negotiable instruments act,1881 act maker it is written by the maker himself and his name appears in...

NEGOTIABLE INSTRUMENTS ACT,1881

Section No. Section Name

4 Promissoy Note

5 Bill of Exchange

6 Cheque

8 Holder

9 Holder in Due course

10 Payment in Due course

11 Inland instruments

12 Foreign Instruments

13 Negotiable instruments

14 Negotiation

15 Indorsement

16 Blank and Full Indorsement

17 Ambigious Instruments

18 Amount different in words and figures

19 Demand Instruments

20 Inchoate Stamped Instruments

23-25 Maturity and its Calculation

26-29 Capacity of Parties

31 Liabilty of drawee of cheque

36 Liability of Indorser

40 Discharge of Indorser’s Liability

42 Acceptance in Fictitous Name

43 Total Absence of Consideration

44 Partial Absence of Consideration Consisting of money

45 Partial Absence of Consideration not Consisting of money

47 Negotiation by Delivery

48 Negotiation by Indorsement

49,55 Conversion of Blank indorsement into Full

53 Holder from a Holder in Due Course

54 Effects of Blank Indorsement

56 Partial Indorsement

58 Instruments obtained by unlawful means or consideration

61 Presentment for Acceptance

62 Presentment for Sight

63 Drawees time for deliberation

64-76 Presentment for Payment

82-83,86 Discharge of party

87,88 Material Alteration

89 Alteration not apparent

91 Dishonour by Non Acceptance

92 Dishonour by Non payment

93-98 Notice for Dishonour

99-104A Noting and Protest

108-112 Acceptance for Honour

113,114 Payment for Honour

115 Drawee in case of need

118 Presumptions as to Negotiable instruments

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120 Estoppel against denying original validity of instruments

121 Estoppel against denying the capacity of payee to indorse

123 General crossing

124 Special crossing

127 More than one special Crossing

128 Payment in due course of a crossed cheque

129 Payment out of due course of a crossed cheque

130 Not Negotiable Crossing

131 Protection to Collecting Banker

132 Bills in sets

138 Dishonour of cheque for insufficiency of fund

4.2 Order And Bearer Instrument

order Instrument

A negotiable instrument is said to be payable to order

when it is expressed to be so payable

when it is expressed to be payable to a specified person and does not contain words prohibiting its transfer

bearer Instrument

A negotiable instrument is payable to bearer:

where it is expressed to be so payable e.g. Pay Bearer

when the only or last endorsement on the instrument is an endorsement in blank

4.3 Characteristics of a Negotiable Instruments Section 13

Written Document

The term instrument or document necessarily implies that it must be in writing.

It should be signed

a instruments to pay money is not binding on a person unless it is signed by him.

Easy Negotiability

A negotiable instrument is freely transferable from one person to another.

Transferable Infinitum

A negotiable instrument can be transferred infinitum i.e. it can be transferred any number of times till its satisfaction.

Promise or order to pay money

Every negotiable instrument must contain either a promise or order to pay money. Also the promise or order must be unconditional.

4.1 Concept of Negotiable Instrument Section 13

Meaning The word negotiable means transferable and the word instrument mean a document. Thus, the term ‘negotiable instrument’ means a document, which is transferable from one person to another.

Definition As per section 13, A Negotiable Instruments means a promissory note, bill of exchange, or a cheque payable either to order or to bearer.

Other Negotiable Instruments

Our Act recognizes and deals with the three Negotiable Instruments as stated above. There are other Negotiable Instruments also recognized by usage or custom of trade such as Hundies, Share warrant, bearer debentures Railway Receipt etc.

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Payment of money only

The promise or order to pay must consist of money only. Nothing should be payable, whether in addition or in substitution of money. Also, the sum payable must be certain.

Presumption A negotiable instrument is subject to certain presumptions as specified u/s118. The presumptions specified u/s118 shall prevail unless a contrary evidence is produced.

Past Attempt Questions

Q1 Which of the following is not applicable to negotiable Instrument? (a) It must be in writing (b) It must be transferable (c) It must be registered (d) It must be signed. [CA PCC MAY 2007]

Sol. It must be registered.

4.4 Promissory Note Section 4

1.Definition of a Promissory Note

As per section 4 " 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.

2.Meaning of a Promissory Note

A promissory note is a promise in writing by a person to pay a certain sum of money to a specified person.

3.Parties to a Promissory Note

Following are the two main parties in a promissory note – 1. Maker -- This is the person who makes the promissory note and promises to pay

the money stated therein. 2. Payee -- This is the person to whom the amount of promissory note is payable

i.e. to whom the promise to pay is made.

4.Essential Elements

(a)In Writing Promissory note must be in writing, an oral promise cannot constitute a promissory note.

(b)Promise to pay

It must contain an undertaking or promise to pay. Thus, a mere acknowledgment of indebtness is not sufficient

However, the word ‘promise’ need not be used, what is necessary is that whatever language is used, it must clearly show that the maker is making himself bound to pay the sum.

(c)Definite and unconditional promise

The promise must be definite and unconditional i.e. it must not be vague or uncertain. In other words, the promise to pay must not depend upon a contingency.

A promise to pay is not conditional merely because of the fact that the performance of promise is dependent upon an event which is certain to happen even though the time of its occurrence may be uncertain. E.g. Death..

Similarly, a promise to pay money only at a particular place or at a particular time is not conditional.

(d)Promise to pay money only

The instrument must be payable in money and money only. An instrument is not a promissory note if the promisor promises to pay – (a) Something other than money ,or (b) Something in addition to money

(e)The sum payable must be certain

For a valid promissory note it is also essential that the sum of money promised to be payable must be certain and definite.

(f)Certain Parties

The parties to the instrument must be designated with reasonable certainty. There are two parties to a promissory note, namely, the person who makes the note and is known as the maker and the payee with whom promise is made . Both the maker and the payee must be indicated with certainty on the face of instrument

(g)Signed by The promissory note must be signed by the maker, otherwise, it is of no effect. Even if

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maker it is written by the maker himself and his name appears in the body of the instrument, it

shall not constitute a valid promissory note, if it is not signed by the maker.

(h)It must be duly stamped under the Indian Stamp Act

It means that the stamps of the required amount and description must have been affixed on the instrument.

5.Some examples

A signs instruments in the following terms: (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 all other sums which shall be due to him." (e) "I promise to pay B Rs. 500 first deducting there out any money which he may owe me." (f) I promise to pay B Rs. 500 seven days after my marriage with C. (g) I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum. (h) I promise to pay B Rs. 500 and to deliver to him my black horse on lst January next. The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes.

6.Section 31 of RBI act,1934

No person in India other than the Bank or, as expressly authorized by RBI Act, the Central Government shall make or issue any promissory note expressed to be payable to the bearer of the instrument.


Q1 Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity of the following Promissory Notes:

(i) I owe you a sum of Rs. 1,000.`A' tells `B' (ii) `X' promises to pay `Y' a sum of Rs. 10,000, six months after `Y's Marriage

with `Z'. [CA PE II NOV. 2002] Sol. Explain the definition of promissory note and explain point 4(b),(c) and

then specify that both are not valid because in first there is no promise and in second promise is conditional.

Q2 What is a "Promissory Note" and what are its elements? S writes "I promise to pay `B' a sum of Rs. 500, seven days after my marriage

with `C'".Is this a promissory note? [CA PE II MAY 2004] Sol. Explain the definition of promissory note and point 4 completely and specify that promissory note is invalid because it contain conditional promise. Q3 What are the essential elements of a "Promissory note" under the Negotiable

Instruments Act, 1881? Whether the following notes may be considered as valid Promissory notes:

(i) "I promise to pay Rs. 5,000 or 7,000 to Mr. Ram." (ii) I promise to pay to Mohan Rs. 500, if he secures 60% marks in the

examination. (iii) I promise to pay Rs. 3,000 to Ravi after 15 days of the death of A. [CA PE II

NOV. 2007] Sol. Explain point 4 completely and specify that

i. It is not valid because sum of money is not certain. ii. Not valid because conditional promise. iii. Valid because death is not conditional as it is certain to happen.

Q4 ‘A’ signs the instrument in the following manner. State the instrument which cannot be considered as promissory note:

(1) I promise to pay B or order Rs. 500

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(2) I acknowledge myself to be indebted to B Rs. 1,000 to be paid on demand, for value received

(3) I promise to pay B Rs. 10,000 after three months (4) I promise to pay B Rs. 500 seven days after my marriage with C. [CA PCC

NOV. 2007] Sol. Explain the definition of promissory note and explain point 4(b),(c) and then specify that first three are valid because they contain unconditional promise whereas last is invalid because promise is condtional.

4.5 Concept of Bill of exchange Section 5

Definition of bill of exchange

As per section 5 “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.

Meaning A ‘bill of exchange’ is an order in writing, directing a person to pay a certain sum of money to a specified person.

Parties to a Bill to Exchange

Following are the three main parties in a bill of exchange – (1) Drawer – This is the person who makes/draws the bill of exchange. (2) Drawee – This is the person on whom the bill is drawn. In other words, the person

who is ordered to pay the amount of the bill of exchange. When the drawee accepts the bill of exchange (i.e. when he give his consent to make the payment of the bill on its due date), he becomes the acceptor.

(3) Payee – This is a person to whom the amount of bill of exchange is payable.

Essentials o It must be in writing. o It must contain an order to pay. o The order to pay must be definite and unconditional. o The parties must be certain. o It must be signed by the drawer. o The sum payable must be certain or capable of being made certain. o The order must be to pay money and money alone. o It must be duly stamped as per the Indian Stamp Act

4.6 Difference between Promissory Note Bill of Exchange

Q1 Examining the provisions of the Negotiable Instruments Act, 1881, distinguish between a ‘Bill of Exchange’ and a ‘Promissory Note’. [CA IPCC MAY 2012]

Basis Promissory Note Bill of Exchange

1.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 only to, or to the order of, a certain person, or to the bearer of the instrument.

“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

2.Nature of Instrument

In a promissory note there is a promise to pay money.

In a bill of exchange there is an order for making payment.

3. Parties In a promissory note there are only 2 parties namely:

i. the maker and

In a bill of exchange, there are 3 parties which are follows

i. the drawer

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ii. the payee

ii. the drawee iii. the payee

4. Acceptance

A promissory note does not require any acceptance, as it is signed by the person who is liable to pay.

The word acceptance is relevant for a Bill. There are some bills which must be accepted by drawee.

5.Payable to bearer

A promissory note cannot be made payable to bearer.

