Negotiableinstrumentact1881-171112121151

Unit-3
Negotiable Instruments
Act 1881
Dr. PrashantB . Kalaskar

Syllabus
• Negotiable Instruments Act, 1881: Negotiable Instruments –
meaning – characteristics – types – parties – holder and holder in
due course
• Negotiation and types of endorsements: Dishonor of negotiable
instruments - noting and protesting, Liability of parties on Negotiable
Instruments

• N e g o tiable Instruments Act 1882 , was introduced in India on
1st March 1982.
• To protect Business Activities, this Act was introduced
• Negotiable means Transferable
• Instrument: Any document which is written
• Negotiable Instruments c a n b e negotiated as many times
depending upon maturity period of the instrument (Viz. C h e q u e
for 3 months c a n b e negotiated)

Currency Note is not a Negotiable Instruments

• Negotiable Instruments are Payable to Bearer or by Order
• Bearer: The one who has the possession of the N e gotiable
Instrument. (payee may have to produce proof in bank for the purpose of
encashment)
Ex: If some1 issues a c h e q u e by writing n a m e of a specific person

or firm ( Mr.A or M/s ABC).
The o ne whose nam e is m entio n e d on it c a n en c a s h it in the
Bank, as they are bearing their n am e on it.
• Negotiable Instruments are Payable to Bearer or by Order
• Order: The one, on whose instruction, the negotiable instrument is
negotiated.
• The b en eficiary (Paye e ) h as to establish his identity to dra w the
amount across the bank counter.
• The p a y e e c a n transfer an order c h e q u e to som e o ne else by
signing his or her n am e on the b a c k of it.

• In business transactions, the payment b e t w e e n the parties is m a d e
through different negotiable instruments such as;
1) Promissory Note (Sec-4)
2) Bills of Exchange (Sec-5)
3 ) C h e q u e (Sec-6) (DD c a n b e included here in Cheque)
• In business, Law has m a d e a provision to make payment using
either of the a b o v e negotiable instrument, which is governed by
Negotiable Instruments Act 1882

Negotiable Instrument
• Thus Negotiable Instrument is a written document, that entitles a
person to a sum of money, which is transferable from one party to
another by means of delivery or endorsement &delivery. (Sec-13)
• The negotiable instrument is payable either to order or to bearer.
• Definition by Thomas;
“Negotiable instrument is a legally recognized custom (practice) of
trade, which is transferable by delivery or endorsement and delivery,
the property in it passes to the bona fide transferee (holder of it), free
from any defect in the title of the person from whom (maker) it is
obtained by him”
Essentials of Negotiable Instruments
• Freely Transferable: The property in negotiable instrument passes
from on e person to the other by delivery. If the instrument is
payable to a bearer by endorsement and delivery, it is payable to
order.
No Name on Cheque
By delivery (Bearer Instruments) can be transferred
further byDelivery
NI Transferable
by endorsement ( on Specific payee’s name)

Essentials of Negotiable Instruments
• The Title of Holder free from all Defects: The b o n a fide person, who is
holding the instrument, should g e t the instrument free from any
de fe ct in the title of the transferor.
• In c a s e of the defect, the holder c a n take a legal action against
the transferor.

Characteristics of Negotiable Instruments
• Recovery: In c a s e of defaulter, the holder of the negotiable
instrument c a n sue the transferor to recover the loss for the value
payable through negotiable instrument.
• Presumptions: Certain presumptions are applicable to negotiable
instruments as follows;
1) Consideration: It is presumed that, the negotiable instrument is drawn,
a c c e p t e d, endorsed or transferre d for consideration as to transfer the
property in it to the holder.

• Presumptions:
2)Date: It is presumed that, the negotiable instrument is drawn or
prepared on the date, mentioned on it.
3)Time o f A c c eptan c e : It is presumed that, the bills of e x c h ange is
a c c e p t e d within the reasonable time.
4)Time o f Transfer: Every negotiable instrument is presumed to b e
transferred before its maturity.
5)Order of Indorsement: It is presumed that the negotiable instrument is in
the n a m e of the party, on which is itindorsed.

