Negotiable Instrument Act - · PDF fileWhere a cheque is crossed specially, the banker on whom...

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Negotiable

Instrument

Act

Promissory Note : SEC.4

Bill of Exchange : SEC.5

Cheque : Sec. 6

Crossed Cheque

Type of Crossing

Payment of Crossed Cheque - Sec. 126 to 129

Acceptance

Holder : Sec 8

Holder in due Course : Sec. 9

Rights and Privileges of a Holder in due course

Nego a on : Sec 14

Endorsement : Sec 15

Conversion of Endorsement in blank into Endorsement in full

Other Terms

Maturity : Sec 22

Calcula on of Maturity

Based on Transfer Procedure, Based on Loca on, Others

Liablility of Agent Signing : Sec 28, Liability of Legal Representa ve : Sec 29, Minor

Dishonour of Cheque : Case 138

Discharge of Endorser's Liability : Sec 40

Liability under Accommoda on Bills / Without Considera on

Failure of Considera on

Presentment of Promissory note for Sight/Instrument for payment : Sec 131

Mode of Discharge of Instrument

Discharge of Party

Nothing and Protes ng

Amendments, Extra Notes Acceptor for honour etc.

Notes

Questions Answer Examples

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Negotiable Instrument Act UNIT-V

NEGOTIABLE INSTRUMENT ACTDeÞni on

The Nego able Instrument has not been deÞned under the Nego able Intruments Act 1881.However, Sec on

13 of the Act describes a nego able instrument to mean a promissory note or a bill of exchange or a cheque

payable to order or to bearer.

Features

a. Considera on

It is presumed that every Nego able Instrument is made or drawn for considera on. The considera on

need not be men oned in the Nego able Instruments.

b. Transferability

A Nego able 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

The transferee, who takes the instrument bonaÞde and for valuable considera on, obtains a good tle

inspite of any defects in the tle of the transferor. To this extent, Nego able instrument is an excep on

to the maxim of law ie. nemo dat quod non-habet (no one can transfer a be!er tle than he himself

has).

PROMISSORY NOTE : SEC.4

A promissory note is an instrument in wri ng (not being a bank-note or a currency-note) containing

an uncondi onal undertaking, signed by the maker, to pay a certain sum of money only to the person

men oned therein, or to the order of a certain person or to the bearer of the instrument. The words ‘or

to the bearer of the instrument” is inopera ve in View of Sec on 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.

Characteris cs of Promissory Note

a. In wri ng

It must be in wri ng. An oral promise does not result in an instrument. Example: A promises to pay

` 70,000/- to “B”, over telephone. This promise is not a promissory note as it is not in wri ng.

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.

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Negotiable Instrument ActUNIT-V

c. Uncondi onal

It is to be noted that a promise to pay will be uncondi onal where it depends upon an event which is

certain to happen but the me of its occurrence may be uncertain.

“I promise to pay to ‘A’ ` 1,000/- 10 days a!er the death of ‘B’.” — This is not condi onal as it is

certain that ‘B’ will die though the exact me of his death is uncertain.

The 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.

The instrument must be payable in money and money only. If the instrument contains a promise to pay

something other than money or something in addi on 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 speciÞed, the amount which would be due on the due date

would not be certain.

e. Signed by the Maker

The maker must sign the instrument and it is incomplete ll it is so signed. The signature may be made

on any part of the document.

f. Certainty of Par es

The person by whose order and to whom the payment is to be made must be deÞnite. The payee must

be a certain person and where the name of the payee is not men oned 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. This is so because it becomes payable to bearer, if endorsed in blank

or it becomes payable to endorsee or his order, if endorsed speciÞcally.

BILL OF EXCHANGE : SEC.5

A Bill of Exchange is an instrument in wri ng containing an uncondi onal order, signed by the maker,

direc ng 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. The words or to the bearer of the instrument is inopera ve in view of

Sec on 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.

Characteris cs of Bill of Exchange

1. In wri ng

It must be in wri ng.

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2. Order

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

3. Uncondi onal Order

The order must be uncondi onal, ie., the order must not make the payment of the bill dependent on a

con ngent event.

Where a bill of exchange is in this form: ‘Three months a"er date pay to my order the sum of

` 8001- for value received’. This is not condi onal.

4. Money only — Certain sum

The Order must be to pay money and money only. The instrument must be payable in money and

money only. The sum of money payable must also be certain.

In the absence of the rate of interest, the amount which would be due on the due date would not be

certain or deÞnite.

5. Acceptance

The drawee must sign the instrument, without which the document is ine#ec ve.

6. Three Par es

The three par es to a bill viz., drawer, drawee and payee are to be speciÞed in the instrument with

reasonable certainty. All three persons need not speciÞcally 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.

Note : The maker of the bill of exchange is called the Drawer (Creditor). The person who is directed to pay is

called the Drawee (debtor). The person who will receive the money is called Payee. When the Payee has the

Custody of the bill he is called the holder.

CHEQUE : SEC.6

A Cheque is a bill of exchange drawn on a speciÞed 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”.

• A Cheque, prima facie, is a bill of exchange and hence must sa sfy the essen al condi ons of bill

of exchange under Sec on 5.

• A Cheque is an excep on to the general rule that a bill of exchange cannot be drawn payable to

bearer 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

genera on of an electronic image for transmission, subs tu ng the further physical movement

of cheque in wri ng.

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


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• “A cheque in electronic form” means a cheque which contains the exact mirror image of a paper

cheque, and is generated, wri!en and signed in a secure system ensuring the minimum safety

standards with the use of digital signature and asymmetric crypto system.

On line payment instruc ons 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 nego ated.

2. The objec ve of crossing is to help tracing the recipient of money, if an unauthorized person

receives it.

Difference between Bill Of Exchange & Promissory note? — 114

Difference between Bill Of Exchange & cheque? — 115

Types of Crossing

1. General Crossing : Sec. 123

Where a cheque bears across its face an addi on of —

• the words ‘and company’ or any abbrevia ons thereof between two parallel transverse lines, or

• two parallel transverse lines simply.

2. Special Crossing : Sec. 124

Where a cheque bears across its face an addi on of the name of a banker, either with or without the

words ‘not nego able’, that addi on 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 collec on.

