A negotiable Instrument is a piece of paper which entitles a person to
the sum of money stated therein and which is transferable from person to
person by mere delivery or by mere endorsement and delivery and the
person to whom it is so transferred gets it, without the defects in the title of
transferor and becomes entitled to the money stated therein and also the
further right to transfer it. Negotiable Instruments are different from other
contractual relations, owing to the peculiar aspect of negotiability which
gives such instruments a very wide acceptance and usage. Such an
instrument can be transferred by endorsement or by delivery and the
transferee gets a legal title to it which is not effected by or dependent upon
the title of the transferor.
Money or paper currency was developed as an alternative to the barter
systems as a medium of exchange. However, with the growth of commerce
and multiplicity of commercial transactions, the inherent risk and
inconvenience of using the paper currency came to fore. Further, the
dealings based on the money could not be credit based. Thus, an alternative
in the form of negotiable instruments, which are basically instruments of
credit that can be converted into money was developed. A negotiable
instrument is one that embodies the characteristics of negotiability. A
negotiable instrument is one, the property of which , is acquired by anyone
who takes it as a bonafide, and for value, withstanding and defect of title in
the person from whom he took it; from which it follows that an instrument
cannot be negotiable unless it is such and in such a state that the true owner
could transfer the contract or engagement contained therein by simple
delivery of the instrument.
Negotiable Instruments are essentially credit instruments with features
of negotiability. Therefore, to clearly to understand them one should first
understand their commercial character. Credit is the privilege to buy now
and pay later. It also includes borrowing of money now with a view to pay
later. Instruments which evidence or acknowledge such credits are called
Credit Instruments. There are some credit instruments which are not
negotiable. That is they are credit instruments but they do not have the
features of negotiability. I.O.Us (I owe you) and postal orders are examples
of such non-negotiable credit instruments.
Of the negotiable instruments, some are negotiable under law (i.e.
Negotiable Instruments Act of 1881).While the others are negotiable
because of mercantile usage and custom. Bills of Exchange, Promissory
Notes, and the cheques are the three instruments which are negotiable under
law. A detailed discussion of the three instruments follows later, but at this
stage a brief distinction between the three instruments is given. Suppose A
sells goods worth Rs1000 to B on credit. The credit so allowed may be
secured by means of different instruments which are given below:
A may draw an unconditional order on B to pay the money
himself or some other specified person. Such an order is called
the bill of exchange.
B may execute an unconditional promise to pay the money to A
or his order. The instrument containing the promise is called
B may draw an unconditional order on his banker (with whom
he has deposited money on current account) to pay A or his
order a sum of Rs 1000 only. Such an order on the banker is
called a cheque.
Government of India Bearer Bonds and dividend warrants are
examples of instruments which are negotiable according to usage and
custom. This is so because Government of India Bonds are similar to
promissory notes and dividend warrants are similar to cheques. The law
relating to the negotiable instrument in India is governed by the Negotiable
Instrument Act 1881and came into effect from the first day of March 1882.
It is nothing but codification of English Common Law with such changes as
may be necessary to give recognition to Indian usage and custom.The Act
does not define the negotiable instruments. It merely states, vide Section 13,
that a negotiable instrument means a promissory note, bill of exchange or
cheque payable either to order or bearer. An instrument may be negotiable
by law or by custom. The types of instruments which are negotiable by law
are given in this section. There are other instruments recognized by custom
to be negotiable like hundies.
The distinct feature of negotiability can be summed by saying that all
negotiable instruments are transferable but all transferable instruments are
not negotiable. A sale of an immovable property represented by an
instrument of sale is merely transferable and not negotiable. The legal
principle is that ‘no one can transfer a better title than what he himself has’.
All the defects in this title is transferred to the transferee. But in the case of a
negotiable instrument a bonafide transferee for value gets a better title than
what the previous transferor/s had. Willis in his book, The Law of
Negotiable Securities, states that “ A Negotiable Instrument is property
which is acquired by anyone who takes it as bonafide, and for value, not
withstanding any defect of title in the person from whom he took it; from
which it follows that an instrument cannot be negotiable unless it is such and
in such a state that the true owner could transfer the contract or engagement
contained therein by simple delivery of the instrument.”
NEGOTIABLE INSTRUMENTS-ACT 1881
The Banking Regulation Act, 1949, does not define Banking
Operations. However, it lays down, inter alia, the activities which the banks
cannot engage themselves in and for this purpose the Act lays down what
constitutes Banking business. The business of banking constitutes
acceptance, either for purpose of lending and/or investment, of the deposit
payable on demand or otherwise and withdrawable by cheque, or order or
otherwise. Accordingly, the major functions of Banks are (1) to mobilize the
deposits from the public and (2) to utilize the deposits for the purpose of
leading or investment or both. Banks mobilize two types of deposits (a)
Demand Deposits – payable on demand and (b) time Deposits – which are
payable after a certain time mutually agreed upon by the customer and the
bank, at the time of depositing the money. Demand Deposits are placed in
Current Account and Savings Bank Account, whereas Time deposits in
Fixed Deposit (Term deposit), Recurring Deposit etc.
The Demand Deposits placed in the Bank are withdrawable by
cheque/withdrawal slip or even by a simple written letter containing
instruction. Transfer of funds from accounts can be done by Telegraphic
Transfer/Mail Transfer/Demand Drafts/Banker’s cheques (Pay orders) etc.
time Deposits can be withdrawn by discharging the receipts on maturity
date. Time Deposits can also be withdrawn before maturity date, with bank’s
consent, with penalty. Funds mobilized by the Bank are used for lending or
both; the rate of interest on funds lent is higher than the rate of interest paid
on deposits. The commercial Banks lend money by way of Overdrafts,
Demand Loans, Cash Credit and through purchase or discounting of bills of
exchange or hundies for the purpose of financing, trade, commerce, industry
or any other business activity. Lending by the Banks is mostly against some
security, - goods, book debts, land, livestock, inventory, shares, securities
etc. When the advance is secured it is termed as a Secured advance and in
cases where the advance is not backed by any security (also called Clean) it
is classified as unsecured or clean advance
CHARACTERISTICS OF NEGOTIABLE
These instruments can be transferred from one person to another with
ease and simplicity . In the case of instruments which are payable to
bearer (they are called bearer instruments)mere delivery is sufficient,
for instruments are payable to order (they are called order
instruments) endorsement and delivery are required. Compare this
with the difficulty involved in transferring, for example, a share in a
joint stock company . A separate instrument of transfer has to be
executed. Application must be made to the charges in the books of the
company. This takes considerable time, apart from the labour and
Normally no one can convey a better title than what he has. In other
words the transferee is also affected by the defects in the title of
transferor to this negotiable instruments are an exemption. In the case
of negotiable instruments, a holder in due course is not affected by the
defects in the title of the transferor. He gets a better title than that of
transferor. Actually there are many instruments which are easily
transferable but they do not have this feature of negotiability. e.g. a
Bill of Lading can be endorsed to another person, but the transferee is
affected by the defects of the title in the transferor. That is why Bill of
Lading and similar other instruments are referred to as quasi-
negotiable instruments. It may not be out of place to mention that
even a negotiable instrument can be deprived of this feature. For
example, when a cheque is crossed with thee addition of words “not
negotiable”, it is red signal for persons who want to obtain such an
instrument. They must be absolutely sure of the title of transferor.
In the case of assignment of a debt the assignee should give notice to
the party liable to pay, otherwise the assignee cannot enforce his
claim. But in the case of negotiable instruments the transferor need
not give such notice to the party liable to pay.
There are certain presumptions applicable to all negotiable
instruments. One such is that the instrument has been obtained for
The credit of every party who signs the instrument in one capacity or
another is pledged to the instrument. That is why bankers prefer to
discount a trade bill than any other form of lending. A good banker is
one who distinguishes a bill to mortgage.
