NEGOTIABLE

INSTRUMENTS ACT,1881
Presented By:

Saakshi Gera (2209)

Akshi Goel (2240)
Neha Aggarwal(2228)
Ozra Karim Batt(2246)
 Section 13 of the Negotiable Instruments Act states that a
“Negotiable Instrument” means a promissory note,bill of
exchange or cheque payable either to order or to bearer.

• Explanation (i) 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 paid to a particular person,and does not contain
words,prohibiting transfer.
• Explanation(ii) A promissory note,bill of exchange or cheque is
payable to bearer which is expressed to be so payable or on which
the last endorsement is an endorsement in blank.

• (2) A Negotiable Instrument maybe payable to two or more payees

jointly or it maybe made payable in the alternative to one of the
two ,or one or some of several payees.
A Negotiable Instrument is a piece of paper which entitles
a person to a sum of money and which is transferable from
person to person by mere delivery or by endorsement and
delivery.The person to whom it is transferred becomes
entitled to the money and also the right to further transfer
it.

NEGOTIABLE INSTRUMENT

Negotiable Instrument
“ Transferable by “ a written document
Delivery” by which a right
is created in
favor of some person.
 LIST OF AMMENDING ACTS AND ADAPTATIONS
ORDERS

• 1.The Negotiable Instruments Act,1885

• 2.The Amending Act,1891
• 3.The Decentralization Act,1914
• 4.The Negotiable
Instruments(Amendment)Act’1914,1919,1920,1921,192
2,1926,1930,1934
• 5.The Repealing and Amending Act,1957
• 6.The Banking,Public Financial Institutions and
Negotiable Instruments(Amendment) Act,1988
• 7. The Negotiable Instruments(Amendment and
Miscellaneous provisions)Act,2002
CHARACTERSTICS OF A NEGOIABLE INSTRUMENTT

• 1.Easy Negotiability:The great element of negotiability is the

acquisition of property by your own conduct ,not by another’s,
that if you take it bonafide and for value,nobody can deprive
you of it.
• 2.Title of holder free from all defects:A Holder in due course
gets the instrument free from all defects.
• 3.Presumptions:
• Consideration:Every negotiable instrument is presumed to
have been made,drawn,accepted,negotiated for a
consideration.
• Date:The negotiable instrument bearing a date is presumed to
be drawn on the same date.
• Order of Endorsements:The endorsements appearing on a
negotiable instrument are presumed to have been made in the
order in which they appear thereon
 The Negotiable Instruments act does not affect
the provisions of the RBI act,1934.Section 31 of
the act states that:
• 1.No person (other that the RBI or the Central
Government) can make or issue promissory notes
“payable to bearer.”
• 2. No person (other that the RBI or the Central
Government) can draw or accept bills of exchange “
payable to bearer on demand”
 PROMISSORY NOTE
• According to Section 4 “ a promissory note is a
instrument in writing (not being a bank or a currency
note) containing an unconditional undertaking signed by
the maker,to pay a certain sum of money only to,or to the
order of, a certain person ,or to the bearer of the
instrument.

PAYEE

MAKER
CHARACTERSTICS OF PROMISSORY NOTES:

• 1.Writing:An oral engagement to pay a sum of money is

not an instrument.
• 2.Promise to pay:A mere acknowledgement of debt is not a
promissory note.e.g. Mr. B, I own you Rs. 500 is not a
promissory note.
• 3.Unconditional:The promise to pay must be unconditional
or subject only to a condition which is bound to happen.
• E.g. in the Beardsley Vs Baldwin case, a written
undertaking to pay a sum of money within so many days
after the defendant’s marriage was not recognized as a
promissory note,because possibly the defendant may never
marry and the sum may never become payable.
CHARACTERSTICS OF PROMISSORY NOTES (Cont.)
• 4.Money Only: the sum payable should be in monetary
terms only and also should be certain.E.g.I promise to
pay B Rs. 500, and all other sums which shall be due to
him” is not a promissory note.
• 5.Certain Parties: The parties to a promissory note must
be designated with reasonable certainty.It is not
however essential that the payee should be specifically
mentioned provided on reading the document as a
whole there is no doubt as to the person who is the
payee.
 BILL OF EXCHANGE
• Section 5 of the negotiable Instruments Act defines a bill
of exchange as:” A Bill of Exchange 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 a certain person or to
the bearer of the instrument.
Payee:
To whom
payment is made

DRAWEE

DRAWER
Distinction between promissory note and bill of exchange

• 1.In a promissory note there is a promise to pay whereas an

order to pay is required in the latter.
• 2.A bill of exchange must be accepted by the drawee
whereas no such acceptance is required in a promissory note.
• 3.The difference in liability of the maker and the Drawer.
• 4.Maker’s position vis-à-vis the position of the drawer.

