Negotiable Instruments

Act, 1881
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 Object of the Act
 The main object of the Negotiable Instruments Act is
to legalise the system by which instruments
contemplated by it could pass from hand to hand by
negotiation like any other goods. The purpose of the
Act was to present an orderly and authoritative
statement of leading rules of law relating to the
negotiable instruments To achieve the objective of
the Act, the Legislature thought it proper to make
provision in the Act for conferring certain privileges
to the mercantile instruments contemplated under it
and provide special procedure in case the obligation
under the instrument was not discharged.
 Section 4. “Promissory Note”

 A ‘Promissory Note’ is an instrument in writing (not

being a bank-note or a currency-note) containing an
unconditional undertaking, signed by the maker, to
pay a certain sum of money only to, or to the order
of, a certain person, or to the bearer of the
instrument.
Section 4. “Promissory Note”
 Illustrations
(a) “I promise to pay b or order Rs. 500.”
(b) “I acknowledge myself to be indebted to B in
Rs.1,000, to be paid on demand, for value
received.”
(c) “Mr. B, I.O.U. Rs.1,000.”
(d) “I promise to pay B Rs. 500 and to deliver to
him my black horse on 1st January next.”
The instruments marked (a) and (b) are promissory
notes. The instruments marked (c) and (d) are not
promissory notes.
 Essential features
 An instrument is a promissory note if there are present the following
elements:-
1. Writing : The first essential is that all negotiable instruments must be in
writing. An oral engagement to pay a sum of money is not an instrument,
much less negotiable.
2. Promise to pay : Secondly, it must contain a promise to pay. A mere
acknowledgement of debt is not a promissory note. “I.O.U., E.A. Gay, the
sum of seventeen dollars for value received.” Has been held not to be a
promissory note. A mere receipt for money does not amount to a
promissory note, even though it might contain the terms of repayment. In
Mange Lal Vs. Lal Chand, AIR 1995, Rajasthan High Court has held
that a document which was in the form of a letter acknowledging receipt of
certain sums and affixed with 20 paise revenue stamp was held to be a
receipt and not a promissory note. In the case of Muthu Sastrigal Vs.
Visvanatha AIR 1914 Madras High Court , it has been held that a
document containing the following words “Amount of cash borrowed of you
by me is Rs.350. I shall in two weeks time returning this sum with interest,
get back this letter.” Has been held to be a promissory note because there
is an unconditional undertaking to repay the borrowed money.
 Essential features
 3. Unconditional : Thirdly, the promise to pay the money should be
unconditional, or subject only to a condition which according to the
ordinary experience of mankind is bound to happen. Thus in Beardsley
Vs. Baldwin (1741), a written undertaking to pay a sum of money within
so may days after the defendant’s marriage was not recognised as a
promissory note because possibly the defendant may never marry and
the sum may never become payable. Similarly in Roberts Vs Peake
(1757), an action was bought upon a promissory note made in the
following form.
“We promise to pay AB £ 116.11s value received, on the death of George
Hindshaw, provided he leaves either of us sufficient money to pay the
said sum or if we shall be otherwise able to pay.”
The court pointed out that if the note had merely been made payable on
the death of G.H., it would have been a good promissory note, be cause
death is an event so certain and necessary that it is bound to happen and
therefore the not must have become payable at one time or the other. But
the other condition that it would be payable provided there would be
sufficient funds left behind made the instrument bad, because that was
an uncertain event, and a note payable on an uncertain contingency can
never be a negotiable instrument.
 Essential features
 4. Money only and a certain sum of money:
 Fourthly, the instrument must be payable in money and money
only. If the instrument contains a promise to pay something other
than money or something in addition to money, it will not be a
promissory note. The sum of money payable must also be
certain. Negotiable instruments are meant for free circulation and
if they are value is not apparent on their face, their circulation
would be materially impeded. Accordingly, in Smith Vs
Nightingale (1818) a promissory note made in the following
form was held bad.
 “I promise to pay to JE… the sum of £65 with lawful interest for
the same, 3 months after date, and also all other the sums which
may be due to him.”
 It was held that the instrument was too indefinite to be
considered a promissory note. It contained a promise to pay
interest for a sum not specified and not otherwise ascertained
than by reference to the defendant’s book.
 Essential features
 5. Certainties of parties:
 Fifthly, the parties to the instrument must be designated with
reasonable certainity. There are two parties to a promissory note, viz ,
the person who make the note and is known as the maker and the
payee to whom the promise is made. Both the maker and the payee
must be indicated with certainity on the face of the instrument. In Brij
Raj Sharan Vs. Saha Raghunandan Sharan AIR 1955, Rajasthan HC,
a letter was addressed to A continuing the following statement.
 “In your account Rs. 4668 – 15 – 0 are due from my son Mahesh
Chandra, I shall pay the amount by December 1948. You rest
assured.”
 It was contended that it should not be treated as a promissory note
because the person to whom the amount was to be paid was not
indicated therein. However, Wanchoo C J, holding it be a good note,
said “By looking to illustration ‘b ‘ of Section 4… it I cleared that if the
person to whom the payment is to be made is certain from the words
used in the document, the fact that the name is not mentioned after
the words ”I shall pay” would not mean that the payee is uncertain.
Since the letter was addressed to A it was clear that A was intended to
be the payee”
 Essential features
 6 Signed by the maker:
 Lastly, the promissory note should be signed by the maker. Signature
may be on any part of the document. Where an instrument is in the
hand writing of a person and it is addressed by him to another, that is
sufficient evidence of his signature. The Allahabad High Court in the
case of Raj Bahadur Singh Vs. Hari Pd. Mehra AIR 1983 Patna High
Court has held that if a document satisfies all the requirements of a
valid promissory note, it would not make any difference to its character
as a negotiable instrument that it was an attested document. The Court
said: Though attestation of a promissory note is neither required nor
prohibited by law, a document which is otherwise a promissory note
does not cease to be so merely because it is attested in as much as
the document was unilateral and was not bilateral which was
necessary for being an agreement.
 To consider whether a document is a promissory note or not the
following tests are helpful : (i) Is the sum to be paid a sum of money
and is that sum certain ? (ii) Is the payment to be made to or to order
of a person who is certain or to the bearer of the instrument ? (iii) Has
the maker signed the document ? (iv) Is the promise to pay made in
the instrument the substance of the instrument ? and (v) Did the
parties intend that the document should be a promissory note ?
 Kinds of Promissory Notes