Di!erence : In general crossing the Name of the Bank is not men oned whereas in special crossing the

Name of the Bank is men oned.

3. ‘Not Negotiable’ Crossing : Sec.130

A person taking a cheque crossed generally or specially, bearing in either case the words ‘not nego able’,

shall not have, and shall not be capable of giving a be!er tle to the cheque other than that which the

person from whom he took it had. The tle of transferee of the cheque cannot be be"er than tle of

transferor of the cheque. It means that even if transferee has acquired in good faith s ll his tle cannot

be defect free if transferor’s tle is defec ve.

It may be noted that though it is men oned ‘Not Nego able’, the cheque can be transferred. The only

restric on is with regard to the tle passed.

In other words, the principle of nemo dat quod non habet (nobody can pass on a tle be!er than what

he himself has) will be applicable to a cheque with a ‘not nego able’ crossing, even though the cheque

is in the hands of a holder in due course.


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‘Account Payee’ Crossing / Restric ve Crossing

The 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 direc on to banker to credit the proceeds only to the account of the payee.

The cheque remains legally nego able but “A/c payee” crossing hinders the nego ability of the cheque in

prac ce’. 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 -

• crossed generally, then to any bank.;

• crossed specially, then to the banker to whom it is crossed or his agent for collection (also

a banker);

2. Where the banker has paid in due course the bank and drawer shall have the same right and be

placed in the same posi on 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.

ACCEPTANCE

A. MEANING

It is signifying one’s assent to the order of the drawer by delivery or no Þca on 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 men oned above.

C. ESSENTIALS OF VALID ACCEPTANCE

1. Capacity- Every person capable of legally entering into a contract may make, accept or endorse

and nego ate a nego able instrument by himself or through a duly authorised agent.

2. Acceptance must be wri!en.

3. Acceptance must be signed.

4. Acceptance must be on the bill.


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5. Acceptance must be completed by delivery.

6. Acceptance may be general or qualiÞed.

HOLDER : SEC. 8

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

(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 par es thereto.

Where the note, bill or cheque is lost or destroyed, its holder is the person so en tled at the me of such

loss or destruc on.

HOLDER IN DUE COURSE : SEC. 9

‘Holder in due course’ means any person who for considera on 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 men oned in it became payable and without having su$cient cause to believe

that any defect existed in the tle of the person from whom he derived his tle.

Essen als are -

(i) The holder must have taken the instrument for value

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

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

(iv) He must have taken the instrument in good faith and without no ce of any defect either in the

instrument or in the tle of the person nego a ng it to him

RIGHTS AND PRIVILEGES OF A HOLDER IN DUE COURSE

1. Presump on

Every holder is deemed prima facie to be a holder in due course and the burden of proving his

tle 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 asser ng, as against a holder in due course, that the instrument

has not been Þlled in accordance with the authority given by him provided the amount Þlled is

covered by the stamp a$xed. (Sec. 20)

3. Fic ous drawer or payee

In case a bill of exchange is drawn payable to the drawer's order in a Þc ous name and is endorsed

the same that has drawer's signature, it is not permissible for the acceptor Þling against the holder

in the course that such name is Þc ous. (Sec. 42)

4. Instruments obtained by unlawful means or for unlawful considera on

The person liable in a nego able 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 considera on. (Sec. 58)


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5. Prior defects

A holder of a nego able instrument who derives tle from a holder in due course has the rights

thereon of that holder in due course. Once a nego able 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 permi!ed 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 permi!ed 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 par es

Every prior party to a nego able instrument is liable thereon to a holder in due course un l the

instrument is duly sa sÞed. (Sec. 36)

9. Nego able Instruments without considera on

A Nego able Instrument made, drawn or accepted without considera on does not create any

obliga on on the par es to the transac on. But if the Nego able Instrument gets into the hands

of a holder in due course he can recover the amount from par es. The plea that there was no

considera on cannot be set up against him.

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

Dis nc on 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 sufficient 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 cons tute that

person the holder thereof, the instrument is said to be nego ated.


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B. ENDORSEMENT: SEC.15

When the maker or holder of a nego able instrument signs the same, otherwise than as such maker,

for the purpose of nego a on, on the back or a slip of paper a!ached thereto, Known as allonge or so

signs for the purpose as a stamped paper intended to be a nego able instrument, he is said to endorse

the same, and is called the ‘Endorser’. The 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 nego able instrument endorsed

in blank is payable to the bearer thereof. (Sec. 16 & 54). But name of endorsee is not wri"en.

2. Endorsement in full

It is an endorsement where the endorser signs his name and adds a direc on to pay the amount

men oned to, or to the order of, a speciÞed person and the person so speciÞed is called as

endorsee’ of the instrument. (Sec. 16)

3. Restric ve endorsement

It is an endorsement which has the e#ect of restric ng further nego a on and transfer. (Sec. 50)

B signs the following endorsements on di#erent nego able instruments payable to bearer:

(a) Pay to Z only.

(b) For the account of Y only.

4. QualiÞed 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 condi onal.

The endorser of a nego able 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 speciÞed event, although such event

may never happen.

(i) “Pay F or order Sans Recourse.”

(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 nego able 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


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c. Faculta ve 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 no ce of dishonour, wherein the endorsement would include

the words ‘no ce of dishonour dispensed with’. Pay Y or order, No ce of dishonour waived.

d. Con ngency 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

The holder of a nego able instrument endorsed in blank, may, without signing his own name, by wri ng

above the endorser’s signature a direc on 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.

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

The holder may then transfer the instrument to the person whose name be so speciÞed, 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. Par al Endorsement: Sec.56

Par al endorsement refers to endorsement of a bill partly paid.

An endorsement purpor ng to transfer only a part of the amount of instrument is invalid and the

endorsee therefore cannot nego ate 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 nego ated 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 nego ated for the balance of ` 40/-.

2. Nego a on Back

An instrument is said to have been nego ated back to him and he is said to have taken up or taken

back the nego able instrument when a person who has been a party to the nego able instrument

takes it again.

