Negotiable instruments Act 1881

Introduction

The advent of modern business practices contributed to the growth of newer ways of facilitating
financial transactions. Previously, cash was the most common mode of exchanging goods and
services for their value. The rise of negotiable instruments, however, brought radical changes in
business practices. These days there are several types of such instruments which have made
commerce simpler.

Whenever one thinks of negotiable instruments meaning (or NIs) the thoughts of cheques and bills
of exchange come to mind.

These instruments are nothing but documents which have monetary value and are exchangeable.
Hence, the two main characteristics of Negotiable Instruments are financial worth and
transferability.

In Pakistan, the Negotiable Instruments Act, 1881 is responsible for governing NIs.
This law defines these instruments and also deals with each type of them individually.

It governs the use of cheques, promissory notes, and bills of exchange. There are other
customary payment methods similar to NIs in Pakistan (like Hundis) but this law does not cover
them.

Other modes of transactions can also be similar to NIs if they fulfill certain basic requirements.
For example, any instrument can be a NI if it is freely transferable by delivery or endorsement.
Furthermore, it should carry certain rights, like the right of the holder to sue for it in his own name.

Definition: Negotiable instruments [Section 13]

A negotiable instrument means a:

_ Promissory note

_ Bill of Exchange or

_ Cheque

payable either to order or to bearer.

In simple terms, negotiable means transferable by delivery and instrument means a written
document by which a right is created in favour of some person. Thus negotiable instrument may
mean a written document transferable by delivery.

Thus, from the above definition it reveals that promissory note, bill of exchange and cheque can
be termed as negotiable instruments.

Explanation:

A promissory note, bill of exchange or cheque is payable to order, which is expressed to be so

payable, or which is expressed to be payable to a particular person, and does not contain words
prohibiting transfer or indicating an intention that it shall not be
transferable.‘Negotiable’ literally means ‘transferable’. ‘Instrument’ means a written ‘document.’
Therefore, negotiable instrument means an ‘a transferable document’.
However, it does not mean that an instrument in order to be valid must benegotiable. Instruments
may be marked ‘not negotiable’ yet they are valid instruments and governed by the provisions of
the Act. The Act narrows down the meaning of instrument. It regulates only three types of
instruments, viz., Promissory Notes, Bills of Exchange and Cheques. A negotiable instrument is
one which entitles the holder to the
receiptof money. It gives him the right to transfer the same by mere delivery or endorsement
thereon. The negotiability of the instrument continues till its maturity.

Advantages of Negotiable Instrument

 One of the biggest advantages of bills of exchange is that the consideration between the
debtor and the creditor is presumed. So we will assume that the purchaser is in debt of the
seller, the seller need not prove this fact. Since the bill has been accepted by the debtor the
court will assume that such debt legitimately exists.

 The creditor does not have to wait for the maturity period to get the money. He can
immediately opt for bill discounting. Or he can endorse the bill to a creditor of his. So his
money does not get locked in.

 Accommodation bills enable the businessmen to obtain funds at a low rate of interest to
meet any temporary financial shortfalls that may arise from time in business.
Characteristics of negotiable instrument

The essential characteristics of a negotiable instrument are shown below:

These essential characteristics are discussed below:

Payable to order or bearer

a. Payable to order

A promissory note, bill of exchange or cheque is payable to order which is expressed to be so

payable or which is expressed to be payable to a particular person, and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable is called payable to
order. e.g. Pay A, Pay A or order and Pay A or B.

However, there is an exception in favour of cheque. A crossed cheque "Account Payee only" can

still be negotiated further.

b. Payable to bearer

A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so

payable or on which the only or last endorsement is an endorsement in blank. If an instrument is
payable to any person whosoever bears it than it is called payable to bearer. Thus a note, bill or
cheque in the form “Pay to A or bearer or pay bearer is payable to bearer.

Example: Payable to bearer

A cheque is payable to A. A endorses it merely by putting his signature on the back and delivers
it to B with the intention of negotiating it (without making it payable to B or B’s order). In the
hands of B the cheque is a bearer instrument.

Easy transferability

They are transferable from one person to another by mere delivery if payable to bearer and by
endorsement and delivery if payable to order.

Transferee can sue in his own name

A bill, note or a cheque represents a debt and implies the right of the creditor to recover something
from his debtor. The creditor can either recover this amount himself or can transfer his right to
another person. In case he transfers his right, the transferee of a negotiable instrument is entitled
to sue on the instrument in his own name in case of dishonour, without giving notice to the debtor
of the fact that he has become holder.

Example: Transferee can sue in his own name

A ---------------- B

To pay To receive
A gave a cheque to B who transfers it to C. If the cheque dishonours C can sue A in his own
name without giving notice to A that he has become the holder.

Title of holder in due course

It means that once an instrument is received in the hands of holder in due course it becomes free

from all defects.

