Importance of NI

¡ Facilitates payment and settlements in the businesses

¡ Easy transferability of value of instrument
¡ It has been amended in 1988
 (Dishonor of Cheques and for penalties and 2002 (modified
for requirements as per the electronic commerce)
¡ The payments through the NI are widely accepted
throughout the world.
Meaning and characteristics of NI
¡ NI means “ a promissory note, bill of exchange or cheque
payable either to order or to bearer
¡ Free transferability –
 *by delivery (payable to bearer) or
 *by endorsement and delivery
 (payable to order)
¡ Holder presumed to be the owner
¡ Holder in due course gets the title from all defects, if the title
is acquired with good faith and for consideration. Can
also sue for recovery of the sum
¡ The instrument transferable till maturity.
 Kinds of NI’s
 o Negotiable by statute- NI Act only recognizes three kinds
of NI i.e.
 PN, BOE and Cheque
 o Negotiable by custom or usage- certain instruments which
have acquired the characteristics of the NI by usage and
custom of trade.
 E.g. the Government PN, Banker’s Draft, Pay orders,
hundies, delivery orders , railways receipts for goods are
all held to be NI.
Presumptions relating to NI
o Sections 118 and 119 of the NI act has certain presumptions
in order to facilitate business transactions:
o It shall be presumed that every NI is drawn for consideration
o Every bill is accepted within a reasonable time before its
maturity
o The instruments are endorsed in the order, in which they
appear on it.
o Every holder is presumed to be a holder in due course

ØAllthe above presumptions are rebuttable by evidence to

the contrary.
ØThe burden of proof lies on the defendant and not upon
the plaintiff
Classification of the NI
¡ Bearer Instruments- payable to bearer
¡ Order Instruments- expressed to be payable to order
¡ Inland Instruments- drawn and made in India upon any
person resident in India, even though payable in a foreign
country
¡ Foreign Instruments- Not an Inland Instrument, must be
drawn outside India and made payable outside or inside
India
¡ Demand Instruments- Time for payment is specified in PN
and BOE/ payable at sight
¡ Ambiguous Instruments- which can be treated as PN or BOE
by the holder
 Continued
¡ Inchoate or incomplete instruments- when the person signs and
delivers a instruments which is wholly blank or incomplete
and gives the authority to make it complete to the holder
¡ Accommodation Bills-A bill drawn , accepted or endorsed
without consideration
 a) Party lending his name to oblige to the other party is
Accommodating or accommodation party
 b) The party so obliged is called the party accommodated
¡ Trade Bills- When a bill is drawn, accepted or endorsed for
consideration it is called a “ genuine trade bill”
¡ Escrow- When the NI is delivered conditionally or for special
purpose as a collateral security or for safe coustody only
and not for transferring the absolutely.
 Promissory Notes ( Section 4)
¡ PN is an instrument in writing not being a bank note or a
currency note
¡ It contains an unconditional undertaking
¡ Signed by the maker to pay a certain sum of money only
¡ To or to the order of certain person, or to the bearer of the
Instruments
¡ Parties to the PN-
 a) Maker- the person making or executing the note
promising to pay the amount stated therein
 b) Payee- The person to whom the amount is payable
 To comply with other formalities like date, place,
consideration, stamp etc
Bill of Exchange (Section 5)
¡ BOE is an instrument in writing
¡ Containing an unconditional order
¡ Signed by the maker
¡ Directing a certain person to pay
¡ A certain sum of money only
¡ To or to the order of
¡ Certain person or to the bearer of the instrument
 Distinction between PN and BOE
¡ In a BOE, there are three
¡ In a PN there are only two parties- drawer, the drawee
parties- maker and the
payee and the payee
¡ It contains an ¡ It contains an unconditional order
unconditional promise to the drawee or his agent to
by the maker to the pay according to the drawer’s
payee directions.
¡ No acceptance is
necessary ¡ A bill has to be accepted if it is a
¡ The liability of the maker bill payable “ after sight”
or drawer is primary ¡ The liability of the drawer
and absolute secondary i.e. when there is
¡ The maker stands in non payment by the drawee.
immediate relationship
with the payee
¡ Notice of dishonor to be given by
¡ No notice of dishonor the holder to the drawer
need to be given. ¡ The maker and the drawee do
not stand in immediate
relationship.
Parties to a Bill of Exchange
¡ Drawer- Person who draws the bill
¡ Drawee- the person on whom the bill is drawn
¡ Acceptor- person who accepts the bill ( he may be the drawee
or a stranger on behalf of drawee)
¡ Endorser- person who endorses the bill in favour of another
person
¡ Endorsee- person in whose favour the bill is endorsed
¡ Bill in sets – They are usually drawn in set of three, which are
called as ‘Via’. The whole set constitutes only one bill
Cheque
¡ Signed by the drawer
¡ Contains an unconditional order to a specified banker to
pay on demand
¡ A certain sum of money to or to the order of a specified
person or the bearer of the instrument
 Therefore all cheques are bills of exchange but
whereas all bills of exchange are not cheques.
 It can be ante-dated or post dated
¡ In case of a cheque till it becomes stale ( on expiry of 6
months from the date of issue). It may be made payable
to two or more or one of two alternatively or some of
several payees.
 Differences between Cheque and BOE
BOE
 Cheque