• Another important feature of the bill of exchange is that it is

an order upon the drawee to pay the money,is not binding
upon unless he accepts it,but acceptance is not necessary for
the validity of the bill.
 Little vs Slackford
• In this case ,the defendant issued a paper addressed to
the plaintiff in the following words:
• Mr. little,Please to let the bearer have seven pounds
and place them to my account ,and you will
oblige.Yours humble servant
R.Slackford

Judgment:the paper does not purport to be a demand

made by a party having a right to call upon the other to
pay.The fair meaning is you will oblige by doing
it.Hence it is not a bill of exchange
 ACCOMODATION BILL
• The only distinguishing feature from an ordinary bill is that
such a bill is not supported by any consideration or trading
transaction.The drawer doesn't give any consideration to the
drawee but it is drawn with the objective of providing
financial help.actually it is a sort of mercantile trade where
one person lends out his name on the bill so that the other
person taking the bill can get it discounted from the bank
and get money for the same.
 CHEQUE

• Section 6 defines cheque as:A cheque is a bill of exchange

drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the
electronic image of a truncated cheque and a cheque in
electronic form.
• Explanation(i)A cheque in an electronic form means a
cheque which contains the exact mirror image of a paper
cheque and is generated,written and signed in a secure
system ensuring safety standards.
• Explanation(ii) A truncated cheque means a cheque which
is truncated during the course of a clearing cycle,either by
the clearing house or by the bank whether paying or
receiving payment.
• A cheque has certain peculiarities which
distinguish it from a bill of exchange.
• A cheque is presented for payment,whereas a bill
in the first instance is presented for acceptance
unless it is a bill on demand.
• Also a bill is dishonored for non-acceptance,this
is not so incase of cheque.
• A cheque has always to be made payable on
demand whereas an ordinary bill of exchange can
be made payable after a fixed period.
 Cole Vs Milson

• A document was drawn absolutely in the form

of a cheque.it was made payable to “cash or
order”.The question was whether it was a valid
cheque.Section 5 of the Indian act require that a
bill of exchange must be payable to or to the
order of a specified person or the bearer.This
document was made payable to “cash or
order”.hence was not payable to any person or
bearer and hence was not a bill of exchange and
consequently couldn’t be a cheque either.
 HOLDER
• The “holder” of a promissory note,bill of exchange or
cheque means any person entitled in his own name to
the possession thereof and to receive or recover the
amount due thereon from the parties thereto.
• Where the note,bill or cheque is lost the holder is the
person so entitled at the time of such loss or destruction.
• If a person is in possession of a negotiable instrument
without having the right to possess the same he cannot
be called a holder.
• A person maybe the bearer or payee or endorsee of an
instrument but he may not be called the holder if he is
prohibited by the court order from receiving the amount
due on the instrument.
 HOLDER(Cont.)

• The use of the phrase “ entitled in his own name “ is

significant because of the institution on benamdari.
• Sarooj Prasad vs Rampyari Devi
• The plaintiff advanced a sum of Rs. 2500 under a hand
note.The note was executed not in the name of the
plaintiff ,but in the name of one X who was a
benamidar.On maturity the plaintiff brought an action
to recover the amount.His claim was rejected.He was
not entitled to the possession of the note in his own
name and therefore was not a holder.
 HOLDER IN DUE COURSE
• Holder in due course means any person who for
consideration became the possessor of a promissory
note,bill of exchange or cheque if payable to bearer,or
payee or endorsee thereof,before the amount mentioned
in it became payable,and without having sufficient cause
to believe that any defect existed in the title of the reason
from whom he derived his title.
• He must possess the following qualifications:
• 1.He must be holder for valuable consideration.
• 2.He must have become the holder of a negotiable
instrument before its maturity.
• 3.He must take the negotiable instrument complete and
regular on the face of it.
 HOLDER IN DUE COURSE(Cont.)

• 4.He must have become the holder in good faith without

having sufficient cause to believe that any defect existed
in the title of the transferor.

• PRIVILEGES OF A HOLDER IN DUE COURSE

• 1.He gets a better title than that of the transferor.For e.g.

if P obtains an instrument by theft or fraud and transfers
it to R under circumstances that make him a holder in
due course.The party liable to pay can take against P,the
defense of theft or fraud, but as against R he will not be
allowed to take such defense.
 Privileges of a Holder in due
course(cont.)
• 2.Liability of Prior Parties
• 3.Prior Defects:For e.g. In a case before Kerela High
Court,a cheque was given to the employee of a company
to enable him to withdraw money for payment of the
workman’s wages.he instead transferred the cheque to a
bank for consideration.The bank,having acted in good
faith,was held not to be affected by the employee’s fraud.
• 4.Privilege when an instrument delivered conditionally is
negotiated.
• 5.Estoppel against denying original validity of
instrument.
 CAPACITY OF PARTIES

• Every person capable of contracting,according to the

law to which he is subject may bind himself and be
bound by the making
,drawing,acceptance,endorsement,delivery and
negotiation of a promissory note,bill of exchange or
cheque.
• 1.Minor:A minor can be a party to a negotiable
instrument but doesn’t incur any liability himself.
• 2.Insolvent:An insolvent is not competent to draw
,make ,accept or indorse a negotiable instrument so as
to bind his estate which now stands vested in the
official receiver.
 CAPACITY OF PARTIES(Cont.)

