NEGOTIABLE INSUTRUMENTS ACT 1881

5.1 DEFINITION OF A NEGOTIABLE INSTRUMENT

[SECTION 13]
The word 'negotiable' means transferable from one person to another, and the term 'instrument' means 'any
written document by which a right is created in favour of some person.' Thus, the negotiable instrument is a
document by which rights vested in a person can be transferred to another person in accordance with the
provisions of the Negotiable Instruments Act, 1881.
The term 'negotiable instrument' has been defined as - A 'negotiable instrument' means a promissory note, bill
of exchange or cheque payable either to order or to bearer."

MAIN FEATURES OF A NEGOTIABLE INSTRUMENT

An instrument may be negotiable either by

(1) Statute - Promissory notes, bills of exchange and cheques are negotiable instruments under the Negotiable
Instruments Act, 1881; or
(2) By usage - Bank notes, bank drafts, share warrants, bearer debentures, dividend warrants, scripts and
treasury bills
An instrument is to be called 'negotiable' if it possesses the following characteristic features:
1) Freely transferable - Transferability may be by
(a) delivery, or
(b) by endorsement and delivery.
2) Holder's title free from defects: The holder (of the negotiable instrument) in due course acquires a good title not
withstanding any defect in a previous holder's title. A holder in due course is one who receives the instrument
for value and without any notice as to the defect in title of the transferor.
3) The Holder can sue in his own Name - Another characteristic feature of a negotiable instrument, is that its holder
in due course, can sue on the instrument in his own name.
4) A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of times till its maturity.
5) A negotiable instrument is subject to certain presumptions.
Presumptions as to negotiable instruments [Sections 118-119]
1) As to Consideration - Every negotiable instrument is deemed to have been made, drawn, and accepted
endorsed, negotiated or transferred for consideration.
2) As to date- Every negotiable instrument bear the date on which it is made or drawn.
3) As to Acceptance- Every bill of exchange was accepted within a reasonable time after the date mentioned
therein and before the date of its maturity.
4) As to Transfer- Every transfer of a negotiable instrument was made before the date of its maturity in case of an
instrument payable otherwise than on demand.
5) As to the order of Endorsements - The endorsements appearing on it were made in the order in which they
appear thereon.
6) As to lost Instruments - Where an instrument has been lost or destroyed, that it was duly stamped and the
stamp was duly cancelled.
7) As to holder-in-due course - The holder of the instrument is a holder in due course.
8) As to dishonour - If a suit is filed upon an instrument, which has been dishonoured, the Court shall, on proof of
the protest, presume the fact of dishonour unless it is disproved.

5.2 PROMISSORY NOTE

[Section 4]

Definition
A promissory note is an instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking, signed by the maker to pay a certain sum of money to, or to the order of, a certain
person or to the bearer of the instrument
 NEGOTIABLE INSTUMENTS ACT

Examples of Promissory Notes

“A” signs instruments in the following terms:
"I acknowledge myself to be indebted to 'B' in Rs. 1000, to be paid on demand, for value received."
Followings are Not Promissory Notes.
(i) "Mr. B, I.O.U. (I owe you) Rs. 1000."
(ii) "I promise to pay B Rs. 1500 on D's death, provided he leaves me enough to pay that sum,"
(iii) "I promise to pay B Rs. 500 seven days after my marriage with C."