Example: Title of holder in due course

A gives a promissory note to B. B lost the instrument and it was found by C. C cannot recover the
amount on the negotiable instrument as he is not the holder in due course but if C transfer the
instrument to D and D becomes holder in due course he can recover the amount on the instrument
from A or all prior parties.

Presumptions

Following presumptions in respect of negotiable instruments, unless the contrary is proved;

[Section 118]

_ Consideration

Every negotiable instrument was made, drawn, accepted, endorsed or transferred for

consideration.

_ Date

Every negotiable instrument bearing a date was made or drawn on such date.

_ Time of acceptance

Every bill of exchange was accepted within a reasonable time after its date and before its maturity.

_ Time of transfer

Every transfer of a negotiable instrument was made before its maturity.

_ Order of endorsements
The endorsements appearing upon a negotiable instrument were made in the order in which they
appear.

_ Stamp

A lost negotiable instrument was duly stamped.

_ Holder in due course

A holder of negotiable instrument is a holder in due course but this presumption would not arise

where it is proved that the holder has obtained the instrument from its lawful owner, or from any

person in lawful custody thereof, by means of an offence, fraud or for unlawful consideration and

in such a case the holder has to prove that he is a holder in due course.

Must be in writing:

A negotiable instrument must be in writing. This includes handwriting, typing, computer print out
and engraving, etc

Unconditional Order:

In every negotiable instrument, there must be an unconditional order or promise for payment.

Payment:

The instrument must involve the payment of a certain sum of money only and nothing else.

For example, one cannot make a promissory note on assets, securities, or goods.

The time of payment must be certain:

It means that the instrument must be payable at a time which is certain to arrive. If the time is
mentioned as “when convenient” it is not a negotiable instrument.

However, if the time of payment is linked to the death of a person, it is nevertheless a negotiable
instrument as death is certain, though the time thereof is not.
The payee must be a certain person:

It means that the person in whose favor the instrument is made must be named or described with
reasonable certainty.

The term “person” includes individual, body corporate, trade unions, even secretary, director or
chairman of an institution. The payee can also be more than one person.

Signature:

A negotiable instrument must bear the signature of its maker. Without the signature of the drawer
or the maker, the instrument shall not be a valid one.

Delivery:

Delivery of the instrument is essential. Any negotiable instrument like a cheque or a promissory
note is not complete until it is delivered to its payee.

Holder

A person is called holder of a negotiable instrument if he satisfies the following two conditions:

_ He must be entitled to the possession of the instrument in his own name and

_ He must be entitled to receive / recover the amount due on the instrument from the parties

liable under the instrument

Thus a holder means the bearer of the bearer instrument and the endorsee or payee of the order

instrument.

When the note, bill or cheque is lost and not found or is destroyed, the person in possession of it

or the bearer at the time of loss or destruction shall deemed to continue to be its holder. [Section

8]

Holder in due course

A person becomes holder in due course when he fulfils the following conditions: [Section 9]

Conditions to be holder in due course

_ Holder

He must be a holder i.e. He fulfils the essentials of a holder.

_ Holder for valuable consideration

There must be a lawful and adequate consideration.

_ Before maturity

A person should receive the instrument before its maturity. In case of instrument payable on

demand, he must have taken the instrument within a reasonable time of its issue.

_ Complete and regular

It is the duty of every person who takes a negotiable instrument to examine its form and contents

thoroughly, for if it contains any material alteration which has not been confirmed by the drawer

through his signature or it is incomplete like drawer name is missing or not properly stamped.

_ Holder in good faith

A person should take the instrument without any negligence on his part and in good faith without

having any reason to believe that any defect existed in the title of the transferor. If there is any

suspicion and he takes the instrument without making proper inquiries he cannot be said to be

acting in good faith.

Maturity of negotiable instrument

‘Maturity’ means the date on which the payment of an instrument falls due. The question of
maturity arises only in the case of a promissory note or a bill of exchange which is expressed to

be payable otherwise than on demand.

An instrument payable on demand or at sight such as a cheque becomes payable immediately

on the date of issue. [Section 22 to 25]

Every Promissory note or Bill of Exchange expressed to be payable:

_ On a specified day, or

_ At a certain period after date, or

_ At a certain period after happening of a certain event

Matures on third day after the day on which it is expressed to be payable. i.e. a grace period of

three days is allowed.

Example: A bill of exchange is payable on 1St January, will have maturity on 4th January.

Inland instrument

A promissory note, bill of exchange or cheque which is:

_ Made or drawn in Pakistan and also made payable in Pakistan, or

_ Made or drawn in Pakistan upon any person resident in Pakistan, although it may be

payable in a foreign country.

is called an inland instrument. [Section 11]

Example: Inland instrument

_ A promissory note made in Multan and payable in Peshawar.