 S.4 recognizes three kinds of promissory

notes :
(1) A promise to pay a certain sum of money
to a certain person,
(2) A promise to pay a certain sum of money
to the order of a certain person, and
(3) A promise to pay the bearer:
 Section 5 : “Bill of Exchange”

 A “bill of exchange” is an instrument in

writing containing an unconditional order,
signed by the maker, directing a certain
person to pay a certain sum of money only to,
or to the order of, a certain person or to the
bearer of the instrument.
 Characteristics and Requirements
 An essential character of a bill of exchange is that it contains an
order to accept or to pay and that the acceptor should accept it, in
the absence of such a direction to pay, the document will not be a
bill of exchange or a hundi.
1) It must be in writing
2) The bill of exchange must contain an order to pay. The order to
pay may be in the form of a request, but it must be imperative. In
Ruff Vs Webb(1974), the plaintiff Ruff was a servant of defendant
Webb. The defendant dismissed him from service and for his
wages gave him a draft in the following words: ”Mr Nelson will
much oblige Mr Webb by paying to J. Ruff or order, twenty guineas
on his account. “
 Lord Kenyon was of the opinion that “paper… was a bill of
exchange , that it was an order by one person to another to pay
money to the plaintiff or his order. It is quite apparent that the
language of the draft was very polite, but it has been said that “the
introduction of the terms of gratitude does not destroy the promise
(or order) to pay. “
Characteristics and Requirements
 But if the language of the draft does not show any “order to pay”, the
draft will not be a bill of exchange. In Little Vs Slackford, the
defendant issued a paper addressed to the plaintiff in the following
words:
 “Mr Little, please to let the bearer have 7 £, and to place them to my
account, and you will oblige. Yours humble servant, R. Slackford.”
 It was held that the paper does not purport to be a demand made by
a part having a right to call on the other party to pay. The fair
meaning is you will oblige by doing it.“
 The order must be such as to require the other to pay the money at
all events. Merely to give him the authority to pay is not sufficient.
 From the definition of the term ‘bill of exchange’ given S.5 of the
Negotiable Instruments Act, it can easily be found that hundi can be
of two types: (1) payable to order and (2) payable to bearer. If the
hundi is payable to order, the payee or endorsee is holder in due
course; it is not necessary to show that they had obtained the bill of
exchange/hundi for consideration. But if the hundi is payable to
bearer the person possessing it will be holder in due course only if
he had come to possess it for consideration
 Following are Bills of Exchange

(1) A banker’s draft

(2) A demand draft even if it drawn upon
another office of the same bank
(3) An order issued by a District Board
Engineer on Government Treasury for
payment to or order of a certain person.
 Section 6 : “Cheque”

 A “cheque is a bill of exchange drawn on a

specified banker and not expressed to be
payable otherwise than on demand and it
includes the electronic image of a truncated
cheque and a cheque in the electronic form.
 Section 6 : “Cheque”
Explanation I – For the purpose of this section, the
expression
(a) “ 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 ;
(b) “ a truncated cheque” means a cheque 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.
 Section 6 : “Cheque”
 Explanation II -- For the purpose of this section, the
expression “clearing house” means the clearing house
managed by the Reserve Bank of India or a clearing house
recognised as such by the Reserve Bank of India.
 A cheque being a bill of exchange must possess all the
essentials of a bill and should also meet the requirements
of Section 6. For instance, in the case of Cole Vs. Milson
(1951) a document was drawn absolutely in the form of a
cheque. It was made payable to “cash or order”. The
question was whether it was a valid cheque. Section 5 of
the Indian Act and Section 3(1) of the English Act require
that a bill of exchange must be made payable to or to the
order of a specified person or the bearer. This document
was made payable to “cash or order”. Hence it was not
payable to any person or to bearer and therefore was not a
bill of exchange, it could not be a cheque either.
 Bill and Cheque Compared
 A cheque is no doubt essentially a bill of exchange but it has
some peculiarities which distinguish it from a bill of exchange.
Some of the peculiarities were clearly stated by PARKHE B in
Ram Churun Mullick Vs. Luchmee Chand (1854) He said that
a cheque “is a peculiar sort of instrument, in many respects
resembling a bill of exchange, but in some entirely different. A
cheque does not require acceptance, in ordinary course it is
never accepted; it is not intended for circulation, it is given for
immediate payment, it is not entitled for days of grace.” This
passage was cited with approval by Lord Wright in Bank of
Baroda Vs. Punjab National Bank(1944). His Lordship made his
own valuable contribution to explaining the nature of a cheque.
He said: “In addition it is to be noted a cheque is presented for
payment, whereas a bill in the first instance is presented for
acceptance unless it is a bill on demand. A bill is dishonoured by
non-acceptance, this is not so in case of a cheque
 Bill and Cheque Compared
 These essential differences (besides others) are sufficient to
explain why in practice cheques are not accepted. Acceptance is
not necessary to create liability to pay as between the drawer and
the drawee bank. The liability depends on contractual relationships
between the bank and the drawer drawer, it customer. Other things
being equal, in particular if the customer has sufficient funds or
credit available with the bank, the bank is bound either to pay a
cheque or dishonour it at once….It is different in case of an
ordinary bill; the drawee is under no liability on the instrument until
he accepts; his liability on the bill depends on the acceptance of it.”
 A cheque is always to be made payable on demand, whereas an
ordinary bill of exchange can be made payable after a fixed period.
 a) future dated cheque, being not payable on demand, may not be
regarded as a cheque in the real sense of the word unless the date
arrives and it becomes payable on demand.
 A cheque is exempted from stamp duty, but a promissory note as
well a bill of exchange attracts stamp duty under the Indian Stamp
Act, 1899.
 Post dated cheque

