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NEGOTIABLE INSTRUMENT ACTDe�nition

�e Negotiable Instrument has not been de�ned under the Negotiable Intruments Act 1881.However, Section 13 of the Act describes a negotiable instrument to mean a promissory note or a bill of exchange or a cheque payable to order or to bearer.

Features

a. Consideration

It is presumed that every Negotiable Instrument is made or drawn for consideration. �e consideration need not be mentioned in the Negotiable Instruments.

b. Transferability

A Negotiable instrument may be transferred by:

(i) endorsement and delivery, if it is an instrument payable to order, and

(ii) mere delivery, if it is a bearer instrument.

c. Title

�e transferee, who takes the instrument bona�de and for valuable consideration, obtains a good title inspite of any defects in the title of the transferor. To this extent, Negotiable instrument is an exception to the maxim of law ie. nemo dat quod non-habet (no one can transfer a better title than he himself has).

PROMISSORY NOTE : SEC.4

A promissory note is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to the person mentioned therein, or to the order of a certain person or to the bearer of the instrument. �e words ‘or to the bearer of the instrument” is inoperative in View of Section 31 of the Reserve Bank of India Act, 1934, which provides that no person in India other than Reserve Bank of India or Central Government can make or

issue promissory note payable to bearer of the instrument.

Characteristics of Promissory Note

a. In writing

It must be in writing. An oral promise does not result in an instrument. Example: A promises to pay ` 70,000/- to “B”, over telephone. �is promise is not a promissory note as it is not in writing.

b. Promise to pay

A mere acknowledgement of debt is not a promissory note.

a) A receipt of ` 50,000/- Not a Promissory Note.

b) A receipt of ` 50,000/- with a promise to pay in 5 monthly instalments beginning 1st April 2004 - It is a Promissory Note.

c. Unconditional

It is to be noted that a promise to pay will be unconditional where it depends upon an event which is certain to happen but the time of its occurrence may be uncertain.

“I promise to pay to ‘A’ ` 1,000/- 10 days a!er the death of ‘B’.” — "is is not conditional as it is certain that ‘B’ will die though the exact time of his death is uncertain.

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�e promissory note does not lose its character as such merely because it contains a promise to pay at a certain place.

“I promise to pay to ‘A’ ` 1 Lac a!er the death of ‘B’ provided ‘B’ leaves enough money to pay.”

d. Certain sum of money only

Amount promised must be certain and should be in terms of money.

�e instrument must be payable in money and money only. If the instrument contains a promise to pay something other than money or something in addition to money, it will not be a promissory note.

‘I promise to pay ` 350 and all other sums which shall be due’ — It is not a valid promissory note.

‘I promise to pay ` 1 Lac and 500 bags of rice is not a valid promissory note.’

In the event of rate of interest not being speci�ed, the amount which would be due on the due date would not be certain.

e. Signed by the Maker

�e maker must sign the instrument and it is incomplete till it is so signed. �e signature may be made on any part of the document.

f. Certainty of Parties

�e person by whose order and to whom the payment is to be made must be de�nite. �e payee must be a certain person and where the name of the payee is not mentioned as a party, the instrument becomes invalid.

g. Not payable to maker himself

A promissory note cannot be made payable to the maker himself. However, it would become valid when it is endorsed to the maker. �is is so because it becomes payable to bearer, if endorsed in blank or it becomes payable to endorsee or his order, if endorsed speci�cally.

BILL OF EXCHANGE : SEC.5

A Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. �e words or to the bearer of the instrument is inoperative in view of Section 31 of the Reserve Bank of India Act, 1934, which provides that no person in India other than Reserve Bank

of India or Central Government make or issue promissory note payable to bearer of the instrument.

Characteristics of Bill of Exchange

1. In writing

It must be in writing.

2. Order

It must contain an order to pay. Order to be made by drawer to drawee to pay money.

3. Unconditional Order

�e order must be unconditional, ie., the order must not make the payment of the bill dependent on a contingent event. A conditional bill of exchange is invalid. An order does not become conditional by reason of time for payment of the amount being expressed to be on the lapse of a certain period or a!er the occurrence of a speci�ed event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.

Where a bill of exchange is in this form: ‘�ree months a!er date pay to my order the sum of ` 8001- for value received’. �is is not conditional.

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4. Money only — Certain sum

�e Order must be to pay money and money only. �e instrument must be payable in money and money only. �e sum of money payable must also be certain.

Negotiable lnstruments are meant for free circulation and if their value is not apparent on their face, their circulation would be materially impeded.

In the absence of the rate of interest, the amount which would be due on the due date would not be certain or de�nite.

5. Acceptance

�e drawee must sign the instrument, without which the document is ine"ective.

6. "ree Parties

�e three parties to a bill viz., drawer, drawee and payee are to be speci�ed in the instrument with reasonable certainty. All three persons need not speci�cally be di"erent persons. One can play the role of two persons, ie., a drawer can be a payee.

7. Stamping

It must be stamped.

CHEQUE : SEC.6

A Cheque is a bill of exchange drawn on a speci�ed banker and not expressed to be payable otherwise than on demand and it includes “the electronic image of truncated cheque” and a ‘cheque in the electronic form”.

exchange under Section 5.

on demand - Sec.31 of Reserve Bank of India Act, ie., payable only on demand.

“A truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or bank whether paying or recovering payment immediately on generation of an electronic image for transmission, substituting the further physical movement of cheque in writing.

A physical cheque deposited at Bank, scanned electronically for processing.

“A cheque in electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature and asymmetric crypto system.

On line payment instructions in net banking,

CROSSED CHEQUE

When a cheque bears across its face two parallel transverse lines, (usually on the top le! corner of cheque) the cheque is said to be crossed.

1. Crossing a"ects mode of payment of cheque. Cheque is not payable to payee or holder at Bank. Payment is to be obtained only through Bank. Crossed Cheque can be negotiated.

2. �e objective of crossing is to help tracing the recipient of money, if an unauthorized person receives it.

Di"erence between Bill Of Exchange & Promissory note?

Di"erence between Bill Of Exchange & cheque?

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Types of Crossing

1. General Crossing : Sec. 123

Where a cheque bears across its face an addition of —

2. Special Crossing : Sec. 124

Where a cheque bears across its face an addition of the name of a banker, either with or without the words ‘not negotiable’, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially.

Where a cheque is crossed specially, the banker on whom it is crossed shall not pay it, otherwise than to the banker to whom it is crossed or his agent for collection.