The endorsements on a nego able instrument are as under :

P, A, B, X, Y, A


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Here A is a person who is a prior party to the instrument. He nego ated it to B, B to X, X to Y and Y again

to this very A resul ng in ‘nego a on back’.

This will lead to a circuity of ac on. Thus A, in the above case cannot sue Y, X or B. But A can sue P since

the la!er is prior to A’s original endorsement. If however A, in original endorsement, had signed “sans

recourse” there could be no circuity of ac on 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. Nego a on of Dishonoured or Overdue Instruments: Sec.59

The holder of a nego able instrument, who has acquired it a!er dishonour, whether by non-

acceptance, or non-payment, with no ce thereof, or a!er maturity, has only, as against the other

par es, the right thereon of his transferor.

4. Accommoda on note or bill

Any person who, in good faith and for considera on, becomes the holder, a!er maturity, of a

promissory note or bill of exchange made, drawn or accepted without considera on, 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 Nego a on: Sec. 60

Instruments remain nego able ll they are discharged by payment or by some other sa sfac on.

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

nego able.

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

nego ability 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 nego a on

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 Nego a on and Assignment

Basis Negotiation Assignment

Notice of Transfer

Consideration for

Transfer

Not Necessary

Presumed

Notice must be served by assignor on

his debtor To be proved

Mode • Bearer Instruments - Delivery,

• Order Instrument - endorsement & Delivery

Document to be reduced into writing

and signed by transferor

Rights Title Transferee acquires all rights of a holder in

due course.

The 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. The title of the

assignee is subject to the defects in the

title of the assignor.


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A. MATURITY - SEC. 22

The 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 —

• when no me for payment is speciÞed in it or

• when it is expressed to be payable “on demand” or “at sight” or “on presentment’.

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 me at the op on of

the holder but within a reasonable me a!er issue. This would become overdue when it

remains in circula on for unreasonable length of me.

2) Time Instrument

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

(i) a!er a Þxed period, or

(ii) on a speciÞed 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. Three days are allowed as days of grace.

4) Calcula on of maturity

The expression “a!er sight” in a promissory note means a!er presentment for sight. This means

that payment cannot be demanded on a Note ll it has been shown to the maker.

Where a bill is payable a!er a Þxed period a!er sight, the me is to be calculated -

• from the date of acceptance, if the billed, and

• from the date of noting or protest, if the bill is noted or protested for non- acceptance.

B. CALCULATION OF MATURITY

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

The Bill or Note shall be at maturity on the third day a!er the date on which the period of Bill or

Note expires.

The 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.


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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 nego able instrument, dated 29th January, 200X, is made payable one month a!er

date. The instrument is at maturity on the third day a!er February, 200X

b) A nego able Instrument, dated 30th August, 200X is made payable three months

a!er date. The 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. The 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

The Bill or note shall be at maturity on the third day a!er the second day. In calcula ng 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.

Explana on — The expression ‘public holidays’ includes Sundays and any other day declared by

the Central Government, by no Þca on in the O#cial Gaze$e, 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.


ClassiÞca on of Instruments

Based on Transfer

Order

Instrument

Time

Instrument

Inchoate

Instrument

Bearer

Instrument

Inland Foreign

Demand

Instrument

Ambiguous

Instrument

Based on Loca on OthersBased on payment

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Amit Bachhawat

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 speciÞed person or an instrument payable to a speciÞed

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.

The 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 op onal.

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 op on 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 Þc ous

person.

2. Incomplete inchoate Instruments: Sec.20

Where one person signs and delivers to another, a paper stamped in accordance with the law


97

Amit Bachhawat

rela ng to nego able instruments then in force in lndia and either wholly blank or having wri$en

thereon an incomplete nego able instrument, he thereby gives prima facie authority to the

holder thereof to make or complete, as the case may be, upon it a nego able instrument, for any

amount speciÞed therein and not exceeding the amount covered by the stamp. The 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 amount. But if such instrument reaches holder in due course then

he can recover more than the amount speciÞed 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 men oned, the holder in due course’ alone has the privilege of entering the amount not

exceeding ` 1 00,000/-.

The provisions of this sec on are not applicable to a cheque since a cheque is not required to be

stamped.’

3. Accommoda on Bills : Sec. 59

An accommoda on bill means a bill which is drawn, accepted without considera on.

Provisions rela ng to such bills:

a) The 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 accommoda on

b) The person who becomes the holder of such a bill in good faith and for considera on, 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 accommoda on bill.

4. Fic ous Bill - Sec 42

A Þc ous bill is a bill in which the name of the drawer or the payee or both is Þc ous. When

both the drawer and payee of a bill are Þc ous persons, the acceptor is liable to a holder in due

course if the holder in due course can show that the signature of The supposed drawer and that

of the Þrst endorser (payee) are in the same handwri ng.

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

ii) X draws a bill upon V in favour of Z who is a Þc ous person

A. LIABILITY OF AGENT SIGNING: SEC.28

An agent who signs his name on a promissory note, bill of exchange or cheque without indica ng

thereon that he signs as agent, is liable personally on the instrument. This 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 representa ve of a deceased person who signs his own name to a promissory note, bill of

exchange or cheque is liable personally for the en re amount, unless he expressly limits his liability to

the extent of the assets received by him as legal representa ve.

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.


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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 instruc ons from the customer not to honour (i.e. stop

payment) a par cular cheque issued by him.

(b) Garnishee order : When the banker receives a Garnishee Order, i.e., a prohibi ng order by any court

a"aching the money in the customer’s account.

(c) Death : When the banker receives a no ce of the death of his customer.

(d) Insolvency : When the banker receives a no ce of the insolvency of his customer.

(e) Insanity : When the banker receives a no ce of the insanity.

(f) Assignment : When the banker receives a no ce of assignment of his credit balance from a customer.

(g) Defect in tle : When the banker suspects or has reason to believe that the tle of the person presen ng

the cheque is defec ve.

(h) Loss of Cheque : When the banker receives a no ce of loss of cheque from his customer.

(i) Material altera on : When there is a material altera on in the cheque and such altera on has not been

authen cated by his customer by pu%ng his signature.

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

by the bank.

(k) No ce of closure : When the banker receives a no ce in respect of closure of account.