 A post dated cheque remains a bill of

exchange till the date written on the face of it.
On that date it becomes a cheque. One of the
effects is that liability for criminal prosecution
under Section 138 would not be attracted and
6 months period would be reckoned from the
date appearing on the cheque.
 Pay Order
 A pay order is not a cheque. It is issued by one branch of a
bank to another branch of the same bank or under
arrangement, to another bank with a direction to credit the
amount to the account of the party on whose demand it is
issued. Therefore, neither a pay order is equivalent to a
cheque no for its dishonour. Section 138 would be
attracted, nor the banker who is directed to pay make the
payment can be a proper complainant because he is not
the payee of the instrument. (Ramesh Deshpande Vs.
Punjab and Sindh Bank 2001)
 The decision of the Supreme Court on this is different.
 A “pay order” has been held to b covered by the definition
of a cheque in Section 6 of the Act. A complain under
Section 138 for dishonour of a pay order was held to be
maintainable. (Punjab and Sindh Bank Vs. Vinkar Sahakari
Bank Limited 2001)
 Section 7 “Drawer” “Drawee”
 The maker of a bill of exchange or cheque is called the “drawer”,
the person thereby directed to pay is called the “drawee”
 “Drawee in case of need” - When in the bill or in any
endorsement thereon the name of any person is given in addition
to the drawee to be resorted to in case of need - such person is
called a “Drawee in case of need”.
 “Acceptor” – After the drawee of a bill has signed his assent
upon the bill, or, if there are more parts thereof than one, upon
one of such parts and delivered the same, or given notice of such
signing to the holder or to some person on his behalf, he is called
the “Acceptor”.
 “Acceptor 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 the honour of the drawer
or of any one of the endorsers, such person is called an
“acceptor for honour”.
 “Payee”- The person named in the instrument, to whom or to
whose order the money is buy the instrument directed to be paid,
is called the “payee”
 Section 7 “Drawer” “Drawee”
 A bill of exchange being an order upon the drawee to pay the
money is not binding to him unless he accepts it, but acceptance
is not necessary to the validity of the bill. If it is not accepted, it
does not become invalid; it only becomes dishonoured by non-
acceptance. The usual mode of acceptance is that the drawee
will sign his acceptance on his face. Section 7 requires that the
drawee should sign his assent and return it to the holder it give
notice to him that he has done it and then he becomes the
acceptor. The holder of the bill (a hundi) alleged that when it was
presented to the drawees, they made an entry of it in their
register and noted the register number on the hundi. The Lahore
High Court held that there had been no acceptance within the
meaning of Section 7. the Section requires that the drawee
should sign his assent.(Gurudasmal Vs. Khemchand, AIR 1930
Lahore High Court). The Court said “It is clear that the mere
writing of some figures on the hundi cannot amount to signing of
its assent. It was held in Pannalal Vs. Hargopal Khubiram 1919
that an oral acceptance of a bill does not make the person
accepting it an acceptor of the bill within the meaning of Section
7 and the same view was taken by the Allahabad High Court.
 Section 7 “Drawer” “Drawee”
 Where a bill is duly accepted by the drawee and is
dishonoured by him by non-payment, it cannot be validly
presented for payment to the drawee in case of need, If it was
not first presented to him for acceptance. (Dove Vs.
Karachivalal , 1938)
 An acceptance should be signed on the original bill and not
on the copy of the bill. (Ardeshir Sorabsha Vs. Khushal
Das)
 Section 33 declares that a bill can be accepted by the drawee
or by all or some of several drawees or by a person
mentioned in the instrument as drawee in case of need or by
a person who accepts it for the honour of the drawee. No
other person can bind himself by acceptance.
 According to Section 34, where there are several drawees of
the bill who are not partners, each can accept for himself and
not for others unless so authorised.
 Section 8 – “Holder”
 The holder of a promissory note, bill of exchange or cheque
means any person entitled in his own name to his position
thereof and to receive or recover the amount due thereon
from the parties thereto.
 Where the note, bill or cheque is lost or destroyed, its
holder is the person so entitled at the time of such loss or
destruction.
 The use of the phrase “entitled in his own name” is
significant because of the institution of “benami”. Its
significance is thrown into full relief by the case of Sarjoo
