The The NegotiabNegotiab

le le InstrumeInstruments Act, nts Act,

18811881

IntroductionIntroduction

The law relating to negotiable The law relating to negotiable instruments is contained in the instruments is contained in the Negotiable Instruments Act, Negotiable Instruments Act, 1881 which applies and extends 1881 which applies and extends to the whole of India.to the whole of India.

The Act came into force The Act came into force

on on 11stst March 1882 March 1882

Definition:Definition:The word “Negotiable "means-The word “Negotiable "means-

““Transferable from one person to another Transferable from one person to another in return for consideration”in return for consideration”

““Instrument” means-Instrument” means-““A written document by which a right is A written document by which a right is

created in favour of some person”created in favour of some person”

A negotiable instrument is a piece of A negotiable instrument is a piece of paper which entitles a person to a certain paper which entitles a person to a certain sum of money and which is transferable sum of money and which is transferable from one to another person by a deliveryfrom one to another person by a delivery

or by endorsement and delivery.or by endorsement and delivery.

““Indorsement”/”Endorsement”-Indorsement”/”Endorsement”-

The term ‘Indorsement’ means writing The term ‘Indorsement’ means writing on an instrument. In its technical on an instrument. In its technical sense in the Negotiable Instruments sense in the Negotiable Instruments Act it means the writing of a person’s Act it means the writing of a person’s name (otherwise than as maker) on name (otherwise than as maker) on the face or back of a negotiable the face or back of a negotiable instrument or on a slip of paper.instrument or on a slip of paper.

The person who so signs the The person who so signs the instrument is called the instrument is called the “indorser”. “indorser”. The person to whom the instrument The person to whom the instrument is indorsed is called the is indorsed is called the “indorsee”“indorsee”

Sec. 13, However, says that “A Sec. 13, However, says that “A negotiable instrument means negotiable instrument means A A PROMISSORY NOTE, BILL OF PROMISSORY NOTE, BILL OF EXCHANGE OR CHEQUE EXCHANGE OR CHEQUE payable payable either to order or to bearer.either to order or to bearer.

1. Payable to Order: 1. Payable to Order: A note bill or A note bill or cheque is payable to order which is cheque is payable to order which is expresses to be ‘payable to a particular expresses to be ‘payable to a particular person or his order’ Example:- i) Pay A, person or his order’ Example:- i) Pay A, ii) Pay A or order , iii)Pay to the order of ii) Pay A or order , iii)Pay to the order of A iv) Pay A and B, v) Pay A or B,A iv) Pay A and B, v) Pay A or B,

But it should not contain any words But it should not contain any words prohibiting transfer, e.g., ‘Pay to A, only’ prohibiting transfer, e.g., ‘Pay to A, only’ or ‘pay to A and none else ‘ or ‘pay to A and none else ‘

2. Payable to Bearer: 2. Payable to Bearer: ‘Payable to ‘Payable to bearer’ means ‘payable to any bearer’ means ‘payable to any person whosoever bear it’. person whosoever bear it’.

CHARACTERISTCHARACTERISTICS OF ICS OF

NEGOTIABLE NEGOTIABLE INSTRUMENTSINSTRUMENTS

1.Free transferability or easy 1.Free transferability or easy negotiabilitynegotiability

2. Title of holder is free from 2. Title of holder is free from all defectsall defects

3.Recovery3.Recovery

4. Presumptions:4. Presumptions:Certain presumptions apply to all negotiable Certain presumptions apply to all negotiable instruments. instruments.

Section 118 and 119 lay down the following Section 118 and 119 lay down the following presumptions:presumptions:

(a)(a)ConsiderationConsideration : : that every negotiable that every negotiable instrument, was made, drawn, accepted, instrument, was made, drawn, accepted, endorsed or transferred for consideration.endorsed or transferred for consideration.

(b)(b)DateDate : : that every negotiable instrument that every negotiable instrument bearing a date was made or drawn on such bearing a date was made or drawn on such date.date.

(c)(c) Time of acceptanceTime of acceptance : : that every bill of that every bill of exchange was accepted within a reasonable exchange was accepted within a reasonable time after its date and before its maturity.time after its date and before its maturity.