Di"erence : In general crossing the Name of the Bank is not mentioned whereas in special crossing the Name of the Bank is mentioned.

3. ‘Not Negotiable’ Crossing : Sec.130

A person taking a cheque crossed generally or specially, bearing in either case the words ‘not negotiable’, shall not have, and shall not be capable of giving a better title to the cheque other than that which the person from whom he took it had. "e title of transferee of the cheque cannot be better than title of

transferor of the cheque. It means that even if transferee has acquired in good faith still his title cannot be defect free if transferor’s title is defective.

It may be noted that though it is mentioned ‘Not Negotiable’, the cheque can be transferred. �e only restriction is with regard to the title passed.

In other words, the principle of nemo dat quod non habet (nobody can pass on a title better than what he himself has) will be applicable to a cheque with a ‘not negotiable’ crossing, even though the cheque is in the hands of a holder in due course.

‘Account Payee’ Crossing / Restrictive Crossing

�e purpose of this crossing bearing the words “A/c Payee” is to obviate the risk of a wrong person obtaining payment on a cheque.

It is a direction to banker to credit the proceeds only to the account of the payee.

�e cheque remains legally negotiable but “A/c payee” crossing hinders the negotiability of the cheque

in practice’. Such cheque cannot be transferred further to any person.

PAYMENT OF CROSSED CHEQUE - Sec. 126 to 129

1. Banker is not liable if he pays in due course a cheque -

2. Where the banker has paid in due course the bank and drawer shall have the same right and be placed in the same position in all respects as if the amount has been paid to and recovered by the true owner.

3. If the payment has been made out of due course”, the banks shall be liable to the true owner of the cheque for any loss the true owner may sustain.

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ACCEPTANCE

A. MEANING

It is signifying one’s assent to the order of the drawer by delivery or noti�cation thereof. It is ordinarily made by the drawee by signing of his name across the face of the bill and by delivery.

B. WHO CAN BE ACCEPTORS: SEC.33 & 34

a) Drawee i.e., person directed to pay.

b) All or some of the several drawees, when bill is addressed to more than one. However, if the several drawers are partners, acceptance by one drawee would bind all other drawees, (as partnership is based on principle of mutual agency).

c) Drawee in case of need.

d) An acceptor for honour.

e) When no drawee has been named in a bill but a person accepts it, then he may be estopped from denying his liability as an acceptor.

f) Agent of any of the persons mentioned above.

C. ESSENTIALS OF VALID ACCEPTANCE

1. Capacity- Every person capable of legally entering into a contract may make, accept or endorse and negotiate a negotiable instrument by himself or through a duly authorised agent.

2. Acceptance must be written.

3. Acceptance must be signed.

4. Acceptance must be on the bill.

5. Acceptance must be completed by delivery.

6. Acceptance may be general or quali�ed.

HOLDER : SEC. 8

he ‘Holder’ of a promissory note, bill of exchange or cheque means any person entitled -

(i) in his own name, to the possession thereof i.e., he must be named in the instrument as payee or endorsee or he must be the bearer of the instrument and

(ii) to receive or recover the amount due thereon from the parties thereto.

Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

HOLDER IN DUE COURSE : SEC. 9

‘Holder in due course’ means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it became payable and without having su#cient cause to believe that any defect existed in the title of the person from whom he derived his title.

Essentials are -

(i) �e holder must have taken the instrument for value

(ii) He must have obtained the instrument before its maturity

(iii) �e instrument must be complete and regular on its face

(iv) He must have taken the instrument in good faith and without notice of any defect either in the instrument or in the title of the person negotiating it to him

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RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSE

1. Presumption

Every holder is deemed prima facie to be a holder in due course and the burden of proving his title is not on him. if it is proved that the history of the bill is tainted with fraud or illegality the burden is shi!ed to the holder to prove that he is a holder in due course. (Sec. 118)

2. Privilege against inchoate stamped instruments

When one person signs and delivers to another, a stamped but otherwise inchoate (incomplete) instrument, he is stopped from asserting, as against a holder in due course, that the instrument has not been �lled in accordance with the authority given by him provided the amount �lled is covered by the stamp a#xed. (Sec. 20)

3. Fictitious drawer or payee

In case a bill of exchange is drawn payable to the drawer’s order in a �ctitious name and is endorsed the same that has drawer’s signature, it is not permissible for the acceptor �ling against the holder in the course that such name is �ctitious. (Sec. 42)

4. Instruments obtained by unlawful means or for unlawful consideration

�e person liable in a negotiable instrument cannot set up against the holder in due course the defence that the instrument had been lost or obtained from him by means of an o"ence or fraud or for an unlawful consideration. (Sec. 58)

5. Prior defects

A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course. Once a negotiable instrument passes through the hands of a holder in due course, it gets cleared of its defects. (Sec. 53)

6. Estoppel against denying original validity of instrument

No maker of a promissory note, and no drawer of a bill of exchange or cheque, and no acceptor of a bill of exchange 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. (Sec. 120)

7. Estoppel against denying capacity of payee to endorse

No maker of a promissory note and no acceptor of a bill of exchange 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. (Sec. I 21)

8. Liability of prior parties

Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satis�ed. (Sec. 36)

9. Negotiable Instruments without consideration

A Negotiable Instrument made, drawn or accepted without consideration does not create any obligation on the parties to the transaction. But if the Negotiable Instrument gets into the hands of a holder in due course he can recover the amount from parties. �e plea that there was no consideration cannot be set up against him.

Even HIDC CANNOT Recover if the acceptance to instrument is FORGED.

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Distinction Between Holder and Holder in Due Course

Particulars Holder Holder in due course

Consideration Holder may become possessor or payee of instrument even without consideration

Holder acquires possession only for consideration

Time of possessing instrument

No restriction as in case of holder in due course

Must possess instrument before amount thereon becomes payable

Good faith No restriction as in case of holder in due course

Must become payee of instrument in good faith ie. without su#cient cause to believe that any defect existed in the transferor’s title.

Every holder is due course is a holder but every holder is not in due course. Do example from page No. 198, 199.

A. NEGOTIATION: SEC.14

When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

B. ENDORSEMENT: SEC.15

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 a slip of paper attached thereto, Known as allonge or so signs for the purpose as a stamped paper intended to be a negotiable instrument, he is said to endorse the same, and is called the ‘Endorser’. �e person in whose favour the endorsement made is called ‘Endorsee’.

1. Endorsement in blank

It is an endorsement wherein the endorser signs his name only. A negotiable instrument endorsed in blank is payable to the bearer thereof. (Sec. 16 & 54). But name of endorsee is not written.