¡ The drawee liable only after it is ¡ A cheque does not

accepted
¡ Days of grace (three) are allowed
in case of a bill except for
payment on demand
¡ Drawee may be any one including
the banker
¡ It should be presented for
payment, otherwise it may
dischare the liability of the
drawer
¡ BOE cannot be crossed
¡ A notice of dishonor has to be
given to the drawer
require acceptance
and it is intended for
immediate payment
¡ No days of grace
¡ The drawee is always a
banker
¡ Delay in presenting does
not discharge the
drawwer from his
liability
¡ It may be crossed
Crossing of Cheques
¡ A cheque can be an open or crossed cheque
¡ Open cheques can be encashed directly across the counter
by presenting to drawee bank. But if it is lost or stolen it
can be encashed by any body unless countermanded
(stop payment)
¡ Crossing of the cheque was introduced with a view to avoid
the losses that may result from the open cheques
¡ Crossing is a direction to the bank to pay the money
generally to a bank or to a particular bank
¡ It is made with the intention to make the payment secured
¡ Its negotiability is not affected unless
 “Not Negotiable“ is inserted but it is still transferable
Modes of Crossing
¡ Where a cheque bears across it face an addition of words
"and company” or any abbreviation thereof, between two
parallel traverse lines, or of two parallel simply, the
addition shall be deemed a crossing and it is known as
‘general crossing’.
¡ General Crossing- In general crossing it is the responsibility
of the drawee bank not to make payment otherwise than
a bank

continued….
Other modes
¡ Special Crossing -Across its face it bears an addition of the
name of a banker with or without the words “ Not
Negotiable”.
¡ Restrictive Crossing-” Account payee” are added to the
general or special crossing. The amount has to be
credited to the account of the payee. They are not
negotiable.
¡ Not Negotiable Crossing- It means that the title of the
transferee cannot be better than the transferor. It is
crossed so, as a protection to the drawer or holder of
the cheque against miscarriage or dishonesty in the
course of transit by making it difficult to get cashed, until
it reaches its destination.
Crossing after issue of the cheque
¡ If the cheque is not crossed, the holder of the cheque may
cross it either generally or specially.
¡ If the cheque is crossed generally, the holder may cross it
specially
¡ The holder may add the words "Not Negotiable” to the
crossing
¡ If it is crossed to specified banker, it may be again crossed
to another specified banker, or agent for collection.
 Parties to a Negotiable Instrument
¡ Capacity of parties- Every person capable of contracting may
bind himself and be bound by the making, drawing,
acceptance, indorsement, delivery and negotiation of the NI
¡ The capacity of the party to a NI is co-extensive with the
capacity of his or her contract capacity to contract
¡ Minor can draw, indorse, deliver and negotiate such
instruments as to bind all other parties other than himself.
¡ Minor can also acquire all rights under it, and if he is a holder
he is entitled to sue all the prior parties to the instruments.
¡ If minor is one of the parties and all others are adults, then
other than the minor all are liable. Adults are not discharged
from liability even if the minor is discharged.
Holder ( Sec 8)
¡ A person who is entitled to hold the negotiable instruments
in his own name, to possess the instrument and to
recover or receive its amount due from the parties
thereto is called a holder.
¡ To be a holder the person must be named in the instrument
as a payee, or the endorsee or a bearer thereof
Holder in due course (HDC)
¡ If a person proves that he acquired the instrument
for a valuable consideration, then he is known
as holder in due course.
¡ The holder in due course should show that for
consideration he became the payee or indorsee
of the instrument , if it is payable to the order.
¡ In such cases, the instrument should have been
indorsed and delivered to him, as his title to the
instrument will be incomplete without delivery.
Other essentials to be a holder in due
course
¡ The HDC should have acquired the instrument any time
before the amount became payable.
¡ If a person takes the instrument after the day the amount
becomes payable, such a person cannot take the place
of HDC, and the rights acquired by him are only co-
extensive with that of his immediate transferor.
¡ The HDC should have acquired the title without notice of the
defect in the title
Privileges of a HDC
¡ The presumption is that the HDC obtains title to the
instrument free from equity.
¡ If the instrument is stamped but otherwise inchoate, the
person who has signed and delivers is prevented from
asserting against the HDC as the stamp in itself is
sufficient to cover the amount, though the instrument
was incomplete
¡ Until the instrument is duly satisfied, every prior party to a NI
is liable thereon to a holder in due course.