On the other hand a bill of exchange can be drawn payable to bearer. However, it cannot be payable to bearer on demand

4.8 Distinction between a bill of exchange and a Cheque

Q1 Point out the differences between a "Cheque" and a "Bill of Exchange" under the Negotiable Instruments Act, 1881. [CA IPCC MAY 2011]

4.7 Concept of cheque Section 6

1.Definition 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 cheque in the electronic form. As per RBI w.e.f 1April 2012 the validity period of cheque is 3months from the date of its issue.

2.Cheque in electronic form

Cheque in the electronic form" means a cheque drawn in electronic form

by using any computer resource and

signed in a secure system with digital signature (with or without biometrics

signature) and asymmetric crypto system or with electronic signature, as the case may be.

Note- For the purposes of this section, the expressions "asymmetric crypto system", "computer resource", "digital signature", "electronic form" and "electronic signature" shall have the same meanings respectively assigned to them in the Information Technology Act, 2000.

3.Truncated cheque Section

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 movement of the cheque in writing.

4.Parties to a cheque

Following are the three main parties in a cheque : 1. Drawer : This is the person who makes/draws the cheque. 2. Drawee : This is the banker who is directed to pay the amount of the cheque. Drawee

is the banker on whom the cheque is drawn. 3. Payee : This is the person to whom the amount of cheque is payable.

5.Essentials

1. The cheque must be in writing. 2. It must contain an express order to pay. 3. The order to pay must be definite and unconditional. 4. It must contain an order to pay a certain sum of money. 5. It must be signed by the drawer. 6. A cheque is always drawn upon a banker and is always payable on demand. 7. A cheque does not require stamping. 8. A cheque doesn’t require acceptance.


Q1 Define the term `Cheque' as given in the Negotiable Instruments Act, 1881 and amended by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 [CA PE II NOV. 2004]

Sol. Explain point 1,2,3 completely

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Basis Bill of Exchange Cheque

Definition 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.

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.

Drawee In case of a Bill of exchange, the drawee can be any person including banker.

However, in case of a cheque, the drawee is a banker (i.e. it is always drawn on a banker)

Payable to Bearer on Demand

A bill of exchange cannot be drawn ‘payable to bearer on demand’. In other words a B/E drawn ‘payable to bearer on demand’ is absolutely void.

A cheque can be drawn ‘payable to bearer on demand’. In other words a cheque drawn payable to bearer on demand is absolutely valid.

Liability of Drawer

In case of bill of exchange the liability of drawer is secondary and conditional. However, until a bill is accepted, the liability of the drawer is primary.

In case of a cheque the liability of drawer is always primary. The drawee bank is simply a custodian of money of the customer

Crossing A bill of exchange cannot be crossed.

A cheque can be crossed either generally or specially.

Stamping bill requires payment of stamp duty. Cheque doesnot require payment of stamp duty.

4.9 Acceptance Section 7

1.Meaning of Acceptance

When the drawee of the bill signifies his consent in writing to the drawer’s order in the bill, by signing across the face of the bill with or without the word accepted and delivers back the bill to the holder or gives notice of acceptance to the holder, the bill is said to have been accepted. The drawee is not liable on a bill until he give his acceptance and thereby becomes the acceptor thereof.

2.Essential of a valid Acceptance

Acceptance must be in writing, an oral acceptance is not valid in law. Acceptance must be signed by the drawee. Acceptance must be on bill either on the face or back. Acceptance must be completed by delivery or a notice of acceptance must be given

by the drawee to the holder.

3.Types of acceptance

(a)General Acceptance: - When the drawee accepts the order of the drawer to pay the sum specified in the bill without any condition , the acceptance is said to be general or absolute acceptance.

(b)Qualified Acceptance: When the drawee accepts the order of the drawer to pay the sum specified in the bill with any condition , the acceptance is said to be qualified acceptance.such acceptance is also valid if consent of prior parties are obtained.

4.Drawee’s time for Deliberation

The drawee has a right to demand 48 hours to consider whether he will accept the bill or not. This period of 48 hours is called as drawee’s time for deliberation. If the drawee does not accept the bill within 48 hours, the bill is dishonoured.

However, if the holder allows more than 48 hours to the drawee, he should obtain the consent of all prior parties otherwise such parties are discharge.

5.Other Provisions

. There are only bill which require acceptance which are as follows-: A bill payable at a specified period after sight. A bill in which there is an express stipulation that it shall be presented for

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acceptance before it is presented for payment.


Q1 Which are the essential elements of a valid acceptance of a Bill of Exchange? An acceptor accepts a "Bill of Exchange" but write on it "Accepted but payment will be made when goods delivered to me is sold". Decide the validity. [CA PE II MAY 2003]

Sol. Explain point 1,2,3(b) and specify such acceptance shall be valid if consent of prior parties is obtained.

Q2 What do you mean by an acceptance of a negotiable instrument? Examine validity of the following in the light of the provisions of the Negotiable Instrument Act, 1881:

(i) An oral acceptance (ii) An acceptance by mere signature without writing the word

"accepted".[CA PE II MAY 2003]. Sol. Explain point 1,2 and specify oral acceptance is not valid but acceptance

without writing the word accepted is valid. Q3 A Bill of Exchange originally drawn by M for a sum of Rs. 10,000, but accepted by

R only for Rs. 7,000. [CA PE II MAY 2007] Sol. Explain point 1,2,3(b) and specify such acceptance shall be valid if consent

of prior parties is obtained. Q4 Referring to the provisions of the Negotiable Instruments Act,1881, examine whether

acceptance of a bill of exchange in the following situation shall be treated as ‘qualified’ acceptance where the acceptor:

(i) undertakes to pay only Rs.2,000 for a bill drawn for Rs.5,000; (ii) declares the payment to be independent of any other event; (iii) Writes : "Accepted, payable at ABC Bank".[CA PE II JUNE 2009]

Sol. Explain point 1,3(b) and specify

- It is qualified since it is accepted partially.

- It is not qualified as no condition is imposed.

- It is not qualified because payment at particular time or place is not a condition.

4.10 Holder Section 8

Definition As per section 8, holder of a promissory note, bill of exchange, cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.

Conditions to be satisfied

In order to be called a holder a person must satisfy the following conditions: i. He should be entitled in his own name to the possession of the instrument, and ii. He should have the right to receive or recover the amount due thereon from the

parties thereto.

Holder means a de-jure holder

If a person has possession of the instrument but doesn’t have a right to recover the instruments then he is said to be a de-facto holder. However if a person has possession as well as a right to recover then he is said to be de-jure holder.

Lost or stolen

Where a note, bill or cheque is lost or destroyed, its holder is the person so entitled to the instrument at the time of such loss or destruction.


Q1 Discuss with reasons, whether the following persons can be called as a ‘holder’ under the Negotiable Instruments Act, 1881:

(i) X who obtains a cheque drawn by Y by way of gift. (ii) A, the payee of the cheque, who is prohibited by a court order from

receiving the amount of the cheque. (iii) M, who finds a cheque payable to bearer, on the road and retains it. (iv) B, the agent of C, is entrusted with an instrument without endorsement by

C, who is the payee.

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(v) B, who steals a blank cheque of A and forges A’s signature. [CA PE II NOV.

2008] Sol. Explain section completely and then specify

X can be holder because obtaining by gift is valid condition for holder.

A can’t be holder because prohibited by court.

M is a bearer but not a holder as he has found the cheque on road.

Agent B is not holder as he has possession without C’s consent.

B is not holder because forgery does not provide any valid title.

4.11 Holder in due course Section 9

1.Definition As per section 9, holder in due course means any person who for consideration become the possessor of a promissory note, bill of exchange or cheque, if payable to bearer or the payee or the endorsee thereof, if payable to order, before the amount mentioned in it become payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived the title.

2. Condition to be fulfilled for becoming a holder in due course

A person is a holder in due course, if he fulfills the following conditions:

He should have acquired the instruments for some consideration.

He should have obtain the instruments before its maturity. If the instrument is taken after its maturity, the person taking it may become a holder but he cannot be called a holder in due course

He should have obtain the instruments in good faith i.e. without sufficient cause to believe that defect existed in the title of the person from whom he derived his title.

He must have received the negotiable instrument complete and regular on the face of it. In other words, he should not receive an inchoate/incomplete instrument.


Q1 Explain the meaning of `Holder' and `Holder in due course' of a negotiable instrument. [CA PE II NOV. 2002]

Sol. Explain the definition of holder u/s 8 and Holder in due course u/s 9. Q2 State the privileges of a "Holder in due course" under the Negotiable Instruments

Act, 1881. [CA PE II NOV. 2004] Sol. State all 9 points

Q3 Examine when shall a holder of a negotiable instrument be considered as a holder in due course under the provisions of the Negotiable Instruments Act, 1881. [CA PE II NOV. 2005]

Sol. Explain point 2 completely. Q4 In legal terms, a person who takes the instrument bona fide for value before it is

overdue, in good faith, is known as (a) Holder in due course (b) Holder (c) Holder for value (d) None of the above. [CA PCC JUNE 2009]

Sol. Holder in due course Q5 P obtains a cheque drawn by M by way of gift. Here P is a :

1. holder in due course 2. holder for value 3. holder 4. None of the above [CA IPCC MAY 2010]

Sol. holder

4.14 Privileges of a holder in due course

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1.Better title than that of transferor Section 58

A holder in due course gets a valid title to the negotiable instrument even though the title of transferor was defective. Thus, a holder in due course acquires a title free from all defects.

2.Privilege in case of an inchoate stamped instruments Section 20

In case of an inchoate stamped instrument, if the holder or original payee fills more amount than what he was authorized; he cannot enforce the instrument for the whole amount.

If such an instrument is transferred to a holder due course, he can claim the whole of the amount so entered provided that the amount is covered by the stamp affixed thereon.

3.Liability of prior parties [Section 36]

a All prior parties to a negotiable instrument continue to remain liable to a holder in due course both jointly & severally until the instrument is duly satisfied

b However, only preceding party is liable to a succeeding party, if the succeeding party is a holder.

4.Privilege in case of fictitious bill [Section 42]

a The words fictitious payee mean person, who is not in existence or, being in existence, is never intended by the drawer to have the payment.

b The acceptor of the bill of exchange cannot as against the HDC, say that the other parties to the bill was fictitious.

5.Privilege when an Instrument delivered conditionally is negotiated [Section 46]

When a negotiable instrument is endorsed or delivered conditionally or for a specific purpose only e.g. for safe custody and not with the idea of transferring the property therein, the property in the instrument does not pass to the endorsee and he is merely a bailee with limited title and power of negotiating it.