Essentials or Characteristics of a Promissory Note

From the definition, it is clear that a promissory note must have the following essential elements.
(1) In writing - A promissory note must be in writing. Writing includes print and typewriting.
(2) Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere acknowledgement of
indebtedness is not sufficient.
 Notice that the use of the word `promise' is not essential to constitute an instrument as promissory note.
(3) Unconditional - The promise to pay must not be conditional. Thus, instruments payable on performance or
non-performance of a particular act or on the happening or non-happening of an event are not promissory
notes.
(4) Signed by the Maker – The promissory note must be signed by the maker, otherwise it is of no effect.
(5) Certain Parties - The instrument must point out with certainty the maker and the payee of the promissory
note.
(6) Certain sum of money - The sum payable must be certain or capable of being made certain.
(7) Promise to pay money only - If the instrument contains a promise to pay something in addition money, it
cannot be a promissory note.
(8) Number, place, date etc - These are usually found in a promissory note but are not essential in law. If a
promissory note does not bear a date, it is deemed to have been made when it was delivered.
(9) It may be payable in installments
(10) It may be payable on demand or after a definite period - Payable 'on demand' means payable immediately
or any time till it becomes time-barred. A demand promissory note becomes time barred on expiry of 3 years
from the date it bears.
(11) It cannot be made payable to bearer on demand or even payable to bearer after a certain period
(12) It must be duly stamped under the Indian Stamp Act - It means that the stamps of the requisite amount
must have been affixed on the instrument and duly cancelled either before or at the time of its execution. A
promissory note, which is not so stamped, is a nullity.

5.3 BILL OF EXCHANGE

[Section 5]

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

Characteristic Features of a Bill of Exchange

1. It must be in writing.
2. It must contain an order to pay and not a promise or request.
3. The order must be unconditional.
4. There must be three parties, viz., drawer, drawee and payee.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being made certain.
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.
 NEGOTIABLE INSTUMENTS ACT

5.4 CHEQUE
[Section 6]

A cheque is defined as 'a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand’.
Thus, a cheque is a bill of exchange with two added features, viz.:
(i) it is always drawn on a specified banker; and
(ii) it is always payable on demand and not otherwise.

Bill of Exchange and Cheque distinguished

Cheque Bill of Exchange

1) It must be drawn only on a banker. 1) It can be drawn on any person including a banker.
2) The amount is always payable on demand. 2) The amount may be payable on demand or after a.
specified time.
3) The cheque is not entitled to days of grace. 3) A usance (time) bill is entitled to three days of
grace.
4) Acceptance is not needed. 4) A bill payable after sight must be accepted.
5) A cheque can be crossed 5) Crossing of a bill of exchange is not possible.
6) Notice of dishonour is not necessary. The parties 6) Notice of dishonour is necessary to hold the parties
thereon remain liable, even if no notice of dishonour liable thereon. A party who does not receive a
is given. notice of dishonour can generally escape its liability
thereon.
7) A cheque is not to be noted or protested in case of 7) A bill is noted or protested to establish dishonour.
dishonour.
8) The protection given to the paying banker in respect 8) No such protection is available in the case of bills.
of crossed cheques is peculiar to this instrument.

Promissory Note and Bill of Exchange distinguished

Promissory Note Bill of Exchange

1) There are only two parties – the maker (debtor) and 1) There are three parties – the drawer, the drawee and
the payee (creditor). the payee- although any two of these capacities may
be filled by one and the same person.
2) A note contains an unconditional promise by the 2) It contains an unconditional order to the drawee to
maker to pay the payee. pay according to the drawer`s directors.
3) No prior acceptance is needed. 3) A bill payable `after sight` must be accepted by the
drawee or his agent before it is presented for
payment.
4) The liability of the maker or drawer is primary and 4) The liability of the drawer is secondary and
absolute. conditional upon non-payment by the drawee.
5) No notice of dishonour need be given. 5) Notice of dishonour must be given by the holder to
the drawer and the intermediate endorsers to hold
them liable thereon.
6) The maker of the note stands in immediate relation 6) The maker or drawer does not stand in immediate
with the payee. relation with the acceptor drawee.

5.5 HOLDER AND HOLDER-IN-DUE-COURSE

[Section 8 & 9]

Holder of negotiable instrument

A holder of a negotiable instrument is a person entitled in his own name to the possession of that negotiable
instrument and to receive or recover the amount due thereon from the parties thereto.
 NEGOTIABLE INSTUMENTS ACT

A 'holder in-due-course'
A 'holder in-doe-course', on the other hand, is a person who for consideration became the possessor of a
negotiable instrument before the due date of payment of that instrument and without having sufficient cause to
believe that any defect existed in the title of the person from whom he derived his title.
Thus, where a person receives a negotiable instrument without consideration, he may be a holder but will not
be called as a holder in due course.