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

(m) Post dated cheque : When the cheque is presented before the actual date on which it is wri$en to be

payable.

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

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.

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 considera on. Y deposits the cheque into his own account in Canara Bank who presents it

and obtains payment from Dena Bank. Discuss the legal posi on of paying banker, collec ng banker,

Y and true owner in each of the following alterna ve 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 nego able’.

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


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(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)]

Collec ng 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–

(c) –do– –do– He is liable to true

owner because he

got a defec ve tle.

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)

Collec ng banker is liable

to true owner (sec on

131)

He is not liable to

true owner.

He can recover from

X or paying banker

or collec ng banker.

(f) Drawee is discharged by

payment in due course

[Sec. 85(1)]

Collec ng 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 (Sec on 101)

Collec ng banker is liable

to the true owner (Sec.

131)

He is liable to true

owner because

forgery passes no

tle at all.

He can recover

from paying ker,

collec ng banker,

collec ng 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 Þne

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

Condi ons

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 in ma on of dishonour received sta ng insu#ciency of funds

as reason for dishonour.

d) The holder or payee in due course should give no ce demanding payment within 30 days of his receiving

no ce of in ma on of dishonour.

e) If the drawer fails to make payment within 15 days of receipt of no ce, then a person could proceed for

prosecu on because on the expiry of 15 days, the cause of ac on arises.

f) Prosecu on complaint to be made only by payee / holder in due course within 1 month of cause of

ac on.

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On su#cient cause exten on of me can be given for Þling the case under Sec 138.

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 insufficiency of funds.

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

me the o$ence was commi"ed, 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 commi$ed with his

consent or connivance, or is a$ributable 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 commi$ed

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

Þnancial ins tu on owned by Government shall not be liable.

Explana on. The expression “Company” includes any body corporate and

includes a Þrm and associa on of individuals; and “director”, in rela on

to a Þrm, means a partner in the Þrm.

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 wri ng, 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 ac on 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.

The Nego able Instruments (Amendment and Miscellaneous provision) Act, 2002 has introduced Sec on

143 to 147 which deal with the Court procedures followed in prosecu on rela ng to dishonour of

cheque.

3. Protec on to Collec ng Banker: Sec.131

The bank which receives the payment of a crossed cheque on behalf of its customer is known as the

collec ng banker.

The requirements for protec on are :

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

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

c) The cheque should be crossed when handed over to the Bank for collec on. If the cheque is

uncrossed the banker is not protected if the customer’s tle is defec ve and he cannot secure

protec on by subsequently crossing the cheque himself;

d) Payment in good faith and without negligence.

Protec on 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.

K. DISCHARGE OF ENDORSER’S LIABILITY: SEC.40

Where the holder of a nego able 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)

Third endorsement, “Y”.

Fourth endorsement, “Z".

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

from Z.

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

The 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. Thus

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 accommoda on instrument means an instrument which has been made, accepted or endorsed

without considera on 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 considera on

to B. A can get the bill discounted and thus raise a sum of money to de over his di#cul es.

If there is considera on or the considera on has failed, as between the par es to the transac on, no

obliga on as to payment will arise. But if such an instrument has been transferred by the holder to any

person for considera on, he or any transferee from him can recover from all the prior par es.

The ul mate liability however is of the party for whose accommoda on 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 accommoda ng A. C endorses the bill to D for considera on. 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.

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P. FAILURE OF CONSIDERATION

1. Par al absence or failure of money considera on

When the considera on 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 rela on with such signer is en tled to receive from him

is propor onally 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

accommoda on to the plain " as to the residue. A can only recover ` 400.

2. Par al failure of considera on not consis ng of money -

Where a part of the considera on for which a person signed a promissory note, bill of exchange

or cheque, though not consis ng 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 rela on with such signer is en tled to receive from him is propor onally 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 nego able instruments. All nego able instruments

must be presented for payment to the maker, acceptor or drawee thereof respec vely, by or on behalf

of the holder. In default of such presentment, the other par es thereto are not liable thereon to such

holder.

10. Presentment when excused :

Presentment for payment is necessary in all the cases of nego able instruments. In default of such

presentment, the other par es thereto are not liable thereon to such holder-

(i) Where presentment is inten onally 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 a!ends place of payment if the instrument is payable at a speciÞed place.

(iv) Party liable to pay not traceable, ie., where the drawee is a Þc ous 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.

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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. Nego ability The instrument ceases to be nego able The instrument con nues to be

nego able

3. Ex nguishments All rights of ac on under the instrument

are completely ex nguished.

All rights of ac on under the instrument

are not completely ex nguished.

4. Discharge of all

par es

Discharge of an instrument means

discharge of all par es.

Discharge of a party does not mean

discharge of all par es.

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 no ce of any defect in the tle 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.

2. Cancella on

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 par es 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 nego a ons the bill comes to B as endorsee. If B holds the

instrument on maturity date, the instrument is discharged.

5. Opera on of Law

A nego able instrument is also discharged by opera on of law such as -

i. under the Law of the Limita on Act, on the expiry of the period prescribed for the recovery

of the amount due.

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

court.

The limita on period for the recovery of debts is 3 years from the date of default.

B. DISCHARGE OF PARTY:

1. By payment -

All par es 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 no ce of any defect in the tle to the instrument.

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2. By cancella on of acceptor’s or endorser’s name

When the holder of a nego able 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 par es, who

have a right of recourse against the partywhose name is cancelled, are discharged from liability to

the holder.

The subsequent par es are in the posi on of sure es to the prior party whose name is cancelled

and a discharge of the principal debtor automa cally discharges the sure es.

If the maker’s or acceptor’s name has been cancelled, the liability of all par es to the instrument,

gets discharged and the instrument itself gets discharged. This is based on the principle of law of

guarantee that when a principal debtor is discharged, the sure es 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 -

The holder can discharge the maker, acceptor or endorser otherwise than by cancella on of

names (by a separate agreement of waiver, release or remission).

The 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.

The e#ect of release is the same as that of cancelling a party’s name, ie., the party so released

and all the par es subsequent to him who have a right of ac on against the party so released are

discharged from liability in due course.

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

The holder of a bill has to present it to the drawee for his acceptance. The drawee should be

allowed only forty-eight hours to consider whether he will accept or not.

