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Negotiable Instruments

Law & Procedure

Dr. Prashant S. Desai,

Assistant Professor of Law,

Module contents

Justification for study of negotiable instruments

Understanding negotiable instruments
Parties to negotiable instruments
Special provisions relating to cheques
Discharge from liability
Noting and protest
Presumptions and estoppels
Offences under the act
Foreign instruments

Understanding the context (at macro

Growing concept of securitization as a mode of
What is securitization?
securitization is a process in which pools of individual loans
or receivables or actionable claims are packaged, under
written and distributed to investors in the form of securities
-- Kenneth Cox














Justification for study

Negotiable instruments form the backbone of
todays complex commercial world
Tradesmen prefer to use cheques, drafts, promissory
notes etc., in their day to day transactions, rather
than ready cash
These instruments are used as mode of payment for
almost all human activities (payment of salary,
application cost, payment of fees etc.,)

Necessity of such instruments make the wheels of

economy turn and transact-ability increases

Negotiable instruments an introduction

Might have originated from negoce (French word)
meaning business, trade or management of affairs
negotiable is something which is legally capable of
being transferred by endorsement or delivery, and
negotiability is the legal character of being
negotiable Blacks Law Dictionary
A negotiable instrument means a promissory
note, bill of exchange or cheque payable either to
order or to bearer S. 13 of NIAct, 1882

Special indicators
It gives certain rights to the person in lawful
possession of such an instrument which no other
instruments can ever give
It represents money to a great extent; and
Does not get tainted by any defect in title at the source so
long as its acquisition is lawful Ex: if the maker of the
instrument commits fraud or forgery the bona fide payee
of the instrument is not affected
It passes by delivery like cash
Person in lawful possession of it can sue in his own name

Kinds of negotiable instruments

The Act deals in three kinds of instruments


Promissory Note;
Bill of Exchange; and


Indian Paper Currency Act, 1871;

Any local usage relating any instrument in an oriental


The saving clause does not render the act
altogether inapplicable to hundis
local custom overrides the statute provided
It is established by the party relying on it; and
Such local usage is not specifically nullified by the
instrument specifically (indicating the intent of the parties)

By excluding the applicability of the Act to

instruments in oriental languages, necessary
confusion in the state of law has been established.
The law of negotiable instruments being closely
related to the commercial world should be, by and
large, uniform in its application Khergamvala on
Negotiable Instruments Act
Eleventh Report of the Law Commission of India

Punjab National Bank v Britannia India Ltd., [(2001)

106 Comp Cas 293 DB]
the Negotiable Instruments Act, 1881 has been framed in
order to assimilate and record the mercantile trade
practices, prevailing as the law merchant in England and
therefore any usage contrary to the provisions of the said
Act may not be upheld by a court. It is presumed that the
Act has taken into account, all the prevailing mercantile
usages and any usage, contrary to the provisions of the
Act cannot be given effect to

Promissory notes
an instrument in writing 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 Sec. 4

two parties






Pro Note for a loan

Bangalore , March 24, 2007

In consideration of loan of Rupees Five Thousands
(Rs.5,000) advanced by Mr. Avtar Singh to me, I
promise to repay the said loan of Rupees Five Thousand
with interest at 6.5% per annum to Mr. Avtar Singh or

Pratap Singh
s/o Biswas Singh,
Resident of 222, 72 cross, 4th Main,
Rajajinagar, 6th Block,
Bangalore-560 012

Pro Note payable on fixed date

Dharwad, March 24, 2008
I, Anand Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay,
Shri. Chandrakant P Bellad, or order the sum of Rs.50,000(Rupees Fifty Thousand
only) on the Seventh day of November two thousand eight.

Anand R. Patil,
s/o Ramappa Chendrashekhar Patil,
Resident of No. 227 Pratap Chendra Nilaya
College Road,
Dharwad-580 001.

Pro Note payable on instalments

Dharwad, March 24, 2008
I, Anand Ramappa Patil, S/o Ramappa Chendrashekhar Patil, promise to pay,
Shri. Chandrakant P Bellad, or order in ten equal instalments of Rs.30,000
(Rupees Thirty Thousand) each payable on the first day of every month
commencing from the first day of every month of May 2008.

Anand R. Patil,
s/o Ramappa Chendrashekhar Patil,
Resident of No. 227 Pratap Chendra Nilaya
College Road,
Dharwad-580 001.


it must be in writing and signed by the maker;

it must contain an unconditional and definite
promise to pay a certain sum, and nothing more;
it must be payable either on demand or after the
efflux of a fixed or determinable time in future;
It must be payable to, or to the order of a
specified person named in the note or to the
bearer of the note;
most importantly, an instrument to be regarded as
promissory note must show a prima facie intention
to make such a note and it must be delivered.