Prasad Vs. Rampyari Debi, AIR 1952, Patna. The plaintiff
advanced a sum of Rs 2459 under a hand note. The note
was executed not in the name of the plaintiff, but in the
name of one X who was a name lender or a benamidar. On
maturity the plaintiff brought an action to recover the
amount. The High Court of Patna rejected his claim. He
was not entitled to the position of the note ‘in his own name’
and therefore was not the holder.
 Section 8 – “Holder”
 Similarly in Suraj Bali Vs Ramchandra, 1950 the real
holder of promissory note had disappeared but was
civilly alive. On maturity his son suit for the amount. But
the Court dismissed his action on the ground that he was
no entitled “in his own name’ to the position of the
instrument. He was as much stranger to the instrument
as a thief or a finder would have been. In a matter of this
kind, in the case of Harkishore Barna Vs. Gura-mia
Chaudhary, 1930, the Calcutta High Court observed “the
property in a promissory note including the right to
recover the amount thereon is vested by statute in the
holder of the note. The Negotiable Instrument’s Act was
enacted for the benefit of trade and commerce and the
principle underlying it is that promissory notes, bills of
exchange and cheques should be negotiable as
apparent on their face without reference to the secret
title to them.”
 Section 9 – “Holder In Due Course”
 Holder in due course means any person, who for
consideration became the possessor of a promissory note, bill
of exchange or cheque if payable to the bearer,
 Or the payee or indoresee, thereof if payable to order, before
the amount mentioned in it becomes payable and without
having sufficient cause to believe that any defect existed in
the title of the person from whom he derived his title.
 The phrase “in good faith and for value” has been split up by
Section into four elements all of which must concur to make a
holder in due course. They are:
 (1) The holder must have taken the instrument for value (2)
He must have obtained the instrument before maturity (3)
The instrument must be complete and regular on its face (4)
He must have taken the instrument in good faith and without
notice of any defect either in the instrument or in the title of
the person negotiating it to him.
 Section 9 – “Holder In Due Course”
 1. Consideration - A negotiation instrument contains a
contract and therefore must be supported by consideration.
A person who takes a bill or note without consideration
cannot enforce it. In order, however, to secure free
circulation of negotiable securities the doctrine of
consideration has been relaxed in certain respects. Firstly,
if a person wants to enforce a simple contract, he must
prove that he has given consideration for it. But in case of
negotiable instruments consideration is always present to
have been given. “The presumption in such a case is that
the instrument was given for good consideration and if the
defendant intends to set up a defence that value has not
been given… the burden of proving that lies on him.”
(Talbot Vs. Von Boris, 1911) every holder, therefore is
presumed to be a holder for value. The presumption applies
for full force where the instrument is payable to order and
the holder has obtained it by endorsement. It becomes less
forceful in the case of a bearer instrument.
 Section 9 – “Holder In Due Course”
 In Madhya Bharat Khadi Sangh Vs. b. K Kapoor AIR 1979 the
Allahabad High Court has held “if the hundi is payable to order then
the payee or endorsee is holder in due course. In their case, it is not
necessary to show that they obtained it for consideration, but if the
hundi is payable to the bearer, then the person possessing will be
holder in due course only if he has come in possession of the hundi
for consideration.”
 The facts of the case were that certain goods were sent to the
defendant according to his order and the railway receipt and a hundi
for the price drawn on him and payable to the collecting agents were
sent through the agents. The defendant accepted the hundi which
was payable after 21 days and obtained the railway receipt. He
refused to pay the hundi amount because he had certain complaints
about the quality and quantity of the goods. The collecting agents
sued him. One of his contentions was that because the agents had
themselves not paid any consideration to the drawers of the hundi,
the were not holders in the due course. This contention was not
accepted and the court expressed the opinion that the agents were
holders in due course and as such entitled to recover the amount.
But as they had paid nothing and lost nothing they were not entitled
to proceed against the acceptor under Section 32 for compensation.
 Section 9 – “Holder In Due