_ A bill of exchange drawn in Sukkur on a person resident in karachi although it may be payable
in UK. (An inland instrument remains inland even if it has been endorsed in a foreign country.)

Foreign instrument

An instrument, which is not an inland instrument, is deemed to be a foreign instrument. [Section

12]

Example: Foreign instrument

_ Promissory note made in Pakistan but payable in Myanmar.

_ A bill of exchange drawn in Pakistan on a person residing outside Pakistan, and made payable
outside Pakistan.
Negotiation

Definition: Negotiation [Section 14]

"When a promissory note, bill of exchange or cheque is transferred free from defects to any person,
so as to constitute that person the holder of it, the instrument is said to be negotiated.

The analysis of the definition reveals that negotiation takes place when the negotiable instrument
is transferred from one person to another and the transfer is made in such a manner so as to make
the transferee the holder of the negotiable instrument and it must be transferred free from defects.

Modes of negotiation

Negotiation by mere delivery

_ A negotiable instrument payable to bearer is negotiable by delivery (voluntary delivery with the
intention of transferring the ownership)

_ It does not require signature of the transferor i.e. endorsement and the transferee becomes the
holder by mere possession.

_ The transferor of a bearer instrument is not liable on its dishonour because by not signing as
endorser he has not added his credit to the instrument. [Section 47]

Negotiation by endorsement and delivery

_ A negotiable instrument payable to order is negotiable by the holder by endorsement and

delivery.

The negotiation of an order instrument requires two formalities

_ The holder should endorse it and

_ Then deliver to his endorsee (voluntary delivery with the intention of transferring the ownership)
[Section 48]

Endorsement

Definition: Endorsement [Section 15]

“When the maker or holder of a negotiable instrument signs the same, otherwise than as such
maker, for the purpose of negotiation on the back or face or on a slip of paper annexed to it thereto,
or so signs for the same purpose a stamped paper intended to be completed as negotiable instrument
he is said to endorse the same and is called the endorser.” The term endorsement may be defined
as signing one’s name on the negotiable instrument for the purpose of transferring it to another
person.

Essentials of valid endorsement

_ It must be on instrument itself, if no space is left on the back of the endorsement, further
endorsements are signed on a slip of paper attached to the instrument called allonge.

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

_ No particular form of words is necessary for an endorsement

_ It must be completed by the delivery of the instrument. The delivery of the instrument with the
intention of passing the property in it.

_ Negotiation by endorsement must be of the entire instrument. Endorsement for part of the amount
or to two or more endorsee severally is invalid.

Kinds of endorsements

_ Blank or general endorsement

If the endorser signs his name only and does not specify the name of the endorsee, the endorsement
is said to be blank. The effect of a blank endorsement is to convert the order instrument into bearer
instrument which may be transferred by delivery. [Section 16 & 54]

Example: Blank or general endorsement

A bill is payable to the order of Imran. Imran signs on the back of the bill and does not specify the
name of the endorsee; this is an endorsement in blank by Imran.

_ Endorsement in full or special endorsement

If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in
the instrument to or to the order of a specified person the endorsement is said to be full. [Section

16 & 54]

Example: Endorsement in full or special endorsement

A holder of a bill of exchange wants to make an endorsement in full to B he would write “Pay to
B or order. After such an endorsement it is only the endorsee i.e. B who is entitled to receive the
payment of the instrument and to further negotiate the instrument by his endorsement.

(A blank instrument can easily be converted into an endorsement in full. The holder of a negotiable
instrument endorsed in blank may without signing his own name by writing above the endorser’s
signature a direction to pay to any other person as endorsee, convert the endorsement in blank into
an endorsement in full, and since such holder does not sign himself on the instrument he does not
thereby incur the responsibility of an endorser.)

Example: Endorsement in full or special endorsement

A is the holder of a bill endorsed by B in blank. A writes over B’s signature the word Pay to C or
order. A is not liable as an endorser but the writing operates as an endorsement in full form B to

C.

Restrictive Endorsement -
Restrictive endorsement seeks to put an end the principal characteristics of a Negotiable
Instrument and seals its further negotiability. This may sound a little unusual, but the endorsee is
very much within his rights if he so signs that its subsequent transfer is restricted. This prevents
the risk of unauthorized person obtaining payment through fraud or forgery and the drawer losing
his money.

Example of restrictive endorsement: “Pay to Mr. Ali only” or “Pay to Mr. Ali for my use” or “Pay
to Mr. Ali on account of Faisal” or “Pay to Mr. Ali or order for collection”.

Conditional or Qualified Endorsement

Where the endorser puts his signature under such writing which makes the transfer of title subject
to fulfillment of some conditions of the happening of some events, it is a conditional endorsement.

Example: Pay to Mr. Jahan or order after his marriage- Kamal.