No particular form of writing
Pen, pencil, typed, etc.,
May be on paper or cloth etc.,

No need to use specifically the word promise

Must be signed by the maker

Undertaking to pay
Essential is express promise to pay
No Promissory notes
Mr. X, I owe you Rs.100
I have received Rs.100 which I borrowed of you, and I have
to be accountable to you for the same with interest
Deposited with me Rs.100 to be returned on demand

Good examples
Rs.1000 balance due to you I am still indebted and do
promise to pay
Received from X Rs.1000 which I promise to pay on
demand with interest
I do acknowledge myself to be indebted to X in Rs.1000 to
be paid on demand for value received

Unconditionality is essential to achieve the
objective of certainty of promissory note
It is indispensable statutory requisite [Black v Pilcher
(1909)25 TLR 497]
Notes that are payable on contingency are not

it would perplex the commercial transactions of

mankind if paper securities of this kind were issued
out in to the world, encumbered with conditions
and contingencies and if persons to whom they
were offered in negotiation were obliged to inquire
when these uncertain events would probably be
reduced to certainty..
-- Lord Kenyon in Carlos v FAncourt, (1794) 5 TR 484

I promise to pay X, Rs.5000 in installments with a
proviso that no payment shall be made after my
I promise to pay X, Rs.500 on As death, provided he
leaves me sufficient money to pay the said sum
I promise to pay AB, Rs.500 out of money due to me
from XY as soon as XY pays
I promise to pay on demand at my convenience

Certainty regarding the sum

Bad promissory notes
I promise to pay A, Rs.100 and all other sums which may be
due to him
I promise to pay A, Rs.100 after deducting any interest or
money which he may owe me
I promise to pay A the proceeds of a shipment of goods
value of Rs.2000
I promise to pay A Rs.1000 and all fines according to rule

Payee must be certain

The payees name may be set out in any part of the
instrument; and so long as it appears on a reading
of the whole instrument that the payee is specified
with certainty the instrument is a promissory note,
assuming other requirements of the definition are

Other formalities
Must be stamped
Although not obligatory
Generally dated
And the place of delivery is mentioned

There are in general two parties to a pro-note the

maker and the payee.
There can also be Joint makers and Joint Payees

Bill of Exchange
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
- Sec. 5 of NI Act


Must be in writing
Must contain an order to pay
Order contained in the bill shall be unconditional
Must be signed by the drawer
Drawee must be certain
Sum payable must be certain
Order to pay money and money only
The payee must be certain

Three parties









Typical BoE (payable on demand)

Dharwad, March 24, 2008
Pay to Chandrakant R Bellad, or order on demand the sum of Rs.50,000 (Rupees
Fifty Thousand only).

Anand R. Patil,
Bhavesh Solanki,
College Road,
Dharwad-580 001.

BOE shall contain an order

Essence of BOE is an order by the drawer to the
drawee to pay the money to payee
Polite assertion may also do
Please pay affixed to the order will not be invalid
Mr. AB will much oblige Mr. CD by paying to the order of
P was held to be good bill

BoE and Pro Note compared

The liability of the maker
In Pro Note it is primary
In BOE it is secondary and conditional

Pro Note two
BOE three

BOE require specially

Acceptance by the drawee; and

Cheque is a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise
on demand and it includes the electronic image of
the truncated cheque and a cheque in the
electronic form
- Sec. 6 of NI Act
There are two explanations
Explaining a cheque in the electronic form and a
truncated cheque; and
Clearing house for the purpose of this section

Broadening the definition of cheque

in 2002
The definition broadened to include
electronic image of a truncated cheque; and
cheque in the electronic form

The Information Technology Act, 2002 recognizes

electronic transfers; and
digital signatures

The present amendment was intended to tune the

NI Act with Information Technology law

Three parties








Some other considerations

No condition attached
Bevins v London & South Western Bank Ltd., (1900) 1 KB 270
A company issued a cheque to its bankers along with a
receipt appended thereto and with a note
provided the receipt form at foot hereof is duly signed,
stamped and dated
The cheque was held to be invalid because its payment
was made conditional

Cheque must be drawn upon the banker

R. Pillai v S. Ayyar, (1920) 43 Mad. 816
A dist. Board had its funds in a Government Treasury and
used to withdraw money by issuing orders in the form of a
Ayyar J, held that Treasury is not a bank and therefore,
the order was not a cheque under Sec. 6 but a BOE u/s 5.
The learned Judge cited the definition by Hart that, a
banker is one who in the ordinary course of his business
honours cheques drawn upon him by persons from and for
whom he receives money on current accounts

