8.
ENDORSEMENT IN BANKING: In banking, endorsement refers to signing a
negotiable instrument with the intention of transferring the rights therein. The person
who effects an endorsement is called an ‘endorser’, and the person to whom negotiable
instrument is transferred by endorsement is called the ‘endorsee’.
Endorsement:
Literal Sense: Writing on the back of an instrument.
Legal Sense: Signing a negotiable instrument for the purpose of negotiation.
Examples: Cheques, banknotes, demand drafts, certificates of deposits, and bills of
exchange.
Importance in Banking: Endorsements in banking assure that a bank will honor its
client’s promises.
Essentials of Valid Endorsement:
On the Instrument: Endorsement must be on the instrument or on a separate paper
attached to it.
By the Maker or Holder: Only the maker or holder of the instrument can endorse it.
Signature: Must be signed by the endorser, usually in ink.
Intent to Transfer: Endorsement must show an intention to transfer the instrument
to a specified person.
Completed by Delivery: Endorsement must be completed by delivery of the
instrument.
Entire Instrument: Endorsement must cover the entire bill; partial endorsements are
not valid.
Who May Endorse?
According to Section 51 of the Negotiable Instruments Act, the following individuals
may endorse a negotiable instrument:
The payee is usually the first endorser of a negotiable instrument.
Subsequent holders of the instrument can also endorse it.
The maker or drawer can endorse if they become the holder.
Endorsement is valid only if the endorser is in lawful possession of the instrument.
9. FORMS OF ENDORSEMENT: Endorsements on negotiable instruments can
take various forms, each with its own implications and effects. The different classes of
endorsement are:
1. Blank or General Endorsement:
- Description: The endorser signs on the instrument without specifying an endorsee.
- Implication: The instrument becomes payable to bearer and can be negotiated by
mere delivery.
- Example: Endorsing a bill payable to X by simply signing the instrument.
2. Special or Full Endorsement:
- Description: The endorser not only signs the instrument but also names the
endorsee.
- Implication: Only the specified endorsee can further transfer the instrument.
- Example: Writing "Pay to A or A’s order" followed by the endorser’s signature.
3. Partial Endorsement:
- Description: Transfers only a part of the amount payable on the instrument.
- Implication: Does not operate as a negotiation of the instrument.
- Example: Endorsing a bill for Rs.1000 as "Pay to B or order Rs.500."
4. Restrictive Endorsement:
- Description: Contains terms restricting or prohibiting further negotiation of the
instrument.
- Implication: Endorsee acquires all rights except the right of negotiation.
- Example: Endorsements like "Pay C," "Pay C for my use," or "Pay C for the account
of B."
5. Conditional or Qualified Endorsement: Conditional or qualified endorsement means
the endorser puts a condition on their liability when endorsing a negotiable
instrument.
Example: If an endorsement says "Pay to Ramgopal when he turns 18," it's a
conditional endorsement. Ramgopal can only receive payment when he reaches 18
years old, and the endorser's liability depends on this condition.
A conditional endorsement unlike the restrictive endorsement does not affect the
negotiability of the instrument. It is also sometimes called qualified endorsement.
An endorsement may be made conditional or qualified in any of the following forms:
- Sans Recourse Endorsement: Excludes endorser's liability upon dishonor.
- Facultative Endorsement: Extends endorser's liability or waives certain rights.
- Sans Frais Endorsement: Waives any expenses on the instrument.
- Liability Dependent upon a Contingency: Endorser's liability arises only upon the
happening of a specified event, like marriage.
10. (A) SANS RECOURSE ENDORSEMENT: "Sans recourse" endorsement means
the person transferring a cheque (the endorser) does not take on any liability if the
instrument is not paid when presented. This type of endorsement protects the
endorser from being held responsible for payment in case of dishonor.
Endorsee Accepts Risk: The person receiving the instrument (the endorsee)
understands that they cannot go back to the endorser for payment if the cheque or
note is not honored.
For Agents and Directors: Agents or company directors can sign on behalf of their
organization without personal liability if they indicate their role clearly.
Example: A is the 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 can recover the amount of the bill from B and C.