Cont….
Continued..
¡ If the bill or note is negotiated to a HDC , then the
negotiating parties cannot avoid liability if there was a
condition or special purpose attached to it.
¡ Once the NI passes through the hands of the HDC, the NI
get cleansed of all its defects, provided the holder is not
a party to the fraud
¡ No defence can be set up against the holder in due course
¡ The validity of the instrument as originally made or drawn
cannot be denied by the maker/ drawer/ acceptor for
honor
¡ The endorser cannot deny the signature or capacity to the
contract of any prior party to the instrument
Liabilities of Parties (Drawer)
¡ Liability of the drawer- the drawer is liable to compensate in
case of dishonor by the drawee or acceptor, provided
due notice has been given to or received by the drawer.
¡ The liability of the drawer in case of bill is secondary in
nature. It is the acceptor who is primarily liable to make
the payment.
¡ By drawing a bill, the drawer undertakes that on
presentment of the same to the acceptor, it will be
accepted and duly honored and
¡ If it is dishonored by the acceptor or not accepted, the
drawer will compensate to the holder or the indorser,
provided due notice is given to him.

Cont…..
Continued…..
¡ The drawer can also limithis or her liability by using the
sans recourse indorsement
¡ If the holder fails to give notice , then the drawer is not liable
and beyond this he is discharged from his/her liability.
¡ This is not only with reference to the bill but also upon the
original debt.
 Liability of the Drawee
¡ The relationship between the banker( drawee) and customer is
that of debtor and creditor.
¡ The banker has to undertake to honor the customers cheque until
the funds are available with the bank in the customers
account.
¡ Banker can refuse to honor the customers in certain instances
like,
 a) bankers lien,
 b) no amount to honor in the customers account,
 c) post dated fund presented before the date,
 d) if the instrument is ambiguous,
 e) if the customer been declared insolvent,
 f) if the customer has countermanded the cheque,
 g) if the bankers receives the notice of death or insanity
Liability of the Drawee Bank for
Wrongful Dishonour
¡ Cheques to be presented during the usual banking hours.
¡ If there is sufficient fund in the customers fund and still the
bank does not honor the cheque , it has to fulfill the
monetary loss of the customer and also the injury to
reputation of the customer.
¡ This remedy against the bank is available only to the
drawer of the cheque and not the holder of the cheque.
 Liability of the Drawee Bank Where the
Drawer’s Signature is Forged
¡ If bank honor’s a cheque which is forged, the bank cannot
get the statutory protection, even if the sign could not be
distinguished.
¡ The Act provides protection to the drawee bank paying a
cheque that carries a forged indorsement.
¡ This section applies if the bank pays a cheque that carries a
forged indorsement and it is payable to order and it
purports to be indorsed by or on behalf of the payee.
………..
 If the bank on which is drawn , makes the payment in
due course, then the bank is discharged from its liability
even if the signature of the payee might be forged.
Liability of the ‘Maker of the note’ and
‘Acceptor of the bill’
¡ Both the maker and the acceptor are liable to make the
payment.
¡ The liability of the maker in case of note and acceptor in
case the bill is absolute, Unconditional and primary. The
liability exists only when he signs and delivers the note
¡ But to make the acceptor liable only signature is not
enough, it has to be accepted i.e. notice of acceptance
should be given and the bill has to be delivered.
¡ As the acceptor is not the originator of the bill as in case of
the note, the acceptor can have an option to give a
qualified acceptance.
 Liability of endorser
¡ Every indorser after dishonor is liable as upon an instrument
payable on demand to every subsequent holder.
¡ The indorser is in a position of a new drawer and the liability
of the indorser is conditional.
¡ By endorsing the bill the endorser undertakes that the
instrument will be accepted and paid as per the tenor of
presentment.
¡ If it is dishonored, he will compensate the holder or
subsequent indorsers who is compelled to pay for it
subject to due notice of dishonor.
¡ The indorsers liability as per this provision
 (sec 35) will not commence until the indorsed instrument
is delivered to the transferee. The indorser has to make good
the loss but he can make qualified indorsement by using
‘sans recourse indorsement’
 Liability of the other parties