Decree can be obtained in the case of suits on promissory notes and
bill of exchange much more quickly than in the case of other suits.
This is because of special procedures prescribed for such suits.
PARTIES TO NEGOTIABLE INSTRUMENTS
(a)The Drawer: This party is relevant to Bills and cheques only. A
person who draws a bill or a cheque is called a Drawer. A minor can draw,
make, accept and negotiate a negotiable instrument just like any other
person. Although a minor cannot incur contractual liabilities, he can acquire
rights under a contract. Moreover the incapacity of one party to negotiable
instrument does not in any way diminish liability of other competent parties.
Therefore other parties are not absolved from their liability simply because a
minor has drawn or negotiated the instrument.
Where an agent acts on behalf of a principal either in drawing,
accepting or negotiating the instrument he must especially indicate that he is
acting in the capacity of an agent. If such an indication is absent he becomes
liable as the principal party. If it is an endorsement e.g. the signature should
follow the words “Per pro………” or “ for and on behalf…”. In the dotted
lines the name of the principal should be stated. In the case of executors and
administrators of the estate of a deceased person they should expressly limit
their liability to the extent of the assets received by them. Otherwise they too
become liable personally. In partnership, every partner has authority to bind
his co-partners by drawing, accepting or endorsing negotiable instruments.
But it should be signed by him in the name of the firm. A company can also
draw, accept and negotiate bills although it being an artificial person. The
job can be done through its agent only. In the case of Non-Trading
Companies however such power must be specifically conferred by the
(b) The Drawee or Acceptor: The drawee may be a person, a firm,
a company or a banker in the case of cheques. In the case of time bills only
the drawer becomes acceptor after giving the acceptance. A minor as a
maker of promissory note or as an acceptor of a bill is not bound by the
instrument, even if the instrument was for necessaries supplied to him.
However, if the minor and guardian have both signed the instrument the
latter cannot escape his liability.
(c) Drawee in case of need: He is the person whose name is
inserted by either the drawer or one of the endorsers in order that resort may
be had to him when the bill gets dishonoured either due to non-acceptance or
non-payment. In India, bill must be presented to the drawee in case of need
before treating it as dishonoured. In English Law he is called “ Reference in
case of need”.
(d) Acceptor for honour supra protest: A provision is made in the
Act for a stranger to accept the bill and become liable under it. This stranger
can accept the bill with the consent of the holder after it has been noted or
protested for non-acceptance or better security. Hence he is called “
Acceptor for honour supra protest”. He should state as to whose honour he
gives the acceptance. If nothing is stated it is deemed to be made for the
honour of the drawer. Acceptor for honour must be a stranger and not one
who is already visible.
(e) Holder: A holder is defined as a person who is entitled in his
name,(i) to the possession of the instrument and (ii) to cover or receive its
amount from the parties thereto. As the holder one who is entitled to the
instrument in his own name, he must be:
• The person whose name is mentioned in the instrument as
• Endorsee; or
• The bearer the instrument.
In the case of instrument lost or destroyed, the holder is one
who was entitled so at the time of such loss or destruction. A thief or a
finder of lost instrument cannot become a holder. Although he has the
possession of the instrument, he does not satisfy the other conditions,
namely, the right to recover or receive the amount of the instrument.
(f) Holder in due course: Every holder in due course is a holder,
but the reverse is not true. A person to become a holder in due course should
satisfy the following conditions:
He must obtain possession of the instrument as the bearer
pr payee or endorsee;
He must have obtained for paid consideration;
The instrument must be obtained before maturity i.e.
before it becomes due;
He must obtain the instrument in good faith and without
sufficient cause to believe that any defect existed in the
title of the transferor.
TYPES OF NEGOTIABLE INSTRUMENT
Bills of Exchange, Cheques and Promissory notes are the negotiable
instruments with which the banker mainly deals and therefore it is essential
to know the law and practice relating to these instruments in detail. Of
course, of the three essentials cheques are more important to bankers, but
then most of the legal stipulations are common to all the three instruments.
A. Bills of exchange:
A Bill of Exchange is an instrument in writing, containing an
unconditional order signed by the maker directing a person to pay certain
sum of money only to or to the order of a certain person or to the bearer of
SPECIMEN OF INLAND TRADE BILL
Three months after date pay Mr. Babubhai or order the sum of
one lakh rupees only for the value received.
B/02, Vasant Nagri,
There are three parties here:
Meena Chaudhari is the drawer of the bill.
Babubhai is the payee of the bill, i.e. person to whom the value of the
bill is to be paid.
Neelam Chaudhari is the drawee i.e. the party on whom the bill is
drawn. He becomes the acceptor when he indicates his acceptance of
Essential of a Bill:
The instrument must be in writing.
It must contain an unconditional order and express order to pay.
There are three parties in the bill, i.e. drawer, drawee and payee. All
of them must be certain and definite individuals. Sometimes the
drawer and payee may be the same person.
It must be signed by the drawer.
A bill may be payable on demand in which case it is called demand
bill. Or it may be payable after a specific period and such bills are
called time bills. In case of time bills, the bill matures for payment
three days after the day on which the bill is expressed to be payable.
These additional days are called as grace days.
In case of demand bills, instruments payable on demand no
acceptance is required. But in the case of time bills the drawer must
testify his willingness to pat the bill. Without such acceptance a time
bill cannot be negotiated.
The amount of money to be paid must be certain and the payment
must be in legal order.
The bill may be payable to payee or his order. Such a bill is called
order bill. When it is payable to bearer, it is called bearer bill.
TYPES OF BILLS:
i)Inland and Foreign Bills:
A bill which is drawn and payable within the same country is called an
inland bill. It may be demand or time bill. Demand bills are exempted from
stamp duty whereas the stamp duty varies according to length of time and
the amount in case of time bills. Foreign bills are the- bills drawn in India
but are payable by a person resident outside India or drawn outside India but
are payable in India. Foreign bills are drawn in sets. This is because in the
case of foreign bills they have to be sent over long distances and therefore
there is possibility of loss or delay.
Rules Regarding Bills in Sets
(1) Bills of exchange may be drawn in parts of 2,3 or 4 as the case may
be . All the parts together make a set and the whole set constitutes
one bill. Each part must be numbered and stamped.
(2)Each part must contain a provision that it shall continue to be
payable only so long as others remain unpaid. In other words
payment of one part discharges the entire set.
(3)Where a person accepts or endorses different parts of the bill to
different persons, he and the subsequent endorsers of each part are
liable on each part as if it were a separate bill. Therefore, the
acceptor should accept only one part of the set.
(4)Each part should contain reference to the other parts. Where in a
particular part there is no such reference, that part in the hands of a
bona fide holder is treated as a separate bill. This is so because the
reference in each of these parts to the other parts of the set is in the
nature of a condition of payment.
(5)If two or more parts are negotiated to different holders in due
courses, the person who first acquired title to his part is entitled to
the other parts. He alone is entitled to the money represented by the
Specimen of a foreign Bill
There months after sight, pay this first of exchange (second and
third of the same tenor and date unpaid) to the order of Messrs General
Motors the sum of four thousand dollars for value received which place
to account as advised.
Messrs Bell Industries,
Chicago. R. Sainath.
Foreign bills are drawn in sets and the specimen given is first part. In the
second part it will be mentioned as second of exchange (first and third of the
same tenor and date unpaid) and so on.
ii) Clean and Documentary bills.