5.6 CERTAIN IMPORTANT CONCEPTS AND EXPLANATIONS

Ambiguous Instrument (Section 17) - the holder may at his election treat it as either and the instrument shall be
thenceforward treated accordingly.

Where Amount is stated differently in Figures and Words (Section 18) - the amount stated in words shall be
the amount undertaken or ordered to be paid.

Inchoate Instruments (Section 20) - It means an instrument that is incomplete in certain respects.
Where one person signs and delivers to another person a duly stamped negotiable instruments and however,
that negotiable instrument is either wholly blank or having written thereon. Such an instrument is thus
incomplete (inchoate).
The maker of the instrument has thereby prima facie authorises the holder thereof to make or complete, for any
amount therein but not exceeding the amount covered by the stamp.

Lost or Stolen Instruments (Sec. 58) - In such instances, the possessor or endorsee who has found or had
obtained the instrument by fraud shall not be entitled to receive the amount due thereon from such maker of the lost
instrument. (Exception – when the later (finder) person is holder in due course).

Forged Instruments - As a general rule, a forged signature does not confer a good title. Even a holder in due
course cannot claim payment on a forged instrument.

5.7 CHEQUE
[Section 6]

Meaning of a Cheque
A Cheque, in essence, is an order by the customer of the bank directing his banker to pay on demand, the
specified amount, to or to the order of the person named therein or to the bearer. It has been defined as a bill of
exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
A 'Cheque in the electronic form' means a Cheque, which contains the exact mirror image of a paper Cheque,
and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of
digital signature (with or without biometrics signature) and asymmetric crypto system.
A "truncated Cheque" means a Cheque which is truncated during the course of a clearing cycle, either by the
clearing house or by the Bank whether paying or receiving payment, immediately on generation of an electronic
image for transmission, substituting the further physical movement of the cheque in writing.

Features of a Cheque
A Cheque is a bill of exchange with following features, viz.,
(i) must be in writing;
(ii) contain an unconditional order to pay
(iii) drawn on a specified banker;
(iv) for a certain sum of money;
(v) the payee must be a definite person;
(vi) amount must be written both in figures and words;
(vii) it must be dated.
(viii) it is always drawn on a specified banker; and
(ix) it is always payable on demand and not otherwise.
 NEGOTIABLE INSTUMENTS ACT

Cheques in electronic form

In view of the banking transforming from traditional banking to e-banking, the electronic form or electronic
image of a Cheque as a valid Cheque has also now been recognized [Negotiable Instruments (Amendment)
Act, 2002].

Dating of cheques
The drawer of a Cheque is expected to date it before it leaves his hands. A cheque without a date is considered
incomplete and is returned unpaid by the banks.
A post-dated cheque is as much negotiable as a cheque for which payment is due, i.e., the transferee of a post-
dated cheque, like that of the cheque on which payment is due, acquires a better title than its transferor, if he is
a holder in due course.

Crossing of cheques
Crossing is a unique feature associated with a cheque affecting to a certain extent the obligation of the paying
banker and also its negotiable character. It is a peculiar method of modifying the instrument to the banker for
payment of the cheque.
Crossing on a cheque is a direction to the paying banker by the drawer that payment should not be made
across the counter. The payment on a crossed cheque can be collected only through a banker.
Crossing of a cheque is effected by drawing two parallel transverse lines with or without the words 'and
company' or any abbreviation thereof. A cheque that is not crossed is called an `open cheque`.

Significance of crossing
As payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves as a
measure of safety against theft or loss of cheques in transit.