This, however, doesn’t effect the rights of a holder in due course, i.e. if such a instrument is negotiated to a holder in due course, the parties liable on the instrument cannot escape their liability.

6.Endorsee from a holder in due course [Section 53]

A holder who receives an instrument from a holder in due course, gets the rights of the holder in due course, even if he had knowledge of the prior defects, provided that he was not a party to the instrument.

7.Estoppels against denying capacity of payee to endorse [Section 121]

Where the payee, being a minor or a person of unsound mind, endorses a promissory note or a bill payable to order, the maker of the promissory note or the acceptor of the bill cannot escape his liability on the ground that the payee was incompetent to endorse.

8.No defence of absence of consideration [Section 43]

When a negotiable instrument is made, drawn, accepted or transferred without consideration, it creates no obligation of payment between the parties to the transaction.

An agreement made without consideration is void.

However, if the instrument gets into the hands of a holder in due course, he can recover the amount on it from any of the prior parties thereto.

9.Estoppels against denying the validity of instruments [Section 120]

The defence of original invalidity of the instrument cannot be put forth against the holder in due course by the drawer of a bill, promissory note or cheque.


Q1 B obtains A’s acceptance to a bill of exchange by fraud. B endorses it to C who is a holder in due course. C endorses the bill to D who knows of the fraud. Referring to

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the provisions of the Negotiable Instruments Act, 1882, decide whether D can recover the money from A in the given case. . [CA PE II NOV. 2006]

Sol. Explain point 6 (section 53) and then specify that although acceptance is obtained by fraud but since C is a HDC so D who obtained from C will also be an HDC.

Q2 X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill is duly accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid payment of the bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881. [CA PE II NOV. 2008]

Sol. Explain point 4 (section 42) and then specify that although Z is a Fictitious payee But since M is a HDC so Y shall be liable to M.

Q3 Describe in brief the advantages and protections available to a "holder in due course" under the provisions of the Negotiable Instruments Act, 1881. [CA PCC NOV. 2008]

Sol. Explain all 9 privileges of HDC

Q4 J accepted a bill of exchange and gave it to K for the purpose of getting it discounted and handing over the proceeds to J. K having failed to discount it, returned the bill to J. J tore the bill in two pieces with the intention of cancelling it and threw the pieces in the street. K picked up the pieces and pasted the two pieces together, in such manner that the bill seemed to have been folded for safe custody, rather than cancelled. K put it into circulation and it ultimately reached L, who took it in good faith and for value. Is J liable to pay the bill under the provisions of the Negotiable Instruments Act, 1881 ? [CA IPCC MAY 2010]

Sol. Explain point 9 (section 120) and then specify that validity of bill cant be challenged before a HDC and therefore L being an HDC will be able to recover J.

Q5 A draws and B accepts the bill payable to C or order, C endorses the bill to D and D to E, who is a holder in due course From whom E can recover the amount? Examining the right of E state the privileges of the holder in due course provided under the Negotiable Instruments Act, 1881. [CA IPCC NOV. 2012]

Sol. Explain point 3 (section 36) and then specify that E being an HDC will be ablr to recover from all his prior parties i.e. A,B,C,D.

Q6 S by inducing T obtains a Bill of Exchange from him fraudulently in his (S) favour. Later, he enters into a commercial deal and endorses the bill to U towards consideration to him (U) for the deal. U take the bill as a Holder – in – due- course. U subsequently endorses the bill to S for value, as consideration to S for some other deal. On maturity the bill is dishonored. S Sues T for the recovery of the money With reference to the provisions of the Negotiable Instruments Act, 1881 decide whether S will succeed in the case or not. - [CA Inter.(IPC) NOV. 2014]

Sol. . Explain point 6 (section 53) and then specify that since S can’t recover from T because being a prior party on the bill he can’t avail the benefit provided u/s 53

4.15 Payment in Due Course Section 10

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Meaning As per sec 10, 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 therein mentioned.

4.16 Inland and Foreign Instrument Section 11 & 12

Definition of inland Instrument

A promissory note, bill of exchange or cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument.

Definition of Foreign Instrument

Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument. In other words any instrument other than inland instrument will be foreign instrument.

4.17 Negotiation Sections 14,47 and 48

Definition of Negotiation

When a promissory note, bill of exchange or cheque is transferred to any person so as to constitute the person the holder thereof, the instrument is said to be negotiated.

Manner of Negotiation

Bearer Instrument If the instrument is a Bearer instrument the rights in it can be transferred by mere delivery from one person to another (Section 47).

Order Instrument It the instrument is an order one, the rights in it can be transferred by endorsement and delivery (Section 48).

Negotiation by whom

Every maker, drawer, payee or endorsee all of them can negotiate an instrument, provided the negotiability of such instrument has not been restricted or excluded by any express words used in the instrument.

Time of Negotiation

A negotiable instrument may be negotiated until payment or satisfaction thereof Thus, negotiability of an instrument stops only when the party ultimately liable thereon pays it. This clearly means that the negotiation can continue even after the maturity date has arrived. It can be negotiated after maturity if it has not been paid or satisfied.


Q1 A negotiable instrument that is payable to order can be transferred by: 1. Simple delivery 2. Endorsement and delivery 3. Endorsement 4. Registered Post. [CA PCC NOV. 2008]

Sol. Endorsement and delivery

4.18 Endorsement Section 15

Definition of Endorsement

When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereof or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the endorser.

Essentials It must be on the instrument itself. If no space is left on the instrument then, it must be on a separate slip of paper attached to the instrument, called alonge.

It must be signed by the endorser for the purpose of negotiation. Signature of the endorser on the instrument without any additional word is sufficient.

Kinds of Endorsement

Blank or An Endorsement is said to be blank or general if the Endorser signs his name only

Negotiable Act

General Endorsement: Sec 16 & 54

on the face or back of the instrument.

A Blank Endorsement specifies, no Endorsee and the instrument in consequences becomes payable to bearer even though originally it was payable to order.

Full or special Endorsement Section 16

An Endorsement is called as special Endorsement, if it specifies the name of the Endorsee. In other words, where the Endorser adds a direction to pay the amount to a specified person or to his order, it is called as Special Endorsement.

Restrictive Endorsement Sec 50

Sec 50, permits restrictive Endorsement also. An Endorsement which, by express words, restricts or excludes the rights of further negotiation to the Endorsee.

Partial Endorsement Sec 56

Where an Endorsement purports to transfer to the Endorsee a part only of the amount of the instrument, the Endorsement is said to be partial. A partial Endorsement doesn’t operate as a negotiation of the instrument.

Conditional Endorsement Sec 52

Meaning An Endorsement is conditional or qualified if it contains any condition imposed by the Endorser. An Endorsement may be conditional or qualified in one of the following ways

Types of conditional Endorsement

Sans recourse Endorsement: When the Endorser expressly excludes his own liability on the negotiable instrument while making Endorsement, to the Endorsee or any subsequent holder in case of dishonour of the instrument, the Endorsement is known as sans recourse or without recourse Endorsement such an Endorsement is indicated by adding the words ‘sans recourse’ or without recourse’.

Sans Frias endorsement: WHER ENDORSER LIMIT HIS LIABILITY DURING NEGOTION IT IS CALLED SANS FRIAS ENDORSEMENT

Facultative Endorsement: Where an Endorser by express words abandons some right or increases his liability under an instrument, the Endorsement is called the facultative Endorsement. An Endorsement ‘pay A or order, notice of dishonour waived’ is a facultative Endorsement.

Contingent Endorsement: An Endorser may Endorse an instrument in such a way that his liability depends upon the happening of a specified event which may or may not happen. Pay A on his marriage.

4.19 Negotiation Back

Negotiation Back

1. In the course of Negotiation, if a negotiable instrument is circulated/negotiated back by an Endorser to any of the prior party on the negotiable instruments it is termed as negotiation back.

2. The person who becomes the holder in due course under this negotiation back cannot make any of the intermediate Endorsers liable on the instruments.

3. But where an Endorser had excluded his liability, by the use of the words ‘sans recourse’ or ‘without recourse to me’ and after that becomes the holder of the instrument in his own right under the ‘negotiation back’ all intermediate Endorsers are liable to him and in case of dishonour, he can recover the amount from all or any one of them.


Q1 M, the holder of a bill, endorses it without recourse to N. N endorses to P, P to Q,Q to R and R endorses it to M. Can M recover the amount of the bill from N, P, Q and R, or any of them? Discuss with reference to the provisions of the Negotiable Instruments Act, 1881. [CA PE II NOV. 2009]

Sol. Explain all 3 points as specified above and then specify that M can recover from al his prior parties i.e. N,P,Q,R because no party can sue him as he has made sans recourse endorsement but he can all his prior parties.

Negotiable Act

4.20 Kinds of Instrument Sec 17, 20, 46

Ambiguous Instruments Section 17

a. When an instrument owing to its faulty drafting may be interpreted either as a promissory note or a bill of exchange, it is called an ambiguous instrument.

b. Its holder has to elect once for all whether he wants to treat it as a promissory note or a bill of exchange (sec 17)

Inchoate stamped Instruments Section 20

The term inchoate instrument means an instrument incompletes in some respects, e.g. an instrument which doesn’t mention the amount payable, or the name of the payee.

Escrow Section 46 Para 3

When a negotiable instrument is delivered conditionally or for a special purpose as a collateral security or for safe custody only, and not for the purpose of transferring property therein, it is called an Escrow.

4.21 Kinds of Bill of Exchange

1.Accommodation Bill

Accommodation Bill

a. It is a bill of exchange made only to provide financial help to some person; or b. It is drawn by person with a view to lend the credit of his name on the bill so that the person taking the bill can get the money for the same. Example A was in need of Rs. 50,000. He went to his friend B for a loan. But B was not in a position to lend money. However B suggested that A may draw a bill of exchange on B which he would accept. Accordingly, A draw a bill of exchange on B and B accepted it. This would be an Accommodation bill. If A enjoys good reputation in market, he can get the bill discounted with his banker and can get the amount. And thus, A will be in a position to acquire the needed money. In this case, A will indemnify B for any payment which B might make in respect of the bill.

Documentary Bill and clean Bill

o When a seller of goods has drawn a bill of exchange on the buyer for the price of the goods and the documents of title to the goods such as railway receipt ,warehouse receipt and some other documents such as invoice, shipping papers, marine insurance policy etc are attached to the bill, such a bill of exchange is called a documentary bill.

o On the other hand, when no documents of title etc, are attached to a bill of exchange it is called a clean bill.