Cheque must be payable on demand

Therefore, a post-dated cheque is only a Bill of Exchange
and no cheque
But does become cheque on the date from which it
becomes payable on demand
A cheque may bear date of Sunday or a holiday

Cheque is peculiar BoE

Cheque is a peculiar sort of instrument, in many respects
resembling a BOE, but in some entirely different. A cheque
does not require acceptance, in ordinary course it is never
accepted; it is not intended for circulation, it is given for
immediate payment; it is not entitled to days of grace
- Parke B in Ramchurn Mullick v Luchmeechund

Holder and
Holder in Due Course

Holder is one who is
Entitled in his own name to the possession of the instrument;
Have the right to receive or recover the amount due
thereon from the parties thereto.

Otherwise a holder means

The payee; or
The bearer; or
The endorsee of an instrument

Sec. 8
Holder The holder of a promissory note, bill of
exchange or 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.
Where the note, bill or cheque is lost or destroyed, its
holder is the person so entitled at the time of such
loss or destruction

Holder in due course

Holder in due course is a person who takes an
instrument in good-faith and for value
And he becomes the true owner of the instrument
and is known technically as holder in due course

Sec. 9
Holder in due course means any person who for
consideration became the possessor of a
promissory note, bill of exchange or cheque, if
payable to bearer, or the payee or indorsee
thereof, if payable to order, before the amount
mentioned in it became payable, and without
having sufficient cause to believe that any defect
existed in the title of the person from whom he
derived his title

Ingredients of s.9

Holder must have taken the instrument for value

Must have obtained the instrument before its
Instrument must be complete and regular on its
face; and
Must have taken the instrument in good faith and
without notice of any defect either in the
instrument of the title of the person negotiating it
to him

Negotiable instrument contains a contract hence
to be supported by valid consideration
A person who takes a bill or note without
consideration cannot enforce it

For the free circulation the following are to be
Consideration is presumed if the defendant intends to set
up the defence that value has not been given the
burden lies upon him
In simple contract only a person who can sue is one from
whom the consideration moves; but in case of Negotiable
instruments if there be a consideration for it, it does not
matter from whom it moves

Before maturity
Once an instrument reaches its maturity, it has
exhausted its life and is no more negotiable No
one can become its holder in due course [Sec. 59]
negotiation after that maturity is out of the usual and
ordinary course of dealing, that circumstance is sufficient
of itself, to excite so much suspicion that the indorsee
can stand in no better position than that of the indorser

An instrument payable on demand is current at

least as long as no demand for payment is made
S. 19 states that a note or bill or cheque where no
time for payment is specified are payable on
a promissory note payable on demand is current
for any length of time

In Brooks v Mitchell, [(1841) 152 ER 7]

a promissory note made in 1824 was received by the
defendant in 1838;
He acted in good faith and gave value for it. In an
action against him to recover the note it was argued
that a bill or note payable on demand must not be
kept locked up for an unreasonable time;
PARKE B, however, said that promissory note payable
on demand could not be treated as overdue as long
as payment was not demanded, because it is
intended to be a continuing security

Following the opinion the English Act was

Now Sec. 86(3) provides that
where a note payable on demand is negotiated, it is not
deemed to be overdue, for the purpose of affecting the
holder with defects of title of which he had no notice, by
reason that it appears that a reasonable time for
presenting it for payment has elapsed since its issue

Suppose a demand instrument, which is dishonored;

and then the note is negotiated to a bona fide
holder for value
Does he become a holder in due course?
If the demand or dishonor is apparent from the face of the
note or from other circumstances he cannot become the
holder in due course;
But he is not to be prejudiced by any dishonor of which he
had no notice.

An extreme instance
If the instrument is not withdrawn from circulation,
even after it is paid off; and a person bona fide
comes in possession of the same (and it is endorsed
to him for value)
He is a holder in due course and is entitled for
See S B Asirvatham v G Palaniraju Mudaliar, AIR
1973 Mad. 349

Complete and regular

In Hogarth v Latham & Company [(1878) 3 QBD 643]
the plaintiff took two bills of exchange without any
drawers name and completed them himself; The court
held that he could not recover upon the bills;
Anybody who takes such an instrument as this, knowing
that when it was accepted the bill had no name of any
drawer upon it, takes it at his peril.
An instrument may also be incomplete because it is not
properly dated or stamped
But a bill of exchange does not need acceptance to make
it complete and regular
Some unusual marks on the instrument may make it
defective, such as the marks of dishonour, blanks, or
restrictive or conditional indorsements