• Presumptions:
6)Holder is presumed to be holder in due course of time: It is presumed
that, the holder is the only one, on whose n a m e the negotiable
instrument is prepared in the d u e course of time.
7)Proof of Protest: If the defaulter party protest in the court, whose

negotiable instrument is dishonored, this proof clearly shows that there is
dishonor of the negotiable instrument.

Type of Negotiable Instruments
• Negotiable Instruments may of two types

1) Instruments Negotiable by Statute: The Negotiable instruments Act
mentions only three types of instruments like Promissory Notes, Bills
of Exchange & Cheques as the Negotiable Instruments.
 This means that, these 3 instruments are passed/approved by the

legislative bodies.

Type of Negotiable Instruments
• Negotiable Instruments may of two types
2) Instruments Negotiable by Custom or Usage: The instruments which
are not mentioned in the Negotiable Instruments Act, but are
acquired as the Neg o tiable Instrument by usage or custom of
Trade.
Ex: Banker’s Note, Share Certificates, Share Warrants, Dividend
Warrants etc.
Banker’s Note: Like a Bank’s Promissory Note or Currency, issued by a bank to the bearer to make payment
Share Certificates: Issued by a compan y to its holder, mentioning that, he hold the ownership du e to investment
Share Warrants: Issued by a Public Ltd. compan y to its holder, mentioning that, he hold the ownership du e to investment
Dividend Warrants: Issued by a compan y to its holder, mentioning that, he is entitled for the mentioned dividend amount

Promissory Notes (Sec-4)
• Promissory Note is the Instrument inwriting,
- Containing an unconditional undertaking,
- Signed by the maker,
- To p a y a certain sum of money only to the person on whose n a m e
it is m a d e or
- To the bearer of the instrument or by order of endorsement
- A Revenue stamp must b e pasted on it.
• The person who makes/prepare the Promissory note is c / a Maker
• The person, to whom the payment is to b e m a d e is c / a Payee
Promissory Notes
- “It is an unconditional written promise by o n e p e rson to
another
- In which the maker (p a yer/drawer) promises to pay on
d e m a n d or at a fixed or determinable d a t e in the future,
- A stated sum of money
- to or to the order of a specified person or the bearer of the
instrument”.
Examples of Promissory Notes
• A Signs the instruments in following terms…
1) IPromise to p a y ` 500 to ‘B’ or order ` 500
2) I acknowledge myself to b e indebted to ‘B’ in ` 1000 to b e paid on
d e m a n d for the value received.
3) Ipromise to p a y ` 500 and all other sums which shall b e d u e to him
4) Ipromise to p a y ` 500 to ‘B’, 7 days after my marriage with ‘C’
5) I promise to p a y ` 50000 to ‘B’, an d deliver him my b l a ck horse on
1 st January of coming year as on date.

Specimen of Promissory Note

Essential Elements of Promissory Note
1) Writing: The instrument must b e in writing, showing a mere
agreement of the maker to p a y the mentioned amount to the
bearer. The writing c a n b e a handwritten, printed or typewritten.
2) Promise to Pay: The instrument must contain the express promise to
make the payment. Just mentioning as the maker is in indebtness
or by just mentioning isPronote or debt is insufficient.
Ex: a) Mr. ‘B’ IO U (I O w e You) ` 6000
b) Ia m liable to ‘B’, in a sum of ` 9000 to b e paid in 3 equal installments
c) We have receive d sum of ` 7000 from R.K.Sharma in cash . This amount will b e
repaid when demand ed. (This is also a promissory note)

3) Definite & Unconditional: The promise to p a y the sum of amount
must b e definite an d unconditional. If the promise is conditional and
uncertain, then it is invalid instrument.
Ex:
a) I promise to p a y ‘B’, a sum of ` 9000, w h en it is convenient or
possible
b) Ipromise to p a y ‘B’ ` 6000, if he delivers the goods.
c) Ipromise to p a y ‘B’ ` 1000 on D’s death, provided ‘D’ leaves m e
enough money to p a y that sum.
4) Signed by the Maker: The promissory note must b e signe d by the
maker, without the signature, the instrument is invalid instrument.
 Even if the instrument is handwritten by the maker an d his n am e
appears on it, but if there is no stamp and signature of the maker,
the instrument is incomplete, h e n c e of no value to the bearer
(payee)
5) Certain Party: The promissory must cle arly indicate, who is the
maker an d who is the payer, or else it is not a valid instrument.
• The maker c a n not prepare the promissory on his own name.