¡ Every prior party to the indorsement will be liable to the
subsequent party until the instrument is duly discharged or
satisfied.
¡ If the indorser knows that bill was forged, he cannot later deny
the liability by pleading forgery as a reason.
¡ The indorser cannot challenge the holder’s title. He will be
liable twice. One to the holder and the other to the true
owner of the instrument.
¡ Acceptor of the bill drawn in fictitious nameand payable to the
drawer’s order is not, by reason that such name is fictious,
relieved from liability to any holder in due course.
 Negotiation
¡ Negotiation of an instrument may be either by delivery or by
indorsement. Delivery of NI is an essential ingredient in
order to bind the parties as they are incomplete and
revocable.
¡ The delivery should be with an intention to passingof the
property . A PN , BOE or Cheque is considered to be
completed only when it is delivered i.e., actual or
constructive
¡ As between the immediate parties, delivery to be effectual must
be made by the party making , accepting or indorsing the
instrument or by a person authorized by such person
¡ For other parties, other than HDC it has to been shown that the
instrument was delivered conditionally or for special
purpose only and not for the purpose of transferring
absolutelythe property therein. All the NI’s are negotiable
by delivery after indorsement.
Endorsements / Indorsements
¡ A bearer instrument is defined as an instrument where the
only or last indorsement is an indorsement in blank.
¡ Partial Indorsement- No writing on a negotiable instrument
is valid for the purpose of negotiation if such writing
purports to transfer only a part of the amount appearing
tobe due on the instrument, …….
¡ But where such amount has been [partly paid, a note to that
effect may be indorsed on the instrument, which may
then be negotiated for the balance ( This is called partial
indorsement)
Features of indorsement
¡ Intention should be there for negotiating the instrument.
¡ Effected by the signature of drawer or holder of a negotiable
instrument.
¡ Indorsement can be made on the back or face of instrument
generally – it can be made on a plain paper or on a
stamp paper)
¡ The person who signs is called – Indorser/endorsor
¡ The person in whose favour it is made is called-
Indorsee/endorsee.
¡ The additional slip pf paper, if used for indorsement is called
as “ allonge”
Legal aspects of endorsement
¡ Negotiation
¡ The endorsee acquires the property or interest in the
instrument as a holder. He can further pass the title
negotiation, other than for restrictive endorsement
(Transfer)
¡ It can be negotiated till the payment is made
¡ Endorsement in part is invalid
¡ If the endorser dies before delivery, endorsement becomes
invalid.
¡ Presumption- Endorsement made in the order it appears
¡ Endorsers signature-Not to be in block letters
¡ Endorser should spell his name in the same way as it
appears on the cheque.
¡ Need not include prefixes and suffixes
Kinds of endorsement
¡ Endorsement in blank: If there is only name of the endorser
( payable to bearer)
¡ Endorsement in full- If it made to a specified person, A
blank endorsement may be converted into full.
¡ Sans recourse endorsement- Exclude his personal liability
by limiting the liability.
¡ Conditional endorsement- If a condition is specified by the
endorser
¡ Restrictive endorsement- if it specified to one person only
¡ Facultative endorsement-If the provisions of giving notice of
dishonor is waived by the endorse
 Difference between Assignment and
Negotiation
¡ Assignment should be in
writing
¡ Notice of transfer of
actionable claims must be
given by the transferee to
the debtor in case if the
assignment in order to
complete the title
¡ The title is subject to all the
defects, equities of the
assignor
¡ Transferee to prove
consideration for transfer
¡ Negotiation by delivery /
endorsement and
delivery
¡ No notice of such kind
required in negotiation
¡ The title of the transferee
is better than the
transferor
¡ Consideration is presumed
in negotiation
Instruments obtained by unlawful
means
¡ Stolen instruments- Acquires no title
¡ Instruments obtained through fraud or coercion- usually not
liable , but liable if due and reasonable care not taken
¡ Instruments obtained for unlawful consideration- Does not
create a legal obligation but HDC obtains good title
¡ Forged instruments- Generally it cannot convey title
¡ Forged endorsement-depends of the different situations
Presentment
Meaning- Showing an instrument to the drawee, acceptor or
maker for acceptance, sight or payment.