Clean bills are those unaccompanied by any document. Documentary
bills are used specially in foreign trade. The exporter ships the goods and
obtains a bill of lading. The cargo is also insured by him and policy
obtained. He prepares the invoice and draws a bill of exchange on the
importer for the amount covered by the invoice. The bill of exchange
accompanied by the bill of lading, insurance policy and the invoice are sent
to the banker in the importing country. Such bills are called Documentry
They are called D/A bills (document against acceptance) if the
documents are passed on to the importer after he gives the acceptance. If the
documents are handed over only after the payment is made by the importer,
they are termed D/P (Documents against Payment).
iii) Trade and accommodation bills :
Trade bills are drawn in the course of trade transaction. When a
wholesaler sells goods on credit to the retailer the relationship between them
is one of creditor and debtor. It is convenient for the wholesaler as creditors
to draw the bill on the retailer. He can discount such a bill with the banker
and realize money immediately without waiting for the payment from the
retailer, which can be obtained only after the period of credit expires.
Accommodation bills are drawn and accepted without consideration
with a view to provide funds to one or more parties. An example will
illustrate this. A, who is in need of money, draws a bill on B, who has credit
in the market. B accepts the same without consideration. A discounts the bill
with a banker and obtains money. On due date, he provides the necessary
funds to enable B to meet the bill.
iv) Fictitious Bills :
As stated already the drawer and payee must be certain and definite
persons. When they are fictitious, the bills are called fictitious bills, where
the drawer is a fictitious person, but the acceptor is genuine and real, the
holder, in due course, can enforce payment of such a bill. This is subject to
the condition that the first endorsement and the signature of the supposed
drawer are in the same handwriting.
v ) Ambiguous Instruments:
Instruments which can be interpreted either as a bill of exchange or as a
promissory note are called ambiguous instruments. The scope for such
interpretation arises because of faulty drafting of the instruments.
Example: A draws a bill on B, a non-existent person, and the bill is payable
to the order of A himself. Then he negotiates the bill to C. As B is a non-
existent person, A becomes primarily liable and therefore it can be treated as
a primary note also, although it is worded as a bill. The holder in this case
has the option to treat it either as a bill or promissory note. But once the
option is exercised it is final.
vi) Inchoate Instruments:
It is an incomplete negotiable instrument duly signed and stamped
which the holder can complete and make it into negotiable instrument up to
the value mentioned or up to the value covered by the stamp affixed on it.
Any person who signs such an instrument in a particular capacity becomes
liable to the holder in due course in that capacity for such amount. But
persons who are not holders in due course cannot recover more than the
Example: A instructs B, his agent, to make purchases and signs a
promissory note without specifying the amount. B is instructed to complete
for the amount for purchase. B makes a purchase for Rs.800 but fills it up
for Rs .1000. The promissory note is given to shopkeeper C, who negotiates
it to D. If D is a holder in due course, he can recover the amount of Rs.1000
from A. But C, who is aware of the circumstances cannot recover more than
Rs.800 which the amount was intended.
A bill delivered conditionally or for a special purpose is called Escrow.
There is no liability to pat if the conditions are not fulfilled or the special
purpose for which the bill is delivered is not satisfied. But the rights of a
holder in due course are nor affected.
Hundis are indigenous bills of exchange written in vernacular language
and governed by local language. The word Hundi in Sanskrit means to
collect. Hundis were originally used to collect debts and hence they acquired
the name Hundis. Hundis are negotiable according to mercantile usage and
the law always respects and recognizes custom and usage. Broadly there are
two types of Hundis-(1) Darshani- payable at sight (2) Muddati- payable
after a specific period. Numerous hundis are there with slight variations of
these two basic types and they are discuss as below:
• Shah jog Hundi: This hundi is payable through a shah or to a shah
who is a respectable person and a man of worth well known in the
bazaar. If there is any fraud or the hundi is stolen or forged, the
drawee can recover the loss from the shah. Because of this feature the
hundi acquires additional credit and negotiates like a generally
crossed cheque. It does not require acceptance of endorsement and
passes from person to person by delivery. Since it is payable through
shah the last endorsement must be in his favour. It should be noted
shah guarantees only the genuineness of the hundi and not the
solvency of the drawer. The drawee pays the amount only if he has the
drawer’s funds or he is willing to give the credit. A shah jog Hundi
may be Darshani or Muddati class.
• Nam jog Hundi: This is payable to the person or his order of one
whose name is mentioned in the instrument. This requires
endorsements similar to order instruments. This Hundi is similar to
shah jog. Except that the shah jog is in the name of shah and nam jog
is in the name of the payee.
• Dhani jog Hundi: This hundi is payable to owner. Dhani means the
owner or holder. It is a bearer instrument but ceases to be so when
endorsed in full
• Firman jog Hundi: This is a hundi payable to the order of a person.
Firman is an order.
• Jokhami Hundi: This is used by merchants as a means of insuring
goods which they send to their customers or agents. It is drawn by the
consignor on the consignee against a shipment and the name of the
ship is mentioned in the instrument. The sum is paid only after the
arrival of goods. It appears to be a combination of bill of exchange
and insurance policy. The bill drawn by the consignor is negotiated
with an insurer at discount, the discount being his premium. The
insurer gets the full value of hundi from the consignee after the safe
arrival of goods. The insurer does not get the payment in case of total
loss. Thus both the seller and the buyer pass on their risk to the insurer
through mechanism of the hundi.
• Jawabi Hundi: This is a means of remittance of funds. The person
who desires to make remittance writes to the payee and delivers the
letter to a banker. The banker either through correspondent or by
negotiation sends the letter to the place of the payee. The payee
obtains the remittance and gives the receipt. The receipt comes back
to the remitter through the same channel.
• Zikhri Chit: It is a letter of protection given to the holder by some
prior party to the hundi to be used by him, in case the hundi is not
accepted. This is somewhat a analogous to acceptor for honour. A
duplicate issued for a hundi is called peth and a hundi paid and
cancelled is called khokha.
Section 6 of the Negotiable Instruments Act defines a cheque as “ a
bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand”. Therefore a cheque is a bill of exchange
with a difference that is always drawn on a specified banker and it is payable
only on demand. With this background, we may discuss some of the
important features of this instrument.
FEATURES OF CHEQUES:
It is an instrument in writing:
The law does not specify any particular format or lay down ant
specific material with which it is to be written. Depending upon the risk
analysis, from time to time, the banker has not only devised and printed
the forms but also has added many safety measures to the instrument to
safeguard the interest of the customer. The banker not only pays the
cheque but also collects cheques for his customers. With the growth of
trade and commerce and mechanization of bank branches and the cheque
clearing system, MICR cheques has been introduced by the bankers at
metropolitan centres. This facilitates quick processing of clearing
instruments with numbers encoded on the cheques. The Magnetic Ink
Character Recognition system, type of accountwise etc. which has helped
a great deal to quicken the clearing of cheques.
It contains an unconditional order:
It is an order in writing from creditor to the debtor. The order
should be unconditional, that is to say, that the order should not depend
upon the happening of an event. The word used is simply “pay”, nothing
more or less. The customer may cross the cheque and thereby through an
account only. This does not make the order conditional.
It is always drawn on a banker:
The cheque is always drawn on and paid by the banker. We have
discuss the definition and relationship between the banker and the
customer. One of the features of this relationship is to pay the customer’s
cheque at the branch where the account is maintained, during banking
hours, subject to availability of the balance properly applicable against
cheque. The name and the branch address is printed on the cheque. The
cheque should be drawn out of the series issued to the particular
customer. As already observed, cheque books are printed by the banker
with the serial numbers. The banker treats the cheque book as sensitive
stationary and maintains a meticulous record of the stock as well as its
issue to a particular customer. To avoid misuse of cheque forms, he
advises the customer also to have proper custody of cheque books, so that
it does not fall into the hands of wrong persons. While paying the cheque
the banker ensures that cheque drawn out of series issued to the particular
customer. The ledger keeper, while passing the cheque for payment notes
the cheque number, which should correspond to the cheque series issued
to the customer.
It is an order to pay certain sum of money:
Not only that the order should be of sum of money and money
only but also that the amount named therein should be certain. The
amount may be mentioned in Indian Rupees or in Foreign Currency. The
amount is generally mentioned in words and in figures, to make it more
certain. If the amount in words and figures differ the banker is right in
returning the cheque for uncertainty, through some opine that in case of
difference the amount in words is the amount directed to be paid.
