Negotiable

Instruments –
Law &
Procedure
Module contents
• Justification for study of ‘negotiable instruments’
• Understanding negotiable instruments
• Parties to negotiable instruments
• Presentment
• 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 level)
• Growing concept of ‘securitization’ – as a
mode of finance
• 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
POOLS OF ASSETS
BELONGS TO THE
1. LOANS & ADVANCES
ORIGINATOR RECEIVE THE LOAN
2. BILLS
(SUPPOSE A ‘BANK’ OR A AMOUNT
3. OTHER RECEIVABLES
‘FINANCIAL INSTITUION’)
4. DEBTORS

CREATION OF SPV
THE SPV MAY BE A POOLED ASSETS ARE
POLLED ASSETS ARE
BANK OR A PASSED ON TO THE
BEING TRANSFERRED TO
FINANCIAL INSTUTIONS SPECIAL PURPOSE
THE SPV FOR
GENERALLY VEHICLE (SPV)
CONSIDERATION

ASSET VALUE IN THE

SHARES / SECURITIES SHARES / SECURITIES
POOL IS DIVIDED
ARE SOLD FURTHER TO PAID BY THE SPECIAL
‘NOTINALLY’ INTO SMALL
VARIOUS INVESTORS PURPOSE VEHICLE
SHARE OR SECURITY
Justification for study
• Negotiable instruments form the backbone of
today’s 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” – Black’s 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
1. Promissory Note;
2. Bill of Exchange; and
3. Cheque.
• Application
– Indian Paper Currency Act, 1871;
– Any local usage relating any instrument in an
oriental language
• Hundis;
• Rukka
Hundi
• 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 (1958)
• 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’

DRAWER DRAWEE

THE PERSON TO WHOSE

PERSON WHO DRAWS THE
FAVOUR THE PROMISSORY
PROMISSORY NOTE
NOTE IS DRAWN
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
order

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, Ashok 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.

Ashok 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, Ashok 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.

Ashok R. Patil,
s/o Ramappa Chendrashekhar Patil,
Resident of No. 227 “Pratap Chendra Nilaya”
College Road,
Dharwad-580 001.
Essentials
• 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.
Writing
• 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
unconditional
• ‘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
negotiable
“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
Examples
• I promise to pay X, Rs.5000 in installments
with a proviso that no payment shall be made
after my death
• I promise to pay X, Rs.500 on A’s 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 payee’s 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
satisfied
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
Essentials
• 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’

DRAWER DRAWEE/
ACCEPTOR

ONE WHO IS DIRECTED TO

PERSON WHO MAKES AND
PAY – AFTER SIGNING
GIVES THE ORDER TO PAY
BECOMES ‘ACCEPTOR’

PAYEE

WHO OR TO WHOSE ORDER

THE AMOUNT OF THE
INSTRUMENT IS PAYABLE
Typical BoE (payable on demand)

RUPEES FIFTY THOUSAND

Dharwad, March 24, 2008

Pay to Chandrakant R Bellad, or order on demand the sum of Rs.50,000 (Rupees

Fifty Thousand only).

Ashok R. Patil,

To
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
• Parties
– Pro Note – two
– BOE – three
• BOE require specially
– Acceptance by the drawee; and
– presentment
cheque
• “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’

DRAWER BANKER

PERSON WHO MAKES AND ORDER IS TO A ‘BANKER’

GIVES THE ORDER TO PAY NO NEED OF ACCEPTANCE

PAYEE

WHO OR TO WHOSE ORDER

THE AMOUNT OF THE
INSTRUMENT IS PAYABLE
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 marked
– ‘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 cheque;
– 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
form 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 Radhakissen [(1854) 9 Moore
PC 46]
‘Holder’ and
‘Holder in Due
Course’
Meaning
• ‘Holder’ is one who is
– Entitled in his own name to the possession of the
instrument; and
– 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
1. Holder must have taken the instrument for
value [consideration]
2. Must have obtained the instrument before
its maturity
3. Instrument must be complete and regular
on its face; and
4. 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
Consideration
• 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
However…
• For the ‘free circulation’ the following are to
be noted
– 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 demand
• “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
amended
• 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 payment
• 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 drawer’s
name and completed them himself; The court held that he
could not recover upon the bills;
– “Anybody who takes such an instrument as this, knowing that
when it was accepted the bill had 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
• Chalmer’s 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 holder’s own mind; and
– the only question is “did he take the instrument
honestly”?
• ‘objective’ test –
– the court has to go beyond the holder’s mind and
see whether he exercised as much care in taking
the security as a reasonably careful person ought
to have done; and
– The subjective test requires ‘honesty’, ‘due care
and caution’.
 1758 – The rule of ‘honesty’ as ‘good faith’ originated