(d)(d) Time of transfer:Time of transfer: that every transfer of a that every transfer of a negotiable instrument was made before its negotiable instrument was made before its maturitymaturity

(e) Order of endorsements(e) Order of endorsements : : That the That the endorsements appearing upon a endorsements appearing upon a negotiable instrument were made in the negotiable instrument were made in the order in which they appear thereon.order in which they appear thereon.

(f)(f) StampsStamps : : When n instrument has been When n instrument has been lost, it is presumed that it was duly lost, it is presumed that it was duly stamped. that a lost promissory-note, bill stamped. that a lost promissory-note, bill of exchange or cheque was duly stamped.of exchange or cheque was duly stamped.

(g) Holder presumed to be a Holder in (g) Holder presumed to be a Holder in due corsedue corse: : that every holder of a that every holder of a negotiable instrument is holder in due negotiable instrument is holder in due course.course.

(h) (h) Proof of protest:Proof of protest: In a suit upon an In a suit upon an instrument which has been dishonored, instrument which has been dishonored, the court, on proof of the protest, the court, on proof of the protest, presumes the fact of dishonour, until such presumes the fact of dishonour, until such fact is disproved. fact is disproved.

Types of Negotiable Types of Negotiable InstrumentsInstruments

Negotiable instruments are of two types Negotiable instruments are of two types which are as follows:which are as follows:

1. Negotiable Instruments 1. Negotiable Instruments recognized by Statute:recognized by Statute: The The Negotiable instruments Act Negotiable instruments Act mentions only three kinds of mentions only three kinds of negotiable instrument.negotiable instrument.These are Bills of exchange, cheque These are Bills of exchange, cheque and promissory notes. and promissory notes.

2. Negotiable instruments 2. Negotiable instruments recognized by usage or customs of recognized by usage or customs of trade:trade: e.g. Bank notes, exchequer bills, share e.g. Bank notes, exchequer bills, share warrants, bearer debentures, dividend warrants, bearer debentures, dividend warrants, share certificate. Etcwarrants, share certificate. Etc

The court of India follow the practice of The court of India follow the practice of English courts – Promissory Note, English courts – Promissory Note, Bankers drafts and pay orders, Bankers drafts and pay orders, Hundies, Delivery orders and Railway Hundies, Delivery orders and Railway receipts for goods .receipts for goods .

  Hundies:Hundies: Hundis refer to financial instruments evolved on Hundis refer to financial instruments evolved on

the Indian sub-continent used in trade and credit the Indian sub-continent used in trade and credit transactions. They were used astransactions. They were used as

as credit instrumentsas credit instruments remittance instruments (to transfer funds from one remittance instruments (to transfer funds from one

place to another),place to another), for trade transactions (as bills of exchange).for trade transactions (as bills of exchange). Technically, a Hundi is an unconditional order in Technically, a Hundi is an unconditional order in

writing made by a person directing another to pay writing made by a person directing another to pay a certain sum of money to a person named in the a certain sum of money to a person named in the order. Though normally regarded as bills of order. Though normally regarded as bills of exchange, they were more often used as exchange, they were more often used as equivalents of cheques issued by indigenous equivalents of cheques issued by indigenous bankers.bankers.

Indigenous bankers Indigenous bankers constitute the ancient banking constitute the ancient banking system of India. They have been carrying on their age-system of India. They have been carrying on their age-old banking operations in different parts of the country old banking operations in different parts of the country under different names.under different names.

In Chennai these bankers are called In Chennai these bankers are called Chettys Chettys ; in ; in Northern IndiaNorthern IndiaSahukars, Mahajans and Khatnes Sahukars, Mahajans and Khatnes in in Mumbai, Mumbai, 

  According to the Indian Central Banking Enquiry According to the Indian Central Banking Enquiry Committee, an indigenous banker or bank is defined as Committee, an indigenous banker or bank is defined as an individual or private firm which receives deposits, an individual or private firm which receives deposits, deals in hundies or engages itself in lending money.deals in hundies or engages itself in lending money.

PROMISSORY NOTEPROMISSORY NOTE DefinitionDefinition::

According to (Sec 4), “According to (Sec 4), “A promissory A promissory note is an instrument in writing note is an instrument in writing (not being a bank-note or a (not being a bank-note or a currency-note) containing an currency-note) containing an unconditional undertaking, signed unconditional undertaking, signed by the maker, to pay a certain sum by the maker, to pay a certain sum of money only to, or to the order of, of money only to, or to the order of, a certain person, or to the bearer of a certain person, or to the bearer of the instrument.” the instrument.”