• 3.Joint Stock Company:If a company executes a

negotiable instrument without being authorized to do
so by its MOU,the instrument is void and even a
holder in due course cannot enforce the same against
the company.
 Liability of Drawer

• The Drawer of a bill of exchange or cheque is

bound,incase of dishonor by drawee or acceptor thereof to
compensate the holder provided due notice has been given
to,or,has been received by the drawer as hereinafter
provided.
• There are two cases here:
In case of non-
acceptance by the
The liability of drawee of the bill
the Drawer is the liability of the
secondary if the drawer becomes
acceptor fails to primary.
pay.
LIABILITY OF THE DRAWEE OF THE CHEQUE

• The drawee of the cheque must pay the cheque when

duly presented for payment provided he has sufficient
funds of the drawer applicable to the payment of such
cheque.if the drawee bank wrongfully dishonours the
cheque he can be made liable to pay exemplary
damages to the drawer.
LIABILITY OF THE ‘MAKER’ OF NOTE OR OF
‘ACCEPTOR’ OF BILL

• The maker of a promissory note or the acceptor of the

bill of exchange are the principal debtors and hence are
primarily liable for the amount due on the instrument
,according to its apparent tenor,in the absence of
contract to the contrary.The maker of the note or the
acceptor of the bill must make the payment
respectively at or after maturity to the holder.For ,if he
makes a pre-mature bill or note,and the same is
subsequently endorsed over,it is valid in the hands of a
holder in due course and the maker or the acceptor will
be liable to pay again on the instrument.
 Presentment of negotiable
instruments
• Exhibiting, presenting or placing of a negotiable
instrument for acceptance, sight or payment before
the acceptor, maker, drawee or other party liable
there on by or on behalf of the holder is called
‘presentment’. Thus presentment may be made for
any of the following purposes.:
1. Presentment for acceptance
2. Presentment for sight
3. Presentment for payment
 Presentment for acceptance
• A bill of exchange may have to be presented for acceptance before
it is presented for payment. but it is not every bill which has to be
presented for acceptance. It is necessary only where-
1. The bill is payable at a given time after acceptance or after sight.
2. The bill expressly stipulates that it shall be presented for acceptance
before it is presented for payment.
3. The bill is made payable at a place other than the place of residence
or business of the drawee
In no other case is presentment for acceptance necessary in order to
render liable any party to the bill
 Time for Presentment for sight
• Where a bill or promissory note is payable after sight it must be
presented by the holder for the drawee’s or maker’s acceptance
within the specified time or, if no time is specified, within a
reasonable time of its issue.
• And if the holder fails in this duty, the drawer and all indorsers
prior to him shall be discharged from their liability to him. thus in a
case before privy council:
A party in kolkata drew a bill on a party in hongkong, payable sixty days
after sight. the holder retained it for five months and when he
ultimately presented it for acceptance, the china bills had lost their
value. this was held to be an unreasonable delay discharging the
parties.
 Place of presentment(S.61)
• The bill should be presented at the place which is specified
for presentment, for as per sec61 “if the bill is directed to
the drawee at a particular place, it must be presented at that
place” . If the drawee cannot be found at that place after
reasonable search then the bill is deemed to be
dishonored .if no place is specified then the bill should be
presented at the drawee’s place of business or residence
 Presentment for payment(s.64)
• Section 64 casts upon the holder the duty to
present the instrument for payment in accordance
with the principles laid down in the act. The
section further provides that in default of such
presentment, the other parties to the instrument are
discharged from their liability to the holder.
• Presentment for payment is not required is the
case of a promissory note which is payable on
demand and is not payable at a specified place.
 Time for Presentment