Types of crossing
Crossing may be either
(1) General - to mean as where a cheque bears across its face an addition of the words 'and company' or any
abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either
with or without the words 'not negotiable', that addition shall be deemed a crossing and the cheque shall be
deemed to be crossed generally
(2) Special - implies the specification of the name of the banker on the face of the cheque
The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through
the particular bank mentioned therein. Thus, it makes the cheque system still safer.

Not Negotiable Crossing

A person who takes such a cheque 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 in the first instance, had. Thus, by including the words 'not
negotiable', the cheque is deprived of its special feature of negotiability. A bank, therefore, should be extra
careful in paying such cheques.

Account Payee Crossing (A/c Payee Crossing)

An A/c payee crossing signifies that the drawer intends the payment to be credited only to the payee’s account
and in none else. The addition of 'A/c payee' to a crossing has no legal sanctity and the paying banker may
ignore such a direction without being liable for any damages.

Not Negotiable, A/c Payee Crossing

The instrument is rendered not negotiable (making the 'paying banker' responsible to see that payment is made
to the person who is entitled to receive it) plus A/c payee crossing directs the collecting banker to collect it for
the payee only.

Who can cross a cheque

A cheque may be crossed by any of the following:
1. The drawer of a cheque.
2. The holder of a cheque.
 NEGOTIABLE INSTUMENTS ACT

3. The Banker, in whose favour the cheque has been crossed specially.

Marking of cheques
Marking or certification is a method adopted when the paying banker verifies the customer's account and
indicates thereon that there are enough funds in his account torn that cheque. [Sita Ram v. Bombay Bullion
Association (1965)]. Marking only certifies the genuineness of the drawer's signature and the sufficiency of
funds.

Material alterations
An alteration is material if it alters materially or substantially the operation of the instrument and thereby the
rights and liabilities of the parties.
In Aldons v. Cornwall, a material alteration was defined as "an alteration, which alters the business effect of
the instrument if used for any business purpose.
Ex-
(i) date;
(ii) the time of payment;
(iii) the place of payment;
(iv) the sum payable;
(v) the number of parties;
(vi) the relationship between parties;
(vii) legal character of the instrument;
(viii) opening a crossed cheque;
(ix) converting an order cheque into a bearer cheque.
It is immaterial as to who makes the alteration. An alteration made by an outsider or stranger to the instrument
will be considered as an alteration made by the holder himself as it is the duty of the holder to preserve the
instrument, free from such forgeries.

Effect of Material Alteration

Any material alteration of a negotiable instrument, which has not been, consented to by either the drawee or
the payee is void as against them.
Alterations which are not material
(i) filling blanks of the instrument;
(ii) conversion of blank endorsement into endorsement in full;
(iii)crossing of cheques;
(iv) altering a general crossing into a special crossing; addition of the words 'account payee' negotiable' to a
crossing; and where a cheque is crossed specially, the banker to whom crossed, crossing it specially to
another banker, his agent for collection;
(v) canceling the word bearer and making the cheque payable to order; and
(vi) alteration made with the consent of the parties.

5.8 THE PAYING BANKER

The 'paying banker' is a term used to denote the position and duties of the drawee-banks in paying cheques of
their customers. Thus, 'paying banker' is a banker upon whom a cheque is drawn.
DUTIES AND RESPONSIBILITIES OF A 'PAYING-BANKER'
The drawee of a cheque having sufficient funds of the drawer in his hands must pay the cheque when duly
required so to do. In default of such payment, the paying bank must compensate the drawer for any loss or
damage caused by such default
 NEGOTIABLE INSTUMENTS ACT

Ex --- In Rolin v. Steward it was held that even though the default arose through inadvertence, and in
fact the cheque was subsequently paid, the Court will not award merely nominal damages, because
credit of the customer was seriously affected. This would be the case even if the customer's account
was overdrawn but the banker had agreed to pay his cheques on an overdraft within certain limits.
[Fleming v. Bank of New Zealand].

Protection in case of crossed cheques

A banker paying the cheques crossed generally to a banker or to the specified banker, is protected even if it
turns out to be a payment to a wrong payee.