is the person from whomCourse”
Secondly, “in a simple contract the only person who can sue upon it
the consideration moves”. But in the case
of a negotiable instrument “if there be a consideration for it, it does
not matter from whom it moves”. Thirdly, a past consideration is
sufficient to support a contract in a bill or a note. Fourthly, if the
holder has taken the instrument for consideration, the party liable
will not be permitted to plead any defect or want of consideration at
any early stage.
 An illustration in point is the decision of the court of appeal in
Diamond Vs Graham, 1968. “ A person obtained a cheque from
the plaintiff on the assurance that he would give to the plaintiff a
cheque for the same amount from the defendant. When h gave such
a cheque, the plaintiff allowed this cheque to be cashed. But the
defendant’s cheque was dishonoured. In the action by the plaintiff on
the cheque the defendant contented that he had received no
consideration from the plaintiff.”
 The court allowed the plaintiff’s action. The court said that thee was
no need for any direct consideration between the plaintiff and the
defendant. The plaintiff had given value and obtained the cheque for
value. Thus he became a holder for value.
Section 9 – “Holder In Due Course”
 2. Before Maturity
 In order to be holder in due course, the holder must have
obtained the instrument before its maturity. It was laid
down as early as 1825 in Down Vs. Halling that “if a bill
or note or cheque be taken after it is due “, the person
taking it takes at his peril. “He cannot have no better title
to it than the party from whom he takes it, and therefore,
cannot recover upon it if it turns out that it has been
previously lost or stolen”. The Madras High Court held in
a case of this kind that “a person obtaining by payment,
after dishonour by drawee, delivery of a negotiable
instrument payable to bearer or acquires the rights of a
holder and can under Section 59 recover from the
drawer, the amount due on proof of presentment and
notice of dishonour.
 Section 9 – “Holder In Due Course”
 3. Complete and Regular
 The third requirement is that the instrument should be complete
and regular on the face of it. And “face” for this purpose includes
back also. It is the duty of every person who takes a negotiable
instrument to examine its form, for if it contains any material
defect, he will not become a holder in due course. An instrument
may be defective in several ways. It may be incomplete, as it
was in Hogarth Vs. Latham & Co. (1878) The plaintiff took
two bills of exchange without any drawer’s name and completed
them himself. The court held that he could not recover upon the
bills. “Anybody who takes such an instrument as this, knowing
that when it was accepted the bill had not the name of any
drawer upon it, takes it at his peril.” An instrument may also be
incomplete because it is not properly dated or stamped. But a
bill of exchange does not need acceptance to make it complete
and regular. Some unusual marks on the instrument may make it
defective, such as the marks of dishonour, blanks, or restrictive
or conditional endorsements. An improper endorsement renders
the whole of the instrument irregular.
Section 9 – “Holder In Due Course”
 This happened in the case of Arab Bank Ltd. Vs. Ross
1954. The plaintiff bank discounted for value two
promissory notes given by the defendant. The notes had
been made out in the name of “F. and F.N. Co.” as payees.
One of the parterners in fraud of the others endorsed them
to the bank thus: “F. and F.N.”, the word “company” being
omitted. It was held, “that the omission of the word
“company” was sufficient to give rise to reasonable doubt
whether the payee and the endorsers were necessarily the
same. Therefore the notes were not complete and regular
on the face of them and the bank could not succeed as
holders in due course”. The plaintiffs were, however,
permitted to recover on the ground that the defendant had
failed to show any defect in the title of any previous party.
 Section 9 – “Holder In Due Course”
4. Good faith - The last requirement is that the holder should
have received the instrument in “good faith”. There are two
methods of ascertaining a person’s good faith, “subjective”
and “objective”. In subjective test the court has to see
the holder’s own mind and the only question is “did he take
the instrument honestly?” In objective test, on the other hand,
we have to go beyond the holder’s mind and see whether he
exercised as much care in taking the security as a reasonably
careful person ought to have done. Subjective test requires
“honesty”, objective “due care and caution”.
 The Supreme Court examined the position in U. Ponnappa
Moothan & Sons Vs. Catholic Syrian Bank Ltd., (1991)
After conducting a vast survey of English textbooks and
Common Law, the Court accepted the view that the effect of
the Indian provision should be different from that of the
English law because the latter requires the holder to act in
good faith and “without notice”, whereas Section ( requires
him to act “without having sufficient cause to believe”.
Section 10 – Payment in Due Course
 “Payment in due course” means payment in
accordance with the apparent tenor of the
instrument in good faith and without negligence
to any person in possession thereof under
circumstances which do not afford reasonable
ground for believing that he is not entitled to
receive payment of the amount mentioned
therein.
 Negotiation
 The transfer of an instrument by one party to another
so as to constitute the transferee a holder is called
“negotiation”. A bearer instrument is transferable by
simple delivery.
 Section 14 which defines negotiations runs as follows:
14. Negotiation -- When a promissory note, bill of
exchange or cheque is transferred to any person,
so as to constitute that person the holder thereof,
the instrument is said to be negotiated.
An instrument payable to order can be transferred by
endorsement and delivery.
Assignment and Negotiations
Distinguished
 The negotiation of an instrument should be distinguished
from transfer by assignment. When a person transfers
his right to receive the payment of a debt that is called
“assignment of the debt”. Where, for example, the holder
of a life insurance policy transfers the right to receive the
payment to another person, that is an assignment. When
the holder of a bill, note or cheque transfers the same to
another, he, in essence, gives his right to receive the
payment of the instrument to the transferee. Thus in both
“negotiation”, and “assignment” there is the transfer of the
right to receive the payment of a debt. But with this the
similarity ends, for the rights which the transferee of an
instrument by negotiation acquires are substantially
superior to those of an assignee.
Assignment and Negotiations
Distinguished
The points of difference may be now stated:
(1) The assignee of a debt takes it subject to all the defects and
equities that may exist in the title of his assignor. But the holder in
due course of a negotiable instrument takes it free from all defects
in the title of the previous transferors.
(2) An assignment does not bind the debtor unless a notice of the
assignment has given to him and he has, expressly or impliedly,
assented to it. But no information of the transfer of a negotiable
instrument has to be given to the debtor. The acceptor of a bill and
the maker of a promissory note are liable on maturity to the person
who is at the time the holder in due course of the instrument.
(3) There are a number of presumptions in favour of a holder in due
course. For example, he is presumed to have given consideration