1758 – Miller v Race, (1758) 1 Sm LC 524 was decided

1824 to 1836 – the rule of honesty was replaced by ‘due care and caution’

1824 – Gill v Cubit

1836 – rule of ‘honesty’ was reinstated

1836 – Goodman v Harvey [per Lord Denman CJ]

Bills of Exchange Act, 1882 (sec. 90) put the controversy to rest

“ A thing is deemed to be done in good faith … where it is in

fact done honestly, whether it is done negligently or not”
Good faith as ‘honesty’ established
• 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 business”.
• This is the point of origination of the rule of
‘honesty’
• 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 defence…would 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”.
Good faith as ‘due care & caution’
• 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 familiar;
– 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’.
Test of ‘honesty’ reestablished
• 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.
Re-affirmation
• Proposition was confirmed by the House of
Lords; and
• 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.
Final position
• 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 wrong
• Ordinarily he need not inquire but if
circumstances are clouded with suspicion he
must not take without inquiry
The Indian position
• 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 holder’s own mind
• Whitley Stokes [the first great commentator on
the Act]
– “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”
Khergamwala’s view point
“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….”
Rights and
privileges of
holder in due
course
• PRESUMPTIONS [S. 18]
– 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 him
– 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
• PRIVILEGE AGAINST INCHOATE STAMPED
INSTRUMENTS [S. 20]
– 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
The section may be illustrated
• 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 and cheques
• 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].
• PRIOR DEFECTS [S. 58]
• The party liable to pay an instrument
cannot, contend that
– he had lost the instrument or
– that it was obtained form him by means of an
offence or fraud, or
– for an unlawful consideration
Negotiation and
Liability

PART II
Assignment v negotiation
• The transfer of an instrument by one party to
another so as to constitute the transferee as
holder is called ‘negotiation’
• A bearer instrument is transferable by simple
delivery [s. 14]
• An instrument payable to order can be
transferred by endorsement and delivery [ss.
15 and 46].
• When a person transfers his right to receive
the payment of a debt is called ‘assignment of
a debt’.
– The holder of a life insurance policy transfers the
right to receive the payment to another person
that is an assignment
• The rights which the ‘transferee’ of an
instrument by negotiation acquires are
substantially superior to those of an ‘assignee’
Notice of Assignment
• An assignment does not bind the debtor
unless a notice of the assignment has been
given to him and he has, expressly or
impliedly, assented to it
• But no information of the transfer of a
negotiable instrument has to be given to the
debtor
– The acceptor of a bill and the maker of a
promissory note are liable on maturity to the
person who is at the time the holder in due
course of the instrument
Presumptions
• Consideration is presumed in case of
• The burden lies upon the opposite party to
show that there is no consideration
• But there are no such presumptions in favor
of an assignee -- He has to prove that, he has
given consideration for the assignment.
Negotiation by delivery
• Sec. 47
• An instrument payable to bearer can be
negotiated by simple delivery
• The person to whom the instrument is
delivered becomes the holder
• Delivery, though simple, is an important
formality, for without it no possessor is
constituted as the holder of the instrument
• A person who steals or finds a bearer
instrument is not the holder
Negotiation by endorsements
• Sec. 48
• An instrument payable to order is negotiated
by indorsement and delivery
• Indorsement is made by signing the name of
the indorser, usually on the back of the
instrument
– But when the back is already full - indorsements
may be signed on a slip of paper annexed to the
instrument
– Such a slip is called ‘allonge’ and becomes part of
the instrument
Endorsement & ‘delivery’
• An indorsement is completed by the delivery of the
instrument to the indorsee
• “An indorsement means an indorsement completed
by delivery”
– Thus when a person indorses an instrument to another
and keeps it in his papers where it is found after his death
and then delivered to the indorsee, the latter gets no rights
on the instrument
– Similarly, where a person finds or takes away an
instrument duly indorsed to him he gets no rights on the
instrument
– A note cut in into two pieces and posted one-half to a
person whom he wanted to remit money, was held entitled
to withhold delivery of the other half, because a partial
delivery does not make a complete indorsement
• Tukaram Bapuji v Belgaum Bank, AIR 1976
Bom. 185
– after sending a bank draft to the payee by post,
the sender issued instruction to the bank not to
pay the draft
– The court held that a draft cannot be cancelled by
the sender after it has been delivered to the payee
and
– The delivery in this case became effective from the
date of posting
Who may endorse
• Sec. 51
• The payee of an instrument is the rightful
person to make the first indorsement
• Thereafter, by the holder in due
• Ordinarily the maker of a note and the
drawer of a bill cannot endorse
– But if any one of them has become holder in his
own right, he may endorse the instrument.
• Sec. 51, enables all parties to an instrument to
indorse
Kinds of
endorsement
Endorsement in blank
• Ss. 16 and 54
• Where the endorser signs only his name on the back
of the instrument for the purpose of negotiating it
that is an indorsement ‘in blank’
• The effect of a blank endorsement is to convert the
order instrument into bearer
– It may be negotiated by simple delivery and the bearer is
entitled to its payment
– It remains so until the indorsement in blank is converted
by the holder into indorsement in full
Endorsement in full
• Sec. 16
• Where the indorser adds to his signature the name
of a person whom or to whose order he wants the
instrument to be paid, that is an indorsement in full
– For Example “pay B or order. Sd/- A” is the usual form
– He may not add the words ‘or order’
– This is the usual form, but no form is prescribed
– Any words will do so long as they show clearly the
indorser’s intention
• The effect is that the instrument can be paid only to
the indorsee and can be further negotiated only by
his indorsement
Restrictive endorsement
• Sec. 50
• when this right of further negotiation is, by express
words in the indorsement, restricted or taken away,
that is called ‘restrictive’ indorsement
• The indorser may
– altogether exclude the right of further negotiation or
– only restrict it or
– ‘may merely constitute the indorsee an agent to indorse the
instrument, or
– to receive its contents for the indorser or for some other
specified person
Liability of parties
Liability of acceptor or maker
• 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
maturity
• In default, they become liable to compensate
any subsequent party for the loss caused to
him by the dishonour
Liability of the drawer of the bill
• 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 non-acceptance or by
non-payment, he shall compensate the holder or every
endorser who has been compelled to pay the loss suffered
by him
Drawer of a cheque
• 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
• however
– 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
Criminal liability (drawer of a cheque)
• Ss. 138 to 142
• 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
Ingredients (sec. 138)
1. The cheque should have been issued in discharge
of a legally enforceable debt or liability;
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 notice.
 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