6)Certain Sum of money: The promissory note must clearly indicate,
the e x ac t amount to b e paid to the p a y e e .
Ex: a) If the d ue to b e paid is along with interest, but if the interest
amount isnot included, then the instrument isnot a valid instrument.
b) If the amount p ay ab le does not include the currency of e x c h a n g e
7)Promise to Pay Money Only: The promissory note must b e a legal
tender money of India. If the promise to p a y something other than
money is not a valid instrument
Ex;Ipromise to deliver 100 b ag s of wheat to ‘B’

8)Bank Note or Currency note is not the Promissory Note:

9)Formalities like number, date, place, consideration etc.: The
promissory note not necessarily required to contain the d a t e on
which it is prepared, p l a c e where it is prepared or the consideration
of payable amount etc.
The d a t e is required, only if the du e payment is after a specific d a t e
or etc.

10) It may be payable on demand or after a definite period of time:
The expression on d e m a n d means, paying immediately, as and
when it is d e m a n d e d by the p a y e e .

Billsof Exchange (Sec 5)
• “Bills of Exchange in an Unconditional order signed by the
Maker directing to a certain person to a pay certain sum of
money to a certain person or to the order that person or to the
bearer of the instrument for values received.”
• If the payment is to b e m a d e immediately is c / a a sight

billor on a fixed d a t e is c / a a termbill.

Features of Billsof Exchange
• It should b e in writing (hand written or type written or printed)

• Unconditional order, prep a red by a creditor for the d e btor
regarding the payment of a certain sum of money
• The amount to be paid iscertain

• The date of payment of amount must b e certain
• The person to whom the amount to be paid must be certain
• The maker has to sign the bill with a proper stamp
Parties to a Billsof Exchange (BoE)
1) The Drawer/ Maker / Creditor/ Seller:

Suppose ‘X’ sold goods to ‘Y’, so ‘X’ should receive money from ‘Y’
To g e t paym ent from ‘Y’, ‘X’ prepares a Bill of Exc h a nge on his
own n am e and sends it to ‘Y’. (X is the Drawer)
 Since ‘X’ sells goods, he is the Seller,

he has to receive money from ‘Y’, he is the Creditor,
Since the BoE is m a d e by ‘X’ , he is the Maker /Drawer

2) Drawee/Acceptor/Debtor/Payer/Buyer:
Since ‘Y’ has to make payment against the goods purchased he
is the Buyer/Payer.
 ‘Y’ a c c e p t e d to make payment to ‘X’ , he is the Acceptor.

Sin c e ‘Y’ h as to make p a y m ent to ‘X’, h e will b e the Drawee/
Debtor.

3) The Payee: P a y e e is the person, who will actually receive the
Money mentioned in BoE.
The Payee c a n b e the Drawer himself or a 3rd person (Agent)
appointed by the Drawer, who will receive money from the
(Drawee/Acceptor/Buyer) on behalf of the Drawer.
Hence Drawer c a n giv e instruction to the Drawe e to make
payment to his agent.
Thusthere can be 3 parties involved in Billsof Exchange

Parties to a Billsof Exchange
• BoEis simply a type ofCheque..
Payee/3rd Party
Accepted
Mr. Rashid Ahmad
Drawer/Payer Accepter Drawer

Parties to a Billsof Exchange
• Drawer: This is the person, who prepares the bills of e x c hange . Drawer is
the creditor, an d he is entitled to the amount mentioned in it.
• Drawee: The person on whom the bills of e x c h a n g e is drawn, also c / a a
Acceptor.
• Payee: The person, to whom the amount of bill is p ay ab l e (to b e paid).
• Indorser: The person, who indorses the bill in favor of 3rd party is known as
Indorser. Indorsement is m a d e by the holder (Drawer).
• Indorsee: The person, in whose favor, the bill is indorsed (he/she has to sign on
backside along with his/her name to indorse to confirm, it is he/she on whom it is entitled infront
of the banker). (Payee) (So in any case there are only 3 parties in BoE)
Cheques
• C h e q u e is also a type/kind of bills of exchange, only thing is that,
the Cheques are drawn on a specific (specified) banker.
• The c h e q u e also possesses all the characteristics to that of Bills of
exchange .
• C h e q u e must include, Sign of the Drawer, Unconditional order to a
specified banker, certain sum of money, an d payment to a certain
person, or to his order orto the bearer of the instruments.