for the instrument. The burden lies upon the opposite party to
show that he had given consideration. But there are no such
presumptions in favour of an assignee, he has to prove that he has
given consideration for the assignment.
(4) An assignment attracts stamp duty, but endorsement does not.
 Section 15 – 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
annexe thereto, or so signs for the same purpose a stamp
paper intended to be completed as a negotiable instrument,
he is said to endorse the same, and is called the “endorser.”
 An endorsement is completed by the delivery of the
instrument to the endorsee. Indeed “every contract on a bill
whether it be the drawer’s, the acceptor’s or and endorser’s,
is incomplete and revocable until delivery of the instrument in
order to give effect thereto.” “An endorsement means an
endorsement completed by delivery.” Thus where a person
endorses an instrument to another and keeps it in his papers
where it is found after his death and delivered o the endorsee,
the latter gets no right on the instrument.
 This is further reinforced by the provisions in Section 57 which
says that a legal representative cannot buy delivery only
negotiate an instrument endorsed by the deceased.
 Section 15 – Endorsement
 Similarly, where a person finds or takes away an instrument
duly endorsed to him, he gets no rights on the instruments.
But the holder of a note cut it into two pieces and posted
one half to a person whom he wanted to remit money, he
was entitled to withhold delivery of the other half, because
a partial delivery does not make a complete endorsement.
Where the endorser is authorised to send the instrument by
post, it is deemed to have been delivered to the endorsee
as soon as it is posted and it is immaterial that the cheque
was stolen in the post by the thief who got it cashed.
( Norman Vs. Ricketts, 1886) Where the bank did not pay
a cheque because of doubt about signature and before the
doubt could be removed, the drawer of the cheque died,
the gift was held to be incomplete. The bank’s authority to
pay was determined.
 Types of Endorsements
 1) Endorsement in Blank – [Sections 16 and 54]
 Section 16 – Endorsement “in blank” and “in full”,
“endorsee”. (1) if the endorser signs his name only, the
endorsement is said to be “in blank”, and if he adds a
direction to pay the amount mentioned in the instrument
to, or the order of, a specified person, the endorsement
is said to be “in full”, and the person so specified is
called the “endorsee” of the instrument. (2) the
provisions of this act relating to a payee shall apply with
the necessary modifications to an endorsee.
 Section 54 – Instrument endorsed in blank – Subject to
the provisions herein after contained as the cross check,
a negotiable instrument endorsed in blank is payable to
the bearer thereof even though originally payable to
order.
 Types of Endorsements
 Where the endorser signs only his name on the back of the
instrument for the purpose of negotiating it, that is an
endorsement “in blank”. The effect of a blank endorsement is
to cover the order instrument into bearer. For all purposes of
negotiation, it becomes a bearer instrument. It may be
negotiated by simple delivery and the bearer is entitled to its
payment. It remains so until the endorsement “in blank” is
converted by the holder into endorsement in full. A
subsequent endorsement in full will not have the effect of
converting the instrument into “order.” All subsequent
endorsements will be needless and forgery of a redundant
endorsement will not affect the title of a subsequent party.
Where a cheque is originally payable to bearer, any
endorsement in blank or in full or of restrictive nature will not
destroy its bearer character and the banker will be discharged
for his liability by payment to the bearer.
 Types of Endorsements
2) Endorsement in full – (Section 16)
 Where the endorser adds to his signature the name of a person
whom or to whose order he wants the instrument to be paid, that is
an endorsement in full. If, for example, A, the holder of a cheque
wants to make an endorsement in full to be, he would write thus:
“pay be or order. Sd. A.” He may not add the words “or order”. An
endorsement to “A” will be equivalent to endorsement to “A or
order”. Where an instrument was endorsed “pay the contents to
L.A.”, it was held that “L.A.” could have endorsed it to another and
the party liable could not object to any such endorsement. (Acheson
Vs. Fountain, 1723)
 The usual form, of course, is to ad the words “or order “ after the
name of the endorsee, but, since no form is prescribed, any words
will do so long as they clearly show the endorser’s intention. A note
was endorsed as follows:
 “I hereby assign this draft, and all benefit of the money secured
thereby to J, and order maker of the note to pay him the amount
thereof an all interest in respect thereof.” This was held to be not
and agreement requiring and stamp but an ordinary endorsement of
the note though in a very elaborate form.
 Types of Endorsements
3) Effect of Endorsement and Restrictive
Endorsement (Section 5)
50 Effective of Endorsement – The endorsement of
a negotiable instrument followed by delivery
transfers to the endorsee the property therein
with right o further negotiation; but the
endorsement may, by express words, restrict or
include such right, or merely constitute the
endorsee an agent to endorse the instrument or
to receive it contents for the endorser of our
some other specified person.
 Types of Endorsements
Illustrations
B signs the following endorsements on different negotiable
instruments payable to bearer:
a) “Pay the contents to C only”
b) “Pay C for my use.”
c) I “pay C or order for the account of B”
d) “The within must be credited to C”
These endorsements exclude the rights of further negotiation by C
e) “Pay C.”
f) “Pay C value in account with the Oriental Bank.”
g) “Pay the contents to C, being part of the consideration in a certain
deed of assignment executed by C to the endorser and others.
These endorsements do not exclude the rights of further
negotiation by C.
 Types of Endorsements
 One of the effects of the endorsements which has been
completed by delivery is that the property in the instrument
passes to the endorsee and he gets the right of further
endorsement. But when this right of further negotiation is, by
express words in the endorsement, restricted o taken away, that
is called “restrictive” endorsement. The endorser may altogether
exclude the right of further negotiation or only restrict it or “may
merely constitute the endorsee” an agent to endorse the
instrument, or to receive its contents for the endorser or for some
other specified person.”
 The effect of a restrictive endorsement is tht the endorsee gets
the right to receive the payment when due and sue the parties for
it, but he cannot further negotiate the instrument except as
authorised by the endorser. The endorsee is constituted merely
as an agent for collection and the endorser remains the real
owner of the instrument.
 Types of Endorsements
4) Endorsement sans Recourse – (Section 52)
 52 - Endorser who excludes his own liability or
makes it conditional – the endorser of a negotiable
instrument may by express words in the
endorsement, exclude his own liability thereon or
make such liability or the right of the endorsee to
receive the amount due thereon depend upon the
happening of a specified event, although such event
may never happen.
 Where an endorser so excludes his liability and
afterwards becomes the holder of the instrument, all
intermediate endorsers are liable to him.
 Types of Endorsements