2. Endorsement in full

It is an endorsement where the endorser signs his name and adds a direction to pay the amount mentioned to, or to the order of, a speci�ed person and the person so speci�ed is called as endorsee’ of the instrument. (Sec. 16)

3. Restrictive endorsement

It is an endorsement which has the e"ect of restricting further negotiation and transfer. (Sec. 50)

B signs the following endorsements on di"erent negotiable instruments payable to bearer:

(a) Pay to Z only.

(b) For the account of Y only.

4. Quali#ed Endorsement (Sec. 52)

B C D E F (Some Recourse)

a. Sans recourse endorsement : (Without Liability)

It is an endorsement where the Endorser excludes his own liability or makes it conditional.�e 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 speci�ed event, although such event may never happen.

(i) “Pay F or order Sans Recourse.”

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(ii) “Pay F or order without recourse to me.”

(iii) “Pay F or order at his own risk.”

Where an endorser so excludes his liability and a!erwards becomes the holder of the instrument, all intermediate endorsers are liable to him.

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.

b. Sans Frais endorsement

Such an endorsement indicates that endorser is not liable for expenses incurred on account of the bill.

Pay X or order San Frais

c. Facultative endorsement

It is an endorsement wherein certain rights are waived and suitable words to this e"ect are indicated.

Waiver of a right to receive notice of dishonour, wherein the endorsement would include the words ‘notice of dishonour dispensed with’. Pay Y or order, Notice of dishonour waived.

d. Contingency based endorsement

Such endorsement combines an order to pay upon the happening or non happening of an event.

Pay to A on safe receipt of goods.

Comment “Once an instrument is bearer it always remain bearer”.

Statement is false because blank endorsement is the a bearer instrument but lateron blank endoresement can be converted into full endorsement.

E. CONVERSION OF ENDORSEMENT IN BLANK INTO ENDORSEMENT IN FULL

�e 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 any other person as endorsee, convert the endorsement in blank into an endorsement in full; and the holder does not thereby incur the responsibility of an endorser.

�e holder does not himself sign, but only adds the name of a person before an endorsement in blank.

�e holder may then transfer the instrument to the person whose name be so speci�ed, but will not incur

the liability of an endorser.

Where A, the payee of a bill of exchange, endorsed it in blank and delivered it to B, and B wrote above A’s endorsement, “pay the contents to C”, but did not sign the bill, B was held not liable to C as an endorser of the bill.

F. OTHER TERMS

1. Partial Endorsement: Sec.56

Partial endorsement refers to endorsement of a bill partly paid.

An endorsement purporting to transfer only a part of the amount of instrument is invalid and the endorsee therefore cannot negotiate it. But when the amount due has been paid in part and a note to

that e$ect has been made on the instrument, then the instrument may be negotiated for the balance.

An instrument of ` 100/- cannot be endorsed for ` 50/- only. But if the amount due has already been partly paid say ` 60/-, a note to that e"ect may be endorsed on the instrument and it may then be negotiated for the balance of ` 40/-.

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2. Negotiation Back

An instrument is said to have been negotiated back to him and he is said to have taken up or taken back the negotiable instrument when a person who has been a party to the negotiable instrument takes it again.

�e endorsements on a negotiable instrument are as under :

P, A, B, X, Y, A

Here A is a person who is a prior party to the instrument. He negotiated it to B, B to X, X to Y and Y again to this very A resulting in ‘negotiation back’.

�is will lead to a circuity of action. �us A, in the above case cannot sue Y, X or B. But A can sue P since the latter is prior to A’s original endorsement. If however A, in original endorsement, had signed “sans recourse” there could be no circuity of action and A could sue Y, X or B.

What will be your answer if endorsement are P, A, B, X, Y, P?

Instrument is discharged.

3. Negotiation of Dishonoured or Overdue Instruments: Sec.59

�e holder of a negotiable instrument, who has acquired it a!er dishonour, whether by non-acceptance, or non-payment, with notice thereof, or a!er maturity, has only, as against the other parties, the right thereon of his transferor.

4. Accommodation note or bill

Any person who, in good faith and for consideration, becomes the holder, a!er 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.

5. Period of Negotiation: Sec. 60

Instruments remain negotiable till they are discharged by payment or by some other satisfaction.

�e e"ect is that where an instrument has reached its maturity, but has not been paid, it remains negotiable.

It is not the maturity, but the fact of actual payment at or a!er maturity which puts an end to the negotiability of an instrument.

Even payment will not end the life of an instrument if it is not a payment “at or a!er maturity”. Where payment is made before maturity, the instrument remains valid for further negotiation unless the fact of payment is noted on it or it is withdrawn, cancelled or destroyed.

Assignment means transferring rights to another person.

Di!erence Between Negotiation and Assignment

Basis Negotiation Assignment

Notice of Transfer C onsiderat ion for Transfer

Not Necessary

Presumed

Notice must be served by assignor on his debtor To be proved

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Mode

Delivery

Document to be reduced into writing and signed by transferor

Rights Title Transferee acquires all rights of a holder in due course. �e title of the transferee (i.e., the holder in due course) is better than that of the transferor

Assignee. has only the right, title and interest of the assignor. �e title of the assignee is subject to the defects in the title of the assignor.

A. MATURITY - SEC. 22

�e maturity of a promissory note or bill of exchange is the date at which it falls due.

1) Instruments payable on demand

a. A cheque is always payable on demand.

b. A promissory note or a Bill of Exchange is payable on demand —

Demand does not imply that any actual demand is to be made. It means immediately payable. Such a bill or note may be presented for payment at any time at the option of the holder but within a reasonable time a!er issue. �is would become overdue when it remains in circulation for unreasonable length of time.

2) Time Instrument

A time Instrument is a Bill or Note which is payable —

(i) a!er a �xed period, or

(ii) on a speci�ed day, or

(iii) a!er sight, or

(iv) on the happening of an event which is certain to happen

i. I promise to pay a!er 6 months

ii. I promise to pay a!er 90 days

iii. I promise to pay X ` 5000/- a!er sight

iv. I promise to pay Y a!er Z’s death

3) Grace days

In the case of a Note or Bill payable on demand, sight, presentment, Grace days are not allowed.

A Note or Bill, p.Lpayable on demand, at sight or on presentment is at maturity on the third day a!er the day on which it is expressed to be payable. �ree days are allowed as days of grace.

4) Calculation of maturity

�e expression “a!er sight” in a promissory note means a!er presentment for sight. �is means that payment cannot be demanded on a Note till it has been shown to the maker.