(B) FACULTATIVE ENDORSEMENT: An endorsement where the endorser extends his
liability or abandons some right under a negotiable instrument, is called a facultative
endorsement.
“Pay A or order, Notice of dishonor waived” is an example of facultative endorsement.
(C) ‘SANS FRAIS’ ENDORSEMENT: Where the endorser does not want the endorsee or
any subsequent holder, to incur any expense on his account on the instrument, the
endorsement is ‘sans frais’.
Example: Ramgopal holds a cheque and wants to endorse it to his friend, Mary.
Ramgopal writes on the back of the cheque, "Pay to Mary, sans frais," and signs it.
This means Ramgopal is endorsing the cheque to Mary and does not want any
collection or protest fees to be charged if the cheque is dishonored.
(D) LIABILITY DEPENDENT ON A CONTINGENCY: When an endorser makes their
liability depend on a specific event happening, this is called a contingent liability
endorsement. The endorser's responsibility to pay only arises if the event occurs.
Example: An endorser writes, "Pay A or order on his marriage with B." This means the
endorser will only be liable to pay if A marries B. If the marriage doesn't happen or
becomes impossible, the endorser is not liable.
HOW TO ENDORSE A CHEQUE
1. Check Accuracy: Verify that the check is made out to you, with the correct date
and amount. Checks older than six months may not be cashable.
2. Determine Endorsers: If the check is payable to more than one person, both must
endorse it. If it's payable to either of two people, either can endorse. If names are
linked by "and", both must sign.
3. Locate Endorsement Area: Flip the check over to its back. Look for an area labeled
"Endorse Here," usually at the top, and a larger box below labeled "Do Not Write,
Stamp, or Sign below This Line."
4. Endorse: Sign your name exactly as it appears on the check, using ink, not pencil.
If your name is misspelled, sign with the incorrect name first, then write your correct
name below it and officially sign it.
By following these steps, you can properly endorse a cheque for deposit or cashing.
HOLDER IN DUE COURSE: A holder in due course, as per Section 9 of the Act, is
someone who acquires negotiable instrument in a good faith for consideration before it
becomes due for payment and without any knowledge of the defective title of a party
who transfers the instrument to him.
Qualifications:
1. Valuable Consideration: The consideration must be valid, not void or illegal. A gift
recipient or someone with inadequate consideration isn't considered a holder in due
course.
2. Possession Timing: Must acquire possession before the maturity date of the
instrument. Taking it on the maturity date disqualifies one from being a holder in due
course.
3. Good Faith and Reasonable Care: Must acquire the instrument in good faith,
without knowledge of any defects in the title. Negligence or carelessness in acquiring
the instrument can disqualify one from being a holder in due course.
4. Complete and Regular Instrument: The instrument must be complete and regular
on its face. Any irregularities can affect the eligibility for holder in due course status.
EXAMPLES:
(i) Incomplete Bill Case: An incomplete bill case refers to a situation where a negotiable
instrument (such as a bill of exchange or cheque) is not in proper form, and taking
such a bill without proper inquiry can disqualify someone from being a Holder in Due
Course.
Example: Person “A” has a bill of exchange that gets torn into pieces.
Person “B” tapes the pieces back together and presents it to Person “C” for payment.
Person “C”, without making proper inquiries about the condition of the bill, accepts it.
Person “C” is disqualified from being a Holder in Due Course because they failed to
inquire about the integrity and authenticity of the bill.
(ii) Post-Dated Cheque: A post-dated cheque, although irregular, doesn't automatically
disqualify a bona fide purchaser from being a holder in due course. Notice of defects in
the immediate transferor's title is crucial.
Example: Person A writes a post-dated cheque to Person B.
The date on the cheque is set for two weeks in the future.
Person B sells goods to Person C and endorses the post-dated cheque to Person C as
payment.
Person C takes the cheque, unaware of any issues with Person B's title or any defects.
Despite the cheque being post-dated, Person C can still be a Holder in Due Course
because:
Person C took the cheque in good faith.
Person C provided value in exchange for the cheque.
Person C had no notice of any defects or problems with Person B’s title.
