The Negotiable Instruments Act,

1881

Presented by:
Abhay Arora (10/MBA/01)
Aditya Aggarwal (10/MBA/)
Rohit Ahuja (10/MBA/45)
Sakshi Leekha (10/MBA/46)
Holder and Holder in Due Course
Holder
Holder is a person who is entitled in his own name
to the possession of the negotiable instrument
and has right to receive or recover the amount
from the parties thereto.

(a) Possession of instrument

(b) Entitled to receive the amount
 Following people are considered the
holders of a negotiable instrument:
A principal whose name appears on an instrument as the
holder though it is executed in the name of his agent for him
 Where a negotiable instrument is a bearer one, any person who
is in the possession of such instrument is the holder
 Where a negotiable instrument is in the name of a partner of a firm,
it naturally becomes a holder, as it is not a separate entity from the
partner
 The endorsee of a cheque is called a holder.
 If a holder of a negotiable instrument is dead, the heirs of the
deceased holder become the holders.
 A principal on whose behalf a pronote is endorsed in blank and is
delivered to hs agent, he is a holder of the instrument though his
name does not appear on the instrument.
 Following people are not the holders
of a negotiable instrument:
 A thief or a finder of an instrument is not a holder though he is
in possession of an instrument.
 A person obtaining the instrument under forgery is not a holder.
 When the endorsement of a bill is ‘for collection only’
the endorsee cannot be a holder.
Holder in a due course
Any person who for the consideration paid becomes the
possessor of a negotiable instruments, before its
maturity, in good faith and without any sufficient
reason to believe that any defect existed in the title of the
person from whom he obtained it.
 He must be a holder of valuable consideration
 He must become a holder of the negotiable instrument
before the date of maturity
 He must become a holder of the negotiable instrument in
good faith
A person is not considered to be a
holder in due course if:
 he obtains the negotiable instrument after its
maturity
 he obtains it by way of a gift
 he obtains it for any unlawful consideration
 he obtains it by some illegal method
 he does not obtain it bonafide
Right and Privileges of a Holder in
due course:
 Liability of prior parties
 Instalment purged or cleansed of all defects
 Privilege in case of inchoate stamped instrument not
affected
 No effect of conditional delivery or of special delivery
 No effect of absence of consideration or presence of an
unlawful consideration
 Privilege in case of a fictitious bill
 Estoppel against denying original validity of instrument
 Estoppel against denying capacity of payee to endorsee
 Estoppel against endorser to deny capacity of prior parties
Distinction between holder and
holder in due course:
 A holder can obtain an instrument without consideration while a
person cannot be a holder in due course unless he obtains an
instrument with consideration and for value.
 If an instrument is inchoate, a holder of such instrument cannot
get good title in the instrument. While holder in due course
acquires a good title even if the instrument is inchoate.
 A holder of an instrument may acquire the instrument if it
becomes payable. But the persons is not treated as a holder in
due course if he acquires an instrument when it becomes
payable.
 A holder need not bother about the defect, if any, in the title.
But no holder is considered a holder in due course who acquires
an instrument knowingly the defect of the title.
Types of Endorsements
 What is an Endorsement?
The payee named on a check endorses the check on the back by
writing his or her name exactly as it appears on the front of the
check. Signing the back of the check completes negotiation of
the item allowing the transfer of money ordered by the check.

If more than one person is listed on the check as a Payee, then

the requirements for endorsement depend on how the names are
written. If the check indicates John Doe AND Jane Doe, then
each must sign the check. If the check indicates John Doe OR
Jane Doe, then only one signature is required. If the two names
are listed and the words "and" or "or" are not shown, assume
"and".
 Types of Endorsements:
Blank Endorsement
Conditional Endorsement
Special Endorsement
Restrictive Endorsement
Qualified Endorsement
 Blank Endorsement
 With a blank endorsement, the payee (person to whom the
check is made payable) signs his/her name as it appears on the
face of the check without mentioning the name of the person to
whom the cheque is endorsed .
 If the person's name is misspelled on the face of the check, the
person endorses exactly as the name is misspelled and then
signs again with the correct spelling.
 A "blank" endorsement is the most common type of check
endorsement and is the least restrictive in that it does not limit
negotiability. Any other person can further negotiate a check
with a blank endorsement.
 If there are more than one payee is identified on the check, the
form of a blank endorsement depends on how the payees are
listed. If the check is payable to A and B, then both A and B
must endorse the check. If the check is payable to A OR B,
then either A or B must endorse the check
 Prior to cashing a check, the check casher should confirm the
identity of the person presenting the check, verify that person
is the named payee, then obtain a blank endorsement.
Conditional Endorsement
 This type of endorsement places a limit or restriction upon
the time when a check can be paid. For example, Larry
Smith has written a check payable to John Doe. John Doe
conditionally endorses the check as "Payable to Billy
Cooper upon satisfactory completion of drywall job,
(signed) John Doe.“
 For this item, a condition must be met in order for the
check to be negotiated further, i.e. Billy Cooper must have
satisfactorily completed the drywall job. A check casher
would most likely want to avoid taking this item.
 The potential risks for this item include:

* Bad Maker
* Maker has insufficient funds
* Endorsement by John Doe was forged
* Condition not met
If the condition was not met, the check casher would have
liability to John Doe.
 Banks do not typically cash such items and will only accept
them for deposit into an account where the bank has recourse.
Special Endorsement
 A "special" endorsement allows a payee to make a check
payable to another person or entity.
 For example, if John Doe, the payee, wants to make the
check payable to his wife, Susan Doe, he would write "Pay
to the order of Susan Doe," on the back of the check and
then endorse it.
 A check casher shouldn't normally cash such an item unless
the payee is present and identified.
 Restrictive Endorsement
 A restrictive endorsement restricts or limits negotiability.
 "For deposit only" is the most common form of restrictive
endorsement and is used to prevent further negotiation of the check.
For example, a check payable to John Doe signed by John Doe, i.e. a
"blank" endorsement, can be cashed or deposited by anyone holding
the item in the event that it is lost or stolen. A "blank" endorsement
makes the item like cash.
 By placing "For deposit only" after the blank endorsement, further
negotiation of the item is restricted. One of the ways in which check
cashers minimize their risk of loss is by placing their own restrictive
endorsement on cashed checks after the payee has endorsed the item.
 It is unlikely that there would be a reason for a check casher to
accept any check with a restrictive endorsement for cashing.
Qualified Endorsement
 A qualified endorsement limits the responsibility of the
endorser.
 With a qualified endorsement, the endorser will not assume
any responsibility for paying the check if it is returned for
any reason. The payee adds words such as "without
recourse" to the back of the check.
 Check cashers should not accept such items.
Forged Instruments
What is Forging?
Forging is the act of criminally making or altering a
written instrument for the purpose of fraud or deceit; for
example, signing another person's name to a check, to write
payee's endorsement or signature on a check without the
payee's permission or authority. The 'payee' of a check is
the true owner or person to whom the check was payable.
 Forgery at common law has been held to be 'the fraudulent
making and alteration of a writing to the prejudice of
another man's right.’
 There are many kinds of forgery, especially subjected to
punishment by statutes enacted by the national and state
legislatures.
The subject will be considered with reference to:

 The making or alteration requisite to constitute forgery.

 The written instruments in respect of which forgery may be
committed.
 The fraud and deceit to the prejudice of another man's right.
 The statutory provisions under the laws of the United States,
on the subject of forgery.
When is an item declared forged?
 The making of a whole written instrument in the name of
another with a fraudulent intent
 Fraudulent insertion, alteration or erasure, even of a letter,
in any material part of the instrument, whereby a new
operation is given to it, will amount to a forgery
 A party who makes a copy of a receipt and adds to such
copy material words not in the original and then offers it in
evidence on the ground that the original has been lost, may
be prosecuted for forgery.
 The fraudulent application of a true signature to a false
instrument for which it was not intended or vice versa, will also
be a forgery.
For example, it is forgery in an individual who is requested to
draw a will for a sick person in a particular way, instead of
doing so, to insert legacies of his own head and then procuring
the signature of such sick person to be affixed to the paper
without revealing to him the legacies thus fraudulently inserted.
 Making an instrument in a fictitious name or the name of a non-
existing person
 With regard to private writings it is forgery fraudulently to
falsify or falsely to make a deed or will or any private document
whereby another person may be prejudiced.
Discharge of Negotiable Instruments
Discharge of an instrument
 A contract is said to be discharged when it loses its force
and effect as a legal obligation.

 A discharged contract is one which for some reason is no

longer in force. It has lost its former legal effect. A paper
may express a promise to pay money, yet the promise may
be without any life in it, and not be expressive of any legal
obligation. This may be true because the promise has been
performed, or for some other reasons.
Causes of discharge of an instrument
 By payment in due course by or for the debtor
 By payment of accommodation paper by accommodated
party
 By intentional cancellation by holder
 By the acquisition of the paper at or after maturity by the
principal debtor
By payment in due course by or for
the principal debtor
 Payment by the maker or acceptor is the most usual method of
discharging a note or bill.
 Assuming that there are no accommodation parties, but that the
party primarily liable on the paper pays it when it becomes
mature or after its maturity this discharges it and it thereafter
becomes only so much waste paper so far as any legal
obligation is concerned.
 If a party secondarily liable upon an instrument pays it, the
instrument is not discharged
 By payment of accommodation paper by accommodated party
 The real debtor may not be the maker or acceptor. One may
have become maker of a note or acceptor of a bill for the
accommodation of another, that is, in order to lend him credit.
 Such accommodator is liable just as a surety or guarantor is
liable, although the creditor may know it is not really his debt.
In such a case it is the real debtor's duty to pay the debt and if
the accommodating party pays it, he may sue the party whom
he has accommodated.
 If the real debtor pays the instrument, then it is discharged.
By intentional cancellation by holder

If a cancellation is by the holder with the intention of

destroying the instrument, as such, it destroys it, but if the
cancellation is unintentional, or under a mistake or by
anyone without authority, the instrument is not destroyed.
By acquisition of the instrument by the
principal debtor, at or after maturity

If one makes a note and at or after its maturity buys it

from the holder that is the same thing as paying it so
far as discharging the instrument is concerned.
Discharge of second party liability
A party secondarily liable is discharged:
(1) by an act that discharges the instrument;
(2) by intentional cancellation of his signature by the holder;
(3) by a valid tender of payment by a prior party;
(4) by release of the principal debtor without express
reservation of right against party secondarily liable;
(5) by extension of time of payment without reserving right
against the party secondarily liable;
(6) by failure of the holder to take the proper steps to hold
him.
Discharge of endorser’s liability
Where the holder of a negotiable instrument, without the consent of
the endorser, destroys or impairs the endorser's remedy against a prior
party, the endorser is discharged from liability to the holder to the
same extent as if the instrument had been paid at maturity. Illustration
A is the holder of a bill of exchange made payable to the order of B,
which contains the following endorsements in blank –
 First endorsement, "B“
 Second endorsement, "Peter Williams"
 Third endorsement, "Wright & Co"
 Fourth endorsement, "John Rozario"
This bill A puts in suit against John Rozario and strikes out, without
John Rozario's consent, the endorsements by Peter Williams and
Wright & Co. A is not entitled to recover anything from John Rozario.