Partial Endorsement

An endorsement partial is one which allows transferring to the endorsee a part only of the amount
payable on the instrument. This does not operate as a negotiation of the instrument.

Example: Mr. Faisal holds a bill for Rs. 5,000 and endorses it as “Pay Faisal or order Rs. 2500”.
The endorsement is partial and invalid.

Definition of promissory note

Definition: Promissory note [Section 4]

“A promissory note is an instrument in writing (not being a bank note or currency note) containing
an unconditional undertaking, signed by the maker, to pay on demand or at a fixed or determinable
future time a certain sum of money only, or to the order of a certain person, or to the bearer of the
instrument.

The analysis of the definition shows that, a promissory note is a written and signed promise to pay
a certain sum of money to a specified person or his order.

Parties to a promissory note

Following are the two main parties in a promissory note:

Maker

It is a person who makes the promissory note and promises to pay the money stated in it.

Payee

It is a person to whom the amount of promissory note is payable i.e. to whom the promise to pay

is made.

Specimen of a promissory note

Date: September 15, 2013 Rs. 10,000/- only
Three months after date I promise to pay ABC or to his order the sum of Rupees Ten
Thousand, for value received
To Sign: __________
ABC XYZ
In the specimen XYZ is the maker and ABC is the payee.
Essential elements of a promissory note

The essential elements of a promissory note are shown below:

These essential characteristics are discussed below:

In writing: A promissory note has to be in writing. An oral promise to pay does not become a
promissory note. The writing may be on any paper, on any book. The words used must impart a
clear undertaking to pay, but it is not necessary that the word promise should be used.

Example: It must be in writing

A signs the instruments in the following terms

a) “I promise to pay B or order Rs.500”.

b) “I acknowledge myself to be indebted to B in Rs.1,000 to be paid on demand, for value

received”.

c) A promise to pay B a sum of Rs. 500 on telephone. This promise will not make a promissory
note because it is not in writing.

In the above example (a) and (b) are promissory notes while (c) is not a promissory note.

Promise to pay

There must be a promise or a clear undertaking to pay. A mere acknowledgement of indebtedness

is not a promissory note, although it is valid as an agreement and may be sued upon as such.

Example: Promise to pay

A signs the instruments in the following terms:

a) Mr. B I owe you Rs. 1,000

b) I am liable to pay to B Rs. 500

c) I have taken from B Rs.2,000 and I am accountable to him for the same with interest.

The above instruments are not promissory notes as there is no clear undertaking or promise to

pay. There is only an acknowledgement of indebtedness.

Where A signs instrument in the following terms:

“I acknowledge myself to be in debited to B in Rs.1,000 to be paid on demand for value received.

There is a valid promissory note

Definite and unconditional

The promise must not depend upon the happening of some uncertain event. i.e. a contingency or
the fulfilment of a condition. If an instrument contains a conditional promise to pay, it is not a
valid promissory note and will not become valid and negotiable even after happening of the
condition.

signs the instrument in the following terms:

a) I promise to pay B Rs.500 seven days after my marriage with C.

b) I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay the sum.

c) I promise to pay B Rs. 500 as soon as I can.

The above instruments are not valid as the payment is made dependent upon the happening of an
uncertain event which may never happen and as a result the sum may never become payable.

Exception

But a promise to pay is not conditional if the amount is made payable

_ at a particular place or

_ after a specified time.

Signed by maker

It is imperative that the promissory note should be duly authenticated by the signature of the

maker. If the maker is illiterate he may place his thumb mark.

Certain parties

The instrument point out with certainty as to who is the maker and who is the payee. Where the
maker and the payee cannot be identified with certainty, the instrument even if it contains an
unconditional promise to pay is not a promissory note.

A promissory note cannot be made payable to the maker himself. But if it is endorsed by the maker
to some other person or endorse in blank it will become valid.

Sum payable must be certain

It is essential that sum of money promised to be payable must be certain and definite. The

amount payable must not be capable of contingent addition or subtraction.

Example: Sum payable must be certain

A signs instrument in the following term

a) I promise to pay B Rs.500 and all other sums which shall be due to him

b) I promise to pay B Rs.500 and all fines according to rules.

Definition of bill of exchange

Definition: Bill of exchange [Section 5]

“A bill of exchange is an instrument in writing containing an unconditional order, signed by the

maker, directing a certain person to pay on demand or at a fixed or determinable future time a
certain sum of money only, to or to the order of, a certain person, or to the bearer of the instrument.”

The analysis of the definition shows that, a bill of exchange is a written and signed order directing
a person to pay a certain sum of money to the bear or of the instrument or to a specified person or
his order. Generally, a bill of exchange is drawn by a creditor, who directs his debtor to pay the
money to the person specified in the instrument.