Where a bill is payable a!er a �xed period a!er sight, the time is to be calculated -

from the date of acceptance, if the billed, and

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B. CALCULATION OF MATURITY

1. Maturity of bill or note payable so many months a!er date or sight: Sec.23

�e Bill or Note shall be at maturity on the third day a!er the date on which the period of Bill or Note expires.

�e period of Bill / Note shall expire on that day of the month which corresponds with the day on which the bill is dated or accepted for honour.

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.

a) A negotiable instrument, dated 29th January, 200X, is made payable one month a!er date. �e instrument is at maturity on the third day a!er February, 200X

b) A negotiable Instrument, dated 30th August, 200X is made payable three months a!er date. �e instrument is at maturity on the 3rd December, 200X.

c) A promissory note or bill of exchange, dated 31st August, 200X, is made payable three months a!er date. �e instrument is at maturity on 3rd December 200X.

d) If the date of the instrument is 15th February and is payable a!er three months, it shall mature on 15th May and its payment can be demanded on the third day a!er that date.

2. Maturity of bill or note payable so many days a!er date or sight: Sec.24

�e Bill or note shall be at maturity on the third day a!er the second day. In calculating the date at which a promissory note or Bill of exchange made payable a certain number of days a!er date or a!er sight or a!er a certain event is at maturity, the day of the date of presentment for acceptance or sight, or of protest for non-acceptance, or on which the event happens, shall be excluded.

A bill drawn on 12th January payable a!er 30 days would be due on 14th February (19+11+3).

3. When day of maturity is a holiday: Sec. 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 immediate preceding business day ie., the working day earlier to the holiday.

Explanation — �e expression ‘public holidays’ includes Sundays and any other day declared by the Central Government, by noti�cation in the O#cial Gazette, to be a public holiday.

If the instrument matures on a day which is a emergency holiday (eg : death of national leader) the instrument shall be due on the next succeeding business day.

PAGE | 53

A. BASED ON TRANSFER PROCEDURE

1. Bearer Instrument. Sec. 13

An instrument expressed to be so payable or an instrument where the only or the last Endorsement on it, is an Endorsement in blank. As per Sec. 31 of Reserve Bank of India Act, 1934, a promissory note cannot be made payable to bearer and a bill of exchange cannot be made payable to bearer on demand.

A bearer instrument is transferred by mere delivery. : Pay to ‘X” or bearer.

2. Order Instrument - Sec. 13

Instrument payable to the order of a speci�ed person or an instrument payable to a speci�ed person or his order. Order instruments can be transferred by endorsement and delivery. : Pay to Y or order; Pay to Y.

If the words “or order” or “or bearer” are missing, the instrument will be deemed to be an order instrument.

B. BASED ON LOCATION

1. Inland Instrument: Sec.11

An inland instrument is Promissory Note, Bill of Exchange or Cheque;

a) Drawn or made in India;

and

b) Made payable in India, OR drawn upon a person resident in india.

An inland instrument remains inland even if it has been endorsed to a foreign country.

�e protest of inland bill is optional.

i. A bill drawn in Mumbai on a trader in Chennai and accepted payable in Japan.

ii. A bill drawn in Paris on a trader in Kolkata and accepted payable in Kolkata.

2. Foreign Instrument is an instrument which is not an Inland Instrument.

Protest : Sec. 104

Foreign bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn. In case of inland bills, protest is optional.

D. OTHERS

1. Ambiguous Instruments : Sec.17

Where an instrument may be construed either as a promissory note or as a bill of exchange, the holder may at his option treat it as either, and the instrument shall be hence-forward treated accordingly, ie,, an ambiguous instrument treated as a bill of exchange or Note cannot be treated di"erently a!erwards.

A bill drawn by a person on himself in favour of third person or where the drawee is a �ctitious person.

2. Incomplete inchoate Instruments: Sec.20

Where one person signs and delivers to another, a paper stamped in accordance with the law relating to negotiable instruments then in force in lndia and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof

to make or complete, as the case may be, upon it a negotiable instrument, for any amount speci#ed

therein and not exceeding the amount covered by the stamp. �e person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such

PAGE | 54

amount. But if such instrument reaches holder in due course then he can recover more than the

amount speci#ed but not exceeding the amount covered by the stamp.

Stamping for a bill of exchange is say 0.5% and stamps a#xed is ` 500/-. If the amount of bill is not mentioned, the holder in due course’ alone has the privilege of entering the amount not exceeding ` 1 00,000/-.

�e provisions of this section are not applicable to a cheque since a cheque is not required to be stamped.’

3. Accommodation Bills : Sec. 59

An accommodation bill means a bill which is drawn, accepted without consideration.

Provisions relating to such bills:

a) �e accommodated party cannot, a!er he has paid the amount of the bill, recover the amount from any person who became a party to the bill for his accommodation

b) �e person who becomes the holder of such a bill in good faith and for consideration, a!er maturity, may recover the amount from any prior party.

X who needs funds. draws a bill on Y who accepts the bill and gets the bill discounted with his banker and on due date remits the requisite amount to V to enable him to meet the bill; such a bill is an accommodation bill.

4. Fictitious Bill - Sec 42

A �ctitious bill is a bill in which the name of the drawer or the payee or both is �ctitious. When both the drawer and payee of a bill are �ctitious persons, the acceptor is liable to a holder in due course if the holder in due course can show that the signature of �e supposed drawer and that of the �rst endorser (payee) are in the same handwriting.

i) A bill drawn upon X in favour of P and the drawer is a �ctitious person.

ii) X draws a bill upon V in favour of Z who is a �ctitious person

A. LIABILITY OF AGENT SIGNING: SEC.28

An agent who signs his name on a promissory note, bill of exchange or cheque without indicating thereon that he signs as agent, is liable personally on the instrument. �is rule does not apply if anyone had induced him to sign upon the belief that the principal only would be held liable.

B. LIABILITY OF LEGAL REPRESENTATIVE: SEC.29

A legal representative of a deceased person who signs his own name to a promissory note, bill of exchange or cheque is liable personally for the entire amount, unless he expressly limits his liability to the extent of

the assets received by him as legal representative.

C. MINOR

A minor cannot make himself liable as a drawer, an acceptor or an endorser, but where the instrument is drawn or endorsed by him, the holder can receive payment from any party thereto.

Cases in which a Banker must Refuse to Honour a Customer�s Cheque.