The instrument may be payable either “to order” or “to bearer”:
While carefully observing the cheque form one would come across
the wording “ Pay to_____________________ or Bearer” printed on the
cheque form. If we insert the word “ Neelam Chaudhari ” after the word
“Pay to” the direction would read as “ Pay to Neelam Chaudhari” thereby
meaning that the cheque could be paid to the named person or any other
bearer of the instrument. This is known as bearer cheque. If the word
“bearer” is cancelled, whether the word “Order” is written or not, the cheque
becomes an “Order” instrument. This means that the cheque should be paid
to the named person or as per his direction. This direction is generally given
The payee named in the instrument should be certain:
The cheque generally has three parties when it is made. The “drawer” who
makes the cheque i.e. draws the cheque, the “drawee” is the banker on whom the
cheque is drawn and the “payee” to whom the payment is directed to be made. Even
if the name of the payee is “mis-spelt” or described by designation only, payee is
considered “certain”. The payee may be individual or a firm, company, institution,
society, association of persons, local body etc. The payee may be more than one
person or the alternative payees.
Signature of the Drawer:
The cheque is complete only if it bears the name of the banker,
the branch name, the date, the name of the payee. The amount in words
and figures and the signature of the drawer. The signature is the mandate
for paying banker and should tally with the specimen kept by him.
CROSSING OF CHEQUES:
The cheque is an order drawn on a banker who has to pay the
same if otherwise in order. If the drawer of the cheque wants to ensure a
perfect proof of payment he may further direct the banker to pay the cheque
through an account only. Crossing of cheque fulfils the desire of the drawer.
Section 123 to 131 of the Negotiable Instruments Act deals with the subject
of crossing the cheques. The provision is also applicable to banker’s
cheques, pay orders and drafts.
Section 123 and 124 deals with two types of crossing i.e.
general crossing and special crossing. General crossing is done by drawing
two parallel transverse lines across the face of a cheque. The crossing may
include such words as “and company” or “ not negotiable” in between the
transverse parallel lines. The effect of general crossing of the cheque is that
the same is to be paid through a bank account only. The payee’s account
may be in the same branch or the same bank or in another bank. The other
bank would be known as the collecting bank who credits the proceeds in the
account of the payee.
But if the cheque bears across its face an addition of the name
of the banker, the cheque would be deemed to have been crossed specially to
that banker, the effect of which is that the proceeds of the cheque can be
paid to the banker only. This is the reason why the crossing stamp is put on
the cheques received for collection which protects the instrument by
restricting the payment to that bank only. The banker to whom the cheque is
crossed specially may appoint another banker as his agent for collection. The
person who can cross the cheque are drawer, the holder or the banker.
Section 126 lays down the duty of the paying banker who
shall not pay a cheque crossed generally otherwise than to a banker and the
cheque crossed specially otherwise than to the banker to whom it is crossed.
This provision makes it obligatory on the paying banker to pay the crossed
cheques through a bank account only. I f a crossed cheque is presented over
the counter for cash payment proper precaution should be followed to see
that the crossing is opened under the authorized signature with the direction
that the “crossing is opened, pay cash” and the drawer himself approaches or
is contacted, before making of the payment. He shall be liable to the true
owner of the cheque for any loss he may sustain owing to such payment.
The paying banker would loose the protection granted under Section 128 of
the Negotiable Instruments Act.
Not Negotiable Crossing:
Inclusion of the words “not negotiable “ in the general or special
crossing would make the cheque transferable but not negotiable. This type of
crossing would remove the negotiable characteristic of the instrument and
the transferee cannot have a better title than what the transferor has. Section
130 of the Negotiable Instruments Act states that “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 than that which the person from whom he took it had”. This type
of crossing is a caution to the collecting banker and the paying banker will
be discharged if the payment is made in due course.
Account Payee Crossing:
In order to add more protection, sometimes the words “A/c Payee”
or “Payee’s A/c only” are added to the crossing. This type of addition of
word is not provided for in the Negotiable Instruments Act but it is a
practice widely followed. These words constitute a direction to the
collecting bank to collect the proceeds in the payee’s account only and do
not take away the characteristics of negotiability. The paying banker cannot
ensure that the amount is credited if the payee’s account and hence he is
discharged by payment of cheque in due course.
ENDORSEMENTS OF CHEQUE:
Section 14 of the Negotiable Instruments Act lays down that when
an instrument is transferred to any person, so as to constitute that person
holder thereof, the instrument is said to be negotiated. The section clarifies
that mere possession of an instrument does not make that person a holder as
defined under section 8. An instrument payable to bearer is transferred by
mere delivery (section 47 )and an instrument payable to order is transferred
by endorsement and delivery (section 48).Section 15 of the Act defines an
endorsement. The drawer or the holder of the instrument can endorse the
instrument by signing the (otherwise than as maker ) on the back, or on the
back, or on the face or on an allonge annexed there to or on a separate stamp
paper and he is called the endorser and the person in whose favour it is
endorsed it is called the endorsee.
Section 51 lays down that “Every sole maker, drawer, payee or
endorsee or all of several joint makers, drawer, payee or endorsee, of a
Negotiable Instrument may endorse and negotiate the same”. This is subject
to any restrictions already specified either for negotiation or for further
negotiation. Section 52 permits an endorser to exclude his own liability or
making his liability conditional. Section 53 speaks about a holder deriving a
better title from the holder in due course. Section 54 makes the instruments
endorsed in blank as instruments payable to bearer and section 55 says that
if an endorsement in blank is followed by an endorsement in full, the
instrument still remains a bearer instrument.
The endorsement for part amount is not valid but if part of the
amount is paid, an endorsement with a note for receipt of part amount
constitutes negotiation for the balance (Section 56). Unless the contrary is
proved, it is presumed that the endorsements are made as per the order in
which they appear on the instrument(Section 118). Whether an endorsement
is regular or irregular depends upon the established customs and usages of
the trade. The signature of the endorser or several endorsers should be in
their own hand. They shall spell their name in the same manner as they
appear on the instrument even if there is a mistake. There should be no
addition or omission of the initials. Prefixes and suffixes such as “Sir” or
“Dr” etc. are to be excluded. These are some of the requirements of a regular
endorsement. “When the maker or holder of a negotiable instrument signs
the same otherwise than as such maker, for the purpose of negotiation, on
the back or face thereof or on a slip of paper annexed thereto he is said to
endorse the same and is called the endorser”. ( Section-15 of Negotiable
Instruments Act).The usual place of endorsement is the back of the
instrument. This is a time honoured convention in the banking industry.
Endorsement means the writing of one’s name on the back thereof with a
view to negotiate the same. If as a result of rapid circulation the back of
instrument is entirely covered by endorsements, the holder in order to
provide space for further endorsements, in view of inadequacy of space, may
add or paste on it a piece of paper ( called it an allonge) and subsequent
endorsements may be made thereon.
KINDS OF ENDORSEMENTS:
Endorsement in Blank: Mere signature of the endorser on the back
of an instrument mentioning the name of the specified person in
whose favour the endorsement is made is called blank endorsement.
(Section-16) This has the effect of making the cheque payable to
bearer and thereafter the cheque can be negotiated by mere delivery,
since a bearer cheque is tranfered by mere delivery.
Endorsement in full : When the endorser makes a direction to pay
the amount specified in the cheque to a certain person or his order
then the endorsement is in full (S-16). By specifying the name, the
endorser guarantees that at the time the cheque left his hands he had a
good title and that the instrument was genuine in all respects. Further
he attests that all the endorsements made prior to this are genuine.
The next endorsee/payee in turn may endorse in blank or in full.