Parties to a bill of exchange

Following are the three main parties in a bill of exchange:

Drawer

It is a person who draws a bill of exchange.

Drawee

It is a person who is ordered to pay the amount of the bill of exchange (on whom the bill is

drawn). When drawee accepts the bill of exchange (when he gives consent to make the

payment) he is called the acceptor.

Payee

It is a person to whom the amount of bill of exchange is payable.

Specimen of a bill of exchange

Essential elements of a bill of exchange

The essential elements of a bill of exchange are shown below:

These essential characteristics are discussed below:

In writing

A bill of exchange is required to be in writing. Like promissory note, a bill of exchange also

cannot be oral.

Order to pay

A bill of exchange contains an order to pay instead of a promise to pay like in promissory note.

This feature distinguishes it from promissory note. Further, a request to pay money is not
considered to be a bill of exchange.
Example: Order to pay

The following instruments signed by A are valid bills of exchange as they contain an order to

pay, though the language used is very polite:

a) B, please pay Rs. 500 to C or order.

b) B will much oblige me by paying to C Rs. 500.

The following instruments signed by A are not valid bills of exchange as they contain only a

request to pay and no order to pay:

a) B, please let C have Rs.500, and place it to my account and oblige,

b) B, I shall be highly obliged if you make it convenient to pay Rs.1,000 to C.

Definite and unconditional

In other words, the order to pay should not depend upon a condition or upon the happening of an
uncertain event. (This point has already been discussed in detail in case of a promissory note).

Signed by drawer and drawee

The instrument must be signed by the drawer and drawee.

Certain parties

All the parties must be certain i.e. indicated in a bill of exchange with reasonable certainty.

Sum payable must be legal tender

If the instrument contains an order to pay something other than money or something in addition to
money, it will not be valid bill of exchange.

Sum Payable must be certain

It is essential that sum of money ordered to be payable must be certain and definite. The amount
payable must not be capable of contingent addition or subtraction.

Presentment for Acceptance

Out of all the negotiable instruments, only bills of exchange require presentment for acceptance.
A drawee has no liability regarding any bill addressed to him for acceptance or payment until he
accepts the bill. He needs to write the word ‘accepted’ on the bill and sign his name below in order
to complete the acceptance. By accepting the bill the drawee gives is assent to the order of the
drawer. Thus, the primary liability on a bill is of the acceptor. The acceptance can be either general
or qualified. As a rule, an acceptance needs to be general. General acceptance is absolute. A
qualified acceptance is made subject to some condition or qualification. It thus varies the effect of
the bill. The holder of a bill may refuse to take a qualified acceptance. In this case, he may treat
the bill as dishonored by non-acceptance and sue the drawer.

Forms of Bills of Exchange

The following are some common forms of bills of exchanges that the Negotiable Instruments Act
recognizes:

a) Inland Bills

A bill of exchange may be an inland instrument under two conditions. Firstly, the bill must be
drawn as well as payable within India. Secondly, it may also be drawn in India upon an India
resident but payable in a foreign country.

b) Foreign Bills

All bills that are not inland bills are foreign bills by default. Generally, foreign bills require three
copies and different rules govern them.

c) Trade Bills

A bill of exchange that comes into play during a genuine trade transaction is a trade bill. For
example, when A sells goods to B, he may draw a bill directing B to pay later on. This bill will
mention the purchase price as well as the specific date on which it is payable.

d) Accommodation Bills

Accommodation bills are different from trade bills because they do not involve any transactions
of trade. Hence, consideration for the exchange of goods or services is not important here. In
accommodation bills, one person lends his name to oblige a friend or some other person. This is
basically similar to loan transactions.

Bills of Exchange v/s Promissory Notes

The following are some points of differences between promissory notes and bills of exchange:

a) A promissory note generally involves two parties, i.e. a maker (debtor) and a payer (creditor).
On the other hand, bills of exchange include a drawer, a drawee and a payee.

b) As the bills of exchange introduction above shows, a bill orders the drawee to pay as per the
drawer’s directions. A promissory note, however, is not an order but a promise to pay.

c) The liability of maker of a promissory note is absolute, while that of the drawer of a bill is
conditional.

d) Notes cannot be payable to their makers, while the drawer and the payee in bills can be the same
person.

Definition of cheque

Definition: Cheque [Section 6]

Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand.

The analysis of the above definition reveals that a cheque is a bill of exchange but is different in

following two characteristics:

_ Drawee will always be a banker

_ Always payable on demand

Parties to a cheque
Following are the three main parties in a cheque:

Drawer

It is a person who draws a cheque.

Drawee

It is a banker who is ordered to pay the amount of the cheque.

Payee

It is a person to whom the amount of cheque is payable.