The three kinds of presentment are:

a) Presentment of BOE for acceptance

b) Presentment of PN for sight
c) Presentment of NI for payment


Presentment must be made in a place and time

specified or in the place of business or residence

or where ever the person is found.

¡
Presentment when excused

Ø Presentment is excused and the instrument can be treated

as dishonored in the following circumstances-
 a) When the drawee cannot be found after
 reasonable search
 b) Where the drawee is a fictitious person or
 incapable of contracting
 c) Where the presentment is irregular,
 acceptance has been refused on some
 other ground.
 d) Where the drawee becomes bankrupt or is dead
Dishonor of a NI
¡ Non-acceptance of the bill or non- payment results in
dishonor of the instruments.
¡ Dishonor by non- payment happens when the maker,
drawee of the cheque or acceptor of the bill makes a
default in payment upon being duly required to pay the
same.
¡ It is considered to be dishonored by non-payment when the
presentment for payment is excused and the overdue
remains unpaid
 Dishonor continued…
 Dishonor by non- acceptance happens in the
following ways:

a) When the drawee does not accept within 48 hours of

presentment
b) when presentment for acceptance is excused and the
bill remains unaccepted.
c) When the drawee is incompetent
d) When the acceptance by the drawee is qualified
e) when the drawee is fictitious person or cannot be found
after reasonable search
 A notice of dishonour is a must to all prior parties whom
the holder wants to make liable except in those cases where
the law considered it as unnecessasry.
Noting and protest
¡ A noting is a process of recording of dishonor by the notary
public upon the instrument within a reasonable time of
dishonor.
¡ It is the discretion of the holder to get it noted.
¡ A bill that is noted must contain the fact of dishonor, the
date, the reasons. It will also have the notary charges.
¡ When the process of noting is certified, it is called protest.
Dishonor of cheques ( Sec 138-142)
 > After the Amendment Act of 1988, the NI Act provide
for criminal penalties in the event of dishonor of cheques for
insufficiency of funds.
> The drawer may be punished under sec 138 with
imprisonment for two years (after 2002 Amendment Act) or
with fine which may extend to twice the amount of the
cheque or with both.
> (The Amendment has inserted five new sections 143-
147 for the procedure to be followed for the trial)
Conditions to attract criminal penalty
under sec 138 are:
¡ The cheque is dishonored due to insufficiency of funds
¡ The payment for which the cheque was issued was for the
discharge of a legally enforceable debt or liability in
whole or part of it. ( If it is a gift , then the liability will not
arise)
¡ The cheque has to be presented to the paying bank within
six months from the date that it was drawn.
¡ The payee or the HDC should have been given a notice of
dishonor of the cheque from the bank.( The court to take
cognizance of the complaint, if it given by the payee or
the HDC)
¡ The drawer will be liable only if he fails to make the payment
within days of such notice period.
¡ The payee or HDC of the cheque should have made a
written complaint within one month of cause of action.
Discharge of a Negotiable Instrument
¡ Discharge of parties
 a) By cancellation
 b) Release
 c) Payment
 d) If the holder gives more time to the drawee
than 48 hours
 e) by default in presenting the cheque within a
reasonable time
 f) Dissenting parties discharged by qualified or
limited
 acceptance
 g) Material alteration etc………..


 ******************