Chalmers Digest of Bills of Exchange stated

If the bill itself conveys a warning, caveat emptor. Its
holder, however honest, can acquire no better title than
that of his transferor. The holder takes at his peril a blank
acceptance, or a bill wanting in any material particular; so
also a bill which has been torn and the pieces pasted
together, at least if the tears appear to show an intention
to cancel it. A post dated cheque is not irregular

Good faith
subjective test
court has to see the holders own mind; and
the only question is did he take the instrument honestly?

objective test
the court has to go beyond the holders mind and see
whether he exercised as much care in taking the security
as a reasonably careful person ought to have done; and
The subjective test requires honesty, due care and

1758 Theruleofhonestyasgoodfaithoriginated
1758 MillervRace,(1758)1SmLC524wasdecided

1824to1836 theruleofhonestywasreplacedbyduecareandcaution
1824 GillvCubit

1836 ruleofhonestywasreinstated
1836 GoodmanvHarvey[perLordDenmanCJ]


In Miller v Race [(1758) 1 Sm LC 524]

A bank note sent by general postage was taken and

carried away by a robber;
The next day the same note came into the hands of
the Plaintiff. He received it for full and valuable
consideration in the usual course of his business and
without any notice of the banknote being taken out
of the mail;
Lordship said here an innkeeper took it bona fide,
in his business, from a person who made the
appearance of a gentleman. Here is no pretence or
suspicion of collusion with the robber. He took it for
full and valuable consideration and in the course of

This is the point of origination of the rule of


In Lawson v Weston [(1801) 170 ER 640]

the plaintiff had discounted a bill of 500 in the usual
course of their business for a person who was
unknown to them;
It was insisted upon by the defendants that a banker
or any other person should not discount a bill for
person unknown without using due diligence to
inquire into the circumstances;
But Lord Kenyon rejected the argument and said
to adopt the principle of the defencewould be at
once to paralyze the circulation of all the paper in
the country, and with it all its commerce. The
circumstance of the bill having been lost might have
been material if they could bring knowledge of that
fact home to the plaintiff.

Gill v Cubit
In this case a bill broker had instructed his assistant to
discount bills for anyone of familiar features. A stolen
bill was brought to him by a person having a
respectable appearance and whose features were
He discounted it without enquiring his name or
address; The question was whether he had acted in
good faith?
Court felt that it is the duty of the court to lay down
such rules as will tend to prevent fraud and robbery
and not give encouragement to them.
And therefore no person should take a security of this
kind from another without using reasonable caution.

In Goodman v Harvey, Lord Denman CJ, said
I believe we are all of the opinion that gross negligence
only would not be a sufficient answer, where the party has
given the consideration for the bill. Gross negligence may
be evidence of mala fides, but it is not the same thing. We
have shaken off the last remnant of the country doctrine.
Where the bill has passed to the plaintiff without any proof
of bad faith there is no objection to his title.

And thus the rule of honesty was re-established.

Proposition was confirmed by the House of Lords;
Later on codified in the Bills of Exchange Act, 1882,
Sec. 90
A thing is deemed to be done in good faith where it is in
fact done honestly, whether it is done negligently or not.

In addition to good faith, Sec. 29 of the same Act

provides that
the holder should have no notice of any defect in the title
of the person who negotiated it.

To defeat the title of a holder for value there must
be bad faith or dishonesty it must be shown that he
had either knowledge or suspicion of something
Ordinarily he need not inquire but if circumstances
are clouded with suspicion he must not take without

Sec. 9 of the Indian act does not use the words
good faith
It provides that
without having sufficient cause to believe that any
defect existed in the title of the person from whom he
derived his title

In other words, to defeat the title of a holder for

value it must be shown that when he took the
instrument he had some cause to believe that
there was something wrong
The court has to see the holders own mind

Whitley Stokes [the first great commentator on the

Mere negligence in taking a bill seems immaterial if a
man takes honestly an instrument made or become
payable to the bearer he has a good title, with whatever
degree of negligence he may have acted, unless his gross
negligence induce the jury to find fraud

Khergamwalas viewpoint
However, under the Act, the words used in sec. 9
are without having sufficient cause to believe
therefore, the legislature seems to have
intended to make due care and caution on the
part of the holder, a test of his bona fides and
that mere good faith on his part would not
suffice. Accordingly, it seems negligence on
the part of a holder at the time of taking a
negotiable instrument, would disentitle him to
the rights of a holder in due course. There will
be sufficient cause to believe in the existence
of defects if the holder was in fact negligent or
careless, though he was acting honestly and in
good faith.