Conditional Endorsement: In the normal circumstances, the effect of
endorsement is that the endorser binds himself to pay upon no other
condition than the dishonour of the instrument on due notice of
dishonour to him. However, at his option, he may make his own
liability on the instrument subject to a condition, in which case the
endorsement is termed as a conditional endorsement. The condition
can be the happening of a contingent event or make the right of the
endorsee to receive the payment in respect of the instrument
dependent upon the happening of such an event. The condition may
either be condition precedent or condition subsequent. Until the
conditions are fulfilled no right accrues to the endorsee. The
conditions attached to endorsement do not affect the negotiability of
the instrument endorsed.
Restrictive Endorsement: When the right of negotiation is restricted
or excluded by the endorsement, it is restrictive endorsement. This is
on the lines of the account payee cheques. If the endorsement is Pay
to Mr. M.M.Lall , then Mr.Lall’s right to negotiate the instrument is
Endorsement-Sans Recourse: The endorser can endorse the
instrument in such a manner as to escape his liability. The effect of
adding the words Sans Recourse-“without recourse to me” would be
that the endorser is excluded from all the liability on the instrument.
PAYMENT OF CHEQUES AND THE RESPONSIBILITY OF
The cheque should be drawn on the banker in a form that
conforms to the definition of cheque as per Negotiable Instruments Act
discuss earlier. We also have see that to ensure uniformity and to avoid risk
on wrong payment bankers have printed the cheque leaves in conformity
with the requirements of law and the customer id required to draw the
cheque only out of the cheque book supplied to the customer. The banker
notes the serial number in the ledger, which is verified while making
payment. It is a statutory obligation of the banker to pay his customer’s
cheque. The banker with whom the customer maintains an account expects
that banker to honour his cheques in accordance with his mandate.
In order that the drawee bank executes the customer’s mandate,
the customer should observe reasonable precaution in drawing a cheque. It is
the duty of the banker to educate his customer by notifying the requirement
from time to time. A cheque could be said to have been properly drawn if it
satisfies the following requirements:
a) Cheque should be drawn in the form supplied by the banker. Though
the banker is not legally correct in refusing payment of a cheque
drawn in form supplied to another customer, in the interest of safety
of customer’s funds the banker may not pay such a cheque.
Sometimes the banker may issue a loose cheque form in case
customer is unable to use his form but in such cases the payment of
such instruments requires extra precaution such as payment should be
made to the drawer only to ensure that the payment is done in due
b) The cheque should bear a date. This date should be taken as a mandate
from the customer to the paying banker as to on which date the
cheque should be paid. The cheque can be paid on or after the date on
the cheque. The date should be complete in terms of day, month and
year. The cheque should be presented within a reasonable time from
its ostensible date. Generally a cheque presented after six months
from the date of the cheque is considered stale and requires drawer’s
reconfirmation before payment. A post dated cheque is one on which
the drawer has put a future date for its payment. Such cheques
becomes effective for payment on and after the date noted on the
cheque and if presented earlier it will be returned by the paying
banker saying that it is post-dated. The paying banker will loose the
protection under Negotiable Instruments Act if he pays a post dated
cheque before its ostensible date.
c) As explained earlier the mandate of the customer should be clear may
be payable to, or to the order of certain person, or to the bearer of the
d) The amount of the cheque should be written in words and figures at
the space provided. If the amount in words and figure differs the
paying banker can pay the amount in words. However, the banker
would prefer to return such cheque with the reason- amount in words
and figures differ. Sometime ago the Indian Bank’s Association had
directed the banks not to return such cheques but to pay the amount in
words and it is better that bankers follow this direction.
e) The drawer’s signature should be as per the specimen kept on bank’s
record. The signature must be made on the face of the cheque at the
space provided. While opening an account the banker obtains the
specimen signature and keeps them in proper custody to avoid misuse.
In a computerized environment the specimen signatures are scanned
into the computers. In both the cases the banker should exercise
utmost care to ensure that the specimen signatures do not fall in
wrong hands. It is a debatable question as to in what language the
specimen signature should be. Generally signature may be in English
or in any vernacular language. In the case of illiterate persons the
specimen signature may be by mere thumb impression. In all such
cases the banker has adopted suitable safety measurers, which we
have discussed at relevant places.
FRAUD AND FOGGERY :
Any alterations of the particular s on the cheque so that it
speaks a different language than the one it originally spoke amounts to
material alteration. Such material alterations requires the consent of the
drawer indicated by his signature at the places of alterations. If such
alterations are without the knowledge and consent of the drawer and to
his detriment such alterations are called as fraudulent alterations. Such
alterations may be in date, name of the payee, amount etc. As per Section
87 of the Negotiable Instruments Act any material alteration of a
negotiable instrument renders the same void as against the party who has
not consented to such alteration. The position of the paying banker vis-à-
vis this provision makes him vulnerable. It is absolutely necessary for
him to guard against such alterations or obtain the consent of the drawer
against such alterations. Otherwise he will not get the protection and the
payment will not be considered as payment in due course. In the modern
world there are cases of chemical alterations which will not be visible to
the naked eye at least for some period. Bankers have installed ultraviolet
ray lamps to detect such alterations which are not visible to the naked
eye. Though Section 89 of the Negotiable Instruments Act grants
protection to the paying banker if payment is made in accordance with
the apparent tenor of the instrument, in practice it becomes impossible to
the paying banker to prove his innocence in the face of the fact that when
the dispute is raised the alteration has become apparent.
On the basis of decisions of various courts and looking to the
opinions of various prominent authors on banking it is clear beyond doubt
that a cheque where the drawer’s signature is forged is no instrument at all.
The paying banker is not absolved of his responsibility by pleading
customer’s contributory negligence of not keeping the cheque leaves safely.
The courts have held that it is the duty of the employees of the bank to be
able to identify the signature of the customer and if they fail to discharge
their duty and thereby the customer suffers loss, there is no reason why the
customer should make good such loss.
If one of the joint account holder’s signature is forged by the
other one and if such cheque is paid the paying banker will be liable to
the other. Since one of the signatures is forged there is no mandate to the
bank. The document where one of the signatures is forged is not a cheque
but mere nullity and the bank is negligent in not properly verifying the
signature of the customer. The dishonesty of one of the employees of the
customer is no defence as the same cannot be proximate cause for the
loss. In the circumstances it has become absolutely necessary to verify
the signature meticulously before making the payment. Even if the
customer is very well known to the banker, proper verification of
signature is necessary.
PAYMENT IN DUE COURSE:
We have seen that a paying banker is discharged by paying
the cheque in due course . Section 10 of the Negotiable Instruments Act
lays down the conditions under which a payment is said to be payment in
due course. They are:
(a) Payment should be in accordance with the apparent tenor of the
instrument. Apparent tenor indicates the intention of the parties as
evidenced from what appears on the instrument. In this respect, the
relevant features of the instruments are date, the name of the payee,
whether the instrument is order or bearer, crossed or open, the
amount mentioned on the instrument, the signature, the
endorsements in blank or full etc. But it is once again reiterated that
the payment should be strictly on the basis of the apparent tenor and
the payment should be in monetary terms only.
(b) The payment should be made to the person in possession of the
instrument. The word ‘possession’ is very significant. The payment
should be made to a person who is capable of giving a valid
discharge. When the instrument is made payable to a particular
person or order and if the instrument is not endorsed by him,
payment to person in actual possession of the instrument will not
amount to a payment in due course. But if an instrument is payable
to bearer, payment to any person in possession, unless there are
suspicious circumstances, will be a payment in due course. If the
cheque is originally payable to the bearer the paying banker is
discharged of making payment of such cheque to the bearer
irrespective of subsequent endorsements. The maxim “once a
bearer, always a bearer” makes the position clear that the paying
banker can overlook the endorsements appearing on an instrument
which is originally made payable to bearer.