Payment in due course [Section 10]

Payment in due course means payment in accordance with the apparent tenor of the instrument made in good
faith and without negligence. They are as follows: -
1. Payment must be in accordance with the apparent tenor of the instrument
2. Payment must be made in good faith and without negligence
3. Payment must be made to the person in possession of the instrument
4. Payment must be made to the person entitled to receive.
5. Payment must be made in money only.

When banker must refuse payment

A paying banker must refuse payment on cheques if any of the following circumstances exist:
1. Where the customer countermands the payment (stopped by the drawer)
2. On receipt of a notice of customer's death
3. On customer's becoming insolvent
4. On receipt of a notice of the customer's insanity
5. On receipt of Garnishee order
5. On assignment of Credit balance
7. On suspicious misuse by trustee

When banker may refuse payment

1. Where the cheque is post-dated.
2. Where the funds of the customer are insufficient.
3. Where a cheque is not duly presented.
4. Not properly signed joint holders
5. Material alteration or irregularity
5. Presented after validity period

5.9 DISHONOUR OF A CHEQUE ON GROUNDS OF INSUFFICIENCY OF FUNDS

[Sections 138 to 142]

Section 138 to 142 of the Negotiable Instruments Act provide for criminal penalties in the event of dishonour of
cheques for insufficiency of funds. The drawer, under Sec. 138, may be punished with imprisonment upto 2
years (earlier I year) or with a fine up to twice the amount of the cheque or with both. The enhancement in the
penal provisions was made by Negotiable Instruments (Amendment) Act 2002 w.e.f. 5.2.2003.
In order to attract the aforesaid penalties, following conditions must be satisfied:

(1). Insufficiency of funds

 The Courts have held the following amounting to dishonour for insufficiency of funds:
(i) Stop-payment instructions to the payee-bank [ET & TD Corpn. Ltd. v. Id Technologies & Engross
P. Ltd. (1996)].
(ii) Request to the payee not to present the cheque till further information [Modi Cement Ltd. v. Kuchil
Kumar Nandi (1998)].
(iii) Cheque received back from the payee-bank with the remarks 'Account Closed' [G.M. Mittal Stainless
Steel vs. Nagarjuna Investments (1997) and N.E.P. C. Micon Ltd. vs. Magna Leasing Ltd. (1999)].
(2).Payment against an enforceable debt
(3). Cheque should be presented to the paying bank within the validity period (generally 6 months from the date on
 NEGOTIABLE INSTUMENTS ACT

which it is drawn)
(4). Payee to serve Default Notice, demanding payment within 30 days
(5). Drawer liable upon failure to pay within 30 days`

Upon failure Complaint in writing; Offence triable by 1 st Magistrate

The payee having failed to receive the payment within 30 days` of notice of dishonour of the cheuqe, shall have
to make a police complaint in this regard. This is a cognizable offence and shall be tried by a Metropolitan
Magistrate or a Judicial Magistrate of the First Class.

Offences by companies

A director, manager, secretary or other officer of the company shall be liable to be proceeded against and
punished accordingly in case the offence has been committed with the consent or connivance, or is attributable
to any neglect on his part in this regard. - Rajneesh Aggarwal v. Anil Bhalla (2001).
However, a person will not be liable in a case.
(i) where such person proves that the offence was committed without his knowledge, or
(ii) where he had exercised all due diligence to prevent the commission of such offence;
(iii) where he is nominated as a Director of a company by the Central Government or State Government or
financial institutions.

POWER OF COURT TO TRY CASES SUMMARILY [SECTION 143]

This is a non-obstante clause. It overrides the provisions contained in the Code of Criminal Procedure, 1973. It
has been now provided that offences for dishonour of cheques shall be tried by a Judicial magistrate of the first
class or by a Metropolitan Magistrate.
In the case of summary trial, the maximum sentence that may be passed by the Magistrate shall be
imprisonment for a term not exceeding one year and an amount of fine not exceeding five thousand rupees.
The trial shall, so far as practicable, consistent with the interests of justice, be continued from day to day.
Further, every trial shall be conducted as expeditiously as possible and an endeavour shall be made to
conclude the trial within six months from the date of filing of the complaint.
Every offence punishable under Negotiable Instruments Act shall be compoundable (Section 147)

5.10 THE COLLECTING BANKER

One of the principal functions of a banker is to receive instruments from his customer in order to collect the
proceeds and credit them to his customer's account. When acting in this capacity he is called a "collecting
banker".