The first privilege is that every holder is deemed prima
facie to be a holder in due course
If the defendant intends to set up the defence that there
was something wrong in the inception or subsequent
negotiations of the bill the burden of proving that lies on
Once it is shown that the history of a bill is tainted with fraud
or illegality the burden is shifted to the holder to prove that
he is a holder in due course


the logical order of operations with regard to a bill is,
the bill should be first filled up,
then it should be signed by the drawer,
then it should be accepted,
then it should be negotiated, and
then it should be indorsed by the persons who
become successively holders;
but it is common knowledge that parties very often
vary, in a most substantial manner, the logical order
of those proceedings,
Sec. 20 is intended to deal with those cases

from reading of the provision, it is clear that Sec. 20 is

itself authority to the holder of the inchoate
stamped and signed instrument to fill up the blanks
and to negotiate the instrument. The instrument
may be wholly blank or incomplete in particulars
and in either case the holder has the authority to
make or complete the instrument as a negotiable
one Madras High Court

Suppose A signs his name on the blank but
stamped instrument. He gives the paper to B
with authority to fill it up as a promissory note for
Rs. 250 only. But B fraudulently fills the paper for
Rs.1000, the stamp put upon it being sufficient
to cover the amount. He then hands it to H for
Rs.1000, who takes it without notice of fraud
A will be bound to pay the full amount to H,
because under this section it does not lie in the
mouth of the signer to say that in filling the
instrument his authority has been exceeded.

Sec. 20 does not squarely apply to cheques
because they are not required to be stamped
The court does not apply S. 20 to incomplete
cheques. [C T Joseph v I V Philip, AIR 2001 Ker 300].


The party liable to pay an instrument cannot,
contend that
he had lost the instrument or
that it was obtained from him by means of an offence or
fraud, or
for an unlawful consideration

Dishonour of a Cheque and the Law

Dr. Prashant Desai,

Assistant Professor of Law,

"Cheque is an instrument in writing containing an
unconditional order, addressed to a banker, sign by
the person who has deposited money with the
banker, requiring him to pay on demand a certain
sum of money only to or to the order of certain
person or to the bearer of instrument."
Section 6 of the Indian Negotiable Instrument Act of
1881 defines the Cheque as A Bill of Exchange
drawn specially on a specified Banker and not on
expressed to be payable otherwise than on

Specimen of Cheque

Essentials of Cheque
It is an Instrument in writing, i.e., it must be written in
Ink and not by pencil.
It must be Drawn on Particular Bank. It is drawn by a
customer who has deposited money with the Bank.
It must not contains any conditions.
It must be signed by the Account holder.
It is always payable on demand.
It must contain an order to pay certain sum of
A Cheque is payable to a Specified Person Only

Types of Cheque

Bearer Cheque
Order Cheque
Open Cheque
Crossed Cheque
Anti-Dated Cheque
Post-Dated Cheque
Stale Cheque
Mutilated Cheque

Bearer Cheque
The words or bearer printed on the cheque, & it is
not cancelled, then the cheque is called a bearer
A bearer cheque is made payable to the bearer i.e.
it is payable to the person who presents it to the
bank for encashment.
In simple words a cheque which is payable to any
person who presents it for payment at the bank
counter is called Bearer cheque

Order Cheque
The word "or order" is written on the face of the cheque,
the cheque is called an order cheque.
Such a cheque is payable to the person specified
therein as the payee, or to any one else to whom it is
endorsed (transferred).

Open Cheque
When a cheque is not crossed, it is known as an
Open Cheque or an Uncrossed Cheque.
These cheques may be cashed at the bank and
the payment of these cheques can be obtained at
the counter of the bank or transferred to the bank
account of the bearer.
An open cheque may be a bearer cheque or an
order cheque.

Crossed Cheque
Crossed cheque means drawing two parallel lines
on the left corner of the cheque with or without
additional words like Account Payee Only or Not
A crossed cheque cannot be en-cashed at the
cash counter of a bank but it can only be credited
to the payees account. This is a safer way of
transferring money then an Uncrossed or open

Anti-Dated Cheque
Cheque in which the drawer mentions the date
earlier than the date on which it is presented to the
bank, it is called as anti-dated cheque.
Such a cheque is valid up to three months from the
date of the cheque drawn.

Post-Dated Cheque
Cheque on which drawer mentions a date which is
yet to come (future date) to the date on which it is
presented, is called post-dated cheque.
For example
If a cheque presented on 10th Jan 2012 bears a
date of 25th Jan 2012, it is a post-dated cheque.
The bank will make payment only on or after 25th
Jan 2012.

Stale Cheque
If a cheque is presented for payment after three
months from the date of the cheque, it is called
stale cheque. After expiry of that period, no
payment will be made by banks against that
A stale cheque is not honored by the bank.

Mutilated Cheque
When a cheque is torn into two or more pieces and
presented for payment, such a cheque is called a
mutilated cheque. The bank will not make payment
against such a cheque without getting confirmation
of the drawer.