Specimen of a cheque

ABC Bank Limited Date: September 15, 2013

Main Branch, Karachi Cheque no:______
Pay _____________________________________________________ OR BEARER
Rupees _______________________________________ Rs.
Account no: _____________
Title of account
Do not write below this line.
Signature

Essential elements of a cheque

The essential elements of a cheque are shown below:

It must be in writing
_ There must be an express order to pay and not a request to pay
_ The order must be definite and unconditional
_ It must be signed by the drawer
_ The three parties (drawer, drawee and payee) must be certain.
_ The order must be to pay a certain sum
_ The order must be to pay money only
_ It must always be drawn upon a specified banker
_ It must always be payable on demand

Method of crossing

A cheque is said to be crossed when it bears across its face two parallel transverse lines which are usually drawn on
the left hand top corner of the cheque. It is an instance of an alteration which is authorised by the Act. A crossing is a
direction to the director of the paying banker not to pay across the counter.

Purpose of crossing

The purpose of crossing is to direct the drawee (banker) to pay the amount of the cheque only to a banker so that the
party who receives the payment can easily be traced.

Types of crossing

General crossing

A cheque is said to be crossed generally where it bears across its face an addition of:

_ The words “and company” or any abbreviation of it between two parallel transverse lines. [Section 123 ]

n general crossing, the cheque bears across its face an addition of two parallel transverse lines and/or the addition of
words ‘and Co.’ or ‘not negotiable’ between them. In the case of general crossing on the cheque, the paying banker
will pay money to any banker. For the purpose of general crossing two transverse parallel lines at the corner of the
cheque are necessary. Thus, in this case, the holder of the cheque or the payee will receive the payment only through
a bank account and not over the counter. But, the words ‘not negotiable’ are significant as they restrict the negotiability
and thus, in the case of transfer, the transferee will not give a title better than that of a transferor.

Effect of general crossing

When a cheque is crossed generally the banker on whom it is drawn shall not pay it otherwise than to a banker. [Section
126]

Special crossing

A cheque is said to be crossed especially where it bears across its face an addition of:

_ Name of the banker

_ Parallel lines are not necessary. [Section 124]

In special crossing, the cheque bears across its face an addition of the banker’s name, with or without the words ‘not
negotiable’. In this case, the paying banker will pay the amount of cheque only to the banker whose name appears in
the crossing or to his collecting agent. Thus, the paying banker will honor the cheque only when it is ordered through
the bank mentioned in the crossing or its agent bank.

Effect of special crossing

When a cheque is crossed specifically the banker on whom it is drawn shall not pay it otherwise than to a banker to
whom it is crossed or his agent for collection. [Section 126]

Specimen of special crossing

Restrictive crossing

Restrictive crossing may be added with general crossing by adding the words “A/c Payee” or “A/c

Payee only”. [Section 123A] This type of crossing restricts the negotiability of the cheque. It
directs the collecting banker that he needs to credit the amount of cheque only to the account of
the payee, or the party named or his agent. Where the collecting banker credits the proceeds of a
cheque bearing such crossing to any other account, he shall be guilty of negligence.

Effect of restrictive crossing

Strictly speaking, the amount collected on the cheque must be credited only to the account of
payee.
Not negotiable crossing

The effect of the words “not negotiable” on a crossed cheque is that the title of the transferee of
such a cheque cannot be better than that of its transferor. The addition of the words not negotiable
does not restrict the further transfer ability of the cheque. It only takes away the main feature of
negotiability, which is transferability free from defects. Therefore, a holder with a defective title
cannot give a good title to a subsequent holder. The object of crossing a cheque not negotiable is
to afford protection to the drawer or holder of the cheque against miscarriage or dishonesty in the
course of transit by making it difficult for the cheque so crossed cashed, until it reaches its
destination. [Section 131]

Circumstances in which a banker must refuse to honour a cheque

_ Where the customer has stopped the payment of the cheque.

_ When a garnishee order or any other legal order of the court prohibits payment of cheque.

_ When the banker receives notice of customers death. But a payment made before

receiving the notice of death is valid.

_ When an order of adjudication has been passed against the customer by the insolvency

court.

_ When the banker receives the notice of customers insanity.

_ When the customer has given a notice to the banker for the assignment of the credit

balance of his account.

_ When the banker has reason to believe the holder title is defective.

_ When the banker receives a notice of loss of cheque from his customer.

_ When there has been material alteration in the cheque and such alteration has not been
authenticated by his customer by putting his signature.

_ When the signature of the drawer does not tally with the specimen signature kept by the

bank.

_ When the banker receives notice in respect of closure of account.

Circumstances in which a banker may refuse to honour a cheque

_ When the balance in customers account is insufficient to meet the cheque.

_ When the balance in the customer’s account cannot be properly allocated to the payment

of the cheque.

_ When the cheque is presented at a branch other than the one where the customer has

account.

_ When the cheque is presented after banking hours.

_ When the cheque has become stale.