Difference b/n Cheque and Billsof Exchange
No. Cheque Billof Exchange
1 It c a n b e drawn only on a Specified Bank It c a n b e drawn on a person or a Bank
2 A C h e q u e n e e d not h a v e A c c e p t a n c e
Bill of Exchange requires A c c e p t a n c e
It is pa y a b l e only after a certain period of
3 A C h e q u e is always pa y a b l e on Demand
time
4 After Maturity, C h e q u e gets expired 3 Days G r a c e period after itsMaturity
5 A C h e q u e c a n b e crossed Bills of Exchange c a n not b e crossed
In c a s e of delayed, the Drawer isnot
If Bill of Exchange is not presented to the
6 discharged from Liability, untill the C h e q u e Acceptor, the Drawer is free from Liability
is expired
In c a s e of Dishonor of Che que , notice & If BoE is dishonored, Notice & Protesting c a n
7
Protesting is not required b e done
Payment by C h e q u e c a n b e Payment by BoE, c a n not b e
8
countermanded (Stopped/Cancelled) Counte rman d e d
Types ofCheques
1) Bearer Cheque: The p hrase “or bearer” is written after the
name of the payee.
• It is payable on d e m an d to the bearer or to the presenter.
• It does not require endorsement.
• If a bearer c h e q u e is lost, the finder c a n cash it, unless the bank is
notified in time to stop the payment (non crossed).
• It is not a safe method of payment.
• If the b earer ch e q u e is lost or p a y m ent is m a d e to a wrong
person, bank has no responsibility for it.

Specimen of Bearer Cheques

Types ofCheques
2) Order Cheque: In these types of c h e q u e the word “order” is
written against the n a m e of p a y e e .
• The payment of such c h e q u e is made only to the person named
there in the cheque on the production of a valididentification.
• No other person c a n g e t the payment of an order che qu e .
• Payment though an order c h e q u e is a safer way, b e c a u s e receiver
will h a v e to prove his identity before receiving money.
• In c a s e of any problem, Bank will b e held responsible.
• Order C h e q u e can be transferred to another person by the act of
endorsement.
Specimen of Order Cheques

Crossing ofCheque
3) Crossed Cheque: The c he q u es issued c a n b e crossed or
uncrossed
• The uncrossed (Open) cheques c a n b e e n c as h e d from the Bank’s
counter, by the bearer of the instrument (c/a BearerCheques).
• To avoid frauds or risk due to loss of cheque, it is always advised to
cross the cheque .
• When a cheque is crossed, the bearer can’t encash it on Bank’s
counter, it c a n only b e encashed by depositing the cheque in bank
and transferring the amount inthe holder’s Bank account
Different Types of Crossing of Cheques
• Crossing of c h e q u e means just drawing two parallel lines on upper
most left corner, with or without the words.
• General Crossing: In c a s e of such general crossing, two parallel
lines are marked on uppermost left corner with or without the
words like ‘& Co.’ or ‘& Company’ etc.
• In this c ase, the drawee bank (issuer’s bank) shall not p a y the
amount, unless it is presented by the banker (of the p a y e e )

• Special Crossing: On the f a c e of the che que , be twe e n the parallel
lines, if n ame of a banker is written, with or without the words, ‘Not
Negotiable’, it is called as a Special C h e q u e
• The payment through such cheques c a n b e obtained from the
specified Bankers only

• Restrictive Crossing: The parallel lines contains the words like;
1) A/C P a y e e or
2) A/C Payee, Not Negotiable
• Such instructions mentioned on the c h e q u e suggests to the drawer’s
bank to transfer the certain amount in Payee’s Bank ac c o u n t only.
• If by mistake, bank transfers money to some other person’s account,
the bank is liable to make the payment to the real p a y e e

• Not Negotiable Crossing: The effect of the words ‘Not Negotiable’
on a crossed c h e q u e is the title of the transferee of a c h e q u e c a n
not b e transferred to any other person.