Crossing of Cheque
Crossing of a cheque means "Drawing Two Parallel
Lines" across the face of the cheque. Thus, crossing
is necessary in order to have safety.
Crossed cheques must be presented through the
bank only because they are not paid at the
Crossing is a popular device for protecting the
drawer and payee of a cheque.
Types of Crossing :1. General Crossing
2. Special or Restrictive Crossing

General Crossing
There are two transverse parallel lines, marked across its
face, or
The cheque bears an abbreviation "& Co. "between
the two parallel lines, or
The cheque bears the words "Not Negotiable"
between the two parallel lines, or
The cheque bears the words "A/c. Payee" between
the two parallel lines.

Special or Restrictive Crossing

Crossing is that the bank makes payment only to
the banker whose name is written in the crossing.
Specially crossed cheques are more safe than a
generally crossed cheques.

Material Alteration
Any alteration made in the cheque is Material
These cheque are not honored by Banks, for
making This as a valid cheque then the drawer has
to sign at every correction made.
Alterations' Like:
Payee Name,
Converting order into bearer cheque, etc.

Altered Cheque

Signature included on the front or back of a
cheque acknowledging that both parties have
agreed to exchange the specified amount on the
The signature or account information included on
the back of a cheque acknowledges that the
intended recipient received the document and
deposited it.
To cash a cheque, the issuer and the recipient must
endorse the document.
Negotiation of an instrument is the process by which
the ownership is transferred from 1 person to
another person.

There are 2 parties in Endorsement
The Person who signs the instrument with an
instrument of transferring his ownership.
The person in whos favor the instrument is

Dishonour and the Law

When a negotiable instrument is dishonoured, the

holder must give a notice of dishonour to all the
previous parties in order to make them liable.
A negotiable instrument can be dishonoured either
by non-acceptance or by non-payment.
A cheque and a promissory note can only be
dishonoured by non-payment but a bill of
exchange can be dishonoured either by nonacceptance or by non-payment.

Dishonour by non-acceptance (Section 91)

If a bill is presented to the drawee for acceptance
and he does not accept it within 48 hours from the
time of presentment for acceptance. When there
are several drawees even if one of them makes a
default in acceptance, the bill is deemed to be
dishonoured unless these several drawees are
When the drawee is a fictitious person or if he
cannot be traced after reasonable search.
When the drawee is incompetent to contract, the
bill is treated as dishonoured.

When a bill is accepted with a qualified

acceptance, the holder may treat the bill of
exchange having been dishonoured.
When the drawee has either become insolvent or is
When presentment for acceptance is excused and
the bill is not accepted. Where a drawee in case of
need is named in a bill or in any endorsement
thereon, the bill is not dishonoured until it has been
dishonoured by such drawee.

Dishonour by non-payment (Section 92)

A bill after being accepted has got to be presented
for payment on the date of its maturity. If the
acceptor fails to make payment when it is due, the
bill is dishonoured by non-payment.
In the case of a promissory note if the maker fails to
make payment on the due date the note is
dishonoured by non-payment.
A cheque is dishonoured by non-payment as soon
as a banker refuses to pay.
An instrument is also dishonoured by non-payment
when presentment for payment is excused and the
instrument when overdue remains unpaid(sec.76).

Effect of Dishonour
Notice of dishonour: when a negotiable instrument
is refused acceptance or payment notice of such
refusal must immediately be given to parties to
whom the holder wishes to make liable. Failure to
give notice of the dishonour by the holder would
discharge all parties other than the maker or the
acceptor(Section 93).
Mode of notice: the notice may be oral or written. It
may be in any form but it must inform the party to
whom it is given either in express terms or by
reasonable intendment that the instrument has
been dishonoured and in what way it has been
dishonoured and that the person served with the
notice will be held liable thereon.

Noting and Protesting

Section 99 provides a mode of authenticating the
fact of the bill having been dishonoured. Such
mode is by noting the instrument. Noting is a minute
recorded by a notary public on the dishonoured
instrument or on a paper attached to such
Noting should specify in the instrument, (a) the fact
of dishonour, (b) the date of dishonour, (c) the
reason for such dishonour, if any, (d) the notarys
charges, (e) a reference to the notarys register and
(f) the notarys initials.