_ When the cheque is undated.

_ When the cheque is post-dated.

Cheques v/s Bills of Exchange

Cheques and bills of exchange might appear to be similar but there are important differences
between them. The following are some such points of distinction:

 A cheque is always drawn only on a banker, while a bill may be drawn on any person.

 Cheques are payable only on demand, while bills may be payable on demand or upon a
specific date.

 It is important to cross a cheque but a bill needs no such crossing.

 Bills generally carry a grace period of three days for repayment of money. Cheques,
however, do not provide for any grace period.
  Dishonor of a bill requires the production of a notice. No such notice is important for
cheques.

 All cheques are bills of exchange but the vice versa is not true.

DISCHARGE OF LIABILITY

Discharge of liability means that the party’s liability, on instrument comes to an end. The
term“discharge” in relation to negotiable instrument has the following two meanings:

_ Discharge of the negotiable instrument

_ Discharge of one or more parties from their liability

The chart below shows the various ways in which an instrument and party may get discharged.
Discharge of the negotiable instrument

A negotiable instrument is said to be discharged when the rights against all the parties to it comes
to an end and the instrument ceases to be negotiable. No party even a holder in due course can
claim the amount of the discharged instrument from any party. An instrument can be discharged
in following ways:

Payment in due course

The instrument is discharge by payment made in due course by the party who is primary liable to
pay. A payment by a party who is secondary liable does not discharge the instrument because in
that case the payer holds it to enforce it against the prior endorsers and the principal debtor.
[Section 82]

Negotiation back

If the party primarily liable on the instrument becomes the holder at or after its maturity in his own
right, the instrument is discharged. [Section 90]

Example: Negotiation back

A issued a note to B, B endorses it to C and C endorses it back to A.

Release

When the holder of a negotiable instrument at or after its maturity absolutely and unconditionally
renounces in writing and gives up his rights against all the parties to the instrument, the instrument
is discharged. [Section 82]

Cancellation

Where an instrument is intentionally cancelled by the holder or its agent the instrument is
discharged and ceases to be negotiable. Cancelation may take place by;

_ crossing out signatures on the instrument, or

_ by physical destruction of the instrument

with the intention of putting an end to the liability of the parties to the instrument. [Section 82]

Discharge as a simple contract

A negotiable instrument may be discharged in the same way as any other contract for the payment
of money. This includes, for example, discharge of an instrument by novation or rescission or by
expiry of limit of limitation.

Discharge of party or parties

A party or parties to a negotiable instrument is/are discharged in any one of the following ways;
Payment

The party is discharge by payment made in due course by the party who is secondary liable to

pay. [Section 82]

Cancellation

When the holder of a negotiable instrument or his agent cancels the name of a party on the
instrument with the intent to discharge him, such party and all subsequent parties who have a right
of action against the party whose name is so cancelled are discharged from liability. [Section 82]

Release

Where the holder of a negotiable instrument releases any party to the instrument by any method
other than cancellation, the party so released is discharged from the liability. [Section 82]

Allowing drawee more than 48 hours

If the holder of a bill of exchange allows the drawee more than 48 hours exclusive of public
holidays, for the purpose of acceptance than all previous parties not consenting to such allowance
are discharged from liability to such holder. [Section 83]

Non-presentment of cheque

Where a cheque is not presented by the holder for payment within a reasonable time of its issue
and the drawer suffers damage through the delay because of the failure of the bank, he is discharge
from the liability to the extent of such damage. [Section 84]

Example: Non-presentment of cheque

A draws a cheque of Rs.1,000 and when the cheque ought to be presented, has funds at the Bank
to meet the cheque. The Bank fails before the cheque is presented and pays 25 paisa in Rupee. The
drawer is discharged to the extent of Rs.750.

Qualified acceptance

If the holder of a bill agrees to a qualified acceptance all prior parties whose consent is not

obtained to such an acceptance are discharged from liability. [Section 86]

The qualified acceptance can be in any of the following ways:

Conditional: the payment is dependent on the happening of an event.

Part payment: Where he undertakes the payment of part only of the sum ordered to be paid.

Place of payment: No place of payment is specified in the order, it undertakes the payment at a

specified place and not anywhere else or where place of payment is specified in the order it

undertakes payment at some other place and not anywhere else.

Time of payment: Payment at a time other than it is legally due.

Operation of law

This includes discharge;

_ By an order of insolvency court, discharging the insolvent.

_ By merger. When a judgement is obtained against the acceptor, maker or endorser, the

debt under the bill is merged into the judgement debt.

_ By lapse of time i.e. when the remedy becomes time barred.

Material alteration

A material alteration of a negotiable instrument renders the same void as against anyone who is a
party to it at the time of alteration and does not consent to it, unless it was made in order to carry
out the common intention of the original parties. [Section 87]

Persons who become parties to the instrument after the alteration are liable under the instrument
as altered.