Meaning of Fictitious Bill

a. It is a bill of exchange in which the names of the drawer or the payees or both are fictitious.

b. Fictitious person means a person who is not in existence or a pretended person i.e. a person who exist but was never intended by the parties to be the drawee or payee of the bill of exchange.

Meaning of Bill in sets

A bill of exchange may be drawn in sets of three. It would be called as ‘bill in sets’. Such a thing may become necessary when the parties to the bill of exchange are at distant places or in different countries. In such cases, the bill of exchange, which is sent from one place to another may be lost or miscarried in transit. In such a case, the different sets of the same bill are sent by separate post to ensure the safe transmission of at least one part of the bill. These parts together constitute one set. And if one or two parts are lost in transit, the payee can present that part which he has received.

4.22 Demand and Time Instrument Section 19 & 21

Negotiable Act

Demand Instrument

a. A demand instrument may be described as the instrument in which the holder need not wait for payment and can demand payment when he chooses to do that.

b. A promissory note or a bill of exchange in which no time for payment is specified, and a cheque, are payable on demand. (Sec 19)

c. In a promissory note or a bill of exchange the expression ‘at sight’ and on presentment’ means on demand (sec 21)

Time Instrument

a. A time instrument means the instrument which is payable some time in future. b. An instrument payable after a fixed time (say, after six months) or on a specified

date (say, on 5 Aug 2006) is termed as a time instrument c. An instrument payable after happening of an even which is certain to happen, e.g.,

death, though the time of its happening may be uncertain, is also called a time instrument.

4.23 Maturity of a Promissory Note or Bill of Exchange Sec 22

1.Meaning a. The maturity of a promissory note or bill of exchange is the date on which it falls due. b. Every instrument payable otherwise than on demand is entitled to three days of

grace.

4.24 Manner of calculating maturity date Sec 22,23,25

2.Manner of calculating maturity date

Sec 23-25 lays down the following rules for calculating the maturity of a time bill or note.

If it is made payable to a stated number of months after date or after sight , or after a certain event , it matures or become payable three days after the corresponding date of month after the stated number of months.

If the month in which the period would terminate has no corresponding date , the period shall be held to terminate on the last day of such month .

If it is made payable a certain number of days after date or after sight ,or after a certain event , the maturity is calculated by excluding the day on which the instrument is drawn or presented for acceptance or sight or on which the events happens.

If the date of maturity of the instrument is a public holiday, it shall mature on preceding business day. If the maturity date of a negotiable instrument is an emergency or unforeseen public holiday the negotiable instrument shall expire on the succeeding business day.


Q1 In what way does the Negotiable Instruments Act, 1881 regulate the determination of the `Date of Maturity' of a Bill of Exchange. Ascertain the `Date of maturity' of a bill payable 120 after the date. The Bill of exchange was drawn on 1st June, 2005[CA PE II NOV. 2005] Sol. Explain point 2 manner of determining completely and then specify maturity date will be 1june 2015+ 120=29 September 2015+3 days of grace=2oct 2015 but since 2 oct is a public holiday so preceding business day i.e. 1 October 2015.

Q2 What is meant by maturity of a Bill of Exchange or Promissory Note? Calculate the date of maturity of the following bills of exchange explaining the relevant rules relating to determination of the date of maturity as provided in the Negotiable Instruments Act, 1881:

(i) A Bill of Exchange dated 31st August, 2007 is made payable three months after date.

(ii) A Bill of Exchange drawn on 15th October, 2007 is payable twenty days after sight and the bill is presented for acceptance on 31st October, 2007. [CA PCC

Negotiable Act

NOV. 2007]

Sol. Explain point 1 and 2 completely and then specify maturity dates as follows

(i) 31August2007+3 months=30 November 2007+3days of grace=3 December 2007.

(ii) maturity date will be calculated from date of sight/ acceptance i.e. 31october 2007 + 20=20November, 2007 +3 days of grace = 23 November 2007

Q3 Bharat executed a promissory note in favour of Bhushan for Rs. 5 crores. The

said amount was payable three days after sight. Bhushan, on maturity, presented the promissory note on 1st January, 2008 to Bharat. Bharat made the payments on 4th January, 2008. Bhushan wants to recover interest for one day from Bharat. Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is liable to pay the interest for one day ? [CA PE II MAY 2008]

Sol. Explain point 1 and 2 completely and then specify date of sight is 1january +3 days of grace= 4January is the date of maturity. Since Bharat made the payment on maturity date so he is not liable to pay any interest.

4.25 Capacity of A Person To Be A Party To A Negotiable Instrument Sec 26,29

1.Position of Minor

A minor may draw, Endorse, deliver and negotiate any negotiable instrument [i.e. an instrument drawn, accepted, endorsed, or negotiated by minor is not void].

All the parties, except the minor shall be bound on such negotiable instrument.

Thus, a minor is not liable on a negotiable instrument even though he may be the maker, acceptor or Endorser.

2.Position of Insolvent

An insolvent is not allowed to draw, make accept or Endorse a negotiable instrument because it will bind his estate which now stands vested in Official Receiver.

3.Position of a company

a. A company, as an artificial person governed by its object clause in the memorandum of association, is capable of doing only such acts as are expressly allowed by its memorandum of association.

b. Hence, if the company executes (i.e. draws, accepts or negotiates) a negotiable instrument without being authorized to do so by its memorandum of association, the instrument would be void and even a holder in due course would not be able to enforce it against the company.

4.Position of an Agent

The doctrine of agency works in the field of negotiable instrument also.

So, a person who has the capacity to become a party to a negotiable instrument, may appoint an agent to draw, make, accept or negotiate a negotiable instrument on his behalf.

This however, will require a specific authority to be granted to the agent.

5.Position of legal representative

A legal representative of a deceased person who signs his name on a negotiable instrument is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such (Sec 29).


Q1 A, a major, and B, a minor, executed a Promissory Note in favour of C. Examine with reference to the provisions of the Negotiable Instruments Act, 1881 the validity of the Promissory Note and state whether it is binding on A and B. [CA PE II NOV. 2005]

Sol. Explain point 1 and specify that promissory note is valid but it is binding on A (major)

Q2 A Promissory–note drawn jointly by X, a minor and Y, a major is:

Negotiable Act

(1) void (2) valid but not negotiable (3) valid but can be enforced only against Y (4) illegal. [CA PCC MAY 2008]

Sol. valid but can be enforced only against Y

Q3 A negotiable instrument drawn in favour of a minor is : (1) void (2) void but not enforceable (3) valid (4) None of the above. [CA IPCC NOV. 2009]

Sol. valid Q4 State with reasons whether the following statements are correct or incorrect. A promissory note duly executed in favour of minor is void. [CA IPCC NOV. 2010] Sol.Incorrect and explain point 1. Q5 P a major and Q a minor executed a promissory note in favour of R Examine with

reference to provisions of the negotiable Instrument Act, 1881 the validity of promissory note and whether it is binding on P and Q[CA Inter.(IPC) MAY 2015]

Sol. Explain point 1 and specify that promissory note is valid but it is binding on P (major)

4.26 Total Or Partial Absence Of Consideration Section 43 To 45

1.Total absence or failure of consideration Section 43

a) No obligation between the parties is created, if a negotiable instrument is made, drawn, accepted, Endorsed or transferred:

o without consideration. o for consideration which fails subsequently.

b) However, if such negotiable instrument is transferred to a holder for consideration, such holder (and every subsequent holder) is entitled to recover the amount due on such negotiable instrument from the transferor or any prior party.

2.Partial absence or failure of consideration consisting of money Section 44

a) In case of partial absence or failure of consideration consisting of money, the holder standing in immediate relation with the signer cannot recover more than the full amount of the negotiable instrument as reduced by that part of consideration which has failed.

b) However, if such negotiable instrument is transfer to a holder for consideration, such holder (and every subsequent holder) is entitled to recover the full amount due on such negotiable instrument from the transferor or any prior party.

3.Partial absence or failure of consideration not consisting of money Section 45

a. In case of partial failure of consideration not consisting of money, the holder standing in immediate relation with the signer cannot recover more than full amount of the negotiable instrument as reduced by that part of consideration which has failed provided the partial failure of consideration can be ascertained in terms of money without any collateral inquiring.

b. However, if the partial failure of consideration cannot be ascertained in terms of money without any collateral inquiry, even the holder standing in immediate relation with the signer shall be entitled to recover the full amount of the negotiable instrument.


Q1 A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without consideration. C transferred it to D for value. Decide —

(i) Whether D can sue the prior parties of the bill, and (ii) Whether the prior parties other than D have any right of action intense?

Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881. [CA PE II NOV. 2004]

Negotiable Act

Sol. Explain point 1 (Section 43) completely and then specify that (i) D can sue all his prior parties since he has obtained the instrument for

value. (ii) No prior party other then D will have any right of action intense.

Q2 A owes a certain in sum of money to B. A does not know the exact amount and hence he makes out a blank cheque in favour of B, signs and delivers it to B with a request to fill up the amount due payable by him. B fills up fraudulently the amount larger than the amount due payable by A and endorses the cheque to C in full payment of dues of B. Cheque of A is dishonoured. Referring to the provisions of the Negotiable Instruments Act, 1881, discuss the rights of B and C. [CA PE II MAY 2007] Sol. Explain point 2 (Section 44) completely and then specify that C will be able to recover the entire amount on instruments whereas B will recover only the original amount due from A and not the entire amount.

Q3 ‘A’ draws a bill of exchange payable to himself on ‘X’. Who accepts the bill without consideration just to accommodate ‘A’. ‘A’ transfers the bill to ‘P’ for good consideration. State the rights of ‘A’ and ‘P’. Would your answer be different if ‘A’ transferred the bill to ‘P’ after maturity? [CA PCC MAY 2008] Sol. Explain point 1 (Section 43) completely and then specify that A will not be able to recover because of absence of consideration but P being Holder for consideration will be able to recover. Our answer remains the same even if P obtains the instrument after maturity.

4.28 Presentment of a Bill For Acceptance Sec 61,63

Meaning Presentment for acceptance means exhibiting/showing the bill of exchange to the drawee to procure/obtains the acceptance thereof.

When is Presentment for Acceptance Required

a. A bill payable at a specified period after sight. Such a bill must be presented to the drawee for his acceptance in order to fix the maturity of the bill.

i. A bill in which there is an express stipulation that it shall be presented for acceptance before it is presented for payment.