Parties to a Promissory NoteParties to a Promissory Note

There are primarily two parties There are primarily two parties involved in a promissory note. They involved in a promissory note. They are:are:

(i) The Maker or Drawer: (i) The Maker or Drawer: The The person who makes the note and person who makes the note and promises to pay the amount stated promises to pay the amount stated therein. In the above specimen, therein. In the above specimen, Sanjeev is the maker or drawer.Sanjeev is the maker or drawer.

(ii) The Payee: (ii) The Payee: The person to whom The person to whom the amount is payable. In the above the amount is payable. In the above specimen it is Ramesh.specimen it is Ramesh.

Specimen of a Promissory NoteSpecimen of a Promissory Note

Essentials of Promissory NoteEssentials of Promissory Note1.1. It must be in writingIt must be in writing2.2. It must contain a promise or It must contain a promise or

undertaking to payundertaking to pay3.3. The promise to pay must be Definite The promise to pay must be Definite

and unconditionaland unconditional4.4. It must be signed by the makerIt must be signed by the maker5.5. Certain PartiesCertain Parties6.6. Certain sum of moneyCertain sum of money7.7. Promise to pay money onlyPromise to pay money only8.8. The Bank note or currency note is not a The Bank note or currency note is not a

promissory note: Because a bank note promissory note: Because a bank note or currency note is money or a or currency note is money or a currency. note is money itselfcurrency. note is money itself

9. The formalities like number , 9. The formalities like number , date , place, consideration , etc .date , place, consideration , etc .

10. It may be payable on demand 10. It may be payable on demand or after a definite period of time.or after a definite period of time.

11. It cannot be made payable to 11. It cannot be made payable to bearer on demand: bearer on demand: The Reserve The Reserve bank of India act, 1934 prohibits bank of India act, 1934 prohibits issue of such promissory notes issue of such promissory notes except by the Reserve Bank of except by the Reserve Bank of India itself or the central India itself or the central Government.Government.

BILL OF EXCHANGEBILL OF EXCHANGE Definition:Definition:According to (Sec 5), According to (Sec 5), “A bill of “A bill of

exchange is an instrument in exchange is an instrument in writing containing an writing containing an unconditional order, signed by unconditional order, signed by the maker, directing a certain the maker, directing a certain person to pay a certain sum of person to pay a certain sum of money only to, or to the order of, money only to, or to the order of, a certain person or to the bearer a certain person or to the bearer of the instrument.”of the instrument.”

Specimen of Bill of ExchangeSpecimen of Bill of Exchange

Parties to a Bill of ExchangeParties to a Bill of ExchangeThere are three parties involved in a bill of exchangeThere are three parties involved in a bill of exchange(i) The Drawer – (i) The Drawer – The person who makes the order The person who makes the order

for making payment. In the above specimen, Rajiv for making payment. In the above specimen, Rajiv is the drawer.is the drawer.

(ii) The Drawee – (ii) The Drawee – The person to whom the order to The person to whom the order to pay is made. He is generally a debtor of the pay is made. He is generally a debtor of the drawer. It is Sameer in this case.drawer. It is Sameer in this case.

(iii) The Payee – (iii) The Payee – The person to whom the payment The person to whom the payment is to be made. In this case it is Tarun.is to be made. In this case it is Tarun.

The drawer can also draw a bill in his own name The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the thereby he himself becomes the payee. Here the words in the bill would be words in the bill would be Pay to us or orderPay to us or order. .

In a bill where a time period is mentioned, just like In a bill where a time period is mentioned, just like the above specimen, is called a the above specimen, is called a Time BillTime Bill. .

But a bill may be made payable on demand also. This But a bill may be made payable on demand also. This is called a is called a Demand BillDemand Bill..