Two Modern Types of Cheques
1) Truncated Cheque: The dictionary meaning is “Shortened”.

• Now a days, for clearing purpose, n e e d not to transfer the
physical c o p y of c h e q u e to the Drawer’s bank, rather a scanned
c o p y is send through mail, so as to shortened the time for clearing.
• It is like the Mirrorimage of Physical C h e q u e

2) Electronic Cheque: A non-paper ch e q u e containing Dig ital
Signature of the Drawer, on the n a m e of Payee.

Parties involved in to Cheques
• C h e q u e is a negotiable instrument, that conne ct 3 people
• Drawer: is the person who is making the instrument for making the
payment, is also called as holder by the Drawer’s Bank
• Drawee: is the Drawer’s Bank, where he/she has his/her b a nk
account, who will make the payment on a c c o u n t of Drawer
• Payee (Beneficiary): is the person, who is entitled to receive money
• Payee’s Bank: The bank, where the P a y e e has his/her account,
an d a c c o u n t of Payee, the bank will receive the money from
Drawer’s Bank
Reasons for Dishonour ofCheques
1) The C h e q u e is Ambiguous(uncertain)
2) Insolvency of the Drawer
3) Insufficient Balance in the Drawers a c c o u n t forclearing
4) Signature of the Drawer is not matching with the specimen
5) Presenting a post d a t e d c h e q u e before the mentioned d a t e
6) The c h e q u e is b e c o m e the Stale (Expired), after 3 months
7) Holder has given a notice of loss of c h e q u e
8 ) C h e q u e is not presented in normal banking hours
9) Death of the p a y e e , is informed to the bank
10)The drawer has issued a notice to the Bank to stop the payment
Payment in DueCourse
If a payment of a negotiable instrument is to b e a payment in due
course, the following conditions must b e satisfied.
1) The Payment must b e either on or before the maturity d a t e (cheque)
or after the maturity d a t e (Pronote/BoE), if a payment is m a d e before
maturity, it is not a payment in due course.
2) The Payment is in due course, when the banker takes proper c a r e to
ensure that it is m a d e to the proper person and it is m a d e ingood faith.
3) Payment must b e m a d e to a person who is in possession of the
instrument.
4) Payment must b e made in money only. If the p a y e e agrees to a c c e p t
payment in some other form, then only it c a n b e m a d e in that form.
Holder
• As per Sec (8) of Negotiable Instrument Act, Holder of Legally
Approved Negotiable Instruments (i.e. Cheque , Bills of Exchange &
Pronote) is a person, who is entitled to posses the instrument in his
own name and also entitled to receive the amount mentioned init.
• Generally, it is the payee whose n a m e is mentioned in the
Negotiable Instrument, for receiving the mentioned amount in it,
e ve n if, the instrument is lost or destroyed.
• Ifthe payee obtains the instrument by fraud, he will not be holder

Holder
• As p er Sec (8) of Negotiable Instrument Act, Holder of
any Negotiable instruments has to satisfy following conditions
1) The instrument must be entitled on his nam e (prepare d on his
name)
2) He must h a v e the right (entitled) to receive the value mentioned
in it (who c a n encash the amount mentioned in it) in good faith

Holder
• Ex: If the Pronote/Cheque is prepared on the n a m e of ‘A’
- ‘B’ obtains the pronote from ‘A’ by theft and indorses his name
on it by forging (counterfeiting/faking) his n a me or by forging
the signature of ‘A’.
- Since the ‘B’ has not obtained the Pronote in g o o d faith, he is
not the holder.
- Since the Pronote is originally prepared on the n a m e of ‘A’, he
will b e c o m e the Holder of the Instrument
Holder in Due Course
• According to Sec (9) of Negotiable Instrument Act, holder in d u e
course, is a person A person who acquires the negotiable
instrument bonafide for some consideration, in g o o d faith, whose
payment is still due, is called holder in d u e course an d fulfill any of
following conditions;
1) He must b e the holder of the instrument (entitled on his name)
2) The instrument received must b e for some consideration
3) The instrument must b e obtained in due course (before maturity)
4) The instrument must b e obtained in good faith
Lets consider oneexample
‘A’ sold some goods to ‘B’ on credit
Sin c e ‘B’ has re c eiv e d the g o o ds from ‘A’, h e must make a
payment to ‘A’ in consideration
‘B’ issue d a C h eque to ‘A’ a g ainst the g o o d s received, to
complete the transaction.