(c) The payment should be in good faith and without negligence and
in circumstances which does not afford a reasonable ground for
the banker to believe that the person who receives the payment is
not the person who is entitled to the payment. If there are doubts
about the person demanding the payment the banker is put to
enquiry and if he fails to make good the loss. Payment made on a
forged instrument is not a payment in due course. Similarly, cash
payments against cheques drawn by corporate bodies or
institutions should be noted that the paying banker who takes
proper care before making the payment of a cheque is the banker
who cares about his customers’ funds.
Payment of cheque depends upon the cheque being properly
drawn, presented at the branch where the account is maintained, during
banking hours and there are no other circumstances such as attachment,
garnishee or stop payment instructions of drawer. If the banker cannot pay
the cheque he has to return the same with the reasons for such return. The
reasons can be broadly classified into financial or non-financial reasons.
Reasons such as “Insufficient Funds”, “Not arranged for”, ”Exceeds
Arrangement “ etc. are financial reasons. Even the words “ Refer to drawer”
is a financial reason as the same is generally used by the banker when there
are no funds. The reasons like “Post dated”, “Amount in words and figures
differ”, “Alterations/deletions require drawer’s confirmation”, “Drawer’s
signature incomplete/differs” etc. are non-financial reasons. The popularity of
cheque currency depends upon its acceptability in the market. Looking to the
alarming rate of bouncing of cheques, particularly for financial reasons,
bankers and the Legislature have taken two important steps. The first step is
that the banker levies a charge to the customers for return of cheque for
financial reason and the second step is by making the return of cheque for
financial reason a cognizable offence.
According to Section 138 of the Negotiable Instruments Act, the
holder of the cheque can file criminal complaint against the drawer for
dishonour of the cheque for financial reasons. On dishonour of the cheque
notice of dishonour should be given to the parties concerned giving them a
time of 15 days to pat the money due under the cheque . The cause of action
arises after this period of 15 days is over and the holder can bring a non-
bailable criminal action within one month from the date of expiry of notice
period of 15 days.
The paying banker should be careful while returning the cheques.
The reason for return should be appropriate so as to ensure that there is no
unnecessary injury to the person’s reputation. The wrong dishonour of cheque
would entitle the drawer to claim damages for business loss and loss of
Here we may recall the provisions of Section 31 of the Negotiable
Instruments Act 1881, which lays down: ‘The drawer of a cheque having
sufficient funds of the drawer in his hands, properly applicable to the
payment of such cheque must pay the cheque when duly required to do so,
and, in default of such payment, must compensate the drawer for any loss or
damage caused by such default.”
We have seen that one of the most important functions of a
banker is to pay and collect his customers cheques. Thus a banker plays a dual
role as a paying banker and a collecting banker. Over the years the cheque has
become an important medium of settlement of payments. Thus a customer of a
bank either pays by cheque or receives payment by cheque. The payments
received by cheque are either collected in cash collected in cash or deposited
in the customer’s account, in a bank, who in turn collects the payment from
the other banker and credit customer’s account. The cheques may be drawn on
another branch of it may even be drawn on a bank abroad. We have already
seen that a cheque crossed generally or specially can be paid through a banker
Section 131 of the Negotiable Instruments Act provides for the
non liability of the banker receiving payment of a cheque under certain
conditions. Those conditions are:
a) The collecting banking should receive payment for a customer. While
discussing the definition of customer we have seen that the customer is
a person who has an account with the bank. The account should be
properly introduced. If the proceeds of a cheque is intended to go to the
account of ‘A’, but the same is collected by the banker in the account of
a wrong person who represented himself to be “A”, the collecting
banker would be liable for conversion of the ownership of funds unless
he can prove that he collected the payment in good faith and without
b) Negligence arises when there is a duty to take care and the collecting
banker has a duty to take care of the interests of the true owner of the
cheque. The test applied is what a prudent man would have done in
similar circumstances to guard his own property. It is presumed that the
banker would have provided reasonable and competent staff to carry
out his duty to take care. The burden to prove the fact that the banker
acted in good faith and without negligence lies on the banker himself.
The instances where the collecting banker may be held responsible are:
Collecting a cheque payable to an official in his private account.
Collecting cheques for very large sums in an account which has
otherwise low operation.
Collecting cheques payable to order without verifying the
Collecting the cheque crossed “A/ c payee” in an account other
than the payee.
Collecting the cheque in an account which is not properly
Collecting the cheque in a third party’s account without proper
c) The protection under Section131 is available only to crossed cheques,
and such crossing should be done before the banker accepts the cheque
d) The protection under Section 131 is available only when the collecting
banker receives payment for his customer and not otherwise. When the
banker collects payment for himself or for non-customer this provision
will not apply. The banker’s position here should be that of an agent for
collection and not in the capacity of a holder for value.
DIFFERENCES BETWEEN A CHEQUE AND A BILL OF
Often confusion arises between the differences a cheque and a
Bill of exchange. This arises from the attempt, in the Negotiable Instruments
Act defining a cheque through a medium of a Bill of Exchange. As per the
definition of the Ace every cheque has to be a Bill of Exchange. However,
the converse is not true and every bill of exchange is not necessarily a
cheque. The essential differences between the two are:
• Drawee: A cheque is always drawn on a banker, whereas Bill of
Exchange need not necessarily be drawn on a banker.
• Payability:: A cheque is always payable on demand whereas a Bill of
Exchange may be payable on demand or may be payable on demand
or payable on a future date. If the bill is payable on a future date, it is
called usance bill.
• Maturity: A usance bill has to be accepted and while calculating the
date of maturity of the usance Bill of Exchange, three days of grace
are given. A cheque is always payable on demand. Hence grace period
is not allowed in the case of cheque, since it is payable on demand and
acceptance is not required.
• Crossing: Cheques can be crossed , a bill of exchange cannot be
• Notice of dishonour: When a cheque is dishonoured no notice of
dishonour need to be given to the drawer. When a Bill of Exchange is
dishonoured notice of dishonour is to be given to the drawer and the
parties entitled to received such notice. In some cases it may be
necessary to have such dishonoured bills noted and protested.
“Promissory note is an instrument in writing (not being a bank note
or a currency note) containing an unconditional undertaking by the marker to
pay a certain sum of money only to, or to the order of a certain person, or to
the bearer of instrument”. (Section 4)
Specimen of a promissory note
Place : Madras
Rs. 2,000 Date : 25th
On demand I promise to pay Sai Krishna or order the sum of Rs.
Two thousand with interest at 6% per annum for value received.
The specimen of promissory note, when there is more than one promise and
the amount is due to a bank is given below:
Place : Madras
Rs. 3,000 Date : 9th
Se pt., 1974
On demand we jointly and severally promise to pay to Anand
Bank Ltd., T’ Nagar, Madras or order the sum of Indian Rs. three
thousand only at 8% per annum compounded quarterly for value.
(1) Sig. (1)
(2) Sig. (2)
Essentials of a Promissory Note :
From the definition given above the following essentials emerge :
(1) The instrument must be in writing.
(2) Mere acknowledgement of debt is not sufficient. There must be an
undertaking of promise to pay. An I.O.U. (I own you) therefore is
not a promise to pay.
(3) The promise to pay must be unconditional. The point is that a
conditional promise destroys the negotiable character of an
otherwise negotiable instrument. But a promise to pay at a
particular place or after a specified time or on the happening of an
event certain to happen is not conditional. For example, ‘I promise
to pay B, Rs. 1000, ten days after X’s retirement’ is not
(4) The instrument must be signed by the marker. In the case of an
illiterate he may affix his thumb mark or any other mark. The
signature may be indicated by a facsimile or by stamping the name.
(5)The promise to pay must be a certain sum of money in legal tender.
A promise to pay Rs. 500 and such other sums as may become due
is not promissory note. But where the promise is to pay the money
at a specified rate of interest, does not make the sum uncertain.
(6) The payee must be certain.