A banker must refuse to honour a customer’s cheque in the following cases :

(a) Stop payment : When the banker receives instructions from the customer not to honour (i.e. stop payment) a particular cheque issued by him.

(b) Garnishee order : When the banker receives a Garnishee Order, i.e., a prohibiting order by any court attaching the money in the customer’s account.

(c) Death : When the banker receives a notice of the death of his customer.

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(d) Insolvency : When the banker receives a notice of the insolvency of his customer.

(e) Insanity : When the banker receives a notice of the insanity.

(f) Assignment : When the banker receives a notice of assignment of his credit balance from a customer.

(g) Defect in title : When the banker suspects or has reason to believe that the title of the person presenting the cheque is defective.

(h) Loss of Cheque : When the banker receives a notice of loss of cheque from his customer.

(i) Material alteration : When there is a material alteration in the cheque and such alteration has not been authenticated by his customer by putting his signature.

(j) Di"erent signature : When the signature of the drawer does not tally with the specimen signature kept by the bank.

(k) Notice of closure : When the banker receives a notice in respect of closure of account.

Cases in which a Banker may Refuse to Honour a Customer’s Cheque

A banker may refuse to honour a customer’s cheque in the following cases :

(a) Insu%cient funds : When funds in the customer’s account are insu%cient to honour the cheque presented.

(b) Funds not applicable : When funds in the customer’s account are not applicable for the cheque presented.

(c) Presentment a!er banking hours : When the cheque is presented a!er the banking hours.

(d) Stale cheque : When the cheque is presented a!er 6 months from the date of its issue.

(e) Post dated cheque : When the cheque is presented before the actual date on which it is written to be payable.

(f) Undated cheque : When the cheque is undated.

A cheque is drawn upon Dena Bank. It is stolen by X who hands it over to Y who takes in good faith for

valuable consideration. Y deposits the cheque into his own account in Canara Bank who presents it and

obtains payment from Dena Bank. Discuss the legal position of paying banker, collecting banker, Y and

true owner in each of the following alternative cases :

(a) If the cheque is payable to bearer.

(b) If the cheque is payable to bearer and is crossed generally.

(c) If the cheque is payable to bearer and is crossed generally with words ‘not negotiable’.

(d) If the cheque is payable to bearer and is crossed specially with words ‘Canara Bank’.

(e) If the cheque is payable to bearer and is crossed specially with words ‘Allahabad Bank’.

(f) If the cheque is payable to B or order and X forges B’s endorsement.

(g) If the drawer’s signatures were forged.

Case Paying banker Collecting banker Y True owner

(a) Drawee is discharged by payment in due course [Sec. 85(2)]

Collecting banker does not incure any liability to the true

He is not liable to ture owner.

He can recover from X and not from Y

(b) –do– –do– –do– –do–

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Case Paying banker Collecting banker Y True owner

(c) –do– –do– He is liable to true owner because he got a defective title.

He can recover from Y or X

(d) –do– –do– He is not liable to true owner.

He can recover from X only.

(e) Drawee is discharged true owner (Sec. 129)

Collecting banker is liable to true owner (section 131)

He is not liable to true owner.

He can recover from X or paying banker or collecting banker.

(f) Drawee is discharged by payment in due course [Sec. 85(1)]

Collecting banker does not incur any liability to the true owner (Sec. 131)

He is not liable to true owner.

He can recover from X only.

(g) Drawee is liable to true owner because the payment is not in due course (Section 101)

Collecting banker is liable to the true owner (Sec. 131)

He is liable to true owner because forgery passes no title at all.

He can recover from paying ker, collecting banker, collecting banker or Y.

2. Dishonour of Cheque: Sec.138 : Drawer/Liability

A person issuing a cheque will be punishable with imprisonment for a term up to 2 years or with �ne twice

the amount of cheque or both, if the cheque is dishonoured due to insu%ciency of funds.

Conditions

a) Cheque should have been in discharge of liability, ie., it does not include gi! cheques.

b) Cheque should be presented within period of validity / 3 months whichever is earlier.

c) Cheque should have been deposited and intimation of dishonour received stating insu%ciency of

funds as reason for dishonour.

d) �e holder or payee in due course should give notice demanding payment within 30 days of his receiving notice of intimation of dishonour.

e) If the drawer fails to make payment within 15 days of receipt of notice, then a person could proceed for prosecution because on the expiry of 15 days, the cause of action arises.

f) Prosecution complaint to be made only by payee / holder in due course within 1 month of cause of action.

Presumption in favour of holder (Sec. 139)

It shall be presumed, unless contrary is proved, that the holder of a cheque received the cheque for discharge, in whole or in part, of any debt or other liability.

Defence not allowed (Sec. 140) It shall not be a defence in a prosecution for that the drawer had no reason to believe that when he issued the cheque that the cheque may be dishonoured, for the reason of insu#ciency of funds.

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O"ences by companies (Sec. 141) If the person committing an o"ence is a company, every person who, at the

time the o$ence was committed, was in charge of, and was responsible, to, the company for the conduct of the business of the company as well as the company, shall be deemed to be guilty of o"ence and shall be liable to be proceeded against and punished accordingly. Further, a director, manager, secretary, or other o#cer of the company shall be deemed to be guilty of that o"ence and shall be liable to be proceeded against and punished accordingly in case the o"ence has been committed with his consent or connivance, or is attributable to any neglect on his part in this regard. However, a person will

not be liable -

a. where such person proves that the o"ence was committed without his knowledge, or Solve Q. No. Page No. 197 & last Q. Page No. 201

b. where he had exercised all due diligence to prevent the commission of such o"ence.

A nominee Director holding any o#ce or employment in Government or �nancial institution owned by Government shall not be liable.

Explanation. �e expression “Company” includes any body corporate and includes a �rm and association of individuals; and “director”, in relation to a �rm, means a partner in the �rm.

Cognizance of o"ences (Sec. 142) a. No Court shall take cognizance of any o"ence punishable under Sec. 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 to be made within one month of the date on which the cause of action arises under Sec. 138;

c. No Court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the First Class shall try the o"ence.

d. O"ences u/s 138 are compoundable o"ences.

3. Protection to Collecting Banker: Sec.131

�e bank which receives the payment of a crossed cheque on behalf of its customer is known as the collecting banker.

�e requirements for protection are :

a) Payment should be received on behalf of and for a customer;

b) �e banker should receive payment of the crossed cheque as agent of the customer;

c) �e cheque should be crossed when handed over to the Bank for collection. If the cheque is uncrossed the banker is not protected if the customer’s title is defective and he cannot secure protection by subsequently crossing the cheque himself;

d) Payment in good faith and without negligence.