 Illustrations
a) the endorser of a negotiable instrument signs his
name adding the words “Without recourse”. Upon
this endorsement he incurs no liability.
b) a is the payee and holder of a negotiable
instrument., Excluding personal liability by an
endorsement “without resource”, he transfers the
instrument to B and B endorses it to C who
endorses to A . A is not only reinstates in his former
rights, but has the rights of an endorsee against B
and C.
 Types of Endorsements

 Commentary
 If the endorser does not want to incur any liability as
endorser, he can insert a stipulation in his endorsement
negativing or limiting his liability. He may, for example,
write his endorsement thus; “ Pay D or order without
recourse to me”, or “pay D or order sans recourse”, or
“Pay D or order at his risk”. These words will exclude the
liability of the endorser all together. A person, who was
not party to a cheque, at the request of the payee wrote
his name on the back thereof adding the words “ Sans
Recourse”. It was held that an endorser has a right to
negative his liability by suitable words “ Wakefield V/s.
Alexander and Company, 1901”
 5 ) Conditional Endorsement ( S. 52)

 52 The endorser can also insert a condition I his

endorsement. He may for example say that “ pay B
or order on his marriage”, or “ on the arrival of a
ship”. A condition of this kind does not affect the
position of the party who has to pay the instrument
on its maturity. He may pay to the endorsee and will
be discharged from liability whether the condition
has been fulfilled or not. But as between the
endorser and endorsee the condition is operative. If
the endorsee obtains the payment without the
condition being fulfilled he will hold the same in trust
for the endorsee .
 6 Partial Endorsement ( S. 56)
 56 Endorsement for part of sum due – no writing on a negotiable
instrument is valid for the purpose of negotiation if such writing
purports to transfer only a part of the amount appearing to be due
on the instrument; but where such amount has been partly paid, a
note to that effect may be endorsed on that instrument, which may
then be negotiated for the balance
 An instrument cannot be endorsed for a part of its amount only if,
for example, the instrument is for Rs. 100/- it cannot be endorsed
for Rs. 50/- only but if the amount due has already been partly paid,
a note to that effect may be endorsed on the instrument and it may
then be negotiated for the balance. When an instrument has been
partly paid but the fact of part payment is not entered on it and, if it
is endorsed to a bonafide holder, it will be a instrument of full value
ion his hand. Shaik Md. Hussain V/s. M Reddaiah ( 1979)
 The transfer of an instrument to two different persons will mean part
transfer in favour of one and part in favour of the other, it will also
be inoperative under Sec. 56. Such persons, however, become joint
owners of the instrument and may recover as joint payees whatever
may be their mutual rate.
 Noting And Protest
 Sec. 99 When a promissory note or bill of
exchange has been dishonoured by non-acceptance
or non payment, the holder may cause such
dishonour to be noted by a notary public upon the
instrument, or upon a paper attached thereto, or
partly upon each.
 Such note must be made within a reasonable time
after dishonour and must specify the date of
dishonour, the reason, if any, assign for such
dishonour or if the instrument has not been
expressly dishonoured the reason why the holder
treats it as dishonoured, and the notary’s charges.
 Noting And Protest
 When a promissory note or a bill of exchange has been dishonoured
by non acceptance of non payment, in order to create a proof of this
fact the holder may approach a notary public and have the fact of
dishonour noted either on the instrument itself or on a separate
piece of paper or partly upon each.
 Noting must be made within a reasonable time after dishonour.
Upon such request being received the notary inquires from the
party liable to pay and if he still dishonours, the notary makes a note
of the fact of dishonour. The note should contain the following
particulars: (1) The fact that the instrument has been dishonoured;
(2) That date on which it was dishonoured; (3) The reason, if any
assigned for the dishonour; 4) If the instrument has not been
expressly dishonoured the reason why the holder treats it as
dishonoured, and (5) Notary charges.
 The advantage of noting is that it creates evidence of the fact of
dishonour and things connected with it. But even so noting is not
compulsory except for foreign bills. The holder may at his choice
have the fact of dishonour noted or not.
 Protest
 Sec: 100 – When a promissory note or a bill or
exchange has been dishonoured by non acceptance or
non payment, the holder may, within a reasonable time,
cause such dishonour to be noted and certified by a
notary public. Such certificate is called a protest.
 Protest for better security – When the accepter of a bill of
exchange has insolvent, or his credit has been publicly
impeached before the maturity of the bill, the holder
may, within a reasonable time, cause a notary public to
demand better security of the accepter, and on it being
refused may, within a reasonable time, cause such facts
to be noted and certified as aforesaid. Such certificate is
called a protest for better security.
 Protest
 Protest for better security is a measure of protection
against the consequences of the accepters
insolvency. When the accepter of a bill of exchange
becomes insolvent all his credit has been publicly
impeached, and this has happened before the
maturity of the bill, the holder may approach a
notary public and ask him to demand from the
acceptor a better security than the mere bill. This
should be done within a reasonable time. If the
acceptor refuses to oblige with any security, the
holder should have the fact of refusal noted and
certified by the notary. Such a certificate is called a
protest for better security. This should be done
within a reasonable time after the acceptors refusal
to provide security
 Contents of Protest
 Section 101 requires a protest to contain certain particulars
for its validity The omission of any one of such particulars
for its invalid. The particulars are as follows:
1. It should contain the instrument itself or a literal transcript
of it and of everything written or printed on the instrument.
2. The name of the person for whom and against whom the
instrument has been protested, that is, the name of the
party making the protest and against whom the protest is
made.
3. It should contain a statement that acceptance, or payment
or better security has been demanded from such person by
the notary public, the terms of his answer, or a statement
that he gave no answer or that he could not be found.
 Contents of Protest
