not Negotiable’ shall not have or shall not be able to give a better
title to the cheque than the title the person from whom he took it had. In consequence, if the title of the
transferor is defective, the title of the transferee would be vitiated by the defect.

Thus, based on the above provisions, it can be concluded that if the holder has a good title, he can still transfer
it with a good title, but if the transferor has a defective title, the transferee is affected by such defects, and he
cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith and
for value.

Since ‘K’ in the given case, had obtained the cheque fraudulently, he had no title to it and cannot give to the
bank any title to the cheque or money; and the bank would be liable for the amount of the cheque for
encashment. (Great Western Railway Co.v. London and Country Banking Co.)
The answer in the second case would not change and shall remain the same for the reasons given above.
Thus, ‘Sumit’ in both the cases shall be successful in his claim from XYZ Bank.

Q: Referring to the provisions of the Negotiable Instrument Act, 1881, examine whether acceptance of a bill of
exchange in the following situations shall be treated as ‘qualified’ acceptance where the acceptor :
➢ Undertakes to pay only Rs. 2,000 for a bill drawn for Rs. 5,000;
➢ Declares the payment to be independent of any other event.
➢ Writes : “Accepted, payable at ABC Bank”. [June 2009]
A:
(i) The acceptance is - Since the acceptance is given for a part of the sum mentioned in the bill.
qualified
(ii) The acceptance is - Since the acceptance is given without any condition or qualification.
not qualified
(iii) The acceptance is - Since an acceptance to pay at a particular place amounts to general acceptance
not qualified (but if it is expressly stated that the bill shall be paid at the specified place only
and not elsewhere, it amounts to qualified acceptance).

Q: X draws a bill on Y but signs it In the fictitious name of Z. The bill is payable to the order of Z. The bill is duly
accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid payment of the
bill? Decide In the light of the provisions of the Negotiable Instruments Act, 1881. [Nov 2008] and [May 2017]
A:
Y is liable to M- since where a bill is signed by the drawer in a fictitious name, the acceptor
for the payment cannot allege against a holder in due course that the drawer is fictitious;
of the bill
- since it can be proved that the signatures of the person signing in the capacity
of drawer and that of the person signing in the capacity of the endorser are in
same handwriting.

Q: ‘E’ is the holder of a bill of exchange made payable to the order of ‘F’. The bill of exchange contains the
following endorsements in blank:
First endorsement ‘F’ Second endorsement ‘G’. Third endorsement ‘H’ and Fourth endorsement ‘I’ ‘E’ strikes out,
without I’s consent, the endorsements by ‘G’ and ‘H’. Decide with reasons whether ‘E’ is entitled to recover
anything from ‘I’ under the provisions of Negotiable Instruments Act, 1881. [Nov 2017]
According to section 40 of the Negotiable Instruments Act, 1881, where the holder of a negotiable
instrument, without the consent of the endorser, destroys or impairs the endorser’s remedy against a prior
party, the endorser is discharged from liability to the holder to the same extent as if the instrument had been
paid at maturity. Any party liable on the instrument may be discharged by the intentional cancellation of his
signature by the holder.

In the given question, E is the holder of a bill of exchange of which F is the payee and it contains the following
endorsement in blank:
First endorsement, ‘F’
Second endorsement, ‘G’
Third endorsement, ‘H’
Fourth endorsement, ‘I’
‘E’, the holder, may intentionally strike out the endorsement by ‘G’ and ‘H’; in that case the liability of ‘G’ and
‘H’ upon the bill will come to an end. But if the endorsements of ‘G’ and ‘H’ are struck out without the consent
of ‘I’, ‘E’ will not be entitled to recover anything from ‘I’. The reason being that as between ‘H’ and ‘I’, ‘H’ is the
principal debtor and ‘I’ is surety. If ‘H’ is released by the holder under Section 39 of the Act, ‘I’, being surety,
will be discharged. Hence, when the holder without the consent of the endorser impairs the endorser’s remedy
against a prior party, the endorser is discharged from liability to the holder.
Thus, if ‘E’ strikes out, without I’s consent, the endorsements by ‘G’ and ‘H’, ‘I’ will also be discharged.

Q: X is the holder of a bill of exchange of which Y is the payee and it contains the following endorsement in
blank
First endorsement, "Y"Second endorsement, "C" Third endorsement, "D" Fourth endorsement, "E"
X, the holder, intentionally strikes out the endorsement by D and C. Will E be liable
to X? Discuss with reference to the provisions of the Negotiable Instruments Act, 1881 [Nov 2017]
A: According to section 40 of the Negotiable Instruments Act, 1881, where the holder of a negotiable
instrument, without the consent of the endorser, destroys or impairs the endorser’s remedy against a prior
party, the endorser is discharged from liability to the holder to the same extent as if the instrument had been
paid at maturity. Any party liable on the instrument may be discharged by the intentional cancellation of his
signature by the holder.

Thus, when the holder without the consent of the endorser impairs the endorser’s
remedy against a prior party, the endorser is discharged from liability to the holder.

In the given question, X, the holder, intentionally struck out the endorsement by D and C. In that case the liability
of D and C upon the bill will come to an end. But if the endorsements of D and C are struck out without the
consent of E, X will not be entitled to recover anything from E the reason being that as between D and E, D is
the principal debtor and E is surety. If D is released by the holder under Section 39 of the Act, E, being surety,
will be discharged.