Protection to paying Banker

Where a cheque is payable to order and it appears to be endorsed by or on behalf of the payee, the banker will be discharged from his liability if he pays such a cheque in good faith and without negligence even

though later on endorsement is found to be a forgery.

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K. DISCHARGE OF ENDORSER’S LIABILITY: SEC.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, then endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

“A” is the holder of a bill of exchange made payable to the order of “B”, which contains the following endorsement in blank :

First endorsement, “B”.

Second endorsement, “X”. (B X Y Z A)

�ird endorsement, “Y”.

Fourth endorsement, “Z".

A strikes out without Z’s consent, the endorsements by X and Y. A is not entitled to recover anything from Z.

L. EFFECT OF FORGED ENDORSEMENT ON ACCEPTOR’S LIABILITY :

�e acceptor of a bill of exchange which is already endorsed is not relieved of his liability by reason that such endorsement is forged, if he knew or had reason to believe that the endorsement was forged. �us if he knew or had suspicion that the endorsement was forged and even then accepted the bill, he would be liable, but not otherwise.

N. LIABILITY UNDER ACCOMMODATION BILLS I WITHOUT CONSIDERATION :

An accommodation instrument means an instrument which has been made, accepted or endorsed without consideration and for the help of a party.

A is in need of money. He draws a bill on B which B accepts to help A and without any consideration to B. A can get the bill discounted and thus raise a sum of money to tide over his di#culties.

If there is consideration or the consideration has failed, as between the parties to the transaction, no obligation as to payment will arise. But if such an instrument has been transferred by the holder to any person for consideration, he or any transferee from him can recover from all the prior parties.

�e ultimate liability however is of the party for whose accommodation the instrument was made or endorsed. He should pay it and relieve the party who helped him from liability. When he pays it, he himself cannot recover from any party.

B accepts a Bill payable to C for accommodating A. C endorses the bill to D for consideration. D can recover the amount from B, C or A. If A has paid, he cannot recover amount from any person. If B has paid, B can recover from A.

P. FAILURE OF CONSIDERATION

1. Partial absence or failure of money consideration

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 for which a holder standing in immediate relation with such signer is entitled to receive from him is

proportionally reduced.

A draws a bill on B for ` 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 ` 400 and as an

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accommodation to the plainti" as to the residue. A can only recover ` 400.

2. Partial failure of consideration not consisting of money -

Where a part of the consideration for which a person signed a promissory note, bill of exchange or cheque, though not consisting of money, is ascertainable in terms of money without collateral enquiry, and there has been a failure of that part, the sum for which a holder standing in immediately relation with such signer is entitled to receive from him is proportionally reduced.

B. PRESENTMENT OF PROMISSORY NOTE FOR SIGHT / INSTRUMENT FOR PAYMENT : SEC 131

Presentment for payment means surrendering the instrument to the party who has been called upon to pay in such manner that he is able to get possession of the instrument on payment.

Presentment for payment is necessary in all cases of negotiable instruments. All negotiable instruments must be presented for payment to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder. In default of such presentment, the other parties thereto are not liable thereon to such holder.

10. Presentment when excused :

Presentment for payment is necessary in all the cases of negotiable instruments. In default of such presentment, the other parties thereto are not liable thereon to such holder-

(i) Where presentment is intentionally prevented by the maker, drawee or acceptor.

(ii) Party liable to pay closes place of business during usual business hours on the due date.

(iii) Nobody attends place of payment if the instrument is payable at a speci�ed place.

(iv) Party liable to pay not traceable, ie., where the drawee is a �ctitious person, as no demand can be made on a person who does not have existence.

(v) Waiver of presentment

(vi) Promise to pay notwithstanding non-presentment

(vii) Part payment is made

(viii)Promise to pay amount in whole or in part

(ix) Presentment becomes impossible.

Basis Discharge of an instrument Discharge of a party

1. When When the party who is ultimately liable, is discharged from liability.

When any party or parties to an instrument is/are discharged.

2. Negotiability �e instrument ceases to be negotiable �e instrument continues to be negotiable

3. Extinguishments All rights of action under the instrument are completely extinguished.

All rights of action under the instrument are not completely extinguished.

4. Discharge of all parties

Discharge of an instrument means discharge of all parties.

Discharge of a party does not mean discharge of all parties.

A. MODE OF DISCHARGE OF INSTRUMENT

1. Payment in due Course

If the maker or acceptor makes payment to the holder of the instrument on or a!er maturity in good faith and without notice of any defect in the title to the instrument, the instrument is discharged.

A payment before maturity does not discharge the instrument unless the instrument is cancelled or the fact of payment is recorded on the instrument.

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2. Cancellation

If the holder of an instrument cancels acceptor’s or maker’s name with intent to discharge him, the instrument is discharged.

3. Release

If the holder of an instrument renounces his right against all the parties to the instrument, the instrument is discharged.

4. Party Primarily Liable becoming Holder

If the acceptor of a bill of exchange becomes its holder at or a!er maturity in his own right, the instrument is discharged.

A draws a bill on B. A!er several negotiations the bill comes to B as endorsee. If B holds the instrument on maturity date, the instrument is discharged.

5. Operation of Law

A negotiable instrument is also discharged by operation of law such as -

i. under the Law of the Limitation Act, on the expiry of the period prescribed for the recovery of the amount due.

ii. under the Law of the Insolvency, on declaration of a party as an insolvent by an order of the court.

�e limitation period for the recovery of debts is 3 years from the date of default.

B. DISCHARGE OF PARTY:

1. By payment -

All parties to an instrument are discharged from liability when the amount due on the instrument is paid by the maker / acceptor / endorser to the holder of the instrument at or a!er maturity in good faith and without notice of any defect in the title to the instrument.

2. By cancellation of acceptor’s or endorser’s name

When the holder of a negotiable instrument or his agent cancels the name of any party on the instrument with intent to discharge him from liability, such party and all subsequent parties, who have a right of recourse against the partywhose name is cancelled, are discharged from liability to the holder.

�e subsequent parties are in the position of sureties to the prior party whose name is cancelled and a discharge of the principal debtor automatically discharges the sureties.

If the maker’s or acceptor’s name has been cancelled, the liability of all parties to the instrument, gets discharged and the instrument itself gets discharged. �is is based on the principle of law of guarantee that when a principal debtor is discharged, the sureties are also discharged.

If the name of an endorser has been cancelled then all the endorsers subsequent to him will be discharged but those prior to him will remain liable. But if the holder, without consent of the endorser, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability.