Essentials of a Bill of ExchangeEssentials of a Bill of Exchange

1.1. It must be in writingIt must be in writing2.2. It must contain an order to pay. It must contain an order to pay. 3.3. The order to pay must be The order to pay must be

unconditional unconditional 4.4. It must be signed by the drawerIt must be signed by the drawer5.5. It requires three parties, i.e. The It requires three parties, i.e. The

drawer, drawee, and the payee.drawer, drawee, and the payee.6.6. The drawer, drawee and payee must The drawer, drawee and payee must

be certain. be certain. 7.7. The sum payable must be certainThe sum payable must be certain8.8. The bill must contain an order to pay The bill must contain an order to pay

money onlymoney only9.9. It must comply with the formalities as It must comply with the formalities as

regards date, consideration, stamps, regards date, consideration, stamps, etcetc

CHEQUECHEQUE

A cheque is a bill of exchange drawn A cheque is a bill of exchange drawn upon a specified banker and payable upon a specified banker and payable on demand and it includes the on demand and it includes the electronic image of a truncated electronic image of a truncated cheque and a cheque in the cheque and a cheque in the electronic form.electronic form.

A cheque is a series of a bill of A cheque is a series of a bill of exchange - exchange -

1- it is always drawn on a specified 1- it is always drawn on a specified banker andbanker and

2-it is always payable on demand.2-it is always payable on demand.

CHEQUE TRUNCATION CHEQUE TRUNCATION SYSTEM(CTS)SYSTEM(CTS)

Cheque Truncation SystemCheque Truncation System (CTS) or Image-based Clearing System  (CTS) or Image-based Clearing System (ICS), in India, is a project undertaken by the (ICS), in India, is a project undertaken by the Reserve Bank of India –  – RBI, for faster clearing of cheques.CTS is basically an online image-RBI, for faster clearing of cheques.CTS is basically an online image-based cheque clearing system where cheque images and based cheque clearing system where cheque images and Magnetic Ink Character Recognition (MICR) data are captured at the  data are captured at the collecting bank branch and transmitted electronically.collecting bank branch and transmitted electronically.

Truncation means, stopping the flow of the physical cheques issued by Truncation means, stopping the flow of the physical cheques issued by a drawer to the drawee branch. The physical instrument is truncated at a drawer to the drawee branch. The physical instrument is truncated at some point en route to the drawee branch and an electronic image of some point en route to the drawee branch and an electronic image of the cheque is sent to the drawee branch along with the relevant the cheque is sent to the drawee branch along with the relevant information like the information like the MICR fields, date of presentation, presenting banks  fields, date of presentation, presenting banks etc.etc.

Cheque truncation, would eliminate the need to move the physical , would eliminate the need to move the physical instruments across branches, except in exceptional circumstances. instruments across branches, except in exceptional circumstances. This would result in effective reduction in the time required for This would result in effective reduction in the time required for payment of cheques, the associated cost of transit and delays in payment of cheques, the associated cost of transit and delays in processing, etc., thus speeding up the process of collection or processing, etc., thus speeding up the process of collection or realization of cheques.realization of cheques.

TYPES OF CROSSINGTYPES OF CROSSING

Cheques for CTS 2010All types of cheques can be presented for clearing through CTS. But to achieve standardisation of cheques issued by banks across the country and to reduce cheque frauds set of benchmarks called as CTS-2010 standard are introduced . These include provision of mandatory minimum security features on cheque forms like quality of paper, watermark, bank’s logo in invisible ink, void pantograph, etc., and standardisation of field placements on cheques.

Sample old and new(CTS 2010 compliant) cheques issued by State Bank of India (SBI) are shown below

Holder & Holder in due Holder & Holder in due coursecourse

Holder(Sec-8) Holder(Sec-8) means any person means any person entitled in his own name to the entitled in his own name to the possession a promissory note bill of possession a promissory note bill of exchange or cheque and to recover or exchange or cheque and to recover or receive the amount due thereon from receive the amount due thereon from the parties thereon. A holder must the parties thereon. A holder must therefore have the possession of the therefore have the possession of the instrument and also the right to instrument and also the right to recover the money in his own name.recover the money in his own name.

““Holder in due course(Sec 9) Holder in due course(Sec 9) means means any personany person

1. That, for consideration he became 1. That, for consideration he became the possessor of a promissory note, the possessor of a promissory note, bill of exchange or cheque, if payable bill of exchange or cheque, if payable to the bearer to the bearer

The payee or indrosee there of ,if The payee or indrosee there of ,if payable to the orderpayable to the order

2. That he became the holder of the 2. That he became the holder of the instrument before its maturity.instrument before its maturity.