While collecting his customer's cheques, a banker acts either:

(i) Banker as Holder for value - When, to oblige a customer, a bank pays the proceeds of a cheque drawn
upon another banker, before collection, he is treated as a holder for value. Similarly, where, a customer
pays in a cheque and the banker expressly or impliedly permits him to draw against it before it is cleared,
the banker will be regarded as a holder for value.
(ii) Banker as Agent - A collecting banker acts, as an agent of the customer if he credits the customer's account
with the amount of the cheque after it is actually realised.

Duties and responsibilities of a collecting banker

Due Care and Diligence in Collection of Cheques
Presentation for payment by the next working day after the receipt of the cheques.
Notice of Dishonour

5.11 BIILS OF EXCHANGE AND PROMISSORY NOTE

 NEGOTIABLE INSTUMENTS ACT

Kinds of bills
Bills are of different kinds. Some of these are:

1. Inland Bill
 An inland bill:
(a) must be drawn and made payable in India, or
(b) must be drawn in India upon a person resident in India although it may be payable outside India.
Ex-
X of Bombay draws a bill on Y of Delhi payable at Yorkshire (U.K.).

2. Foreign Bills
 A foreign bill of exchange is
(a) drawn in India upon a person resident outside India and made payable outside India, or
(b) drawn outside India and payable in India.
Ex-
X of Bombay draws a bill of exchange on Y of London payable at London.

3. Trade and Accommodation Bills

 A trade bill is a bill of exchange issued in respect of a genuine trade transaction. Such bills are drawn by
the seller on the buyer in respect of payment of the price of the goods sold and purchased.
 Since an accommodation bill is drawn and accepted without any consideration, it creates no obligation of
payment between the parties to the transaction.
 But, however, all bills are not genuine bills i.e., they do not represent a trade transaction but are drawn as a
convenient mode of accommodating a friend.
 Ex - Thus, X may be in need of money and approaches his friend Y who instead of lending money directly,
draws and accepts a bill of exchange, say, for Rs. 5,000. If the credit of Y is good it lends a currency to the
bill and it can be discounted with the bankers or any other person.
On maturity, X remits the amount with Y who in turn pays it in honouring the bill of exchange on
presentment.
Thus, it provides an accommodation to the party and is, therefore, called an 'Accommodation Bill'. The
language and form of an accommodation bill is, however, similar to a genuine trade bill.

4. Time Bills (Usance Bills)

 Time bills, also called as usance bills, are bills payable at a fixed period after date or sight of the bills. Thus,
a bill of exchange drawn payable at 3 months after the date it is drawn is a time or usance bill.
 Similarly, a bill drawn payable at 90 days after sight is again a time or usance bill. A time bill may also be
made payable at a fixed period after an event which is certain to happen.
 Hence, a bill payable at 90 days after the death of the drawer will be a valid time bill.

5. Demands Bills
 A bill of exchange or a promissory note is payable on demand when
(i) It is made payable 'on demand' or 'at sight' or 'on presentation’.
(ii) No time for payment is mentioned therein (Section 19).

6. Clean and Documentary Bill

 It is a common practice in home as well as foreign trade to deliver to the banker along with the bills of
exchange, the documents of title to the goods. (Ex- Lorry Receipt, Railway Receipt or Bill or Lading).
 Where the banker is instructed to deliver to the drawee of the bill the documents of title against acceptance
of the bill, the bill is called as Documents against Acceptance of Bill (D/A Bill) and where the documents are
to be released only against payment, it is called as Documents against Payment ad Bill (DIP Bill).