• When an instrument is payable after a fixed period of time, it should

be presented for payment on its maturity.
• An instrument payable on demand must be presented for payment
within reasonable time after it is received by the holder.
• Delay in presentment will discharge the party thereto except one
which is primary liable will be discharged from their liability.
• In all cases, presentment should be made during the usual hours of
business and in case of a cheque , with in banking hours
 Place for Presentment
• Where in an instrument the precise address of the place of payment
has been indicated by the maker, drawer or acceptor, it must be
presented at that place for payment (S.68 and 69)
• Where no place of payment has been indicated , the note or the bill
must be presented at the place of the business or at the usual address
of the maker, drawee or acceptor, as the case may be
• if the maker, drawee or acceptor of a negotiable instrument has no
known place of business or fixed residence, and no place is specified
in the instrument for Presentment for acceptance or payment such
Presentment may be made to him in person wherever he can be found
If there is default in making the presentment in accordance to the above
rules the drawer or maker will be discharged from the liability and
other parties will remain liable.(S.69)
 When Presentment for payment
unnecessary.
1. When the Presentment is initially
prevented.
2. Place of business is closed.
3. Payer absents from the place of payment.
4. When the payer cannot be found.
5. Waiver of Presentment .
6. When the drawer could not suffer damage.
 Negotiation of negotiable
instruments.
• The transfer of an instrument by one party to another so as to
constitute the transferee a holder is called ‘negotiation’. A bearer
instrument is transferable by simple delivery.
Who can negotiate?
• Every maker, drawer, payee or indorsee and if there are several
makers, drawers, payees or indorsees all of them jointly can negotiate
an instrument, provided negotiability is not restricted
Duration of negotiability;
• A negotiable instrument may be negotiated until payment or
satisfaction thereof by the maker, drawee or acceptor at or after
maturity, but not after such payment or satisfaction.
• A payment before maturity does not stop negotiability.
 Assignment and negotiation
• Assignment: when a person transfers his right to
receive the payment of a debt that is called
‘assignment of the debt’.
for eg: the holder of a life insurance policy transfers
the right to receive the payment to another
person, that is an assignment
• The point of difference between assignment and
negotiation may now be stated:
1. Subject to equities: The assignee of a debt takes it subject to all the defects
and equities that may exist in the title of his assignor.
But the holder in due course of a negotiable
instrument takes it free from all defects in the title of the previous
transferors
2. Notice of assignment: an assignment does not bind the debtor unless a
notice of the assignment has been given to him and he has expressly or
impliedly, assented to it. But no information of
the transfer of a negotiable instrument has to be given to the debtor.
3. Presumptions: there are a no. of presumptions in favor of a holder in due
course. for e.g. he is presumed to have given consideration for the
instrument. The burden lies upon the opposite party to how that he had
given no consideration. But there are no such presumptions in favor of an
assignee. He has to prove that he has given consideration for the
assignment
Negotiation by delivery (s44 and
47)
• An instrument payable to bearer can be
negotiated by simple delivery.
• The person to whom it is delievered
becomes the holder
• Delivery though simple is an important
formality, for without it no possesor is
constituted as the holder of the instrument.
 Negotiation by indorsement
• an instrument payable to order is negotiated by
indorsement and delivery. thus indorsement requires two
formalities:
1. The holder should indorse it and then deliver it to the
indorsee.
2. An indorsement is completed by the delivery of the
instrument to the indorsee
for eg: where a person indorses an instrument to another and
keeps it in his papers where it is found after his death
and then deliver it to the indorsee, the latter get no rights
on the instrument.
 Indorsement
Section 15 defines indorsement as follows:
“when the maker or holder of a negotiable instrument signs
the same, for the purpose of negotiation, on the back or
face thereof on a slip of a paper annexed thereto, or so
signs for the same purpose a stamped paper intended to be
completed as negotiable instrument.”
• The person making the indorsement is called an indorser,
and the person to whom the instrument is indorsed is
called an indorsee.
• A valid indorsement should be made in ink. an
indorsement in pencil or by a rubber stamp is invalid.
 Kinds of indorsement
1 Blank or general indorsement: if the indorser signs his name only
and does not specify the name of the indorsee, the indorsement is
said to be in blank. The effect of a blank indorsement is to convert
the order instrument into bearer instrument, which may be
transferred merely by delivery.
2 Indorsement in full or special indorsement : if the indorser in
addition to his signature also adds a direction to pay the amount
mentioned is said to be in full. for e.g. A, the holder of a bill of
exchange, wants to make an indorsement in full to B,he would thus
‘Pay to B or order, Sd/A’.After such an indorsement it is only the
indorsee i.e. B, who is entitled to receive the payment of the
instrument and to further negotiate the instrument by his
indorsement
3 Partial indorsement : a partial indorsement which transfers the rights
to receive only a part payment of the amount due on the instrument
is invalid. such an indorsement has been declared invalid it would
object the prior parties to plurality of actions and will thus cause
inconvenience to them.
• Also an indorsement which purports to transfer the instrument to
two or more indorses separately and not jointly is also treated as
partial indorsement and hence is invalid.
4 Restrictive indorsement : an indorsement which by express words
prohibits the indorsee from further negotiating the instrument or
restricts the indorsee to deal with the instrument as directed by the
indorser.
• The indorsee under a restrictive indorsement gets all the rights of an
indorser except the right of further negotiation.
• E.g. B the holder, makes an indorsement saying “pay c only”
5 Conditional indorsement : if the indorser of a negotiable instrument, by
express words in the indorsement makes his liability dependent on the
happening of a certain evevt, although such an event may never happen,
such indorsement is called a ‘conditional’ indorsement
• The law permits a conditional indorsement and therefore it does not in
anyway affect the negotiability of the instrument.
• Thus, indorsements can validly be made in the following terms.
a) “pay B or order on his marriage”
b) ”pay B on the arrival of ship at Mumbai”
6 Sans recourse indorsement: when the indorser expressly excludes his own
liability on the negotiable instrument to he indorsee or any subsequent
holder in case of dishonor of the instrument , the indorsement is known as
Sans recourse indorsement
• E.g. pay X or order sans recourse”
 Negotiation back
• During the course of negotiation if a negotiable instrument
is reindorsed by the last indorsee to the original holder or a
previous indorser it is called as ‘negotiation back’
• the person who becomes the holder by reason of
negotiation back cannot make any of the intermediate
indorsers liable on the instrument.
• But where an indorser excludes his liability by the use of
words ‘sans recourse’ and afterwards becomes the holder
of the instrument in his own right, all intermediate
indorsers are liable to him
• And in case of dishonour he can recover the amount from
all or anyone of them.
Negotiation by unauthorised
parties.
 Lost instruments
1. Where a bill of exchange has been lost before it is overdue. The person who was its
holder may apply to the drawer to give him another bill of the same tenor.
• The drawer may require the holder to give security to indemnify him against all
persons whatever in case the bill alleged to have been lost shall be found again
• If the Drawer refuses to give a duplicate bill he may be compelled to so by means of
a suit.
2 To avoid the risks involved in case of a negotiable instrument, its holder should
inform all parties liable on it and should also give public notice by advertisement in
some local newspaper.
3 If the holder could not obtain a duplicate copy, he should on maturity make an
application to the person liable to pay.
• Although the payer is entitled to refuse payment till the instrument is delivered, he
may make the payment after getting a written undertaking from he payee to
indemnify him against any further claim thereon.
• In case payer refuses to pay then payment can be obtained through court on similar
undertaking to indemnify.
4 The finder of the instrument gets no title to it and cannot sue the party
thereon for its payment.
• The rightful holder is entitled to get back the instrument from him.
• But if the finder obtains the payment of the instrument in his possession, it
being a bearer document, the payer will be discharged from his liability if
he makes the payment in due course.
• The true owner however will be entitled to recover the amount from the
finder.
5 Although the finder ,in the absence of title to it , cannot lawfully transfer it,
but if he negotiates it, being a bearer instrument or one indorsed in blank,to
a holder in due course, such holder gets a good tile to it and can obtain the
payment from the party concerned
• The true owner cannot take possession of the same from such a holder but
he can claim damages from the finder, if traceable
6 In case the finder transfers an order instrument by making a forged
indorsement, even a transferee for value gets no legal title to it. And
therefore he is not entitled to sue on the instrument.
• Forgery can confer no title and thus indorsee is not a holder in due course.
• If the party liable to pay on the instrument makes the payment to the
indorsee who holds it under a forged indorsement, he shall continue to be
liable to the true owner.
STOLEN INSTRUMENTS
• The position in this case is almost the same as in the case of a lost
instrument.
• The thief is open to criminal prosecution while a finder is not
• Thief does not acquire any title and the true owner can sue him for the
recovery.
• But if the thief transfers a bearer instrument to a holder in due course, such
a holder gets a good title to it.
 Instruments obtained by fraud
• If a person obtains a negotiable instrument by fraud, undue influence or
coercion, he is not entitled to enforce its payment as his title is defective.
• But if such an instrument is transferred to a holder in due course, such a holder
will acquire good title to it and the plea of fraud will not be of use against him