3. That he became the holder of the 3. That he became the holder of the instrument in good faith , i.e. without instrument in good faith , i.e. without sufficient cause to believe that any sufficient cause to believe that any infirmity in the instrument or defect infirmity in the instrument or defect existed in the title of the person from existed in the title of the person from whom he derived his title.whom he derived his title.

A Holder of a Negotiable A Holder of a Negotiable instrument will not be a Holder in instrument will not be a Holder in

due course if…due course if…1.1. He has obtained the instrument by He has obtained the instrument by

gift or for an unlawful consideration gift or for an unlawful consideration or by some illegal method.or by some illegal method.

2.2. He has obtained the instrument He has obtained the instrument after its maturity.after its maturity.

Difference between holder and Difference between holder and holder in due courseholder in due course

Meaning-holder means any person Meaning-holder means any person entitled in his own name possession entitled in his own name possession of the instrument in other of the instrument in other hand hand holder in due course a holder who holder in due course a holder who takes the instrument in good faith for takes the instrument in good faith for consideration before it is overdue consideration before it is overdue and without any notice of defect in and without any notice of defect in the title of the who transferred it to the title of the who transferred it to him.him.

One of the essentials feature of a One of the essentials feature of a negotiable instrument is its negotiable instrument is its transferability. A negotiable transferability. A negotiable instrument may be transferred instrument may be transferred from one person to another in from one person to another in either of the followings way-either of the followings way-

1-By Negotiation1-By Negotiation

2-By Assignment2-By Assignment

NEGOTIATIONNEGOTIATION The transfer of an instrument by one The transfer of an instrument by one

party to another so as to constitute party to another so as to constitute the transferee a holder is called the transferee a holder is called Negotiation.Negotiation.

Negotiation means as the process by Negotiation means as the process by which a third party is constituted the which a third party is constituted the holder of the instrument so as to holder of the instrument so as to entitle him to the possession of the entitle him to the possession of the same and to receive the amount due same and to receive the amount due thereon in his own name.thereon in his own name.

Modes of negotiationModes of negotiation

1.1. Negotiation By delivery Negotiation By delivery An instrument payable to bearer is An instrument payable to bearer is

negotiable by delivery thereof (Sec.47)negotiable by delivery thereof (Sec.47)

2. Negotiation By indorsement and 2. Negotiation By indorsement and DeliveryDelivery

An instrument Payable to order is An instrument Payable to order is negotiable by the holder by Indorsement negotiable by the holder by Indorsement and delivery thereof (Sec.48)and delivery thereof (Sec.48)

ASSIGNMENTASSIGNMENT

When a person transfers his right to When a person transfers his right to receive the payment of a debt, receive the payment of a debt, ‘Assignment of the debt’ takes ‘Assignment of the debt’ takes place .Thus where a holder of a bill place .Thus where a holder of a bill note or cheque transfer the same to note or cheque transfer the same to another, he in fact gives his right to another, he in fact gives his right to receive the payment of the receive the payment of the instrument to the transferee.instrument to the transferee.

Difference between Difference between Assignment & NegotiationAssignment & Negotiation

Mode of transferMode of transfer- The transfer by - The transfer by negotiation requires only delivery with or negotiation requires only delivery with or without endorsement of a bearer or order without endorsement of a bearer or order instrument. Whereas the transfer by instrument. Whereas the transfer by assignment requires a separate written assignment requires a separate written document such as transfer deed signed by document such as transfer deed signed by the transferor.the transferor.

Notice of transfer-Not require in Notice of transfer-Not require in negotiationnegotiation

Consideration-consideration must be Consideration-consideration must be proved in assignee.proved in assignee.

““Indorsement”/”Endorsement”-Indorsement”/”Endorsement”-

The term ‘Indorsement’ means writing The term ‘Indorsement’ means writing on an instrument. In its technical on an instrument. In its technical sense in the Negotiable Instruments sense in the Negotiable Instruments Act it means the writing of a person’s Act it means the writing of a person’s name (otherwise than as maker) on name (otherwise than as maker) on the face or back of a negotiable the face or back of a negotiable instrument or on a slip of paper.instrument or on a slip of paper.