Lets see, if ‘A’ b e c o m e s the Holder in Due Course (HDC) or not
1 ) The c h e q u e is prepared on the n a m e of ‘A’. Yes Holder
2) ‘B’ g a v e c h e q u e to ‘A’, against goods received Yes Consideration
3) ‘A’ received the c h e q u e before maturity d a t e Yes Before Due

Date
4) ‘A’ received the c h e q u e against goods sold Yes Good Faith
Since ‘A’ satisfies all the 4 conditions of Sec (9), he
Becomes the Holder in Due Course
Lets consider one moreexample
 ‘A’ asks some money (5000 Rs.) to ‘B’ as loan
 ‘B’ gives Rs. 5000 to ‘A’ as a Loan by means of C h e q u e
Will ‘A’ b e c o m e s the Holder in Due Course in this case..?????
1) The c h e q u e is prepared on the n a m e of ‘A’. Yes
Holde
2) Is there any consideration from ‘A’ to ‘B’
r No No
3) The c h e q u e is prepared before maturity Consideration
4) The c h e q u e is Obtained in G o o d faith Yes B4 Maturity
Since ‘A’ satisfies only 3 conditions of Sec (9),he Yes Good Faith
Cannot become the Holder in Due Course
• A holder of a ne g otiable instrument will not be the holder in due
course, if;
1) He has obtaine d the instrument as a g ift or for an unlawful
consideration or by some illegal methods or
2) He has obtained the instrument after its maturity
3) He has not obtained the instrument from a b o n a fide payer

Presentment of NegotiableInstrument
• The word negotiable means transferable from o ne person to
another, and the term instrument means any written document by
which a rightiscreated in favor of some person to receive money.
• The holder of the ne g o tiable instrument has to present the
instrument for the purpose of receiving the claim (value or goods)
• The presentment of negotiable instrument is m a d e for either;
1) For A c c e p t a n c e
2) For Payment
• The Act requires presentment of negotiable instruments.

• Presentment is simply a demand, by whic h holder of the
instruments is required to d o as per direction of the instruments.
• Direction may b e either a c c e p t a nc e in c a se of bill of exch a n g e
or payment in c a s e of all instruments.

• The claimant or presenter of the negotiable instrument must get
the claim what is mentioned in the instrument fromthe liable party
• Negotiable instrument is said to b e negotiated when the
transferee (payee) becomes the holder of it.
• Transferability is the most important aspect of negotiability
• The making, a c c e p t a n c e , or indorsement of the negotiable
instruments like c he qu e, bill of exchange, promissory note will b e
completed only by Delivery of it from the maker to the acceptor.

Time for Presentation ofInstrument
• Some times the instruments like Promissory note or Bill of Exchange
are time specific, h e n c e must b e a c c e p t e d and presented during
the specified time only.
• Ex.- The mentioned amount is p aya ble after 2 months of the d a t e
of preparation.
• This means the instrument must b e presented only after two
months.