5. By default in presen ng cheque within reasonable me - Sec. 84

It is the duty of the holder of a cheque to present it for payment within reasonable me 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. The bank fails before the cheque is presented. The drawer

is discharged, but the holder can prove against the bank for the amount of the cheque.

In determining what is a reasonable me, regard shall be had to the nature of the instrument, the

usage of trade and of bankers, and the facts of the par cular 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 me taken in transit.

A draws a cheque at Chennai on a bank in Kolkata. The 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 presen ng the cheque.

Similarly, a crossed cheque takes more me in reaching the drawee-banker and, therefore, me

necessary for clearance is excluded in determining reasonable me for presentment.

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6. Payment of cheques - Sec. 85

Protec on to paying Banker

The sec on lays down two principles rela ng 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. The reason why this

protec on 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. The facility a#orded by cheques as nego able instruments would be

considerably lost.

The result of this protec on 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 ques on only on the ground of forgery in some endorsement.

7. By material altera on without assent of all par es liable: See.87

Material Altera on

It alters the rights & liabili es of par es to the Instrument. It some mes alter character of the

instrument.

Any material altera on of a nego able instrument renders the instrument void as against any one

who is a party thereto at the me of making such altera on and does not consent thereto, unless

it was made in order to carry out the common inten on of the original par es.

Types of material altera on

a. Altera on of date of the instrument or of payment

b. Altera on of the amount of the instrument

c. Altera on 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 Na onal Bank and inserts that of Corpora on Bank.

d. Altera on of the rate of interest :

e. Altera on 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 altera on, and if made a"er the note

was issued one could avoid it.

f. Altera on by increasing or Þxing stamps : A$xing stamps when the instrument originally carried no

stamps, or increasing their value or a!es ng the instrument where it originally carried no a!esta on,

have been held to be material altera ons.

Permi!ed Altera on

An altera on which is not material does not make the instrument void. The Act itself permits three kinds of

altera on 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)

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Excep ons

The principle does not apply to the following cases:

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

or endorsement.

ii. Altera ons which are made to carry out the common inten on of the par es cannot be complained

of.

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

C. NOTING AND PROTESTING

1. No ng: Sec.99

It is a mode of authen ca ng 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.

No ng must be made within a reasonable me a"er dishonour. Upon such request being received

the notary inquires from the party liable to pay and if he s ll dishonours, the notary makes a note

of the fact of dishonour noted or not.

2. Protest : See. 100

Protest is one step further to no ng. Where the holder gets the fact of dishonour noted, he

may also have the dishonour and no ng cer Þed by the Notary Public. Thus the holder will get a

cer Þcate from the Notary Public cer fying the fact of dishonour. Such a cer Þcate is called a

protest.

The advantage of no ng and protes ng is that this cons tutes prima facie good evidence in the

court, of the fact that the instrument has been dishonoured.

The protest should be done within a reasonable me.

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Questions and AnswerUNIT-V

QUESTIONS NEGOTIABLE INSTRUMENTS ACT, 1881

1

The drawer, ‘D’ is induced by ‘A’ to draw a cheque in favour of P, who is an exis ng person. ‘A’ instead

of sending the cheque to ‘P’ forges his name and pays the cheque into his own bank. Whether ‘D’ can

recover the amount of the cheque from ‘A’s banker ?

First state the protec on available to paying banker (sec. 85) & then collec ng banker (sec. 131), D’s

Banker is the paying banker & A’s banker is the collec ng banker. Hence not liable.

2

A, induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged C’s

endorsement and collected proceeds to the cheque through his banker. B the drawer wants to recover

the amount from A’s Bankers. Decide in the light of the provisions of the Negotiable Instruments Act,

1881 :

(i) Whether B, the drawer, can recover the amount of the cheque from A’s Bankers ?

(ii) Whether C is the Þc ous payee ?

(iii) Would your answer be s ll the same in case C is Þc ous person ?

Even B’s banker is not liable since Sec. 85 gives protec on to a paying banker even A’s banker is not liable

because sec. 311.

C’s banker is not liable since it has neither collected nor paid the cheque

If C were a Þc ous payee, the answer would have remained same since C’s banker would have neither

collected nor paid the cheque.

(i) Sec on 131 states that :

(a) A banker who has received payment for a customer of a cheque crossed generally or

specially to himself :

– in good faith and

– without negligence shall not

in case the tle to the cheque proves defec ve, incur any liability to the true owner of the

cheque by reason only of having received such payment.

(b) Even if a banker credits the customer’s account before the payment is actually received by

him, he shall deemed to have received payment under sec on 131 and will not incur any

liability merely on account of receiving it.

(i) C’s banker is not liable since it has neither collected nor paid the cheque. Even A’s banker is not

liable because of sec on 131 even B’s banker is not liable because of sec on 85.

(ii) If C were a Þc ous payee the answer would have remaind same since C’s banker would have

neither collected nor paid the cheque.

3

A cheque payable to bearer is crossed generally and marked “not negotiable”. The cheque is lost or

stolen and comes into possession of B who takes it in good faith and gives value for it. B deposits the

cheque into his own bank and his banker presents it and obtains payment for his customer from the

bank upon which it is drawn. The true owner of the cheque claims refund of the amount of the cheque

from B.

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Amit Bachhawat


Discuss the liability of the banker collec ng the cheque and the banker paying the cheque and B to the

true owner of the cheque referring to the relevant provisions of the Nego able Instruments Act, 1881.

When the cheques are crossed “Not Nego able” the tle of the transferee cannot be be!er than that of

the transferor. Hence B is liable to the true owner.

Liability of B’s Banker :

B’s Banker is a Collec ng Banker and sec on 131 absolves the collec ng bank from any liability towards

true owner, if it receives payment in good faith and without negligence. The collec ng banker shall

be deemed to have received payment even if he credits the account of the customer before receiving

payment of the cheque. Hence B’s Banker account no liability merely by collec ng and credi ng the

proceeds of the cheque to the account of his customer (B).

Liability of banker paying the cheque :

As per sec on 128, there is a presump on that the banker making payment in due course on a crossed

cheque, has made payment to the true owner, even though the payment does not reach the true owner.