Presentment to whom?

The bill must be presented to: o the drawee or his agent; or

drawee in case of need or his agent, where the name of drawee is mentioned in the bill, and the original drawee refuses to accept the bill; or

legal representative of the deceased drawee, where the drawee is dead or

official receiver or official assignee of the drawee, where drawee is insolvent.

Presentment by whom?

The presentment is to be made by the holder of a bill of exchange. A bill of exchange may be negotiated even before the acceptance has been obtained. The holder who takes the bill impliedly undertakes to procure the acceptance thereof by properly presenting the same as required in section 61.

Time for presentment

The rules with regard to time of presentment for acceptance are as follows: The presentation for acceptance must be made on a business day within business hours, whether the parties are traders or non-traders (sec 61).

Place of presentment:

a. If a particular place has been specified in the bill for presentment for acceptance, it must be presented at that place. If at such a place the drawee cannot be found on the due date for presentment after reasonable search, the bill is dishonoured. (Section 61)

b. If no place is mentioned in the bill, it may be presented at the usual place of business of the drawee or his residence.

Holders’ duty on

It is holder duty to provide 48 hours to the drawee so that can decide whether to accept the bill or not.

Negotiable Act

Presentment

Effects of non-presentment

a. When the presentment of a bill of exchange for acceptance is compulsory i.e. when a bill of exchange is payable after sight, holder’s duty is to duly present the bill to the drawee thereof as required by section 61.

b. In defaults of such presentment, no party thereto is liable thereon to the person making such defaults (sec 61)

When presentment for acceptance is excused

a. Where the drawee, even after reasonable search, cannot be found, the presentment for acceptance is excused and the bill of exchange is deemed to be dishonoured..

4.29 Presentment of a Promissory Note for Sight Sec 62

Meaning presentment for sight means that the promissory note must be presented to the maker to determine the maturity date.

When is presentment for sight required?

Not all negotiable instruments are required to be presented for sight only a promissory note is required to be presented for sight. IF IT IS PAID CERTAIN PAID AFTER SIGHT

Presentment to whom?

The promissory note must be presented to the maker for sight.

Presentment by whom?

The presentment shall be made by the holder of the promissory note or his duly authorized agent.

Time of Presentment?

a. The promissory note must be presented for sight within a reasonable time. b. The promissory note must be presented for sight during business hours on a

business day.

Effect of non-presentment

a. When the presentment of a promissory note is compulsory i.e. when a promissory note is payable after sight, holders duty is to duly present the note to the maker thereof as required by section 62.

b. In default of such presentment, no party thereto is liable thereon to the person making such default.

When is presentment for sight excused

The presentment of a promissory note is excused if the maker cannot, after reasonable search, be found.

4.30 Presentment For Payment Sec 64 To 76

1.Meaning of presentment for payment

Presentment for payment means exhibiting the negotiable instrument to the person from whom the payment is demanded, and delivering the negotiable instrument to the person when it is paid.

2.Is it compulsory

All the negotiable instruments are required to be presented for payment.

3. Presentment to whom?

The presentment for payment of promissory notes, bill of exchange and cheque must be to: a. the maker, acceptor or drawer respectively or b. to the duly authorized agent of the above persons or c. where the maker, acceptor or drawer has died to his legal representative or d. where any of maker, acceptor or drawer has become insolvent to his assignee.

4.Presentment by whom

a. The presentation is to be made by or on behalf of the holder of the promissory note, bill of exchange or cheque.

5.Time for a. Presentment for payment must be made during the usual hours of business.

Negotiable Act

presentment b. In case of a cheque presentment for payment should be made during banking

hours.

6.Place of presentment

Presentment for payment must be made: a. At the place of payment specified in the instrument (sec 68 & 69) b. If no place is specified, at the place of business (if any) or at the usual residence,

of the maker, drawer or acceptor, as the case may be (sec 70).

7.Effects of non-presentment

If a negotiable instrument is not presented for payment all the parties shall be discharged from liability, except the following parties: a. Maker of a promissory note. b. Acceptor of a bill c. Drawer of the cheque

8.When is presentment for payment excused?

a. When Presentment Is Intentionally Prevented: Where the maker, acceptor or drawee intentionally does something which prevents the holder from presenting the instrument.

b. Place Of Business Closed: If the instrument is payable at the payer’s place of business and he closes such place on a business day during the usual business hours.

c. Payer Absents From Place Of Business: If the instrument is payable at some other specified place, neither the payer nor any person authorized to make payment attends at such place during the usual business hours.

d. Where The Payer Cannot Be Found: If the instrument not payable at any specified place and the payer cannot after due search be found.


What is meant by ‘Presentment’ of a bill of exchange under the Negotiable Instruments Act, 1881? When is such a bill of exchange presented for payment? State when is the presentment not necessary. [CA PCC MAY 2008] Sol. Presentment of a bill of exchange means presenting the bill to the drawee

for his acceptance and then specify all 8 points.

4.31 Discharge of Negotiable Instrument

A negotiable instrument is said to be discharged when the liability of all the parties on such negotiable instrument comes to an end. A negotiable instrument is discharged in the following cases

Payment in due course

This is the most usual and expected mode of discharge of a negotiable instrument. When a negotiable instrument is paid on maturity by the party primarily liable, the negotiable instrument is discharged .

Cancellation of acceptor’s name

Where the holder cancels the name of the acceptor with an intention to discharge him, the negotiable instrument is discharged.

Release Where the holder releases or renounces his rights against all the parties to negotiable instrument, the negotiable instrument is discharged.

Negotiation back

If the party who was primarily liable on the negotiable instrument becomes the holder of negotiable instrument, the negotiable instrument is discharged and so all the parties are consequently discharged.

Non-presentment of bill for acceptance

A bill must be presented for acceptance, if it is payable after sight, or if it contains an express term requiring acceptance. In case, such bills are not presented for acceptance within reasonable time after it is drawn all parties stands discharged.

Payment of instrument on which alteration is not apparent

Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay, and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such a person or banker from all

Negotiable Act

Section 89

.

liability thereon, and such payment shall not be questioned by reason of the instrument having been altered, or the cheque crossed.

4.32 Discharge of party

A party is said to be discharged from his liability when his liability on the instrument comes to an end. One or more parties to a negotiable instruments is/are discharged from liability in the following ways

1.By Cancellation

Where the holder releases any party liable on the instrument such a party and all parties subsequent to him are discharged.

2.By Release If the holder of a negotiable instrument releases any party to the instrument by any method other than cancellation of names, the party so released and all parties subsequent to him.

3.By Payment When the party primarily liable on the instrument makes the payment in due course to the holder at or after maturity all the parties to the instrument are discharged, because the instrument as such is discharged by such payment.

4.By allowing drawee more than 48 hours to accept

If the holder of a bill of exchange allows the drawee more than forty eight hours exclusive of public holiday, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder.

5.By taking qualified acceptance

If the holder of a bill agrees to a qualified acceptance all prior parties whose consent is not obtained to such an acceptance are discharged from liability.

6.By not giving notice of dishonour

Any party to a negotiable instrument to whom notice of dishonour is not sent by the holder is discharged from liability as against the holder.

7.By non-presentment for acceptance of a bill

A bill must be presented for acceptance, if it is payable after sight, or if it contains an express term requiring acceptance. In case, such bills are not presented for acceptance within reasonable time after it is drawn all parties stands discharged.

8.By delay in presenting cheque section 85

It is the duty of the holder of a cheque to present it for payment within reasonable time of its issue. If he fails to do so and in the meanwhile the bank fails causing damage to the drawer, the drawer is discharged as against the holder to the extent of the actual damage suffered by him.

9.By material alteration

Where a negotiable instrument is materially altered, any person who was a party to it at the time of making the material alteration is discharged, unless

he has consented to such alteration

10.By Negotiation Back

If the party who was primarily liable on the negotiable instrument becomes the holder of negotiable instrument, the negotiable instrument is discharged and so all the parties are consequently discharged.

11.Discharge of endorser's liability

Section 40

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.


Q1 A issues a cheque for Rs. 25,000/in favour of B. A has sufficient amount in his account with the Bank. The cheque was not presented within reasonable time to the Bank for payment and the Bank, in the meantime, became bankrupt. Decide under the provisions of the Negotiable Instruments Act, 1881, whether B can

Negotiable Act

recover the money from A? [CA PE II MAY 2003] Sol. Explain point 8 (section 85) and specify that A will be discharge to the extent of his loss and therefore B can recover from A (25000- loss of A).

Q2 `A' draws a cheque for Rs. 50,000. When the cheque ought to be presented to the drawee bank, the drawer has sufficient funds to make payment of the cheque. The bank fails before the cheque is presented. The payee demands payment from the drawer. What is the liability of the drawer? [CA PE II MAY 2005] Sol. Explain point 8 (section 85) and specify that A will be discharge to the extent of his loss and therefore payee can recover from A (50000- loss of A).

Q3 B issued a cheque for Rs.1,25,000 in favour of S. B had sufficient amount in his account with the Bank. The cheque was not presented within reasonable time to the Bank for payment and the Bank in the meantime, became insolvent. Decide, under the provisions of the Negotiable Instrument Act, 1881 whether S can recover the money from B. [CA PCC NOV. 2008] Sol. Explain point 8 (section 85) and specify that B will be discharge to the extent of his loss and therefore S can recover from B (125000- loss of B).

Q4 N’ is the holder of a bill of exchange made payable to the order of ‘P’. The bill of exchange contains the following endorsements in blank:

First endorsement ‘P’ Second endorsement ‘Q’ Third endorsement ‘R’ Fourth endorsement ‘S’ ‘N’ strikes out, without S’s consent, the endorsements by ‘Q’ and ‘R’. Decide with

reasons whether ‘N’ is entitled to recover anything from ‘S’ under the provisions of Negotiable Instruments Act, 1881. [CA IPCC NOV. 2009]

Sol. Explain point 11 (section 40) and specify that N striked out the endorsement of Q and R without S’s consent causing loss to S and therefore S is discharged and N will not be able to recover from S. Q5 A issued a cheque for Rs. 5,000 to B , B did not present the cheque for payment

within reasonable period. The bank fails. However, when the cheque was ought to be presented to the bank, there was sufficient fund to make payment of the cheque. Now B demands payment from A. Decide the liability of A under the Negotiable Instruments Act, 1881 – [CA Inter.(IPC) MAY 2014] Explain point 8 (secion 85) and specify that A will be discharge to the extent of his loss and therefore B can recover from A (5000- loss of A).