Protest is a formal certificate of the notary public

attesting the dishonour of the bill by nonacceptance or by non-payment.
After noting, the next step for notary is to draw a
certificate of protest, which is a formal declaration
on the bill or a copy thereof.
The chief advantage of protest is that the court on
proof of the protest shall presume the fact of


Sec. 32
The liability of the acceptor of a bill of
exchange and of the maker of a promissory
note is the same
They are liable to pay the instrument on its
In default, they become liable to
compensate any subsequent party for the
loss caused to him by the dishonour

Sec. 30
The drawer of a bill of exchange is primarily liable
until the bill has been accepted by the drawee
After the acceptance the acceptor becomes
primarily liable
Thus the liability of the drawer of a bill can be put in
terms of the following propositions
by drawing and issuing the bill he engages that,
it shall be accepted and paid by the drawee
according to its apparent tenor; and
that if it is dishonoured either by nonacceptance or by non-payment, he shall
compensate the holder or every endorser who
has been compelled to pay the loss suffered by

The drawer of a cheque gives a guarantee to the
holder that, it shall be paid by the banker when it is
duly presented for payment
If the cheque is dishonored, the drawer is liable to
compensate the holder provided that he has
received notice of dishonor
The liability of the drawer of a cheque is primary
and not secondary
This is so because the holder of a bill can sue the
acceptor, but the holder of a cheque has no
remedy against the banker
His remedy is only against the drawer

Ss. 138 to 147
The amendment of 1988 added a new
chapter to the Act
Vide Sec. 4 of Banking, Public Financial
Institutions and Negotiable Instruments Laws
(Amendment) Act,1988 [Act 66 of 1988]
Came into effect on 01.04.1989
First edition Ss. 138 to 142
Latest addition Ss. 143 to 147 [vide
Amendment Act of 2002]

to enhance the acceptability of cheques in

settlement of liabilities by making the drawer liable
for penalties, in case of bouncing of cheques due
to insufficiency of funds in the accounts or for the
reason that it exceeds the arrangement made by
the drawer, with adequate safeguards to prevent
harassment of honest drawers
The object is to
inculcate faith in the efficacy of banking
operations and
credibility in transacting business on the basis of
negotiable instruments

1. The cheque should have been issued in
discharge of a legally enforceable debt or
2. The cheque should have been dishonored
within the period of its validity;
3. The cheque should have been dishonored for
want of funds in the account of the drawer;
4. The payee or holder of the cheque should
have issued, within a specified time limit, a
notice in writing to the drawer demanding the
amount of cheque; and
5. The drawer must have failed to make
payment within 15 days of receipt of the

Dishonor of the cheque for want of funds

Notice of dishonor within 30 days to the drawer

Drawer fails to fulfill his obligation within 15 days


Whethermensrea isnecessary?
such person shall be deemed to have
committed an offence
Thus, if the conditions stated therein are satisfied,
the court has to deem that the offence has been
committed, regardless of the state of mind of the
Sec. 140 excludes the defence of the belief of the
person about the sufficiency of funds
For offences by companies as envisaged in Sec.
141, also show the exclusion of mens rea

As earlier the civil remedy is always available
Both civil and criminal proceedings against the
drawer can continue simultaneously
Section 138 also provides for civil liability which
provides for fine twice the amount of dishonoured

A cheque should presumably have been issued for
payment in discharge, wholly or partly, of a legally
enforceable debt or liability

Is a liquidated amount of money owed and
payable to another whether in present or in future
It is pecuniary liability recoverable by action in
respect of money demand
The provision includes not only debt but other
liability as well
The world liability denotes the state of being liable

Hencethe following are outside the purview of

A cheque given as gift or donation
Discharge of mere moral obligation
For an unlawful or illegal consideration

Sec. 139
The legal presumption that the holder received it
for the discharge of debt or liability
The initial burden (very light one) is on the
Then the burden shifts upon the drawer

He may rely upon (generally) circumstantial
The rebuttal has to be by proof and cogent
evidence and not by mere explanation


The drawee of a cheque is always a banker
The bankers duty is only owed to the customer
and not to the payee
Therefore, if the cheque is dishonored the holder
has no remedy against banker [even if the cheque
is been marked good for payment]

.writers are of the opinion that marking or
certification is neither in form nor in effect an
acceptance. Their Lordships are of the opinion
that the certification relied on as constituting
acceptance of the cheque is not an
acceptance within the meaning of the English
and Indian Acts. It is not necessary to hold that
a cheque can never be accepted; it is enough
to say that it is done in very unusual and special
circumstances No cases is reported in
England or in India of a banker being held
liable or even sued, as an acceptor of a
cheque drawn upon him
-- Lord Wright

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 by such default Sec. 31

Sufficient funds
There should be sufficient credit balance in the customers

Funds properly available

& the funds are not properly available if
The banker has exercised his right of set off for amounts due
from the customer;
There is an order passed by a court; restraining the bank from
making payment

The banker is liable (only to the drawer and not the
holder) for any loss of damage which might have
occurred to the drawer