3. By Release -

�e holder can discharge the maker, acceptor or endorser otherwise than by cancellation of names (by a separate agreement of waiver, release or remission).

�e holder may agree to release any of them from liability by a separate agreement or may do so by conduct which has the e"ect of discharging a party from his liability.

�e e"ect of release is the same as that of cancelling a party’s name, ie., the party so released and all the

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parties subsequent to him who have a right of action against the party so released are discharged from liability in due course.

4. By allowing drawee more than 48 hours to accept - Sec. 83

�e holder of a bill has to present it to the drawee for his acceptance. �e drawee should be allowed only forty-eight hours to consider whether he will accept or not.

5. By default in presenting cheque within reasonable time - Sec. 84

It is the duty of the holder of a cheque to present it for payment within reasonable time of its issue. If he fails to do so and before he actually presents the cheque something happens (for eg., the failure of the bank) which prevents the banker from paying the cheque, then the drawer of the cheque is discharged as against the holder provided that he had su%cient balance to meet the cheque when it ought to have been presented.

A draws a cheque for ̀ 5,00,000/- and, when the cheque ought to have been presented, he has funds at the Bank to meet it. �e bank fails before the cheque is presented. �e drawer is discharged, but the holder can prove against the bank for the amount of the cheque.

In determining what is a reasonable time, regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the particular case. If the holder and the banker are at the same place, the cheque should be presented the next day a!er its receipt. But if they are at di"erent places, due margin has to be given for the time taken in transit.

A draws a cheque at Chennai on a bank in Kolkata. �e bank fails before the cheque could be presented in the ordinary course. A is not discharged, for he has not su"ered, actual damage through any delay in presenting the cheque.

Similarly, a crossed cheque takes more time in reaching the drawee-banker and, therefore, time necessary for clearance is excluded in determining reasonable time for presentment.

6. Payment of cheques - Sec. 85

Protection to paying Banker

�e section lays down two principles relating to payment of cheques.

Where a cheque is payable to order and it appears to be endorsed by or on behalf of the payee, the banker will be discharged from his liability if he pays such a cheque in good faith and without negligence even though later on endorsement is found to be a forgery. �e reason why this protection becomes necessary is that there are chances of endorsements being forged and the banker, having no means of checking the genuineness of an endorsement, would be hesitant to pay endorsed cheques. �e facility a"orded by cheques as negotiable instruments would be considerably lost.

�e result of this protection is that bankers feel safe in making payment of endorsed cheques atleast to this extent that a payment made in good faith and without negligence cannot be brought into question only on the ground of forgery in some endorsement.

7. By material alteration without assent of all parties liable: See.87

Material Alteration

It alters the rights & liabilities of parties to the Instrument. It sometimes alter character of the

instrument.

Any material alteration of a negotiable instrument renders the instrument void as against any one who is a party thereto at the time of making such alteration and does not consent thereto, unless it

was made in order to carry out the common intention of the original parties.

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Types of material alteration

a. Alteration of date of the instrument or of payment

b. Alteration of the amount of the instrument

c. Alteration in the place of payment

Where a bill is accepted payable at the State Bank of India, and the holder without the consent of the acceptor, scores out the name of Punjab National Bank and inserts that of Corporation Bank.

d. Alteration of the rate of interest :

e. Alteration by adding the name of a party : Where a note was altered by causing another person to sign as a joint and several maker, the Court held that this was a material alteration, and if made a!er the note was issued one could avoid it.

f. Alteration by increasing or �xing stamps : A#xing stamps when the instrument originally carried no stamps, or increasing their value or attesting the instrument where it originally carried no attestation, have been held to be material alterations.

Permitted Alteration

An alteration which is not material does not make the instrument void. �e Act itself permits three kinds of alteration even though they are material :

Writing of the amount in an ‘inchoate instrument’ by holder in due course. (Sec. 20)

Conversion of an instrument endorsed in blank to an endorsement in full. (Sec. 16)

Crossing, subsequent to issue. (Sec. 125)

Exceptions

�e principle does not apply to the following cases:

i. An acceptor or endorser cannot complain of any alteration which was made before his acceptance or endorsement.

ii. Alterations which are made to carry out the common intention of the parties cannot be complained of.

iii. A party cannot complain of an alteration to which he has assented.

C. NOTING AND PROTESTING

1. Noting: Sec.99

It is a mode of authenticating the fact that a bill or note has been dishonoured,

Where a promissory note or bill of exchange has been dishonoured by non acceptance or non-payment, in order to create a proof of this fact, the holder may approach a Notary public and have the fact of dishonour noted either on the instrument itself f or on a separate piece of paper or partly upon both.

Noting must be made within a reasonable time a!er dishonour. Upon such request being received the notary inquires from the party liable to pay and if he still dishonours, the notary makes a note of the fact of dishonour noted or not.

2. Protest : See. 100

Protest is one step further to noting. Where the holder gets the fact of dishonour noted, he may also

have the dishonour and noting certi�ed by the Notary Public. �us the holder will get a certi#cate

from the Notary Public certifying the fact of dishonour. Such a certi#cate is called a protest.

�e advantage of noting and protesting is that this constitutes prima facie good evidence in the court, of the fact that the instrument has been dishonoured.

�e protest should be done within a reasonable time.

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CLASS EXAMPLES

1

B C D E ‘C’ got acceptance of ‘B’ by fraud By fraud D is HIDC. E knows of the fraud.

Can E recover from B ?

As per NI Act any person deriving title from HIDC gets a clear title and all defects in the title are cleared. In this case ‘E ‘is getting bill from HIDC all defects in the title are cleared. Hence E can recover from all parties from which ‘D’ (HIDC) could have recovered ( HIDC can recover from any of its prior party)

2

B C D C Dis HIDC.

Can C recover from B?

By fraud But in this case ‘C’ himself is a party to the fraud,

So ‘C’ cannot recover from B.

3

P Q R S Q

Can Q recover from R, S?

Negotiation Back – when endorser again become the holder before due date it is negotiation back initially ‘Q’ was liable to R, S. But later on when ‘Q’ become a subsequent party now Q is demanding from R, S. �is will lead to a circuity of action. Here ‘Q’ cannot demand from R, S. Rather Q will be liable to R, S.

4

P Q R S Q

In this case can Q recover from R,S?

At the time of endorsement ‘Q’ wrote …..Sans Recourse. It means ‘Q’ will not be liable to any subsequent party (R, S). And later on when ‘Q’ will demand from R, S because Q is now the subsequent party then Q will be able to demands from R, S.