(7) Usually promissory notes bear date and place but they are not
required under law. But a stamp is necessary as is required under
the Indian Stamp Act.
Points of Difference between Promissory Notes and Bills of Exchange:
(1) A promissory note contains a promise to pay, but a bill of
exchange contains an order to pay.
(2)In a note there are only two parties viz. the maker (debtor) and the
payee (creditor). In a bill there are three parties, the drawer, the
drawee and the payee. But one person may assume two capacities,
e.g. the drawee and payee may be the same person.
(3) In the case of a promissory note, the liability of the maker who
signs the instrument is primary and absolute. But in the case of a
bill the drawer becomes liable only if acceptor fails to make the
payment. Thus his liability is secondary and contingent. If the bill
is not even accepted, the drawer’s liability is primary.
(4) A bill which is payable after sight and bill drawn payable after
specified period from the date of the bill require acceptance before
they can be presented for payment. But in the case of a promissory
note as the maker himself is liable the need for acceptance does not
(5) A bill can be made payable to bearer. But a promissory note is
payable only to the payee named therein or to his order.
(6) Foreign bills are drawn in sets; there is no such practice in the case
of promissory notes.
(7) The promise to pay in the case of promissory note and the order to
pay in the case of bills are unconditional. But in the case of bills
they may be conditionally. If the holder does not object to it, such
qualified acceptance does not amount to dishonour. However other
parties to the instrument are discharged from their liability.
(8) The practice of noting and protesting applicable to bills is
unnecessary in the case of promissory notes. It is, however,
necessary to note that protest is only compulsory in the case of
(9) Parties in immediate relation in the case of a promissory note are
maker and payee, but, in the case of bills they are the drawer and
(10) In the case of bills the holder should give notice of dishonour to
the drawer and endorsers otherwise they are discharged in the case of
RIGHT AND PRIVILEGES OF THE NEGOTIABLE
A holder in due course gets a perfectly good title to the instrument. He
is not affected by any defects in the title of the transferor or the
previous parties. Just as in the case of a devout Hindu a dip in the
Ganges frees him from all the sins, negotiable instrument in the hands
of a holder in due course is relieved of all its previous defects. What is
more important is that all the holders subsequent to him are also
protected. They obtain the same rights and privileges as that of the
holder in due course. The implication of this right is that the acceptor
of the instrument or maker of a note cannot plead against the holder in
due course any right of set-off or a counter claim which he might have
had against the transferor of the instrument.
He can recover the amount from all the previous parties. All of them
will continue to be liable until the instrument is duly satisfied.
Sometimes instruments might have been delivered conditionally or
for a special purpose. When such an instrument comes into the hands
of a holder in due course, the parties cannot escape liability on the
ground that the condition or special purpose not be fulfilled.
In the case of enchoate instruments, he can recover the full amount
covered by the stamp.
His title is not affected even if the instrument was the result of fraud
or any other offence as between immediate parties. Holder in due
course cannot, by very definition, be one of such parties. There are
however, some exceptions. The signature on the instruments must not
be the result of forgery. The instrument must not be vitiated due to
lack of consent right from the beginning. In these cases, the holder in
due course is affected by the defects of the instrument kike any other
Every holder is presumed to be a holder in due course unless proved
The person liable to pay cannot set up defences against the holder in
due course that the instrument has been lost or obtained from him by
means of fraud or unlawful consideration.
Acceptor is precluded from denying against the holder the existence
of the drawer, genuineness of his signature, his capacity to draw, or to
endorse or his existence of the payee and his capacity to endorse.
The drawer is precluded from denying the existence of payee and his
capacity to endorse.
So also the endorser is estopped from denying the genuineness of
Acceptor cannot raise the plea against the holder in due course that
the drawer is the fictitious person.
Endorser and Endorsee: A negotiable instrument is negotiated by means of
an endorsement. Generally, the first endorsement is made by the payee. The
intention of endorsement is to enable the transferee to obtain the payment of
the instrument. The endorsement can be attached on the face or back of the
instrument or on a slip of paper attached thereto if the space is not sufficient.
Such a slip of paper is called Allonge. The person who signs on the
instrument or on the allonge with a view to transfer the instrument is called
the endorser. The person in whose favour the bill is endorsed is called the
Liability of the Parties to a Negotiable Instrument:
Drawer: When the instrument is dishonoured by the acceptor or drawee, he
has to compensate the holder provided he has received the notice of
dishonour. The liability of drawer is primary before acceptance and
secondary after acceptance.
Maker and Acceptor: The liability of both is primary and they are bound to
pay the amount at maturity according to the apparent tenor of the instrument
or acceptance as the case may be. Failure to do so makes them liable to
compensate any party to the note or bill for any loss or damage caused by
Endorser: The endorser of a negotiable instrument is liable to all
subsequent parties in the event of dishonour unless he has excluded such
liability as in the case of ‘sans recourse’ endorsement. Like drawer, he is
also entitled to receive notice of dishonour.
The drawee becomes liable only after giving his acceptance.
Acceptance consists of the signature of the drawee with or without the words
accepted. The drawee must give his unqualified assent and must not express
that the drawee will perform his promise by any means other than payment
of money. An acceptance to be valid must be in writing signed by the
drawee or his agent on the bill and completed by delivery to the holder.
Kinds of Acceptance:
Acceptance may be of two kinds: namely, general and qualified.
General Acceptance: Where drawee accepts the bill without adding any
condition regarding payment, the acceptance is called general acceptance.
As a rule acceptance must be general.
Qualified Acceptance: A qualified acceptance is one where the drawee
does not assent to the terms of the bill as drawn, but adds some condition or
qualification therein. A qualified acceptance may be:
Conditional: The payment is made to depend on the fulfillment
of some condition or on the happening of some event, e.g.,
“Accepted payable on safe receipt of goods”, “accepted payable
when in funds” or “accepted payable after receiving the railway
Partial: A bill for Rs. 3,000 accepted for Rs. 2,000 only.
Qualified as to place: Where the drawee makes the bill payable
at a particular place and there only.
Qualified as to time: A bill payable 30 days after date accepted
a payable 60 days after date.
Acceptance by some of the drawees only: Where there are
several drawees and all of them do not accept, the acceptance is
qualified. But if the drawees are partners, one or more can
accept on behalf of all the partners.
Acceptance may be given by (a) the drawee, (b) all or several drawees, (c)
the drawee in case of need, (d) the acceptor for honour and (e) the agent of
any of the persons mentioned above. Drawee in case of need, and Acceptor
for honour (already discussed. Ref.: Parties to Negotiable Instruments.)
Presentment for Acceptance
As stated earlier only bills payable certain days after sight or the date
of the bill or bills where there is an express stipulation for presenting them
for acceptance, need be presented for acceptance. Bills payable on demand
or on a fixed day need not be presented. Strictly speaking bills payable
certain number of days after the date of the bill (time bills) do not require
acceptance. But in practice this formality is gone through as otherwise it will
be difficult to negotiate them.
The bill should be presented to the following:-
1) The drawee or his authorized agent.
2) All the drawee if they are no partners.
3) The legal representative where the drawee is dead.
4) The official assignee or receiver as the case may be, if the drawee
has become insolvent.
The bill has to be presented for acceptance within a reasonable time, during
business hours and at business premises or residence of the drawee.
Presentment can also be made through post when so authorized. If the holder
fails to present the bill, the drawee and all the endorsers are discharged from
their liability. The holder cannot file a suit even on the basis of original
Presentment is excused in the following cases:-
• Where the drawee cannot be found,
• Where the drawee is a fictitious person or has contractual
• Although presentment is irregular, acceptance has been within
refused on some other ground.
The holder must allow the drawee 48 hours to consider whether he will
accept the bill or not. If he does not accept within this time the bill is
deemed to be dishonoured by non-acceptance.