Instruments obtained for an unlawful

consideration
• the general rule of law of contracts that every agreement of which the object
or consideration is unlawful or immoral or against the public policy is void
and inoperative applies to negotiable instruments for unlawful consideration as
well.
• Thus , a bill of exchange or a promissory not given in committing a crime is
void and creates no obligation between the parties thereto.
 Forged instruments
• If the signature of maker , drawer or acceptor is forged on a negotiable instrument, it is
termed as a forged instrument.
• A forged signature in law is wholly inoperative and therefore a forged instrument is
deemed incomplete on the face of it.
• Even if in the course of negotiation , a forged instrument passes through the hands of a
holder in due course it cannot be cured of its defect because there is no defect of title
which can be cured but there is a complete absence of title
FORGED INDORSEMENT
• if the signature of indorser is forged on a negotiable instrument it is called a forged
indorsement
• a forged indorsement is regarded in law as no indorsement at all.
• as a result the indorsee of an order instrument bearing a forged indorsement gets no title
thereto. even if he is a bonafide holder for value, because in law he has taken an
instrument which was incomplete on the face of it.
• the party liable to pay will remain liable if it makes the payment to the indorsee who
holds it under a forged indorsement.
 Instruments without
consideration
• Unlike ordinary contracts, in the case of negotiable
instruments there is a presumption of consideration
Total absence or failure of consideration
According to sec43” a negotiation instrument made, drawn,
accepted, indorsed or transferred without consideration or
for a consideration which fails, creates no obligation of
payment between the parties to the transaction”
• But if any such party has transferred the instrument to a
holder for consideration such holder and every subsequent
holder deriving the title from him may recover the amount
due on such instrument from the transferor for
consideration or any prior party thereto
 Partial consideration
• As per sec 44 and 45 , when there is partial failure of
cnsideration , either originally or subsequently, the parties
standing in immediate relation to each other cannot
recover more than the actual consideration.
• But this rule does not apply to a holder in due course who
can recover the full amount due on such instrument
• Thus the absence of consideration ,either total or partial ,in
case of a negotiable instrument can be taken as defense to
avoid the liability only towards parties to the transaction
i.e. those parties who have immediate relation with one
another.
DISHONOUR AND DISCHARGE OF
NEGOTIABLE INSTRUMENTS
Discharge From Liability [S. 82-90]
 1. By cancellation [S. 82]

When a bill is intentionally cancelled by the holder or his agent, and the
cancellation is apparent, the bill is discharged.
 