4.33 Dishonour Section 91,92

1.Dishonour of a bill of exchange by non-acceptance: Sec 91

Dishonour of a bill of exchange, by non-acceptance, may take place in any of the following ways.

When bill is presented for acceptance and drawee makes default in acceptance.

When presentment is excused and bill is not accepted.

When drawee is incompetent to contract.

When drawee makes a qualified acceptance.

2.Dishonour by non-payment Sec 92

A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same (sec 92)

Apart from that there are certain circumstances when presentment for payment is excused and the instrument is deemed to be dishonoured even without presentment (sec 76

Past Attempt Q1 When a bill of exchange may be dishonoured by `nonacceptance' and

Negotiable Act

Questions `nonpayment' under the provisions of Negotiable Instruments Act, 1881? [CA PE

II NOV. 2002] Sol. Explain point 1 and 2 completely

4.34 Material alteration Section 87,88

1.Meaning An alteration which alters the character or identity of the instrument or changes the rights and liabilities of the parties is called material alteration

2.Instance of Material alteration

The following alterations are material, i.e. the alteration of:

the date

the sum payable

the time of payment

3.Alterations not vitiating the instrument

In the following cases, the alteration of a negotiable instrument will not vitiate the instrument. a. An alteration, though in a material part, made before the instrument is issued. b. An alteration made for the purpose of correcting a mistake c. An alteration made to carry out the common intention of the original parties, d. An alteration made with the consent of the parties. e. An alteration, which is not material.

4.Alteration authorized by the Act

The following alteration, though material are permitted by the Act a. Filling blanks of an inchoate instrument (sec 20) b. Conversion of a blank Endorsement into an Endorsement in full (sec 49) c. Crossing of cheques (sec 125)

5.Effect of material alteration

a. Parties not consenting to material alteration are discharged: A person who was a party at the time of material alteration shall be discharged, if he has not given its consent to the material alteration. Such party doesnot remain liable even to a holder in due course.

b. Parties consenting to material alteration remain liable: A person who was a party at the time of material alteration shall continue to be liable, if he has given its consent to material alteration.

c. Parties subsequent to material alteration are liable: A person who becomes a party to the materially altered negotiable instrument, is liable for payment.


Q1 When is an alteration in a negotiable instrument is deemed to be a "material alteration" under the Negotiable Instruments Act, 1881? What are the consequences of material alteration in a negotiable instrument? [CA PE II MAY 2006]

Sol. Explain all 5 points Q2 What do you understand by "Material alteration" under the Negotiable Instruments

Act, 1881? State whether the following alterations are material alterations under the Negotiable Instruments Act, 1881: (i) The holder of the bill inserts the word "or order" in the bill, (ii) The holder of the bearer cheque converts it into account payee cheque,

(iii) A bill payable to 'X' is converted into a bill payable to X and Y. [CA PE II NOV. 2007]

It is not material alteration since now instrument can be further negotiated which is common intention all party.

It is material alteration because it section 125 permit conversion of uncrossed cheque into general or special crossing but in this case it was converted to account payee crossing.

It is material alteration because payee has changed from X to X and Y. Q3 A issues an open ‘bearer’ cheque for Rs.10,000 in favour of B who strikes out the

word ‘bearer’ and crosses the cheque. The cheque is thereafter negotiated to C

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and D. When it is finally presented by D’s banker, it is returned with remarks "payment countermanded" by drawer. In response to a legal notice from D, A pleads that the cheque was altered after it had been issued and therefore he is not bound to pay the cheque. Referring to the provisions of the Negotiable Instruments Act, 1881 decide, whether A’s argument is valid or not? [CA PCC JUNE 2009]

Sol. A’s argument is invalid because converting a bearer cheque into an order instrument is common intention of all parties(for ensuring safety) and therefore permitted by the Act and therefore not a material alteration similarly converting uncrossed cheque into general crossing is also permitted by the act and hence permitted. Q4 Define material alteration under The Negotiable Instruments Act, 1881 and give

examples. [CA Inter.(IPC) MAY 2013] Sol. Explain all 5 points

4.35 Notice of Dishonour Sec 93,98,106

1.Meaning Notice of dishonour means information about the fact that the instrument has been dishonoured. Notice of dishonour is given to the party sought to be made liable and therefore, it serve as a warning to the person to whom the notice is given that he could now be made liable.

2.Notice of dishonour by whom

Notice of dishonour is to be given by a person who wants to make same prior party of his liable on the instrument.

3.Notice to whom

The notice of dishonour must be given to all the parties to whom the holder seeks to make liable. If a party liable on a negotiable instrument is dead or insolvent, the notice of dishonour must be given to the legal representative or official assignee.

4.Mode of Notice

Notice may be oral or written or partly oral and partly written. It may be sent by post.

5.Time within which notice is to be given

The notice must be given within reasonable time of dishonour of negotiable instrument.

6.Place at which notice is to be given

The place of business or (in case such party has no place of business) at the residence of the party for whom it is intended, is the place where the notice is to be given.

7.When is notice of dishonour unnecessary

Section 98 mentions the following circumstances when the notice of dishonour is not necessary: a. When it is dispensed with by the party entitled to the notice, it means that the party

who is entitled to the notice may expressly or impliedly waive the same. b. When the drawer has countermanded payment(i.e. stop payment), no notice is

required to charge the drawer. c. When after a due search the party entitled to the notice cannot be found, notice of

dishonour is excused in such a case. d. No notice is required to charge the drawee, when the acceptor is also the drawee.


Q1 Describe the circumstances where under notice of dishonour is excused under the Negotiable Instruments Act, 1881. [CA PE II MAY 2004] Sol. Explain point 1 and 7

Q2 Ram has Rs.2000 in his bank account and he has no authority to overdraw. He issued a cheque for Rs. 5000 to Gopal which was dishonoured by the bank. Point out whether Gopal must necessarily give notice of dishonor to Ram under the Negotiable Instruments Act, 1881- [CA Inter.(IPC) MAY 2014]

Negotiable Act

4.36 Noting and Protest Sec 99,104A

1.Noting

(a)Meaning of noting

Noting is the authentic and official proof of presentment and dishonour of a negotiable instrument.

(b)Noting to whom See 99 para l

When a promissory note or a bill of exchange has been dishonoured by non acceptance or nonpayment, the holder may cause such dishonour to be noted by a Notary Public upon the instrument.

(c)Content of noting

Noting must contain of following particulars: a. the fact of dishonour; b. the date of dishonour; c. the reasons, if any, assigned for such dishonour; d. if the instrument has not been expressly dishonoured the reason why the holder

treats it as dishonoured; and e. the notary charges

(d)Time limit for Noting

Noting must be made within a reasonable time after dishonour.

(e)Noting is optional

Noting is not compulsory in the case of an inland bill or note. The omission to get instrument noted does not in any way effects rights of the holder thereof.

2.Protest

(a)Meaning of protest

Protest is a formal certificate of dishonour issued by the Notary Public to the holder of the bill or note, on his demand

(b)Notice of protest

When a promissory note or 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.

(c)Time limit for protest

The protest must be made within a reasonable time of maturity of a negotiable instrument.

(d)Contents of protest

A protest must contains all the following particulars: a. The instrument or a literal transcription of the instrument. b. The name of the person for whom and against whom the instrument has been

protested. c. The fact of and reason for dishonour. d. The place and time of dishonour e. The signature of the Notary public.

(e)Protest for better security

When the acceptor of a bill of exchange has become insolvent before the maturity of the bill, the holder may, within a reasonable time, through a notary public, demand a better security from the acceptor. If the acceptor refuses to give a better security the fact may also be noted and certified by the Notary Public .Such certificate is called as protest for better security (Sec100, para 2)

4.37 Acceptance for honour or acceptance supra protest Sec 108-112

1.Meaning When a bill of exchange is dishonoured by non-acceptance the credit and honour of the parties thereto, particularly the drawer, is adversely hit. The holder in such a case may bring an action against the parties liable on the bill.In order to save the credit and honour of such parties such a bill can be accepted for honour.

When a bill of exchange has been noted or protested for non-acceptance or for better security, any person not being a party already liable thereon may, with the consent of the holder, by writing on the bill, accept the one for honour of any party-thereto (section 108).

2.Conditions for a valid acceptance of

a. Bill must have been noted or protested for non acceptance or better security b. Such an acceptance can be made only by a stranger. c. Acceptance for honour should be made in writing on the bill.

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honour d. Acceptance for honour should be made with the consent of the holder.

e. A person desiring to accept for honour must, by writing on the bill under his hand, declare that he accepts for the honour of the drawer or of a particular Endorser whom he names. Where the acceptance doesnot mention for whose honour it is made it shall be deemed to be made for the honour of the drawer (section 110).

3.Rights and liabilities of acceptor for honour

a. An acceptor for honour cannot be charged unless the bill has, at its maturity been presented to the drawee for payment and has been dishonoured by him, and noted and protested for such dishonour. (section 112)

b. As regards rights and liabilities, an acceptor for honour takes the place of the person for whose honour he has accepted the bill.

c. On such acceptance the acceptor for honour binds himself to all parties subsequent to the party for whose honour he accepts to pay the amount of the bill ,if the drawee does not pay (section 111).

d. On paying the bill, an acceptor for honour is entitled to recover the amount from the person for whose honour he accepted the bill and all prior parties to such a person


Q1 Explain the terms ‘Acceptance for Honour’’ as used in the Negotiable Instrument Act, 1881. –[CA Inter.(IPC) NOV. 2014]

Sol. Explain all 3 points

4.38 Payment for honour Sec 113&114

1.Concept of payment for honour

a. As a general rule no one can make any payment voluntarily on behalf of somebody else and then claim the amount from the person on whose behalf payment was made.

b. As per section 113 if a person pays a bill for the honour of any party liable on the bill, he can recover the payment made by him, and he is called as payer for honour.

2.Conditions for a valid payment of honour

The payment for honour is made only of a bill of exchange. For a valid payment of honour the following essentials are to be satisfied : a. The bill of exchange must have been dishonoured by non-payment and then noted

and protested for the same. b. Such payment must have been made for the honour of any party liable to pay the

same. c. The person making the payment or his agent must declares before the Notary

Public the party for whose honour he pays, and that such declaration must have been noted by such Notary Public.