The person who so signs the The person who so signs the instrument is called the instrument is called the “indorser”. “indorser”. The person to whom the instrument The person to whom the instrument is indorsed is called the is indorsed is called the “indorsee”“indorsee”

TYPES/KINDS OF TYPES/KINDS OF INDORSEMENTINDORSEMENT

1.Blank or general Indorsement1.Blank or general Indorsement

2. Full or special Indorsement2. Full or special Indorsement

3. Restrictive Indorsement3. Restrictive Indorsement

4.Partial Indorsement4.Partial Indorsement

5.Conditional Indorsement5.Conditional Indorsement

1. Blank or general endorsement:1. Blank or general endorsement: If the endorser signs his name only If the endorser signs his name only

and does not specify the name of the and does not specify the name of the endorsee, the endorsement is said to endorsee, the endorsement is said to be in blank Sec. 16(1). The effect of a be in blank Sec. 16(1). The effect of a blank endorsement is to convert the blank endorsement is to convert the order instrument into bearer order instrument into bearer instrument (Sec. 54), which may be instrument (Sec. 54), which may be transferred merely by delivery.transferred merely by delivery.

2. Endorsement in full or special endorsement:2. Endorsement in full or special endorsement: If the endorser, in addition to his signature, also adds a If the endorser, in addition to his signature, also adds a

direction to pay the amount mentioned in the direction to pay the amount mentioned in the instrument to, or to the order of, a specified person the instrument to, or to the order of, a specified person the endorsement is said to be in full [Sec. 16(1)].endorsement is said to be in full [Sec. 16(1)].

If, for example, A, the holder of a bill of exchange, If, for example, A, the holder of a bill of exchange, wants to make an endorsement in full to B, he would wants to make an endorsement in full to B, he would write thus: “Pay to B or order, .” After such an write thus: “Pay to B or order, .” After such an endorsement it is only the endorsee, i.e., B, who is endorsement it is only the endorsee, i.e., B, who is entitled to receive the payment of the instrument and entitled to receive the payment of the instrument and to further negotiate the instrument by his endorsement.to further negotiate the instrument by his endorsement.

A blank endorsement can easily be converted into an A blank endorsement can easily be converted into an endorsement in full.endorsement in full.

3. Restrictive endorsement:3. Restrictive endorsement: Stating the effect of endorsement, Section 50 provides that “the Stating the effect of endorsement, Section 50 provides that “the

endorsement of negotiable instrument followed by delivery transfers to the endorsement of negotiable instrument followed by delivery transfers to the endorsee the property herein with the right of further negotiation.” endorsee the property herein with the right of further negotiation.” However, Section 50 permits restrictive endorsement.However, Section 50 permits restrictive endorsement.

An endorsement which, by express words, prohibits the endorsee from An endorsement which, by express words, prohibits the endorsee from further negotiating the instrument or restricts the endorsee to deal with his further negotiating the instrument or restricts the endorsee to deal with his instrument as directed by the endorser is called ‘restrictive’ endorsement.instrument as directed by the endorser is called ‘restrictive’ endorsement.

Illustrations:Illustrations: (a) B, the holder of the bill, makes an endorsement on the bill saying “Pay C (a) B, the holder of the bill, makes an endorsement on the bill saying “Pay C

only.” It is a restrictive endorsement as C cannot negotiate the bill further.only.” It is a restrictive endorsement as C cannot negotiate the bill further.

4. Partial Endorsement:4. Partial Endorsement: Section 56 provides that a negotiable instrument cannot Section 56 provides that a negotiable instrument cannot

be endorsed for a part of the amount appearing to be be endorsed for a part of the amount appearing to be due on the instrument. In other words, a partial due on the instrument. In other words, a partial endorsement which transfers the rights to receive only a endorsement which transfers the rights to receive only a part payment of the amount due on the instrument is part payment of the amount due on the instrument is invalid.invalid.

Such an endorsement has been declared invalid Such an endorsement has been declared invalid because it would subject the prior parties to plurality of because it would subject the prior parties to plurality of actions (one action by holder for part value and another actions (one action by holder for part value and another action by endorsee for part value) “and will thus cause action by endorsee for part value) “and will thus cause inconvenience to them.inconvenience to them.

Thus, where A holds a bill for Rs 2,000 and endorses it in Thus, where A holds a bill for Rs 2,000 and endorses it in favour of B for Rs 1,000 and in favour of C for the favour of B for Rs 1,000 and in favour of C for the remaining Rs 1,000, the endorsement is partial and remaining Rs 1,000, the endorsement is partial and invalid.invalid.