The cancellation should be apparent on the face of the instrument
otherwise the instrument remains valid in the hands of a bona fide holder
for value.

Section 82(a) deals with the situation where the holder intentionally
cancels the name of the acceptor. The effect is that all other parties, being
sureties for the acceptor, will also be discharged from liability.

But if he cancels the name of an indorser, then all the parties subsequent
to him will be discharged but those prior to him will remain liable.

Example: A draws a bill payable to his own order on B, who accepts. A

indorses to C, C to D and D to E. As between E and B, B is the principal
debtor and A, C and D are his sureties.
 CASE: Ingham vs. Primorse

A accepted a bill. He later tore the bill in half intending to cancel

it. B picked that bill and pasted the two pieces together in such a
manner that it seemed to be folded for safe custody rather than
cancelled. B put the it into circulation and it was received by
plaintiff, a holder in due course.

Judgment:
A was held liable because the tearing of the bill was not so clearly
manifest on the face of the bill to indicate to a reasonably person
that it has been cancelled.
 2. By release [S. 82(b)]

If the holder of the negotiable instrument releases any party to the

instrument by any method other than cancellation of names (i.e. by a
separate agreement of waiver, release or remission), the party so
released and all parties subsequent to him, who have a right to action
against the party so released, are discharged from liability.
 3. By payment [S. 82(c)]

• All parties to an instrument are discharged from liability when the

amount due on the instrument is paid.
• Payment is an effective discharge only if it is “payment in due
course” i.e. if it is made,

 On the maturity of the instrument

 In good faith and without negligence
 To the rightful holder.

Thus, payment even to a thief or finder will discharge the maker or

acceptor if there is nothing to excite suspicion of a prudent man.

However, where the instrument is payable to order then it is

necessary that the payment be made to the genuine indorsee. If
payment is made to a person whose title is made through a forged
indorsement, it will not discharge the payer and he will remain liable
to the true owner of the instrument.
Example: A bill is indorsed to John Smith to order. Another person
of the same name gets the bill and presents it. The acceptor pays him.
The bill is not discharged. The acceptor is liable to the real John
Smith.

Exception to the rule: It is in favour of a banker who pays cheque to a

person whose title is derived through forged indorsement. This is a
special protection of the paying banker and is necessary in the very
nature of banking business.
 4. By allowing more than 48 hours to
accept
[S. 83]
• After the bill holder presents it to the drawee for his
acceptance, he should be allowed only 48 hours (exclusive
of public holidays) to accept or not.

• If the holder allows more than 48 hours all previous parties

who do not consent to such allowance are discharged from
liability to the holder.
 5. By qualified acceptance [S. 86]

The holder of a bill who presents it for acceptance should insist that
the bill be accepted without any conditions or qualifications. If the
holder acquiesces in a :

 Qualified acceptance
 One limited to part of the sum mentioned in the bill
 Substitutes a different time or place of payment
 Where the drawees are not partners, is not signed by all the
drawees
In that case, all prior parties whose consent is not obtained are
discharged from liability.
 6. By delay in presenting cheque [S. 84]

The holder should present the Instrument within a reasonable time

of its issue.
(Reasonable time - Regard is given to the nature of the
instrument, usage of trade and of bankers, facts of the particular
case and public holidays are excluded)

 If he fails to do and in the meanwhile the bank fails causing

damage to the drawer, the drawer is discharged as against the
holder

 Provided he had sufficient balance to meet the cheque when

it ought to have been presented. 
 7. By material alteration [S. 87,88,89]

Any material alteration of a negotiable instrument discharges the

instrument and all parties not consenting to the change. However,
those who take an altered instrument remain liable under the
instrument as altered. The party in custody of the instrument is
bound to preserve it in its integrity.

What constitutes a material alteration?

The negotiable Instruments Act is silent on the question. However,
courts in India held that ‘anything which has the effect of altering
the legal relations between the parties or the character of the
instrument or sum payable amounts to a material alteration’.
Examples of material alteration:

 Any alteration of the date, sum payable, time of payment and the place of
payment.
 Alteration by the addition of a new party to the instrument.
 Alteration of the rate of interest.
 Tearing off the material part of the instrument.

Alterations not vitiating the instrument:

 Alteration made for the purpose of correcting a mistake or a clerical error.

 Alteration made to carry out the common intention of the original parties.
 Alteration made before the instrument is issued.
 Alteration made with the consent of the parties liable on the instrument.
 Conversion of bearer cheque into an order cheque.
 Filling blanks in the case of inchoate or incomplete instruments.
 Conversion of blank indorsement into an indorsement in full.
 Making qualified acceptance.
 Crossing of an uncrossed cheque.
 Alteration which is the result of an accident, e.g. mutilation by washing, ravages
by white ants or rats, document torn by a child, document burnt in part by the
hot end of a cigarette. [ HSBC Vs. Lo Lee Shi ]
 Apparent alteration
 Section 89 provides that where an instrument has been materially
altered but does not appear so, the party paying it will be discharged
by payment in due course.
 But the acceptor is liable only for the original tenor of the instrument.

