Parties to the

Negotiable Instruments

Presented by Vaghela Nayan

SDJ International College
 Various common parties to the
negotiable instruments
1. Maker: the person who signs the promissory
notes.
2. Drawer: the maker of the Bill of Exchange or a
Cheque is called Drawer.
3. Drawee: the person who is directed to pay.
4. Payee: the person who will receive the money.
5. Acceptor: when the drawee signs on the bill for
the consent, he becomes acceptor.
6. Acceptor for honour: in case when the bill is
protested, with the consent of the holder in
writing the party thereto may accept the same
and he will be known as Acceptor for honour.
7. Endorser: the maker or the holder, for the
purpose of negotiation, signs on the back side of
the instrument and transfers the property with
in the instrument, then he is Endorser.
8. Endorsee: the person in whose favour
instrument is transferred is called the endorsee.
Drawee in case of need:
• When the drawer has a doubt about the non
acceptance of the bill by the drawee, then he may
write the name of another drawee in the bill.
• When the first drawee does not accept the bill
then the holder of a bill has to present it to the
second drawee.
• The second drawee is called ‘the drawee in case of
need’.
• As and when there is drawee in case of need, the
bill is not likelt to be dishonoured.
• In England it is known as “Reference in case if
need”
Holder:
• “The holder of a negotiable instrument means
any person who
a) Is entitled in his
b) Own name to the possession thereof and to
receive or remove the amount, due thereon
from the parties thereto.
• Necessities to be Holder of a Negotiable
Instrument:
− He should be entitled in his own name to
the possession of the instrument, and
− He should have a right to recover the
amount due thereon from the parties.
• Every instrument initially belongs to the
payee.
• He can transfer it to any person in payment of
his own debt. (Negotiation)
• Negotiation is possible in the following cases:
− In case of bearer instrument. (by mere
delivery)
− In case of an order instrument. (by
endorsement and delivery)
• It means the person who is legally entitled to
receive the money due on the instrument is
called ‘Holder’.
 Holder in Due Course

• Section 9 of the negotiable instrument act

defines Holder in Due Course as:
• “Any person who for consideration became
the possessor of a negotiable instrument, if
payable to bearer, or the payee, or endorsee
thereof, if payable to order, before the
amount mentioned in it became payable, and
without having sufficient cause to believe
that defect existed in the title of the person
from whom he derived his title.”
Conditions to become a HDC
1. He must be a Holder of Valuable
Consideration.
2. He must became a holder of the
instrument before the date of maturity.
3. He must became the holder of the
instrument in good faith.
4. He must not have any reason to believe the
title of the instrument to be defective.
When the Holder is not a HDC?
1. If the instrument is obtained in the form of
gift.
2. If it is obtained by illegal method.
3. When the instrument is acquired after the
date of maturity.
4. If the torn instrument is pasted together.
5. If the instrument contains several erasures.
6. If the instrument is not bonafied.
Rights of a HDC:
1. Liability of prior parties.
2. Defects of the instruments are eliminated.
3. Unauthorized act of the agent may be valid.
4. Good title in an inchoate stamped
instrument.
5. Acceptance of bill drawn in fictitious name.
6. Unlawful instrument.
7. Conditional delivery.
8. Estoppel against denying original validity of
instrument.
 Difference between Holder and HDC
Aspects Holder
1. Time to obtain: Instrument may be obtained
at any time.
2. Consideration: The holder may become the
possessor or payee of the
instrument even without the
consideration.
3. Maturity: The holder may become the
possessor before or after the
maturity.
4. Knowledge of The holder may have the
defects: knowledge of the defects in
the title of the person from
whom he derived his title.
5. To be a holder Each holder is not a Holder in
Due Course.
Holder in Due Course
Instrument may be obtained
before the date of maturity.
The HDC is one who obtains
possession for consideration.
HDC must become the
possessor or payee before the
amount thereon becomes
payable.
He must have become the
holder of the instrument in
good faith and after exercising
due care and caution.
Each Holder in Due Course is
also a Holder.
Liability of the Parties:
• According to sec. 30 to 32 and 35 to 42, of the
Negotiable instrument, Act, followings are the
points of the liability of the parties to the
negotiable instrument:
1. Drawer:
 The drawer is bound to compensate the holder
in case of dishonor of the bill when he receives
the notice of dishonor. (sec. 30)
 The liability of a drawer in BOE and Cheque is
different as the drawer in case of cheque is
drawee himself.
2. Drawee of a cheque:
 When the payee presents the cheque for
encashment, he must receive the payment.
 In case of dishonor of the cheque, the damages
to the payee must be compensated by the
drawee. (sec. 31)

3. Maker and Acceptor:

 The maker of the Promissory note and the
acceptor of the bill of exchange are the primarily
liable for the payment due. ( Sec. 32)
 Even after the maturity in case of BOE, the
acceptor is liable to pay the amount on demand.
 In case of dishonor, the either party has to
compensate the damage occurred to the payee.
4. Endorser:
 The endorser will be liable to all the subsequent
parties in case of dishonor of the cheque.
 He will not be liable if:
• There is a contract to the contrary,
• The endorser has made his liability limited by
expressed words.
• Due notice of dishonor is receive or given to the
endorser.(Sec. 35)
• If the holder of the instrument, without the
consent of the endorser destroys the instrument
or impairs the endorser’s remedy form the prior
party, the endorser’s liability is discharged as if
the instrument has been paid at maturity.
(sec. 40)
5. General rules regarding liability:
I. Principle of Suretyship: every prior party to
the negotiable instrument is liable thereon to
HDC until the instrument is duly satisfied.
(Sec. 36) the endorser stands as surety for the
prior party.
II. Maker, Drawer and Acceptor as Principals:
Incase of cheque and promissory notes, the
maker or drawer will be the principal debtors
and in case of BOE the acceptor is the
principal debtor, other parties are surety as
the case may be. (sec. 37)
 II. Prior party is principal for the subsequent
party: (Sec. 38)
III. Suretyship: when the acceptor enters into any
contract with the holder under sec. 134/135 of
Indian Contract Act, 1872 and the holder
stands in the position to expressly reserve the
right to charge, the acceptor is not
discharged.
6. Acceptor’s liability on a forged instrument:
the Acceptor of the BOE already endorsed is
not relieved from the liability by reason that
such endorsement is forged. (Sec. 41)
 Stolen Instrument:
• The person who steals or finds an instrument can not
enforce the payment on any party thereto.
• He cannot retain it against the party from whom he so
obtained it.
• If he obtains the payment, then the true owner can
recover the payment thereon.
• If the bearer stolen instrument is negotiated by mere
delivery, then the later person obtains the good title
and becomes the rightful person to compel the
payment.
• The instrument payable to order, if negotiated by
forged endorsement, the holder do not have the good
title to the instrument.