5

P Q R S P

�is is not a case of negotiation Back. Here the instrument is discharged because the party primarily liable again becomes the holder.

6

Stop payment of cheque to escape the provision of Sec. 138 and Sec. 142 of NI Act is considered as dishonored due to insu#ciency of funds.

7

“Avinash” gave a cheque to “ B”. Later on someone forged B’s signature & endorsed it to ‘ C’ & C’s bankers collected the payment.

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Step – 1 Identify the paying banker – Avinash’s banker

Step – 2 identify the collecting bankers – C’s bankers

Step – 3 recall the protection available to paying banker and collecting banker. Sec 85 & 131 of N.I.Act

Step – 4 When a cheque is payable to order & endorsed by the payee (i.e B here) then Paying Banker (AVINASH) will get protection if the payment is made in due course in good faith and without negligence even if later on it is found that endorsement of payee turns out to be a forgery

Step – 5 When a banker collects a crossed cheque for a customer in good faith & without negligence then collecting banker (C’s) will get protection.

8

Recall example-1 again B C D E (Try to understand the relationship b/w ‘C’ & ‘D’)

By fraud HIDC

C is the transferor & D is the transferee. Although C’s title is defective but D’s title (HIDC) is good. Hence it is said that title of the TRANSFEREE is better than title of the TRANSFEROR. But this statement can only be applied b/w HIDC and its prior party. We cannot apply this statement b/w ‘D’ &’E’

9

General Crossing

10

Special Crossing

11

Restrictive Crossing

�is cheque is no longer transferable

12

A minor is not personally liable on a bill for necessaries supplied to him. His estate will be liable.

13

In case of instruments drawn without consideration holder in due course can recover from any of its prior parties, Any person deriving title from HIDC also gets all rights of HIDC i.e. can recover from any of the prior parties of HIDC.

BUT in such bills, between immediate parties if consideration is not present recovery is not possible.

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B, who steals a blank cheque of A and forges A’s signature.

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–

(i) Yes, X can be termed as a holder because he has a right to possession and to receive the amount due in his own name.

(ii) No, he 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.

(iii) No, M is not a holder of the Instrument though he is in possession of the cheque, so is not entitled to the possession of it in his own name.

(iv) No, B 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.

(v) No, B is not a h

Give the answer of the following :

A draws a cheque in favour of M, a minor, M endorses the same in favour of X. �e cheque is dishonoured by the bank on grounds of inadequate funds. Discuss the rights of X.

(b) A promissory was made without mentioning any time for payment. �e holder added the words “on

demand” on the face of the instrument. Does this amount to material alteration?

(a) As per Section 26, a minor may draw, endorse, deliver and negotiate the instrument so as to bind all parties except himself. �erefore, M is not liable. X can, thus, proceed against A.

(b) As per the provision of the Negotiable Instrument Act, 1881 this is not a material alteration as a promissory note where no date of payment is speci�ed will be treated as payable on demand. Hence adding the words “on demand” does not alter the business e"ect of the instrument.

Distinction between a bill of exchange and a promissory note

In a note there are two parties – the maker and the payee. In a bill there are three parties – the drawer, the drawee and the payee.

b. A note contains an unconditional promise to pay. A bill contains an unconditional order to pay.

c. �e maker of a note is the debtor and he himself undertakes to pay. �e drawer of a bill is the creditor who directs the drawee (his debtor) to pay.

d. �e liability of the maker of a note is primary and absolute, whereas the liability of the drawer of a bill is secondary and conditional.

e. A note cannot be made payable to the maker himself, whereas in a bill the drawer and the payee may be one and the same person.

f. A note require no acceptance as it is signed by the person who is liable to pay. A bill payable a!er sight or a!er a certain period must be accepted by the drawee before it is presented for payment.

g. A note cannot be drawn payable to bearer. A bill can be so drawn. But in no case can a note or bill be drawn ‘payable to bearer on demand.’

h. �e maker of a note stands in immediate relation with the payee. �e drawer of a bill stands in immediate relation with the acceptor and not the payee.

i. In case of dishonour of a bill either by non-acceptance or by non-payment, due notice of dishonour must be given to all the persons who are to be made liable to pay. �is includes the drawer and the prior indorsers. But

PAGE | 66

in the case of dishonour of a note no such notice is required to be given to the maker (Sec. 93).

j. Foreign bills must be protested for dishonour when such protest is required by the law of the place where they are drawn (Sec. 104). No such protest is required in the case of a note.

a. A bill of exchange may be drawn on any person, including a banker, but a cheque is always drawn on a banker. �us all bills are not cheques whereas all cheques are necessarily bills.

b. A bill must be accepted before the drawee can be called upon to make payment upon it. A cheque requres no

acceptance.

c. A bill which is not expressed to be payable on demand is entitled to three days of grace. A cheque is not entitled to any days of grace.

d. A bill may be payable on demand or a!er the expiry of a certain period a!er date or sight. A cheque is always payable on demand.

e. A cheque may be crossed but not a bill.

f. A cheque does not require any stamp whereas a bill, except in certain cases, must be stamped.

g. �e payment of cheque may be countermanded by the drawer but the payment of a bill cannot be countermanded.

h. A cheque is not required to be noted or protested for dishonour. A bill may be noted or protested for dishonour.

21. "At sight", "On presentment", "After sight"

In a promissory note or bill of exchange the expressions "at sight" and "on presentment" means on demand. The expression "after sight" means, in a promissory note, after presentment for sight, and, in a bill of exchange after acceptance, or noting for non-acceptance, or protest for non-acceptance.

22. "Maturity"

The maturity of a promissory note or bill of exchange is the date at which it falls due.

Days of grace: Every promissory note or bill of exchange 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.

23. Calculating maturity of bill or note payable so many months after date or sight

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 honor, 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.

Illustrations

(a) A negotiable instrument dated 29th January, 1878, is made payable at one month after date. The instrument is at maturity on the third day after the 28th February, 1878.

(b) A negotiable instrument, dated 30th August, 1878, is made payable three months after date. The instrument is at maturity on the 3rd December, 1878.

(c) A promissory note or bill of exchange, dated 31st August, 1878, is made payable three months after date. The instrument is at maturity on the 3rd December, 1878.

24. Calculating maturity of bill or note payable so many days after date or sight

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.

25. When day of maturity is a holiday

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 15[***] and any other day declared by the 16[Central Government], by notification in the Official Gazette, to be a public holiday.

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