CAUSE OF ACTION HAS ARISEN

Whether mens rea is necessary?
• ‘…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 drawer
• 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
Civil remedies after Chapter XVII
• As earlier the civil remedy is always available
• Both civil and criminal proceedings against
the drawer can continue simultaneously
Legally enforceable debt
• A cheque should presumably have been
issued for payment in discharge, wholly or
partly, of a legally enforceable debt or liability
‘legally enforceable debt’
• 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
• Hence…the following are outside the purview
of s. 138
– A cheque given as gift or donation
– Discharge of mere moral obligation
– For an unlawful or illegal consideration
• The ‘debt’ or ‘liability’ shall be legally
enforceable
– Time barred debt
• A V Murthy v B S Nagabasavamma, (2002)
– A cheque drawn from a loan given four year prior
to the date of cheque does not cease to be legally
enforceable for the purpose of prosecution
Presumption of legally enforceable debit
• 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
complainant
• Then the burden shifts upon the drawer
Rebuttal of presumption (by drawer)
• He may rely upon (generally) circumstantial
evidence
• The rebuttal has to be by proof and cogent
evidence and not by mere explanation
Liability of the
‘drawee’ (i.e.
banker) of a
cheque
Liability of the drawee of the cheque
• The drawee of a cheque is always a banker
• The banker’s 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]
On marked cheque…
“….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
Special reference to US (regarding
marked cheques)
• In US marked cheques are in common use
• Hence there is specific statutory recognition
• Sec. 187 of Uniform Negotiable Instruments
Law
– States that, certification of a cheque by banker is
equivalent to acceptance; and
– The banker becomes bound to pay
– And the drawer and endorsers are discharged
from liability (if it is a marked cheque)
Liability of ‘unjustified dishonour’
“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
ingredients
• Sufficient funds
– There should be sufficient credit balance in the
customer’s account
• 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
Bankers liability (for wrongful dishonour)
• The banker is liable (only to the drawer and
not the holder) for any loss of damage which
might have occurred to the drawer
Protection to the
‘paying banker’
Three important provisions

Payment in due
Sec. 10 course
(generic)

PROTECTION Altered
TO THE instrument and
Protection to PAYING
the paying making
BANKER payment
banker
(specific) (generic)