Dishonour of Negotiable Instrument
• Dishonor is simply a Refusal

• The Negotiable Instrument may b e dishonoured either by;
1) Non A c c e p t a n c e of Negotiable Instrument
2) Non Payment of mentioned value
The dishonor of Negotiable instrument c a n h a p p e n e v e n in c a s e of
Pronote & Bills of Exchange along with C h e q u e

Dishonour of Billsof Exchange (BoE)
• Ex: Suppose Mr.Xhas purchased some goods from Mr.Z
• Hence, Mr.Xis supposed to p a y against the goods purchased to Mr.Z
• So, Mr.Zwill draw a Bills of Exchange on the n ame of Mr.X
Mr.Z Billsof Exchange Mr.X
Drawer Drawee
• Here Mr. X Refused to Accept the Bills of Ex c h an g e may b e d u e to
dispute or some other problem.
• Such refusal to a c c e p t the BoE is called as Dishonor by Acceptance
Billsof Exchange is nothing but the order to make payment against value
Dishonour of Billsof Exchange (BoE)
• Ex: Suppose Mr.Xhas purchased some goods from Mr.Z
• Hence, Mr.Xis supposed to p a y against the goods purchased to Mr.Z
• So, Mr.Zwill draw a Bills of Exchange on the n ame of Mr.X
Mr.Z Billsof Exchange Mr.X
Drawer Drawee
• Here Mr. X A c c e p t e d the Bills of Ex c h an g e of maturity period of 2
months.
• On the d a y of maturity (after 2 months), if Mr. X refuses to make
payment according to the BoE is called as Dishonor by Non-Payment

Noting against Dishonor of Billsof Exchange
• When the Drawee (Mr. X) refuses to make payment against Bills of
Exchange (Legal Instrument) to the Drawer, it will b e a loss to the
Drawer (Mr. Z).
• Since BoE is a Legal document, the Drawer (Mr. Z) c a n take a
legal action against the defaulter party-Drawee (Mr. X).
• In such c a s e of Dishonor of BoE, the Drawer c a n g o to the Notary
Public in the court to file a complaint by requesting to note the fact
of non acceptance (Refusal by Drawee).
• Notary Public will write the fact on it and Sign &Seal it(BoE).
Noting against Dishonor of Billsof Exchange
• The Notary Public will first approach to the Drawee (Mr. X) asking
him to;
1) Either a c c e p t the BoE or
2) Make Payment against BoE to the Drawer
• If still, the Drawee (Mr. X) refuses to a c c e p t or make payment
against BoE, the Notary Public will write on the BoEas Dishonored by
Mr.X.
• This process is called as Noting, which b e c o m e s a legal evidence
for Mr.Zto take further any legal action against the defaulter Mr.X
Protest against Dishonor of BillsofExchange
• The drawer c a n g o further and request to Notary Public to issue a

certificate mentioning the c a s e of dishonor of BoE along with Sign
and Seal of the Notary Public by paying some fees (Noting Charges).
• Such certificate obtained by the Drawer from the Notary Public is

called as Protest.

Dishonor of Cheque (Sec. 138 to 142)
• Suppose Akash has Drawn (the Drawer) a C h e q u e of ICICI b a nk
to make payment to Rahul (the Payee).
Mr. Akash Cheque Mr.Rahul

Drawer ICICI Bank- Drawee Payee/Holder
• If the Drawe e (ICICI Bank) refuses to make p a y m ent (cle ar the

che que) to Mr. Rahul, is called as Dishonor of Cheque.
• The Maturity Period of Cheque is only 3 months from the date of its
preparation
Conditions of Dishonor of Cheque
1) Insufficient funds in the ac c o u n t of the Drawer
2) If the ac c o u n t is closed either by the a c c o u n t holder or by Bank
3) Stop Payment instructions given by the Drawer to his Bank (ICICI)
which is also called as “Counter Mended Payment”.
4) Signature not matching or incorrect d a t e on C h e q u e
• Issue of Cheque by the Drawer to the Pa y e e (Holder) is nothing
but a kind of contract is created be twe e n the two parties.
• The dishonor of Cheque means Breach of Contract and treated as
Criminal Offence
Dishonor of Cheque
Informs the Reason ofDishonor Mr.Rahul
Bank
Drawee Payee/Holder
• The Paye e (Holder) now c a n take a leg al action a g a inst the

defaulter party (Drawer-Akash).
Send a Legal Notice thro’ his Lawyer Mr. Akash
Payee (Rahul)
Within 30 days of Cheque Dishonor Drawer
• The holder (Rahul) thro’ the notic e c a n giv e a tim e p eriod