5. Conditional endorsement:5. Conditional endorsement: If the endorser of a negotiable instrument, by express If the endorser of a negotiable instrument, by express

words in the endorsement, makes his liability, words in the endorsement, makes his liability, dependent on the happening of a specified event, dependent on the happening of a specified event, although such event may never happen, such although such event may never happen, such endorsement is called a ‘conditional’ endorsement endorsement is called a ‘conditional’ endorsement (Sec. 52).(Sec. 52).

The law permits a conditional endorsement and The law permits a conditional endorsement and therefore it does not in any way affect the negotiability therefore it does not in any way affect the negotiability of the instrument. Thus, endorsements can validly be of the instrument. Thus, endorsements can validly be made in the following terms:made in the following terms:

(i) “Pay B or order on his marriage;”(i) “Pay B or order on his marriage;” (ii) “Pay B on the arrival of Pearless ship at Bombay.”(ii) “Pay B on the arrival of Pearless ship at Bombay.”

DISCHARGEDISCHARGE

““Discharge means release from Discharge means release from obligation”.obligation”.

By PaymentBy Payment By cancellationBy cancellation By material alteration or lapse of By material alteration or lapse of

time.time.

DISHONORDISHONOR

It may be by non acceptance or non paymentIt may be by non acceptance or non payment

A. DISHONOUR BY NON-ACCEPTANCE (Sec-91)A. DISHONOUR BY NON-ACCEPTANCE (Sec-91) A bill of exchange can be dishonored by non A bill of exchange can be dishonored by non

acceptance in the following ways-acceptance in the following ways- 1-Does not accept 48 hours from the time of 1-Does not accept 48 hours from the time of

presentment.presentment.

Means showing an instrument to the drawee, Means showing an instrument to the drawee, acceptor, or maker for acceptance, sight or acceptor, or maker for acceptance, sight or payment.payment.

2-Drawee is fictitious person2-Drawee is fictitious person 3-Drawee has become insolvent or 3-Drawee has become insolvent or

deaddead 4-Drawee is incompetent4-Drawee is incompetent

Drawee(Drawee(The person to whom the The person to whom the order to pay is madeorder to pay is made))

B. DISHONOUR BY NON-PAYMENTB. DISHONOUR BY NON-PAYMENT

A promissory note, Bill of exchange A promissory note, Bill of exchange and cheque is said to be dishonoured and cheque is said to be dishonoured by non-payment when the make of by non-payment when the make of the note, acceptor of the bill or the note, acceptor of the bill or drawee of the cheque makes default drawee of the cheque makes default in payment upon being duly requires in payment upon being duly requires to pay the sameto pay the same

NOTINGNOTING

When a promissory note or bill of exchange has When a promissory note or bill of exchange has been dishonoured by non- acceptance or non- been dishonoured by non- acceptance or non- payment, the holder may cause such dishonour to payment, the holder may cause such dishonour to be noted by a notary public upon the instrument, be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon or upon a paper attached thereto, or partly upon each. Such note must be made within a each. Such note must be made within a reasonable time after dishonour, and must specify reasonable time after dishonour, and must specify the date of dishonour, the reason, if any, assigned the date of dishonour, the reason, if any, assigned for such dishonour, or, if the instrument has not for such dishonour, or, if the instrument has not been expressly dishonoured, the reason why the been expressly dishonoured, the reason why the holder treats it as dishonoured, and the notary' s holder treats it as dishonoured, and the notary' s charges.charges.

PROTESTINGPROTESTING

When a promissory note or bill of exchange has been When a promissory note or bill of exchange has been dishonoured by non- acceptance or non- payment, the dishonoured by non- acceptance or non- payment, the holder may, within a reasonable time, cause such holder may, within a reasonable time, cause such dishonour to be noted and certified by a notary public. dishonour to be noted and certified by a notary public. Such certificate is called a protest. Protest for better Such certificate is called a protest. Protest for better security. When the acceptor of a bill of exchange has security. When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary public may, within a reasonable time, cause a notary public to demand better security of the acceptor, and on its to demand better security of the acceptor, and on its being refused may, within a reasonable time, cause being refused may, within a reasonable time, cause such facts to be noted and certified as aforesaid. Such such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security.certificate is called a protest for better security.