Thus there is protec on to the bank. Hence, the Banker of true owner also does not incur any liability in

case he has made payment in due course.

4

‘A’ draws a cheque for ̀ 50,000 when the cheque ought to be presented to the drawee bank, the drawer

has sufficient funds to make payment of the cheque. The bank fails before the cheque is presented.

The payee demands payment from the drawer. What is the liability of the drawer ?

In the instant case, ques on arises if the drawer of a cheque discharged on failing of the Bank. Cheques

are required to be presented to the Bank for payment.

Sec on 84 states that :–

(i) if a cheque is not presented for payment within a reasonable me of the issue, and

(ii) Reasonable me depends on facts & circumstance the drawer has su!cent funds in his account

whenever the cheque is presented.

(iii) su#ers actual damage, through the delay,

then, he is discharged to the extent of such damage, that is to say to the extent to which such

drawer or person is a creditor of the banker to a larger amount than he would have been if such

cheque had been paid.

In the instant case, there is a delay in the presentment of the cheque for the payment and therefore, A

(the drawer) is discharged.

However, the holder can prove against the bank for the amount of the cheque.

5

A B C D E

x x x x D is HIDC

x transfer of bill without considera on

transfer with considera on

1. Can E recover from D ?

2. Can C recover from B ?

3. Can D recover from A ?

4. Can E recover from B ?

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Amit Bachhawat


1) Between immediate par es if there is no considera on then recovery is not possible.

2) Any person who gets tle from HIDC can recover from HIDC could have recovered.

6

A, a major and B, a minor executed a promissory note in favour of C. Examine whether this promissory

note valid?

See 26 of NI Act provides that a promissory note does not become invalid merely because that any party

to the nego able instrument is a minor. The minor can make all the par es liable except himself.

7

Whether stop payment of a cheque is considered as dishonour due to insufficiency of funds?

8

B C D E Can E recover from B?

by fraud D is HIDC

9

When presentment of a bill is not necessary for payment.

10

When a banker is justified in dishonouring in cheque?

11

J, a shareholder of a Company purchased for his personal use certain goods from a Mall (Departmental

Store) on credit. He sent a cheque drawn on the Company’s account to the Mall (Departmental Store)

towards the full payment of the bills. The cheque was dishonoured by the Company’s Bank. J, the

shareholder of the company was neither a Director nor a person in-charge of the company. Examining

the provisions of the Negotiable Instruments Act, 1881 state whether J has committed an offence

under Sec. 138 of the Act and decide whether he (J) can be held liable for the payment, for the goods

purchased from the Mall (Departmental Store).

Company has commi!ed an o#ence u/s 138.

The facts of the problem are very similar to the facts of a case know as H.N.D Mulla Feroze Vs. C.Y. Somaya

Julu, J(2004) 55 SCL (AP) wherein the Andhra Pradesh High court held that although the petitioner has a

legal liability to refund the amount to the appellant , petitioner is not the drawer of the cheque , which

was dishonoured and the cheque was not also not drawn on an account maintained by him but was

drawn on an account maintained by the company. Hence, it was held that the petitioner J could not be

said to have committed the offence under section 138 of the Negotiable Instrument Act, 1881. Therefore

X also is not liable for the cheque but legally liable for the payments for the goods.

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Amit Bachhawat


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 tle from HIDC gets a clear tle and all defects in the tle are cleared.

In this case ‘E ‘is ge%ng bill from HIDC all defects in the tle are cleared. Hence E can recover from all

par es 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?

Nego a on Back – when endorser again become the holder before due date it is nego a on back ini ally

‘Q’ was liable to R, S. But later on when ‘Q’ become a subsequent party now Q is demanding from R, S.

This will lead to a circuity of ac on. 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 me 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

This 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 insufficiency 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.

Step – 1 Iden fy the paying banker – Avinash’s banker

Step – 2 iden fy the collec ng bankers – C’s bankers

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Amit Bachhawat


Step – 3 recall the protec on available to paying banker and collec ng 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 protec on 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

collec ng banker (C’s) will get protec on.

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 tle is defec ve but D’s tle (HIDC) is good. Hence it is

said that tle of the TRANSFEREE is be!er than tle 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

Restric ve Crossing

This 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.

ICICI BANKBANK OF INDIA

A/c PAYEE

FRONT BACK

Pay Ramesh Gupta

Naresh

Endorsed to Bunty

Ramesh Gupta

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Amit Bachhawat


1. Payable to order

2. Payee

3. Endorsed

4. Paying banker-Naresh

5. Collec ng banker- Bunty

6. Later on found that signature of RG was forged.

7. Collec ng banker and paying banker will get protec on. Paying banker will only check the signatureof his

customer.

M drew a cheque amoun ng to ̀ 2 lakh payable to N and subsequently delivered to him. A"er receipt of

cheque N indorsed the same to C but kept it in his safe locker. A"er some me, N died, and P found the

cheque in N’s safe locker. Does this amount to Indorsement under the Nego able Instruments Act, 1881?

No, P does not become the holder of the cheque as the nego a on was not completed by delivery of the

cheque to him. (Sec on 48, the Nego able Instruments Act, 1881)

M owes money to N. Therefore, he makes a promissory note for the amount in favour of N, for safety of

transmission he cuts the note in half and posts one half to N. He then changes his mind and calls upon N

to return the half of the note which he had sent. N requires M to send the other half of the promissory

note. Decide how a rights of the parties are to be adjusted.

The ques on arising in this problem is whether the making of promissory note is complete when one half

of the note was delivered to N. Under Sec on 46 of the N. I. Act, 1881, the making of a P/N is completed

by delivery, actual or construc ve delivery of the whole. So the claim of N to have the other half the P/N

sent to him is not maintainable. M is jus Þed in demanding the return of the Þrst half sent by him. He

can change his mind and refuse to send the other half of the P/N.

Bharat executed a promissory note in favour of Bhushan for ` 5 crores. The said amount was payable

three days after sight. Bhushan, on maturity, presented the promissory note on 1st January, 2008 to

Bharat. Bharat made the payments on 4th January, 2008. Bhushan wants to recover interest for one

day from Bharat. Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881,

whether he is liable to pay the interest for one day?