3.Rights of person making payment

a. Any person so paying is entitled to all the rights in respect of the bill, of the holder at the time of such payment, and may recover from the party for whose honour he pays all sums so paid, with interest thereon and with all expenses properly incurred in making such payment (section 114)

b. The payer for honour steps into the shoes of the holder to whom the payment has been made.

c. Now instead of the holder claiming payment such payer can claim payment from the person for whose honour the payment has been made and from all parties prior to such person. All parties subsequent to the person for whose honour the payment has been made are discharged from liability.

4.39 Drawee in case of need Sec 115

1.Optional to name ‘drawee in case of

The name of any person may be given in a bill as ‘drawee in case of need’. In such a case, he shall also be treated as a drawee in addition to the drawee named in the bill.

Negotiable Act

need’

2.When does liability of ‘drawee in case of need’ arise?

The liability of drawee in case of need arises only if the drawee refuses to accept or pay the bill.

3.When is bill dishonoured?

Where ‘drawee in case of need’ is named in a bill, the bill is not dishonoured until such bill is dishonoured by drawee in case of need. In other words, the bill is dishonoured if- a. the drawee refuses to accept the bill, or where acceptance of bill is not required, if

the drawee refuses to pay the bill; and b. the drawee in case of need also refuses to accept or pay the bill, as the case may

be.


Q1 Explain the terms ‘Drawee in case of need’’ as used in the Negotiable Instrument Act, 1881. –[CA Inter.(IPC) NOV. 2014]

Sol. Explain all 3 points

4.40 Presumption as to Negotiable Instruments Section 118

The Act lays down a number of presumptions in favour of negotiable instruments to facilitate proof of claims assign upon them. Unless the contrary is proved, the following presumptions shall be made.

1.Presumption of consideration

There is a presumption that every negotiable instrument was made or drawn for consideration.

2.Presumption as to date

It is presumed that every negotiable instrument bearing a date was made or drawn on such date.

3.Presumption as to time of acceptance

It is presumed that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity.

4.Presumption as to time of transfer

There is a presumption that every transfer of a negotiable instrument was made before its maturity.

5.Presumption as to order of endorsements

It is presumed that the endorsements appearing upon a negotiable instrument was made in the order in which they appear thereon.

6.Presumption as to stamps

There is a presumption that a lost promissory note, bill of exchange or cheque was duly stamped.

7.Presumption that holder is a holder in due course

It is presumed that the holder of a negotiable instrument is a holder in due course.

8.Presumption as to dishonour

In a suit upon an instrument, which has been dishonoured, the court shall on proof of the protest, presume the fact of dishonour unless and until such fact is disproved.

4.41 Crossing

1.Meaning of crossing

Crossing of a cheque means an instructions to the drawee i.e. the paying bank that the payment is not to be made at the counter but through a bank.

2.Objects of crossing

An uncrossed cheque is known as open cheque and its payment is made at the counter on the presentation of the cheque. In such case, if a wrong person takes away the payment of the cheque, it is difficult to trace him.

This difficulty could be removed by crossing a cheque. If a person takes the

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payment of a crossed cheque through a bank. It is easily possible to trace him.

3.Who may cross a cheque

A cheque may be crossed either by the drawer or by the holder.

The banker also is entitled to cross a cheque in the name of another bank who may collect the cheque as an agent for collections.

4.Types of crossing

(a)Meaning of General crossing

Where a cheque bears across its face two parrellel, transverse lines without any words or with words ‘and company’ or/and ‘not negotiable’ written in between these two parrellel lines, it is called general crossing.

(b)Meaning of special crossing

Where a cheque bear across its face an addition of the name of the banker either with or without the words ‘not negotiable’ the cheque is deemed to be crossed specially. As a general rule, special crossing can made only once However, as an exception to this rule, a cheque containing special crossing can be crossed specially again if following conditions are satisfied

The second special crossing is made by the collecting banker.

The second special crossing is made for the purpose of collection of the cheque.

(c)Meaning of Not Negotiable

a. If the drawer gives a direction to the paying banker to pay the amount of the cheque to a banker (whether named therein or not) and a further direction that the title of the Endorsee shall not be better than that of Endorser, it is called as not negotiable crossing.

b. Not negotiable crossing can be made by complying with the following two requirements. I The cheque must be crossed generally or specially. ii. The cheque contains the words ‘not negotiable’ .

Effects of not negotiable crossing

The payment of the cheque cannot be made at the counter of the bank. The paying banker must pay the proceeds of the cheque only to a banker.

The title of a person who accepts a cheque containing not negotiable crossing (i.e. Endorsee) shall not be better than the title of the person from whon he accepted such a cheque (i.e. the Endorser). Therefore, if the title of Endorser of cheque is defective, title of Endorsee shall also be defective. In other words, the transferee gets only the rights of transferor.

The cheque remains negotiable notwithstanding the fact that it contains “not negotiable” crossing. In other words, “not negotiable” crossing does not restrict negotiability of a cheque.

(d)Meaning of account payee crossing / restrictive

Sometimes along the crossing of a cheque the words ‘A/C Payee’ or ‘A/C Payee only’ may be written. The effect of such words is that the collecting bank is supposed to collect the cheque only on behalf of the payee.

If the collecting bank collects it on behalf of some other person it can be held responsible for the same. The object of adding these words in the crossing is to give protection to the payee.


Q1 What do you understand by "Crossing of cheques"? What is the object of crossing? State the implications of the following crossings:

(i) Restrictive crossing (ii) Not–negotiable crossing [CA PE II NOV. 2003]

Sol. Explain point 1,2,4(c) ,4(d) Q2 A cheque marked 'Not Negotiable' is not transferable. [CA PE II MAY 2007]

Sol. False and explain 4(c) briefly Q3 Explain as to why shall the combination of ‘not negotiable’ with ‘Account payee’

crossing be considered as the safest form of crossing a cheque. [CA PCC NOV. 2007]

Sol. Explain point 1,2,4(c) ,4(d). Q4 A cheque marked "Not–Negotiable" is not transferable. [CA IPCC MAY 2011]

Negotiable Act

Sol. False and explain 4(c) briefly

4.42 Protection and liability of banker

1.Liability of drawee of cheque

Section 31

The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.

2.Cheque payable to order

section 85

Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course.

Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.

3.Payment of cheque crossed generally Section 126

Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker.

Payment of cheque crossed specially: Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection.

4.Payment of cheque crossed specially more than once Section Section 127

Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.

5.Payment in due course of crossed cheque Section 128

Where the banker on whom a crossed cheque is drawn has paid the same in due course, the banker paying the cheque, and (in case such cheque has come to the hands of the payee) the drawer thereof, shall respectively be entitled to the same rights, and be placed in the same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.

6.Payment of crossed cheque out of due course Section 129

Any banker paying a cheque crossed generally otherwise than to a banker, or a cheque crossed specially otherwise than to the banker to whom the same is crossed, or his agent for collection, being a banker, shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.

7.Cheque bearing "not negotiable" Section 130

A person taking a cheque crossed generally or specially, bearing in either case the words "not negotiable", shall not have and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had.

8.Non-liability of banker receiving payment of cheque Section 131

A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.

9.Payment of a cheque on

If any drawee banks made the payment on a cheque on which drawer signatures were forged then such bank shall be liable to the true owner

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which drawer signature were forged.


Q1 The drawer, `D' is induced by À' to draw a cheque in favour of P, who is an existing person. À' instead of sending the cheque to `P', forges his name and pays the cheque into his own bank. Whether `D' can recover the amount of the cheque from À's banker. Decide. [CA PE II NOV. 2002]

Sol. Explain point 8 and specify A’s banker will not be laible since it collected the payment in good faith and without negligence.

Q2 Mr. ‘Wise’ obtains fraudulently from ‘R’ a crossed cheque "Not Negotiable". He transfers the cheque to ‘V’, who gets the cheque encashed from ANS Bank Limited which is not the drawee bank. ‘R’ on coming to know about the fraudulent act of Mr. ‘Wise’ sues ANS Bank for the recovery of the money. Examine with reference to the relevant provisions of The Negotiable Instruments Act, 1881, whether ‘R’ will succeed in his claim. Would your answer be still the same in case Mr. ‘Wise’ does not transfer the cheque and gets the cheque encashed from ANS Bank himself? [CA PCC JUNE 2009]

Sol. Explain point 8 section 131 and specify that ANS Bank collected the cheque in good faith and without negligence although the tittle of V is defective because of not negotiable crossing but ANS bank will be discharged. In the second case our answer will remain same.

Q3 A Cheque is drawn "payable to N or order". It is stolen and N’s endorsement is forged. The banker pays the cheque in due course. Is the banker discharged from liability? Would it make any difference if the drawers’ signature were forged? Discuss with reference to the provisions of the Negotiable Instruments Act, 1881. [CA PE II NOV. 2009]

Sol. Explain point 2 and 9 and specify bank will be discharge in case N’s endorsement proved to be forged but banker will be liable in case drawer signature are forged.

4.43 Liability of drawer for dishonor of cheque Sec 138-142

1.Position of drawer

A drawer of a dishonoured cheque shall be deemed to have committed an offence.

2.Nature of liability of Drawer u/s 138

For this offence (as stated above), the drawer is punishable with a. imprisonment up to 2 years or b. with fine up to twice the amount of the cheque; or both

3.Applicability of section 138

The liability under section 138 is attracted only if the following conditions are satisfied: a. The cheque has been dishonoured due to insufficiency of funds in the account

maintained by him with a banker ,for payment of any amount of money to another person from out of that account.

b. The payment for which the cheque was issued should have been in discharge of a legally enforceable debt or liability in whole or part of it;

c. The cheque should have been presented by the payee or the holder in due course within a period of 3 months from the date on which it is drawn or within the period of its validity whichever is earlier;

d. The payee or the holder in due course of the cheque should have given notice demanding payment within 30 days from the drawer on receipt of information of dishonour of cheque from bank;

e. The drawer is liable only if he fails to make payment with 15 days of such notice period;

4.Presumption a. It shall be presumed unless contrary is proved that the holder of a cheque,

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in favour of holder Section 139

received the cheque of the nature mentioned in section 138 for discharge in whole or in part, of any debt or other liability.

5.Defence which may not be allowed Section 140

It shall not be a defence in a prosecution for an offence u/s 138, that the drawer had no reason that when he issued the cheque that the cheque may be dishonoured for the reasons mentioned in section 138.