CASE: Scholfield Vs. The Earl of Londesborough

A bill for $500 was presented with spaces left. The acceptor wrote his
acceptance. The drawer then fraudulently filled the spaces and turned
it into a bill of $3500 and negotiated it for that value to a bona fide
holder.
Judgment: The acceptor of bill of exchange is not under a duty to take
precautions against fraudulent alteration after acceptance. He was
held liable for $500 only.
 8. By negotiation back of a bill [S. 90]

When a bill of exchange comes back to the acceptor by process

of negotiation and he becomes its holder, that is known as
“negotiation back”. If this happens at or after maturity, all
liability on the instrument comes to an end.
 • Dishonour Of Negotiable Instruments [S. 91-98]

1. Dishonour By Non-Acceptance [S. 91]

2. Dishonour By Non-Payment [S. 92]
 Dishonour By Non-Acceptance [S.
91]

A bill of exchange is said to be dishonoured by non-acceptance in the

following cases:

When the drawee or one of several drawees makes default in

accepting the bill
Where presentment is excused and the bill remains unaccepted

Where the drawee is incompetent to contract

Where the drawee makes the acceptance qualified

If the drawee is a fictitious person or after reasonable search cannot
be found
Dishonour By Non-Payment [S. 92]
 
A promissory note, bill of exchange or cheque is said to be dishonoured by
non-payment when it is duly presented to the maker, acceptor or banker
and he makes a default in payment.

Effect of Dishonour
 
 The holder becomes entitled to sue the parties liable to pay thereon
 The drawer of cheque, maker of note, acceptor and drawer of bill and all
indorsers are liable severally and jointly to a holder in due course
 The holder must give ‘notice’ of dishonour to all parties against he intends
to proceed.

Notice of Dishonour
It is a formal communication of the fact of dishonour served as a
warning to the party to be held liable.
By and to whom notice should be give

 Notice may be given to a duly authorised agent of the person.

 If he is dead  to his legal representative
 If he is declared insolvent  to his assignee 
 Notice may be oral or written

 
 • Noting And Protest [S. 99-101]

Noting
It is the authentic and official proof of presentment and dishonour of a
negotiable instrument.

•The holder may cause such dishonour to be noted by a Notary Public

upon the instrument or a paper attached to the instrument.

•Note should be made within reasonable time after dishonour and

must specify:
The date of dishonour
The reason assigned for such dishonour
The notary’s charges
 Protest

It is a formal certificate of dishonour issued by the notary public to the

holder of the bill or note, on his demand.

Protest for better security:

When before the maturity of a bill, the acceptor has become insolvent,
or his credit has been publicly impeached, the holder may through a
notary public, demand better security from the acceptor. If the acceptor
refuses it, the fact may also be noted and certified by the notary. Such a
certificate is called ‘a protest for better security’.
The demand should be made within reasonable time.
However, the holder shall have to wait till the date of maturity to take
any action against the acceptor, drawers and indorsers.
 Contents of protest

• The instrument itself or a literal transcript of the instrument and of

everything written or printed thereupon.
• The name of the person for whom and against whom the instrument
has been protested.
• The fact and the reasons for dishonour

• The place and time of dishonour.

• The signature of the Notary Public

• In the case of acceptance for honour or payment for honour, the
names of the persons by whom and for whom it is accepted or paid.
 Criminal liability of drawer for issuing cheques without
funds and latest Amendments to the Act [S. 138-147]

1. 1998 Amendment (Addition of five new Sections from 138 to

141)
2. 2002 Amendment (Addition of five new Sections from 143 to
147)
1998 Amendment (New Sections from 138 to 141)
141

Amendment (1988) aims at achieving speedy justice; exemplary and

compensatory justice.
A drawer attracts a criminal liability for issuing cheques with the
knowledge that they would not be paid. The liability arises when a
cheque is not paid on account of, 

Insufficiency of funds or
The amount of the cheque exceeds the amount of credit facility
allowed to the customer.
 
Criminal Liability: Imprisonment for a term which may extend to one
year, or with fine which may extend to twice the amount of the cheque,
or with both. (The term of punishment extended to two years vide 2002
amendment).
Five basic conditions of section 138 for creating an offence for
dishonour of a cheque

 cheque should have been drawn by the drawer in payment of a legal liability to
discharge the existing debt. Cheque given by way of gift would not come under
this provision.

 The cheque should be presented within the validity period i.e. within six months or
three months as the case may be. Common sense demands that the cheque should
reach the drawer bank within the validity period.

 Return of memo by the drawer bank to the drawee bank and subsequently by the
drawee bank to the drawee reporting that the cheque got unpaid is must. Reasons
for dishonour is not material at this stage.

 Giving notice to the drawer of the cheque by the drawee or the holder of the
cheque in due course is must for making the said payment within fifteen days. The
notice must be sent to drawer within 15 days (amended to 30 days by the 2002
amendment) of the receipt of the information from the drawee bank that the cheque
got dishonoured.