S.10 paymentinduecourse
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 does not afford a reasonable
ground from believing that he is not entitled to
receive payment of the amount therein

The payment shall be
In accordance with the apparent tenor of the
Payment made in good faith
Payment made without negligence
To the person in possession of the instrument; and
No belief that the person in possession of the
instrument is not entitled to receive payment of
the amount in the instrument

s.85 specificprotectiontothebanker


where the cheque is payable to order purports

to be endorsed by or on behalf of the payee the
drawee is discharged by payment in due course
Where the cheque is originally expressed to be
payable to bearer the drawee is discharged
by payment in due course to the bearer thereof

Bhutoria Trading Company v Allahabad Bank, AIR

1977 Cal. 363
BTC sold some jute to WFD (another limited
Company) in payment of which WFD issued an
uncrossed cheque payable to BTC or order
The same was delivered to one of the officials of
the BTC
That official used the official seal and endorsed
the cheque as manager and en-cashed over
the counter
BTC later sued the bank for recovery of the

the cheque is an uncrossed cheque payable to

the plaintiff or order. The cheque was endorsed
by the plaintiff through its Manager. The fact
that Jethmall is the Manager is borne out of the
seal of the Company which is unquestionably an
authentic seal. The seal of the Manager is also
equally authentic. That the payment was made
in good faith has not been disputed for all
practical purposes. There is not a grain of
evidence before the court from which it remotely
appears that the payment was not made in
good faith

there was no circumstances which afforded

any reasonable ground for believing that he was
not entitled to receive payment of the cheque.
It must be held that the bank made the payment
in due course. The learned judge, in our opinion
has rightly pointed out that payment in due
course is necessarily payment in the ordinary

Bareilly Bank Ltd., v Naval Kishore, AIR 1964 All. 78

N opened an account and made a cash
deposit of Rs.19,900; he was also issued a cheque
book of 25 leaves
After 17 months of operation N drew a cheque
for the first time for Rs.5,900 which was
dishonoured by the bank
N was informed that, 11 months back 3
cheques aggregating to Rs.19,500 were paid by
the bank, which N denied (about their
And he also sued the bank for recovery of the

In evidence it came out that 3 cheques used to

withdraw, were not from the cheque book issued
to N
There was some difference between the
specimen signature and the signature on the
Held that bankers are responsible

S.89 alteredinstrumentandpayment
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
person or banker from all liability thereon; and such
payment shall not be questioned by reason of the
instrument having been altered, or the cheque

This section provides statutory protection to the

paying banker provided the following conditions
are fulfilled:
1) The cheque does not appear to be crossed one at
the time of presentation or the obliteration of the
crossing is not apparent; and
2) The payment is made according to apparent tenor
of the cheque and in due course.


When the cheque is forged there is no mandate
to the bank to pay
Hence, banker is not entitled to debit the
customers account (on the basis of that forged

Canara Bank v Canara Sales Corporation and

Others [(1987) 2 SCC 666]
The current account of the company was to be
operated by the MD
The accountant of the company had the
custody of the cheque book, who forged the
signature on 42 cheque leaves and took out
Rs.3,26,047.92 over a period of time
Upon detection demanded the amount back
from the bank, which was denied

Company filed the suit for recovery; this attempt

was successful at the initial level
The bank appealed to the Supreme Court, which
dismissed the same

since the relationship between the customer and

the bank is that of creditor and debtor, the bank
had no authority to make payment of a cheque
containing a forged signature. The bank would
be acting against the law in debiting the
customer with the amount of the forged cheque
as there would be no mandate on the bank to

In a joint account if one the signatures is forged
same consequence will follow
As there is no mandate banker cannot debit the
customers account

Recent changes in Law

In Dashrath Rupsingh Rathod v State of Maharashtra, the
Honble SC has made it mandatory that the complaint
related to cheque bouncing must be filed only where
the drawee bank is located.
The Negotiable Instruments Amendment Act, 2015
provides that cheque bounce cases can be filed only in
a court in whose jurisdiction the bank branch of the
payee (person who receives the cheque) lies.
If a complaint against a person issuing a cheque has
been filed in the court with the appropriate jurisdiction,
then all subsequent complaints against that person will
be filed in the same court, irrespective of the relevant
jurisdiction area.

If more than one case is filed against the same

person before different courts, the cases will be
transferred to the court with the appropriate
It seeks to amend the definition of cheque in the
electronic form. While the parent act defines it as a
cheque containing the exact mirror image of a
paper cheque and generated in a secure system
using a digital signature, the Amendment Act redefines it as a cheque drawn in electronic medium
using any computer resource and which is signed in
a secure system with a digital signature, or
electronic system.