6 Cases (a) If a person after issuing the cheque stops the cheque then he shall be liable u/s 138 Modi Cement Ltd v Kuchil Kumar Nandi

(b) If a person who is the shareholder of the company but neither a director nor a person incharge issue the cheque out of companies a/c to discharge his personal debts then he shall not be liable u/s 138 as H.N.D Mulla Feroze v C.V Somaya Julu

Offences by companies. Section 141

If the person committing an offence under section 138 is a company,

every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company,

as well as the company,

shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence. [Section 141(1)]

Notwithstanding anything contained in section141(1), where any offence under this Act has been committed by a company

and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company,

such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.— For the purposes of this section,—

(a) “company” means anybody corporate and includes a firm or other association of individuals; and (b) “director”, in relation to a firm, means a partner in the firm. [Section 141(2)]

7. Jurisdiction of courts Section 142(2)

The offence under section 138 shall be inquired into and tried only by a court within

whose local jurisdiction,—

(a) if the cheque is delivered for collection through an account, the branch of the bank

where the payee or holder in due course, as the case may be, maintains the

account, is situated; or

(b) if the cheque is presented for payment by the payee or holder in due course,

otherwise through an account, the branch of the drawee bank where the drawer

maintains the account, is situated.

Explanation— For the purposes of point (a), where a cheque is delivered for collection

at any branch of the bank of the payee or holder in due course, then, the cheque shall

be deemed to have been delivered to the branch of the bank in which the payee or

holder in due course, as the case may be, maintains the account.".

Subsequent complaints Section

Where the payee or the holder in due course, as the case may be, has filed a complaint against the drawer of a cheque

in the court having jurisdiction as above and such complaint is pending in that

https://indiankanoon.org/doc/66320/

https://indiankanoon.org/doc/1923203/

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142A(2) court,

all subsequent complaints arising out of section 138 against the same drawer

shall be filed before the same court irrespective of whether those cheques were delivered for collection or presented for payment within the territorial jurisdiction of that court.


Q1 J. a shareholder of a Company purchased for his personal use certain goods from a Mall (Departmental Store) on credit. He sent a cheque drawn on the Company’s account to the Mall (Departmental Store) towards the full payment of the bills. The cheque was dishonoured by the Company’s Bank. J, the shareholder of the company was neither a Director nor a person incharge of the company. Examining the provisions of the Negotiable Instruments Act, 1881 state whether J has committed an offence under Section 138 of the Act and decide whether he (J) can be held liable for the payment, for the goods purchased from the Mall (Departmental Store). . [CA PE II NOV. 2006] Sol. Explain point 3 and 6(b) and specify that section 138 is not attracted because cheque not dishonoured for insufficiency of funds but because of invalid signatures of J as he can’t sign on company’s behalf. However he shall be laible to pay for goods purchased from Mall.

Q2 State the circumstances under which the drawer of a cheque will be liable for an offence relating to dishonour of the cheque under the Negotiable Instrument Act, 1881.

Sol. Explain point 1-5 Q3 Examine, whether there is an offence under the Negotiable Instrument Act, 1881,

if a Drawer of a cheque after having issued the cheque, informs the Drawee not to present the cheque as well as informs the Bank to stop the payment. [CA PCC MAY 2007]

Sol. Explain point 3 and 6(a) and specify that section 138 is applicable in case of stop payment and therefore drawer has committed an offence.

Q4 X draws a cheque in favour of Y. After having issued the cheque he informs Y not to present the cheque for payment. He also informs the bank to stop payment. Decide, under provisions of the Negotiable Instruments Act, 1881, whether the said acts of X constitute an offence against him ? [CA PE II MAY 2008]

Sol. Explain point 3 and 6(a) and specify that section 138 is applicable in case of stop payment and therefore drawer has committed an offence.

Q5 V makes a gift of Rs.10,000 to W through a cheque issued in favour of W. Later he (V) informs W not to present the cheque for payment and informs the bank also to stop payment. Examining the provisions of the Negotiable Instruments Act,1881, decide whether V’s above acts constitute an offence. [CA PE II JUNE 2009]

Sol. Explain point 3 and 6(a) and specify that section 138 is not applicable because cheque was not issued to discharge some debts but as gift only however this section is applicable if it was issued to discharge debt and therefore V has not committed any offence.

4.44 Hundies

Meaning of Hundi

Hundies are indigenous negotiable instruments written in a vernacular language. These are mostly like bills of exchange in form and substance.

Whether Negotiable Instrument Act applies to Hundi?

The provisions of the Negotiable Instrument Act apply to hundi unless there is a local usage to the contrary.

Negotiable Act

Kinds of Hundies:- The various types of hundies are as follow

Darshani Hundi

It is payable at sight like a demand bill.

Muddati Hundi It is one payable after a specified period of time like a time bill

Shah jog Hundi

a. A shah means a respectable person. A shah jog hundi means a hundi which is payable only to a shah.

b. It can be freely transferred from one person to another by mere delivery and no Endorsement is required.

Nam jog hundi It is a hundi, which is payable at or to the order of a specified person named in the hundi.

Jokhami hundi A jokhami hundi is one which implies a condition that the money shall be payable by the drawee who is the buyer of goods, only in the event of the safe arrival of the goods against which the hundi is drawn.

Dhanijog hundi or dekhandar hundi

Dhani means a ‘holder ‘. A dhani jog hundi is a hundi which is payable to the holder or bearer.

Firman jog hundi

Firman means order. A firman jog hundi is one which is payable to order. It can be negotiated, like instrument payable to order, by Endorsement and delivery.

Jaw bee hundi It is a hundi which is used for remitting money from one place to another. When the payee i.e. the person who is to receive the money gets the money, he has to send an answer, i.e. jawab to the remitter.

Khokha A hundi when paid and cancelled is called a khokha

Peth The duplicate of a hundi when the original is lost, is called peth.

Perpeth The duplicate of a duplicate hundi is called perpeth.

4.45 Cases when is bound to dishonour customers cheque

• If a cheque is undated, • if it is stale, that is if it has not been presented within reasonable period, • If the instrument is inchoate or not free from reasonable doubt • If the cheque is post-dated and presented for payment before its ostensible date • If the customer’s funds in the banker’s hands are not ‘properly applicable’ to the

payment of cheque drawn by the former. • If the customer has credit with one branch of a bank and he draws a cheque

upon another branch of the same bank in which either he has account or his account is overdrawn.

• If the bankers receive notice of customer’s insolvency or lunacy • If the customer countermands the payment of cheque for the banker’s duty and

authority to pay on a cheque ceases • If a garnishee or other legal order from the Court attaching or otherwise dealing

with the money in the hand of the banker, is served on the banker • If the authority of the banker to honor a cheque of his customer is undermined by

the notice of the latter’s death. However, any payment made prior to the receipt of the notice of death is valid.

• If notice in respect of closure of the account is served by either party on the other. • If it contains material alterations, irregular signature or irregular endorsement.


Q1 State the grounds on the basis of which a cheque may be dishonoured by a banker, in spite of the fact that there is sufficient amount in the account of the drawer. [CA PE II NOV. 2003]

Q2 State the cases in which a banker is justified or bound to dishonour cheques. [CA PE II MAY 2005]

Q3 PQR Limited received a cheque for Rs. 50,000 from its customer Mr. LML After a

Negotiable Act

week company came to know that the proceeds were not credited to the account of PQR Limited due to some ‘defects’, as informed by the Banker. What according to you are the possible effects? [CA PCC MAY 2007]

Q4 State, in brief, the grounds on the basis of which a banker can dishonour a cheque under the provisions of the Negotiable Instruments Act, 1881. [CA IPCC NOV. 2011]

Q5 State the circumstances of the basis of which a banker can dishonor a cheque under the provisions of Negotiable Instruments Act, 1881. [CA Inter.(IPC) NOV. 2013] Sol. For all 5 questions specify all points.

4.46 Difference between negotiation and assignment

1. Formalities: Negotiation requires mere ‘delivery’ of a ‘bearer’ instrument and ‘endorsement and delivery’ of an ‘order’ instrument to effectuate a transfer. Assignment requires a written document signed by the transferor irrespective of whether the instrument is a ‘bearer’ or ‘order’ one. 2. Notice of transfer: In the case of assignment a notice of transfer of debt is required to be given by the assignee to the debtor in order to complete his title. No such notice is required to be given in the case of negotiation. 3. Title: In the case of negotiation if the transferee takes the negotiable instrument for value and in good faith, i.e., as holder in due course, he takes it free from all defects in the title of the previous transferors. But in the case of assignment the assignee takes the instrument subject to the defects in the title of his assignor, even though he took the assignment for value and in good faith. 4. Consideration: Consideration is always presumed in the case of transfer by negotiation, whereas there is no such presumption in the case of transfer by assignment, where the burden of proof of consideration lies upon the assignee.


Q1 What are the differences between "negotiability" and "assignability"? [CA PE II NOV. 2003]

Q2 Point out the differences between "transfer by negotiation" and "transfer by assignment" under the provisions of the Negotiable Instruments Act, 1881. [CA PE II MAY 2006]

Q3 Distinguish between “Negotiability” and “Assignability” [CA Inter.(IPC) MAY 2013]

4.47 Some Extra Questions

Negotiable Act

Q1 A induced B by fraud to draw a cheque payable to C or order. A obtained the cheque, forged C's indorsement and collected proceeds to the cheque through his bankers. B the drawer wants to recover the amount from C's Bankers.

Decide in the light of the provisions of Negotiable Instruments Act, 1881 — (i) Whether B the drawer, can recover the amount of the cheque from C’s Bankers? (ii) Whether C is the Fictitious Payee? (iii) Would your answer be still the same in case C is a fictitious person? [CA PE II NOV. 2004]

Q2 A cheque payable to bearer is crossed generally and marked "not negotiable". The cheque is lost or stolen and comes into possession of B who takes it in good faith and gives value for it. B deposits the cheque into his own bank and his banker presents it and obtains payment for his customer from the bank upon which it is drawn. The true owner of the cheque claims refund of the amount of the cheque from B.

Discuss the liability of the banker collecting the cheque and the banker paying the cheque and B to the true owner of the cheque referring to the provisions of the Negotiable Instruments Act, 1881. [CA PE II MAY 2005]

Q3 P draws a bill on Q for Rs.10,000. Q accepts the bill. On maturity the bill was dishonored by non–payment. P files a suit against Q for payment of Rs. 10,000. Q proved that the bill was accepted for value of Rs. 7,000 and as an accommodation to the plaintiff for the balance amount i.e. Rs.3,000. Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether P would succeed in recovering the whole amount of the bill? [CA IPCC NOV. 2010]

negotiable instruments act,1881 act maker it is written by the maker himself and his name appears in...

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