Sec. 85 Sec. 89
S. 10 – payment in due course
“payment in due course means payment in
accordance with the apparent tenor of the
instrument in good faith and without
negligence to any person in possession thereof
under circumstances which does not afford a
reasonable ground from believing that he is
not entitled to receive payment of the amount
therein mentioned”
Ingredients
• The payment shall be
– In accordance with the apparent tenor of the
instrument
– 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 – specific protection to the banker
1. 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
2. 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 money
“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
course…”
• Madras Provincial Cooperative Bank Ltd., v
Official Liquidator, South Indian Match
Factory Ltd., AIR 1945 Mad. 30
– The Official Liquidator of the Company had sold
certain properties of the company -- payment was
made by the purchaser by giving a cheque in favor
of the liquidator
– The liquidator collected cash over the counter
and misappropriated the same
– Held it is no payment in due course
“…they knew or must have deemed to have
known that this money could only be
collected by the payee through his own bank
and therefore it was most improper on his
part to ask for payment over the drawee’s
counter. In our judgment there was a clear
breach of a statutory duty placed upon the
bank and the learned judge was right in
holding the bank liable…”
• Bank of Maharashtra v M/s Automotive
Engineering Co., (1993) 2 SCC 97
– The respondent – a partnership firm, opened a
current account with the appellant bank
– The said bank’s branch was in the outskirts of
Bombay (where forgery of cheques were rampant)
– although other banks were provided with
ultraviolet ray lamps; the said branch was not
provided with such lamp
– A Cheque was presented for collection (through
Union Bank of India) by one Mr. Shah on 29
May 1967 for Rs.6,500
– The appellant bank passed the cheque and
debited the amount to the Respondent
– Upon objection the cheque was examined
through ultraviolet ray-lamp then found out that
it was originally issued to one Mr. G R Pardawala
for Rs.95.98
– The writing of the cheque was chemically altered
with regard to date, the name of the payee and
also the amount
– All subordinate courts & High Court found the
bank guilty of negligence (as they did not use the
ultraviolet lamp)
– Then an appeal was preferred to the SC, which
was allowed
“simply because the ultraviolet ray lamp was
not kept in the branch and the said cheque
was not subjected to such lamp, would not be
sufficient to hold the appellant bank guilty of
negligence more so when it has not been
established on evidence that the other
branches of the appellant bank or the other
commercial banks had been following a
practice of scrutinizing each and every cheque
or cheques involving a particular amount
under such lamp by way of extra precaution”
• 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 pad by the bank, which ‘N’
denied (about their issuance)
– And he also sued the bank for recovery of the money
– 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 cheques
– Held that banker’s are responsible
S. 89 – altered instrument and payment
Forged cheque &
banker’s liability
Proposition
• When the cheque is forged – there is no
mandate to the bank to pay
• Hence, banker is not entitled to debit the
customer’s account (on the basis of that
forged cheque)
• 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 pay….”
Additional proposition
• In a joint account if one the signatures is
forged – same consequence will follow
• As there is no mandate – banker cannot debit
the customer’s account
Crossing of
cheques
Introduction
• ‘Crossing’ is a feature which is unique to
cheques and distinguishes cheques from other
negotiable instruments
• Crossing is a usage born of commercial
practice
• The objective – give direction to the banker
that, he is not to pay the cheque across the
counter but to pay it only to another banker
• Crossing of a cheque accords a protection or
safeguards the interest of the drawer
• If wrongful person seeks payment – it can be
traced back (as he has acted through another
banker)
Kinds of crossing
• General crossing
• Special crossing
General crossing
• Sec. 123
• “where a cheque bears across its face an
addition the words ‘and company’ or any
abbreviation thereof, between two parallel
transverse lines or of two parallel transverse
lines simply, either with or without word ‘not
negotiable’, that addition shall be deemed a
crossing, and the cheque shall be deemed to
be crossed generally”
Special crossing
• Sec. 124
• “where a cheque bears across its face an
addition of the name of banker, either with
or without the words ‘not negotiable’, that
addition shall be deemed a crossing and the
cheque shall be deemed to be crossed
specially, and to be crossed to that banker”
Classification of ‘crossing’
crossing