Claim of Interest

Sec on 24 of the Nego able Instruments Act, 1881 states that where a bill or note is payable a"er date

or a"er sight or a"er happening of a speciÞed event, the me of payment is determined by excluding the

day from which the me begins to run.

Therefore, in the given case, Bharat will succeed in objec ng to Bhushan’s claim. Bharat paid rightly

“three days a"er sight”. Since the bill was presented on 1st January, Bharat was required to pay only on

the 4th and not on 3rd January, as contended by Bharat.

X, a legal successor of Y, the deceased person, signs a Bill of Exchange in his own name admitted a

liability of ` 50,000 i.e. the extent to which he inherits the assets from the deceased payable to Z after 3

months from 1st January, 2002. On maturity, when Z presents the bill to X, he (X) refuses to pay for the

bill on the ground that since the original liability was that of Y, the deceased, therefore he is not liable

to pay for the bill.

Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether Z can succeed in

recovering ` 50,000 from X. Would your answer be still the same in case X does not state the limit in the

bill and the liability is more than the assets he inherits from Y.

In the Þrst case he will be liable to full amount of ` 50,000/-. In the second case since he has made a limit

in the instrument itself before signing on it, his liability will be only to the extent of ` 50,000/- and not to

the extent of the full amount as given on the instrument though he might have inherited the property of

value greater amount than that of the instrument.

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Amit Bachhawat


A cheque was dishonoured at the first instance and the payee did not initiate action. The cheque was

presented for payment for the second time and again it was dishonoured. State in this connection

whether the payee can subsequently initiate prosecution for dishonour of cheque.

Supreme Court in Sadanandan Bhadran v. Madhavan Sunil Kumar (1998) 4 CLJ 228 held that on a careful

analysis of sec on 138 of the Nego able Instruments Act, 1881 it is seen that the main part creates an

o#ence when a cheque is returned by the bank unpaid for any of the reasons men oned therein. The said

proviso lays down three condi ons precedent to the applicability of the above sec on :

If one has to proceed on the basis of the generic meaning of the terms “cause of ac on” certainly each of

the above facts would cons tute a part of the cause of ac on, but is signiÞcant to note that clause (b) of

sec on 142 gives a restric ve meaning in that it refers to only one fact which will give rise to the cause of

ac on and that is failure to make the payment within 15 days from the date of receipt of the no ce.

Besides the language of sec on 138 and sec on 142 which clearly postulates only one cause of ac on,

there are other formidable impediment which negates the concept of successive causes of ac on. The

combined reading of sec ons 138 and 142 leave no room for doubt that cause of ac on within the

meaning of sec on 142(c) arises and can arise only once.

Nego able Instruments Act, 1881

Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable

Instruments Act, 1881 :

(i) X who obtains a cheque drawn by Y by way of gi".

(ii) A, the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque.

(iii) M, who Þnds a cheque payable to bearer, on the road and retains it.

(iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who is the payee.

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

Person to be called as a holder

As per sec on 8 of the Nego able Instruments Act, 1881 ‘holder’ of a Nego able Instrument means

any person en tled in his own name to the possession of it and to receive or recover the amount due

thereon from the par es 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 en tled not only to the

possession of the instrument but also to receive the amount men oned therein.

(iii) No, M is not a holder of the Instrument though he is in possession of the cheque, so is not en tled

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 men oned 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 holder because he is in wrongful possession of the instrument.

Give the answer of the following :

(a) A draws a cheque in favour of M, a minor, M endorses the same in favour of X. The cheque is

dishonoured by the bank on grounds of inadequate funds. Discuss the rights of X.

(b) A promissory was made without men oning any me for payment. The holder added the words

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

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Amit Bachhawat

(a) As per Sec on 26, a minor may draw, endorse, deliver and nego ate the instrument so as to bind

all par es except himself. Therefore, M is not liable. X can, thus, proceed against A.

(b) As per the provision of the Nego able Instrument Act, 1881 this is not a material altera on as a

promissory note where no date of payment is speciÞed will be treated as payable on demand.

Hence adding the words “on demand” does not alter the business e#ect of the instrument.

Dis nc on between a bill of exchange and a promissory note

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

the drawee and the payee.

b. A note contains an uncondi onal promise to pay. A bill contains an uncondi onal order to pay.

c. The maker of a note is the debtor and he himself undertakes to pay. The drawer of a bill is the creditor

who directs the drawee (his debtor) to pay.

d. The liability of the maker of a note is primary and absolute, whereas the liability of the drawer of a bill

is secondary and condi onal.

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. The maker of a note stands in immediate rela on with the payee. The drawer of a bill stands in immediate

rela on with the acceptor and not the payee.

i. In case of dishonour of a bill either by non-acceptance or by non-payment, due no ce of dishonour

must be given to all the persons who are to be made liable to pay. This includes the drawer and the

prior indorsers. But in the case of dishonour of a note no such no ce 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.

Dis nc on between a bill of exchange and a cheque

a. A bill of exchange may be drawn on any person, including a banker, but a cheque is always drawn on a

banker. Thus 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 en tled to three days of grace. A cheque is not

en tled 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. The 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.

The government has no Þed the Nego able Instruments (Amendment) Bill, 2015 which allows Þling cheque

bounce cases in a court at a place where the cheque was presented for clearance and not the place of issue.


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Amit Bachhawat

The law provides that cases of bouncing of cheques can be Þled only in a court in whose jurisdic on the bank

branch of the payee (person who receives the cheque) lies. It will also result in fast prosecu on of o#enders.

Acceptance for honor

When a bill of exchange has been noted or protested for non-acceptance or for be!er security, any person not

being a party already liable thereon may, with the consent of the holder, by wri ng on the bill accept the same

for the honor of any party thereto

How acceptance for honor must be made

A person desiring to accept for honor must, 28[by wri ng on the bill under his hand], declare that he accepts

under protest the protested bill for the honor of the drawer or of a par cular endorser whom he names, or

generally for honor

Acceptance not specifying for whose honor it is made

An acceptor for honor binds himself to all par es subsequent to the party for whose honor he accepts to pay

the amount of the bill if the drawee does not; and such party and all prior par es are liable in their respec ve

capaci es to compensate the acceptor for honor for all loss or damage sustained by him in consequence of

such acceptance.