4. When the protest is against the dishonour of a bill or note, the
protest should specify the time and place of dishonour. When
the protest is against refusal of better security, the place and
time of refusal should be noted.
5. The subscription of the notary public making the protest.
6. Where there has been acceptance or payment for honour, the
protest should specify the name of the person who accepted or
paid for honour and for whose honour he did so and also the
manner in which such acceptance or payment was offered and
effected.
 Clause ( c ) of the section requires the notary before preparing
his certificate to make a demand for acceptance, payment or
security. This section concludes with the provision that the
notary may make such demand either in person or by his clerk
or, where authorised by agreement or usage, by registered
post.
 Notice of Protest
 102. Notice of protest.—When a promissory note or
a bill of exchange is required by law to be protested,
notice of such protest must be given instead of
notice of dishonour, in the same manner and subject
to the same conditions; but the notice may be given
by the notary public who makes the protest.
 In circumstances where a protest is a compulsory
legal requirement, Section 102 requires that instead
of a notice of dishonour, a notice of protest should
be given. Notice of protest will have to be given in
the same manner and subject to the same
conditions as notice of dishonour with only this
difference that notice of protest can be given by the
same notary who makes the protest.
 Notice of Protest
 Protest for Non-payment
Section 103. Where a bill is payable at some place other
than the place mentioned in the bill as the residence of
the drawee and the bill has been dishonoured by non-
acceptance, then, without any further presentation to the
drawee, the bill may be protested for non-payment in the
place specified for payment. No such protest will,
however, be necessary where the bill has been paid
before or at maturity.
 Foreign Bills
Section 104. Protest of foreign bills.-- Foreign bills of
exchange must be protested for dishonour when such
protest is required by law of the place where they are
drawn.
 Dishonour Of Cheques
 Penalties in case of dishonour of cheque for insufficiency ,
etc. of funds in the account:
 Sec. 138 dishonour of cheque for insufficiency, etc. of funds in
the account – where any cheque drawn by a person on an
account maintained by him with a banker for payment of any
amount of money to another person from out of that account for
the discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid, either because of the amount of
money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be
paid from that account by an agreement made with that bank,
such person shall be deemed to have committed that offence and
shall, without prejudice to any other provision of this Act, be
punishable with imprisonment for a term which may extend to 2
years of with fine which may extend to twice the amount of the
cheque or with both:
 Dishonour Of Cheques
 Provided that nothing contained in the section shall apply
unless –
(a) The cheque has been presented in the bank within a
period of 6 months from the date on which it was drawn
or within the period of its validity, which ever is earlier.
(b) The payee or the holder in due course of the cheque,
as the case may be, makes a demand for the payment
of the said amount of money by giving a notice, in writing,
to the drawer of the cheque within 30 days of the receipt
of information by him from the bank regarding the return
of the cheque as unpaid; and
(c) The drawer of such cheque fails to make the payment
of the said amount of money to the payee or , as the
case may be , to the holder in due course of the cheque ,
within 15 days of the receipt of the said notice.
 Dishonour Of Cheques
 The Supreme Court in the case of Electronics Trade and Technology
Development Corporation Limited Vs Indian Technologists and
Engineers Electronics Private Limited (1996) has observed that the
object of Section 138 is to inculcate faith in the efficacy of banking
operations and credibility in transacting business on negotiable
instruments. Despite civil remedy, Section 138 intended to prevent
dishonesty on the part of the drawer of a negotiable instrument in
drawing a cheque without sufficient funds in his accounts and in
inducing the payee or holder in due course to act upon it. Section 138
is based upon the presumption that one commits the offence if he
issues the cheque dishonestly. Once such a cheque against
insufficient funds has been drawn and issued to the payee and the
payee has presented the cheque and thereafter, if any instructions are
issued to the bank for non payment and the cheque is returned to the
payee with such an endorsement, it amounts to dishonour of the
cheque and it comes within the meaning of Section 138. If, after the
cheque is issued to the payee or to the holder in due course and before
it is presented for encashment and the drawer informs the payee not to
present the cheque and yet the payee or holder in due course returns
the cheque to the bank for payment and when it is returned on
instructions, Section 138 does no get attracted.
 Dishonour Of Cheques
 In a subsequent ruling on the point, in the case of
Goa Plast (P. Limited) Vs Chico Ursula Dsouza ,
AIR 2004 the Supreme Court referred to this point
of the statement and sad that if this were accepted
as good law, the very object of introducing section
138 would be defeated.
 In another Supreme court decision, the object have
been reinstated as follows: Chapter XVII containing
Ss 138 – 142 was introduced in the Act by the 1988
amendment with the object of inculcating faith in the
efficacy of banking operations and giving credibility
to negotiable instruments in business transactions.
The said provisions were intended to discourage
people from not honouring the commitments by way
of payment through cheques.
 Dishonour Of Cheques
Ingredients of Liability under Section 138
The ingredients of liability under the Section have been stated in terms of
the following points.
 The cheque is drawn on the bank for the discharge of a legally
enforceable debt or other liability.
 The cheque is returned by the bank unpaid.
 The cheque is returned unpaid because the amount available in the
drawer’s account is insufficient for paying the cheque.
 The payee has given a notice to the drawer claiming the amount within
30 days of the receipt of the information form the bank.
 The drawer has failed to pay within 15 days from the date of the receipt
of the notice.
 If the aforementioned ingredients are satisfied then the person who has
drawn the cheque shall be deemed to have committed an offence.
 Punishment
 Maximum 2 years imprisonment on the defaulting party with fine which
may extend to twice the amount of cheque or with both.