LIABILITY OF PARTIES ON LIABILITY OF PARTIES ON NEGOTIABLE INSTRUMENTNEGOTIABLE INSTRUMENT

1.1. Liability of Drawer-Liability of Drawer-

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

2.Liability of drawee of cheque-2.Liability of drawee of cheque-

The drawee of a cheque(who is always The drawee of a cheque(who is always banker) having sufficient funds of a banker) having sufficient funds of a drawer in his hands, properly drawer in his hands, properly applicable to the payment of such applicable to the payment of such cheque, must pay the cheque when cheque, must pay the cheque when duly required to do so . In default of duly required to do so . In default of such payment, the drawee, i.e. , the such payment, the drawee, i.e. , the banker , must compensate the banker , must compensate the drawer for any loss or damage drawer for any loss or damage caused by such default. caused by such default.

3. Liability of maker of note and acceptor of bill-3. Liability of maker of note and acceptor of bill-In the absence of a contract to the contrary, the maker In the absence of a contract to the contrary, the maker

of a promissory note, by making it, the acceptor of a promissory note, by making it, the acceptor before maturity of a bill of exchange by accepting it, before maturity of a bill of exchange by accepting it, engages that he will pay it according to the tenor of engages that he will pay it according to the tenor of the note or his acceptance respectively, and in the note or his acceptance respectively, and in default of such payment, such maker or acceptor is default of such payment, such maker or acceptor is bound to compensate any party to the note or bill bound to compensate any party to the note or bill for any loss or damage sustained by him and caused for any loss or damage sustained by him and caused by such default. .by such default. . The acceptor of a bill of The acceptor of a bill of exchangeexchange  at or afterat or after  maturitymaturity, by accepting , by accepting it, it, engages to payengages to pay the amount thereof to  the amount thereof to the the holder on demand.holder on demand.

4. Liability of endorser-4. Liability of endorser- In the absence of a contract to the contrary, In the absence of a contract to the contrary,

the .endorser of a negotiable instrument, by the .endorser of a negotiable instrument, by indorsing it, engages that on due presentment it indorsing it, engages that on due presentment it shall be accepted and paid according to its shall be accepted and paid according to its tenor and that if it be dishonoured he tenor and that if it be dishonoured he will compensate the holder or subsequent will compensate the holder or subsequent endorser who is compelled to pay it for any loss endorser who is compelled to pay it for any loss or damage caused to him by such dishonour.or damage caused to him by such dishonour.

5. Liability of prior parties to a holder 5. Liability of prior parties to a holder in due course- in due course-

Every prior party to a negotiable Every prior party to a negotiable instrument is liable thereon to a instrument is liable thereon to a holder in due course until the holder in due course until the instrument is duly satisfied.instrument is duly satisfied.

6. General rules regarding Liability- 6. General rules regarding Liability-

1.1.Maker, drawer and acceptor Maker, drawer and acceptor principalsprincipals

2.2.Prior party a principal debtor in Prior party a principal debtor in respect of each subsequent party.respect of each subsequent party.

3.3.Discharge of endorsers liabilityDischarge of endorsers liability

4.4.SuretyshipSuretyship

7. Acceptor’s liability on a forged 7. Acceptor’s liability on a forged indorsement-indorsement-

An acceptor of a bill of exchange An acceptor of a bill of exchange already indorsed is not relieved from already indorsed is not relieved from liability by reason that such liability by reason that such endorsement is forged, if he knew or endorsement is forged, if he knew or had reason to believe the had reason to believe the indorsement to be forged when he indorsement to be forged when he accepted the bill. accepted the bill.

8. Acceptors Liability for a bill in a fictitious 8. Acceptors Liability for a bill in a fictitious name – name –

An acceptor of a bill of exchange drawn in An acceptor of a bill of exchange drawn in fictitious name and payable to the fictitious name and payable to the drawers order is not, reason that such drawers order is not, reason that such name is fictitious, relieved from liability to name is fictitious, relieved from liability to any holder in due course claiming under any holder in due course claiming under an indorsement by the same hand as the an indorsement by the same hand as the drawers signature, and purporting to be drawers signature, and purporting to be made by the drawer.made by the drawer.