Parties to a Bill of Exchange

1. The Drawer - the person who draws or makes the bill.
2. The Drawee - the person on whom the bill is drawn.
3. The Payee - the person to whom the amount of the bill is payable.
4. The Holder - is the original payee but where the bill has been endorsed, the endorsee.
5. The endorser - is the person who endorses a bill.
 NEGOTIABLE INSTUMENTS ACT

6. The endorsee - is the person to whom the bill is negotiated by endorsement.

Acceptor for Honour

An acceptor for honour is a person who, on the refusal by the original drawee to accept the bill or to furnish
better security when demanded by the notary, accepts the bill in order to safeguard the honour of the drawer or
any endorser.
Acceptor for honour must specify as to whose honour he is accepting the bill of exchange . Where the acceptor
does not express for whose honour it is made, it shall be

Parties to A Promissory Note

1. The Maker - the person who makes the note promising 'to pay the amount stated therein.
2. The Payee - the person to whom the amount of the note is payable.
3. The Holder - is either the original payee or any other person in whose favour the note been endorsed.
4. The Endorser - the person who indorses the note in favour of another person.
5. The Endorsee - the person in whose favour the note is negotiated by indorsement.

ACCEPTANCE

The acceptance of a bill is the indication by the drawee of his assent to the order of the drawer.
It has been defined as the signature of the drawee of a bill who has signed his assent upon bill and delivered it
or given notice of such signing to the holder to some person on his behalf.
An acceptance to be valid must be
(a) in writing,
(b) signed by the drawee or his agent,
(c) on bill of exchange, and
(d) completed by delivery to the holder or by notice of acceptance to him or some person on his behalf
[Jagjivan Mauji Vithlani v. M/s Ranchahodas Meghaji, 1945]

An acceptance of a bill may be general or qualified.

(a) General Acceptance
(b) Qualified Acceptance

Who may Accept

A bill of exchange may be accepted by the following persons
(1) The drawee of the bill
(2) Where there are more than one drawees, by all or some of them.
(3) A drawee in case of need.
(4) An agent of any of the person mentioned above.
(5) An acceptor for honour.
(6) An agent of the acceptor for honour.
(7) In case no drawee is mentioned in the bill and a person accepts it, he becomes an acceptor by estoppel.

Acceptance for Honour

When a bill of exchange has been noted or protested for non-acceptance or for better security and any person
accepts it supra protest for honour of the drawer or of anyone of the endorsers, such person is called an
acceptor for honour.
After acceptance of the bill by the acceptor for honour, the payee, at the due date, has to present the bill first to
the drawee for payment and if it is also dishonoured for payment by the drawee and noted or protested as the
case may be it should then be presented to the acceptor for honour for payment.

PRESENTMENT

Presentment of a negotiable instrument is made for two purposes.

1. Presentment for acceptance - It is only bills of exchange that require presentment for acceptance and that too
not all but certain kind of bills only. Bill payable on demand or on a fixed date need not be presented for
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acceptance.
2. Presentment for payment - A negotiable instrument must be presented for payment to the maker, acceptor or
drawee, thereof, as the case may be, by the holder or his agent.

DISHONOUR

1. Dishonour by Non-Acceptance (Section 91)

(I) When the drawee does, not accept it within 48 hours from the time of presentment for acceptance;
(2) when presentment for acceptance is excused and it remains unaccepted;
(3) when the drawee is a person incompetent to contract;
(4) when the drawee could not be found after a reasonable search.
(5) where the acceptance is qualified;
(6) where one or more of the several drawees refuse to accept the bill.

2. Dishonour by Non-Payment

Notice of Dishonour
When a negotiable instrument is dishonoured by non-acceptance or non-payment, the holder must give notice
of dishonour to the drawer and all other parties whom he seeks to make liable. Each party receiving notice of
dishonour must in order to render any prior party liable to himself give notice of dishonour to such party within a
reasonable time after he has received it. The notice may be oral or in writing though for safety it is advisable to
give a written notice.