But an acceptor for honor is not liable to the holder of the bill unless it is presented, or (in case the address

given by such acceptor on the bills is a place other than the place where the bill is made payable) forwarded for

presentment, not later than the day next a"er the day of its maturity.

When acceptor for honor may be charged

An acceptor for honor cannot be charged unless the bill has at its maturity been presented to the drawee for

payment, and has been dishonored by him, and noted or protested for such dishonor.

Payment for honor

When a bill of exchange has been noted or protested for non-payment, any person may pay the same for the

honor of any party liable to pay the same; provided that the person so paying 17[or his agent in that behalf]

has previously declared before a notary public the party for whose honor he pays, and that such declara on

has been recorded by such notary public.

Right of payer for honor

Any person so paying is en tled to all the rights in respect of the bill, of the holder at the me of such payment,

and may recover from the party for whose honor he pays all sums so paid, with interest thereon and with all

expenses properly incurred in making such payment.

Drawee in case of need

Where a drawee in case of need is named in a bill of exchange, or in any endorsement thereon, the bill is not

dishonored un l it has been dishonored by such drawee.

Acceptance and payment without protest

A drawee in case of need may accept and pay the bill of exchange without previous protest.

Ram has 2000/- in his bank account and he has no authority to overdraw. He issued a cheque for 5000/-

to Gopal which was dis-honoured by the bank. Point out whether Gopal must necessarily give no ce of

dishonour to Ram under the Nego able Instrument Act, 1881?

According to Nego able Instrument Act, 1881, in a suit against, the drawer on an instrument being

dishonoured, no ce of dishonour is a material part of the cause of ac on. However, there are certain

case where no ce of dishonour is not necessary, when the party charged could not su#er damage for

want of a no ce. In such a case, it is su$cient if it is shown that at the me of drawing the instrument,

there were no funds belonging to the drawer in the hands of the drawee. Thus , it is not necessary for

Gopal to give no ce of dishonour to Ram under sec on 98 of the Act [Subrao vs. Sitaram 2 BOM.L.R 891]


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Amit Bachhawat

UNIT-V

what is meant by maturity of a Bill of Exchange or Promissory Note? Calculate the date of maturity of the following bills of exchange explaining the relevant rules rela ng to determina on of the date of maturity as provided in the Nego able Instrument Act, 1881:

• A Bill of Exchange dated 31st August, 2017 is made payable three months a"er date.

• A Bill of Exchange drawn on 15th October , 2017 is payable twenty days a"er sight and the bill is presented for acceptance on 31st October, 2017.

The maturity of a promissory note or bill of exchange is the date on which it falls due for payment

(sec 22). Sec 22 of the Nego able Instrument Act, 1881 further adds that for payment in calcula ng

the maturity of a promissory note or a bill of exchange which is not payable or demand, at sight or on

presentment, three days, called the days of grace, must be added to the date on which the instrument

is expressed to be payable.

Bill of Exchange date 31st August , 2017: 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 (sec 23). In this

case bill of exchange is dated 31st august,2017 and it is made payable 3 months this a"er date. Hence it

falls due on 3rd day a"er November, 2017 (the last day of month) i.e. on 3rd December,2017.

Bill of exchange payable 20 days a"er sight : The bill is presented foe acceptance on 31st October , 2017.

The date of presentment for acceptance is to be excluded. Hence the instrument is at maturity on the

3rd day a"er 20th November, 2017 i.e. 23rd November, 2017.

In what way does Nego able Instrument Act, 1881 regulated the determina on of the ‘Date of maturity’ of Bill of Exchange. Ascertain the ‘Date of maturity’ of a bill payable 120 days a"er the date. The Bill of Exchange was drawn on 1st June, 2015.

Answer to problem: In this case the day of presentment for sight is to be excluded i.e.1st June, 2015.

The period of 120 days ends on 21st September, 2015 (June 29 days + July 31 days + August 31 days +

September 29 days =120days ). Three days of grace are to be added. It falls due on 2nd October, 2015

which happens to be a public holiday. As such it will fall due on 1st October,2015 i.e. the preceding

Business Day.

Mr. A is the payee of an order cheque. Mr. B steals the cheque and forges MR. A signatures and endorses the cheque in his own favour. Mr. B then further endorses the cheque to Mr. C, who takes the cheque in good faith and for valuable considera on. Examine the validity of the cheque as per the provisions of the Nego able Instruments Act, 1881 and also state whether Mr. C can claim the privileges of holder-in- due-course.?

Title to forged cheque under the Nego able Instruments Act, 1881: Forgery confers no tle and a holder

acquires no tle to a forged instrument. A forged document is a nullity. The property in the instrument

remains vested in the person who is the holder at the me when the forged signatures were put on it.

Forgery is also not capable of being ra Þed. In the case of forged endorsement, the person claiming

under forged endorsement even if he is purchaser for value and in good faith, cannot acquire the rights

of a holder in due course. Therefore, Mr. C acquires no tle on the cheque (Mercan le Bank vs. D’Silva ,

30 Bom.L.R.1225). Such a holder is not a holder in due course and hence no privilege is available.

J accepted a bill of exchange and gave it to k for the purpose of ge%ng it discounted and handing over the proceeds to J. K having failed to discount it, returned the bill to J. J tore the bill in two pieces with the inten on of cancelling it and threw the pieces in the street .K picked up the pieces and pasted the two pieces together, in such manner that the bill seemed to have been folded for safe custody, rather than cancelled k put into circula on and it ul mately reached l, who took it in good faith and for value. Is J liable to pay the bill under the provision of the Nego able Instrument Act, 1881?

The ques on is based upon the privileges of a ‘ holder in due course’, sec on 120 of the Nego able

Instruments Act, 1881, provides that no drawer of the bill shall in a suit thereon by a holder in due course

be permi!ed to deny the validity of the instrument as originally drawn. A holder in due course gets a

good tle of the bill. Therefore, in the given problem, J is liable to pay for the bill. L is a holder in due

course, who got the bill in good faith and for value (Ingham v Primrose)

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