PRESENTMENT FOR PAYMENT
All negotiable instruments will have to be presented for payment on
maturity. If there is a default by the folder, the parties thereto will not be
liable to him. The following rules should be observed:
1) The instrument muse be presented on the due date.
2) If the instrument is a demand instrument, presentment must be made
within reasonable time.
3) Presentment must be made by the holder or his authorized agent at a
reasonable hour on a business day at the proper place specified in the
bill and if not specified at the address of the drawee given the bill. If
both are not available it should be presented at the drawee’ s place of
business or at his ordinary residence or wherever he can be found or at
his last known place of business.
4) Where there are several acceptors, unless they are partners, the bill
should be presented to all of them.
5) If the drawee id dead, the bill should be presented to the legal
6) Presentment through the post office.
Circumstances when presentment is excused or not necessary:
a) If the drawee intentionally prevents or cannot be found after
b) Where the drawee is fictitious person.
c) If the presentment for payment is waived.
d) Where the drawee could not suffer any damage as in the case of
e) If the acceptor or maker intentionally prevents the presentment
of the instrument.
f) Where a party makes a part payment and promises to pay the
Payment for honour: Arises when a person comes forward to pay
the amount under the bill. After it is protested for the honour of anyone
liable thereon. Consent of the holder is not necessary for such payment
whereas such consent is necessary in the case of acceptance for honour. He
should declare before a notary public should be rewarded by notary public.
Anyone including a person who is already liable can be a payer for honour.
On payment he is entitled to all the rights of the holder at the time of such
payment. He can recover the money with interest and also the expenses
incurred from the party for whose honour he pays.
Dishonour may be either by non-acceptance or non-payment. When
such dishonour takes place the holder should give notice to the drawer or
other parties, whom he seeks to make liable. If such notice of dishonour is
not sent to the parties liable on the bill they are discharged from liability.
Contents of notice:
The notice should contain (a) the fact of dishonour (b) the way
in which it was dishonoured and (c) the fact that the party will be held liable.
Such a notice will have to be given within a reasonable time after dishonour
at the place of business or at the residence of the party. Each party receiving
the notice must in turn give notice to prior parties whom he seeks to make
liable. Notice of dishonour may be given to the party himself or to his agent
or to his legal representative in case he is dead or his official assignee in case
ha has become insolvent. If there are joint drawees and endorsers notice
must be given to all of the them. In case there is a “ drawee in case of need”
the instrument must be presented to him before issuing notice of dishonour.
Notice of honour is excused:-
When it is dispersed with by a party entitled to it as in the case
of facultative endorsement.
Where the drawer has countermanded the payment.
When a party cannot be found after due search.
If notice cannot be given after exercise of reasonable diligence
or such notice does not reach the party.
If the drawer and drawee are the same person.
If the drawee is a fictitious person or a person incompetent to
enter into contract.
When the party knowing the facts, unconditionally promises to
Noting and Protesting :
When a bill is dishonoured by nonpayment or non-acceptance,
the holder before issuing notice of dishonour may get the fact of dishonour
noted down by a notary public. The notary public is a person appointed by
the State Government. The latter will note the following facts : (a) the fact
of dishonour, (b) the date of dishonour, (c) the reason for dishonour and (d)
the notary charges.
After having the bill noted, the holder may have the bill protested and
obtain a certificate from him. Such a certificate is called protest. Protest is a
formal document issued by the notary public certifying the fact of dishonour.
Protest for better security :
Where the acceptor becomes insolvent or his credit has been publicly
impeached, or suspends payment to his creditor, the holder may demand
better security and if one is not forthcoming, my cause such fact to be noted
and certified. Such a certificate is called protest for better security.
Noting and protesting are not necessary in the case of Inland bills. In
the case of foreign bills they must be duly protested for non-acceptance or
non-payment. A bill must be protested in the place of dishonour and on the
Contents of Protest:
(a) the instrument or its copy;
(b)name of the parties for whom and against whom the bill is
(c) a statement that payment or acceptance or better security has been
demanded, of such person by the notary public and his refusal or a
statement that he gave no answer or that he could not be found;
(d)the place and time of dishonour, and of refusal to furnish better
(e) the signature of the notary public, the details of acceptance for
honour and payment for honour, if any.
Miscellaneous Points relating to Dishonour, Noting and Protesting:
(1) A notice of dishonour can be given in India, U.K. and U.S.A.
orally or in writing. Under the Bills of Exchange Act notice of
dishonour in writing need not be signed.
(2) Under Section 94 of the Bills of Exchange Act, in the absence of a
notary, a protest could be effected by “any householder or
substantial resident of the place attesting the dishonour of a bill in
the presence of two witnesses.” This is because the services of
notary may not be available at all places.
(3) Under the Geneva Conventions the holder of a Bankrupt’s
acceptance is allowed to exercise his right of recourse but under
the Bills of Exchange Act and the Negotiable Instruments Act the
holder is required to wait till the bills fall due before he can sue
any party, and the protest for better security does not excuse a
subsequent protest for non-payment, if the bill is not met at
Majority of the people are not aware about negotiable instrument. So
Government Organization, Financial Institution, educational institution
should take initiative in spreading the uses of negotiable instrument and
benefit thereof. This will help the Government Agencies to track down the
transactions and weed out the black money circulation in the economy. Bills
of Exchange are very much useful to businessmen and corporate clients
where the buyers as well as sellers get the benefit of credit and guaranteed
payment. This also serves as a evidence in court of law during the time of
dispute and litigation.
ANALYSIS OF SURVEY REPORT
AWARE NOT AWARE
According to the survey, 17% are aware of negotiable instruments.
Majority of the people i.e. 83% are not aware about negotiable
BILL OF EXCHANGE
As per the survey 86% uses cheque in their transaction. Only
businessmen and retail traders opt for promissory note and bill of
31% felt that the charges on negotiable instruments are
reasonable, while the majority felt that the same are not
reasonable i.e. 69%
41% of the people felt that procedure for acquiring negotiable
instrument are time consuming, while almost same percentage
felt that the procedure is simple
According to the survey, 91% say negotiable instruments are safe. While
few people i.e. 9% say they are not safe.
DAILY MOMTHLY WEEKLY
Around 16% those who are businessmen and traders use it daily
while 39% use monthly and 45% use it monthly.
Specimen of Cheque
QUESTIONAIRE FOR THE BANKER
1) Are Negotiable Instruments are easily transferable?
Ans- Yes. It can be transferred from one person to another by
endorsement or by mere delivery.
2) What is the difference between Promissory Note and Bills of Exchange?
Ans- In promissory Note, there is a promise to pay while in Bills of
Exchange there is an order. In Promissory Note he liability of the
maker is primary and absolute and in Bills Of Exchange the drawer is
liable in case of non-payment by drawee. A bill can be paid to a bearer
but in Promissory Note payment is made to the payee named therein
or to his order.
3) What is dishonour?
Ans- Dishonour is non- acceptance or non-payment. For e.g is there is any
difference in the amount in words and figures the bank will dishonour
4) On an average how many negotiable instruments are cleared in a day?
Ans- Approximately 5000 cheques, 5 bills of exchange and 15 promissory
note are cleared in a day.
5) How many days do banks take to clear this instruments?
Ans- Cheques are cleared within 3 days. Bills of Exchange and Promissory
Notes depend upon the tenure.
6) What are the discounting charges charged by your bank for bills of
Ans- It totally depends upon tenure. For e.g. for 90 dayy 16% is deducted as
Today in the modern business world Negotiable Instrument plays an
important role as well as convenient mode of settling account. A negotiable
Instrument is a special type of contract for payment of money which is
unconditional and capable of transfer by negotiation. Negotiable Instrument
make the economy goes round. The law relating to Negotiable Instrument
i.e. Negotiable Instrument Act 1881 has a tremendous importance as a a
considerable amount of litigation in Indian courts revolve around this
Book : Banking- S.M.Chaudhary
Indian Financial Institute of Banking.