Notice of dishonour unnecessary

(1) When it is dispensed with by the party entitled thereto.
(2) When the payment has been countermanded by the drawer or endorser.
(3) When the party charged could not suffer damages for want of notice.
(4) When the party entitled to notice cannot after reasonable search be found.
(5) Where the party liable to give notice is unable, without any fault of its own, to give it, e.g. death or
serious illness of the holder or his agent or any other accident.
(6) Where the promissory note is not negotiable.
(7) In case the drawer himself is acceptor, no notice is necessary to charge the drawer.
(8) When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount
due on the instrument.

NOTING

Noting is a convenient method of authenticating the fact of dishonour. Where an instrument is dishonoured, the
holder, besides giving the above notice, should get the bill or promissory note 'noted' by the notary public.
The notary public presents the instrument, notes down in his register date of its dishonour and the reason, if
any, given by the acceptor. If the instrument has been expressly dishonoured, the reason why the holder treats
it as dishonoured and the notary's charges should be metioned. 'Noting' must be made within a reasonable
time after dishonour.
Noting is not compulsory in the case of an inland bill or note, but foreign bills must be protested, if s required by
the law of the place where drawn.

PROTESTING

The protest is the formal notarial certificate attesting the dishonour of the bill and based upon the noting. After
the noting has been made, the formal protest may be drawn up by the notary at his leisure. When the protest is
drawn up it relates back to the date of noting.
A protest to be valid must contain the following particulars:
1. The instrument itself, or a literal transcript thereof.
2. The names of the parties against whom the instrument is protested.
3. The fact and reason/reasons for dishonour.
4. Place and time of dishonour or refusal to give better security.
5. Signature of the notary public.
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5. In the event of an acceptance for honour or of a payment for honour, the name of the person by whom or
the person for whom, and the manner in which, such acceptance or payment was offered and effected.

COMPENSATION

Compensation to holder
The holder is entitled to the amount due upon the instrument with interest plus the expenses properly incurred
in noting and protesting it.

Compensation to Endorser
If an endorser of a bill has paid the amount due thereon, he is entitled to the amount so paid plus expenses
with interest @ 6 per cent per annum from the date of his paying to the date of his receiving back amount.

Compensation against banker

Compensation that may be claimed include damages to credit and reputation of the drawer, and the Court
would normally award exemplary or vindictive damages.

5.12 HUNDIS

Hundis are instruments written in an oriental language. The word 'hundi' appears to have been derived, from
the Sanskrit work 'hund' which means 'to collect'. These hundis were, therefore, originally used for the
collection of debts. Hundis have been in circulation in India from very early times, long before the Negotiable
Instrument Act, 1881.

It is to be noted that The Negotiable Instruments Act does not apply to hundis, but where, by any words in the
instrument itself, the usages regarding such instruments are excluded, or where it is expressly indicated that
the legal relations of the parties thereto shall be governed by the Negotiable Instruments Act 1881, the Act
becomes applicable. In the absence of any of the above indications, hundis shall be governed by local usages
applying to such documents [Kanhyalal v. Ramkumar, 1956].

Kinds of hundis
 Shah-Jog Hundi - A Shah-jog hundi is drawn by one merchant on another asking the latter to pay the said
hundi to a 'Shah'. 'Shah' is a respectable and responsible person, a man of worth and known in the bazar.
 Darshni Hundi (payable at sight) - A darshni hundi must be presented for payment within a reasonable
time after its receipt by the holder.
 Muddati Hundi or Miadi Hundi – Hundi payable agter a specified period of time.
 Nam Jog Hundi - A hundi payable to the specified person is called Nam-jog hundi.
 Nishan.Jog Hundi – This hundi is payable only to the persons who presents it.
 Dhani.Jog Hundi- A dhani-jog hundi is payable to a dhani, owner.
 Firman-Jog and Dekhanhar Hundis – There are payable to order.