Discharge by payment of altered instrument

When an instrument has been materially altered but does not appear to have been so altered, or
where cheque is presented for payment which does not at the time of presentation appear to be
crossed, payment on such an instrument discharges the party liable if he pays according to the
tenure of the instrument at the time of payment and in due course. Such a payment is a valid
payment even if it is proved that the instrument has been altered or the cheque was originally
crossed. [Section 89]

Not giving notice of dishonour

Any party to a negotiable instrument to whom notice of dishonour is not sent by the holder is
discharged from liability as against the holder unless no notice of dishonour is required to be sent.

Non-presentment for acceptance of a bill

When a bill of exchange is payable certain period after sight, its holder must present it for
acceptance to the drawee within a reasonable time after it is drawn. If he makes a default in making
such presentment the drawer and all endorsers who were liable towards such a holder are
discharged from their liability towards him. [Section 61]

Negotiation back

When a bill of exchange comes back to the drawer or endorser by process of negotiation and he
becomes its holder then all the parties in between are discharged from the instrument unless the
person to whom the instrument is re-endorsed did sans recourse endorsement. [Section 90]

Dishonour of a Negotiable Instrument

Dishonour of a negotiable instrument means the loss of honour for the instrument on the part of
the maker, drawee or acceptor, which renders the instrument unsuitable for the realization of the
payment. Note that the dishonour of a negotiable instrument can be done by the maker, drawee or
the acceptor depending on the case.

Further, Section 64 lays down the general rule as to presentment of negotiable instruments for
payment. It says all notes, bills, and cheques must be presented for payment thereof respectively
by or on behalf of the holder during the usual hours of business and of the maker or acceptor, and
if at the banker’s within banking hours. To point out, the presentment of payment is excused in the
case of dishonour.

Cases of Dishonour

The above means that there can be several cases leading to dishonour of a negotiable instrument,
some of which are:
  When the maker, drawer or acceptor actively does something so as to intentionally obstruct
the presentment of the instrument, e.g., deprives the holder of the instrument and keeps it
after maturity.

 When his business place is closed on the due date.

 In a situation, when there is no person present to make payment at the specified place for
payment.

 When we cannot find the person even after due searching.

 In the case of a promise to pay notwithstanding non-presentment.

 When the party entitled to presentment waives the presentment in an express or implied
manner.

 When there would have been no damage to the drawer in the case of non-presentment.

 If the drawer is incompetent to contract.

 In a case where the drawer and the drawee is the same person.

 In the case of the situation that renders the presentment impossible for e.g. the declaration
of war between the countries of the holder and the drawee.

 When there is a non-acceptance on some other grounds, even though the presentment has
been irregular.

Dishonour by Non-Payment

A promissory note, bill or cheque is dishonoured if the maker, drawee or acceptor of the cheque
commits default in payment upon being required to do the same.

Furthermore, a holder of a promissory note or bill may call it dishonoured if the maker or the
acceptor expressly excuses the presentment of payment when payment remains overdue.

It is important to realise that all the endorsers and maker of a bill are liable to the holder in case of
dishonour of the bill, provided the holder issues notice of dishonour.

Further note that a drawee is liable to the holder only in the case of dishonour by non-payment.
Dishonour by Non-Acceptance

Dishonour by non-acceptance is a situation of refusal to accept a negotiable instrument. Further,

we generally observe dishonour by non-acceptance in the case of a bill of exchange.

This is because it is the only kind of negotiable instrument that requires presentment for acceptance
or non-acceptance.

Also, in case of dishonour by non-acceptance, only the makers and endorsers are liable to the
holder of the bill, provided the holder issues a notice of dishonour. Some circumstances that lead
to the dishonour of a bill by non-acceptance are:

 When the drawee refuses to accept it within 48 of presentment for acceptance.

 In the case of an excuse of presentment, leading to a non-acceptance of the bill.

 When the drawee is incompetent to contract.

 When we cannot find the drawee after a reasonable search.

 If the drawee is a fictitious person.

 When acceptance is a qualified one.

Notice of Dishonour

In the case of dishonour of a negotiable instrument by non-acceptance or non-payment, a liable

holder should notify all the parties of his liability by issuing a notice of dishonour.

Upon receiving a notice of dishonour, a party must issue a notice of dishonour to other parties
rendering them liable to himself, within a reasonable amount of time.

To point out, the purpose of a notice of dishonour is to notify a party of his liability. Further, in
case of a drawer, it helps to protect himself in case of a dishonour occurring at the end of a drawee
or acceptor. In fact, the notice of dishonour is so important that an omission to it discharges all
parties other than the maker or acceptor. Further, a notice of dishonour can be oral or written.
However, it must be formal and should be issued within a reasonable amount of time.