(15 days) to Akash to make the d u e payment.
• If Drawer makes part payment, still it will b e a dishonor of c h e q u e
Dishonor of Cheque
• If after 15 days, the Drawer doesn’t make payment to the P a y e e
(balance part payment or entire amount), then the P a y e e (Rahul)
c a n file a c a s e against the drawer (Akash) in the court within one
month of time after the 15 days g r a c e period over, by producing;
1) The Bank’s statement along with reason of Dishonor of c h e q u e &
2) The copy of notice given to the drawer thro’ the Lawyer of
Payee
Penalty: up to 2 yrs. imprisonment and double amount of dishonor

Liabilities of Parties in Negotiable Instruments
• Liability of the Drawer: The liability of the Drawer will be;

1) To make the transfer/paym ent of funds what is mentio n e d in
negotiable instrument (promissory note or Cheque).
2) In c a se of dishonor of ne g o tiable instrument by the Drawe e
(bank) or the Drawer (e), to compensate the dues to the holder
3) Not to refuse to p a y without any earlier intimation to the holder
(payee)
4) To Properly note down a ll the specific a tions on the ne g o tiable
instrument
• Liability of the Drawee (Bank of Drawer): The liability of the Drawee will
be;
1) To hold the sufficient funds for the payment from the Drawer’s
account.
2) The Dra w e e (bank) must make p a y ment or transfer funds to the
p a y e e immediately after itspresentment
3) The d r aw e e (Bank) must compensate the drawer in c a s e of dishonor
of instrument, by its own default. (negligence)
4) Must validate the p a y e e in c a s e of order c h e q u e
• Liability of the Maker of ProNote or Acceptor of BoE (Payer): The

liability of the Maker of ProNote or Acceptor of BoE willbe;
1) Primarily to make payment to the other party (holder) on
d e m a n d or presentment.
2) In c a s e of defaulter, the Maker of ProNote or Acceptor of BoE
are bound to compensate to the holder equivalent to the loss
(Damage).

• Liability of the Payee: The liability of the P a y e e will be;

1) Primarily to present or d e m a n d the ch e q u e or any other
negotiable instrument within the due date.
2) The P a y e e should not overwrite or c h a n g e in d a t e or amount on
the Negotiable Instrument.
3) If the instrument is given on his name, the p a y e e should not use it
for illegal transfer of value (money).

ThankYou
Associate Professor
Sinhgad Institute of Business Administration & computer Application,
Lonavala
Mob.: 7350520025
pbkalaskar@Sinhgad.edu, prashantbkalaskar1977@gmail.com

Negotiableinstrumentact1881-171112121151

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Negotiableinstrumentact1881-171112121151

Enviado por

Direitos autorais:

Formatos disponíveis

Unit-3

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Ex: If some1 issues a c h e q u e by writing n a m e of a specific person

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

7)Proof of Protest: If the defaulter party protest in the court, whose

Dr. PrashantB . Kalaskar

• Negotiable Instruments may of two types

 This means that, these 3 instruments are passed/approved by the

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

8)Bank Note or Currency note is not the Promissory Note:

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

• If the payment is to b e m a d e immediately is c / a a sight

Dr. PrashantB . Kalaskar

• It should b e in writing (hand written or type written or printed)

• The amount to be paid iscertain

1) The Drawer/ Maker / Creditor/ Seller:

 Since ‘X’ sells goods, he is the Seller,

Dr. PrashantB . Kalaskar

 ‘Y’ a c c e p t e d to make payment to ‘X’ , he is the Acceptor.

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Drawer/Payer Accepter Drawer

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

1) Truncated Cheque: The dictionary meaning is “Shortened”.

• It is like the Mirrorimage of Physical C h e q u e

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

1 ) The c h e q u e is prepared on the n a m e of ‘A’. Yes Holder

2) ‘B’ g a v e c h e q u e to ‘A’, against goods received Yes Consideration

3) ‘A’ received the c h e q u e before maturity d a t e Yes Before Due

Dr. PrashantB . Kalaskar

• The Act requires presentment of negotiable instruments.

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

• Dishonor is simply a Refusal

Dr. PrashantB . Kalaskar

Dr. PrashantB . Kalaskar

• The drawer c a n g o further and request to Notary Public to issue a