General crossing

Special crossing

A/C payee crossing

Not negotiable crossing

General crossing – ingredients
• Two parallel transverse lines on the face
• Either with or no writing between them
• The words ‘and company’, ‘& Co.’, or ‘not
negotiable’ between them
• As law mandates – drawing of parallel
transverse lines is important
Specimens

any
o mp
d c
An

Co
&
Special crossing
• Two transverse parallel lines may or may not
be drawn
• Name of the banker should e written across
the cheque
• The words ‘not negotiable’ may also be
included
specimens

t d.
aL
di ia
I n nd
k of ofI
b an ank
e e b
Th ta t
e s
a ye
n tp
c ou B I
Ac S
b le
a
g oti
t ne
No
Account payee crossing
• ‘account payee’ crossing does not restrict the
negotiability of the cheque
• It is only an indicating to the banker to pay
the monies in to the bank account of the
holder or payee
• If the banker receives payment of such cheque
on behalf of third person (any one other than
payee/holder or one who does not have
account) he will be guilty of negligence
Not negotiable
• Sec. 130 decals with the concept of ‘not
negotiable’
• Earlier notion (of both English and India law)
– That by striking ‘order or bearer’ the cheque is
made non transferable
– But now Sec. 13 – states the mere absence of the
word does not mean that it is non transferable
• Hence, only way is crossing it with ‘not
negotiable’ marking
Who can cross the cheque?
• Crossing can be done
– By the drawer
– By the payee
– By the holder; or
– By the banker
• Sec. 125
Proposition of law
• ‘crossing’ by itself does not amount to
material alteration
• However
– Intensity of the crossing can not be reduced by
subsequent holder
– The banker crossing the cheque should do so only
in favour of another banker
Can the crossing be cancelled?
• The answer (by analogy) of law is – NO
• However the practice is different
– Whereby the crossing is cancelled by writing with
initials ‘please pay cash’
– However the banker is probably to take some risk
in such situations
London Clearing House Bankers –
resolution
“That no opening of cheques be recognized
unless the full signature be appended to the
alteration and then only when presented for
payment by the drawer or by his known
agent”
Protection of the
collecting banker
Collecting banker
• Collecting banker is one who collects money
on behalf of the holder
• This is essential as a crossed cheque can be
paid only by bankers and to another banker
• Sec. 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”
Discharge from
liability
introduction
• ‘Discharge’ in legal sense means ‘release from
liability’
• In our context ‘discharge’ means ‘release of
liability on the instrument’
• Discharge of parties and discharge of
instrument
– The former is releasing one party; and
– The other is extinguishment of all rights over the
instrument
Classification for easier understanding

DISCHARGE

BY ACT OF OTHER
BY OPERATION
PARTIES CIRCUMSTANCES
OF LAW
SEC. 82 SEC. 83-90

LAPSE OF ONE OF THE

CANCELLATION RELEASE PAYMENT INSOLVENCY MERGER DISCHARGE JOINT DRAWERS
OF TIME ETC.
By act of the parties
• By cancellation
– When the holder or his agent deliberately cancel
the bill and make such cancellation apparent on
the face of it
– The bill is discharged and the parties to the bill
are released from their liability
– If the cancellation is not apparent – then the
instrument remains valid in the hands of holder
in due course
• Ingham v Primorse
– A accepted a bill and gave it to B for the purpose
of getting it discounted (and hand over the
proceeds to A)
– The bill could not be discounted, hence A upon
return of bill tore it in half to indicate
cancellation and threw it into the street
– The said bill was collected and pasted carefully in
such a manner that, the bill seemed to have been
folded for safe custody rather than cancelled
– Then B put back the bill into circulation
– The Plaintiff (holder in due course subsequently)
sued A, on the basis of the bill
– Held, A is liable
“…because the tearing of the bill into two
pieces was not so clearly manifested on the
face of the bill as to indicate to a reasonably
careful person that it had been cancelled.
Tearing of the instrument must be such that a
man of ordinary intelligence and caution
should at once come to know that it has been
cancelled..”
• release
– Holder of the instrument can release the acceptor
or endorser from liability
– This can be done
•By separate agreement; or
•By an act which has the effect of discharging
them
• By payment
– Most obvious method (i.e. by payment)
– But the payment should be in ‘due course’
By operation of law
• Due to insolvency
– In the insolvency proceedings the maker, acceptor
or endorser is discharged by the court
– Then he will be discharged of his liability on the
bill
• By merger
– Merger is simply ‘joining’
– When the acceptor of the bill becomes the holder
of it in due course (of course in his own right)
then the bill is discharged
• Lapse of time
– If the holder does not file a suit for recovery of
the bill amount till the lapse of time prescribed by
the Limitation law
– His remedy to enforce his right is extinguished
– Hence, in effect the acceptor is discharged unless
he wants to pay the time barred debt
• Discharge of one party
– It operates only in few cases where circumstances
exists so
– Discharge of one of the several joint drawers
would release the remaining also from their
liability
Other circumstances
• Qualified acceptance
– Sec. 84
• Delay in presenting the cheque
• Material alteration
– Ss. 87, 88 & 89