 The drawer of the cheque fails to make the payment of the said amount of money
to the payee or to the holder in due course within 15 days of the receipt of the said
notice.
Section 139

By this section it shall be presumed that the holder of a cheque received the
cheque for the discharge of some liability or any debt.

Section 140
 
This section says that defense in the prosecution under section 138 shall not be
available to the drawer if the conditions of 138 are completed.
 
Section 141
This section defines that if an offence is done by any company, the person(s)
shall be held liable who were in charge and responsible to the company for
the conduct of the business of the company, at the time the offence under
section138 was committed.
 
 
2002 Amendment (New sections from 143 to
147)

It came into force from February 6, 2003 under NI (Amendment and

Miscellaneous Provision) Act 2002.

Sections 6, 64, 81 and 89 amended due to entrance of the electronic

technology in the Negotiable Instruments.

Section 138(a) amended regarding the term of imprisonment

increased to Two years from One year and through 138(b) the period
of giving notice of demand to the drawer increased from fifteen days
to thirty days.
Section 143

It is intended to achieve speedy trials. This section provides the power to

courts to try cases, under section 138 and endeavor is made to conclude
the trial within six months from the date of filing of the complaint.

Section 144

This section provides that the copy of summon/s may also be issued by
speed post or by such courier services as are approved by a court of
session.

Section 145

According to this section the complainant can give his evidence by way
of an affidavit and the same may be attached with the complaint and if
the accused wants to contradict the contents of the affidavit the
complainant may be called for examination.
Section 146
 
This section provides the court shall presume the fact of dishonour of a
cheque on production of Bank’s slip or memo having thereon the official
mark denoting that the cheque has been dishonoured.
 
Section 147
 
Every offence punishable under this Act shall be compoundable. This
means that a compromise in the matters under section 138 can be made
between the complainant and the accused at any stage of the case.
 
 Compensation [S. 117]

Rules for determining compensation to be paid to the holder or indorsee:

Amount due upon the instrument together with expenses incurred in

presenting, noting and protesting.

Where the person liable to pay resides at a place different from that at
which instrument is payable, the amount is recoverable at the current rate
of exchange between the two places.

Interest on amount due is recoverable @ 18% ( vide amendment of

1998 )
 Bankers and Customers
• Legal relationship
• Rights and obligations of banker
• Crossing of cheques
• When a banker may and must dishonour a cheque
• Protection to paying banker
• Protection to collecting banker
• Bouncing of cheques
 Banker
• The Banking Regulation Act,1949 [Sec5(b)] A “banking
company” is a “a company which transacts the business of
banking in India”

• [Sec 5(c)] Banking as “accepting, for the purpose of

lending or investment, of deposits of money from the
public repayable on demand or otherwise, and withdrawal
by cheque, draft, order or otherwise.”
 Customer
• A person who has an account in a bank.

• Dealings with banker must relate to the business of

banking i.e., depositing, withdrawing money or taking
loans.

• Merely availing of services rendered by the banker like

encashing a cheque, do not create the relationship of
banker and customer.
 Legal relationship between banker and
customer
• Contractual relationship

• Debtor (the banker) and creditor (the customer) or vice versa

• Agent (the banker) and principal (the customer)

 Rights and obligations of banker
• Obligation to honour cheques [Sec.31]
• Obligation to keep a proper record of transactions
• Obligation to abide by the instructions given by the customer
• General lien of bankers [Sec.171]
• Obligation not to disclose the state of his customer’s account
or affairs
• Incidental charges and interest
• Right to set off
• Right of appropriation [Sec 59 to 61 of Indian Contract Act,
1872]
 Crossing of cheques
• Cheques may be of two types
(1) open or uncrossed cheques is payable at the counter
of the drawee bank on the presentation of the cheque. It is
risky.

(2) crossed cheques is payable only through a collecting

banker and not directly at the counter of the bank. Thus,
crossing provides security and protection.
 Types of crossing
General crossing [Sec. 123]
• Where a cheque bears across its face two parallel traverse
lines without any words or with the words ‘and company’
or ‘not negotiable’ written between those two parallel
lines.
• It can take the following forms:

le
iab
ny

ot
bl
pa

eg
ia
m

ot

tn
co

eg
Co

no
tn
d
an

Co
&

no

&
 Types of crossing
Special crossing [Sec. 124]
• Where a cheque bears across its face (traverse lines are not
necessary) an addition of the name of a banker either with
or without the words ‘not negotiable.’
• It can take the following forms:

a
ndi ia b le dia
I d tia f In
of In o
nk of eg ko
Ba
a nk t N an
e B No e B
Th e Th
Th
 Types of crossing
Account Payee or Restrictive Crossing
• It can be made in the case of general as well as special
crossing by adding the words ‘Account Payee’ (A/c
Payee), ‘Account Payee only’ (A/c Payee only).
• It can take the following forms:
ly
on

k o ly

iab y
an on
e

ot nl
f
ye

le
eg e o
dia B e
In ate aye
Pa

t N a ye
St c P
t
un

No c P
A/
co

A/
Ac
 Types of crossing

Not negotiable crossing [Sec. 130]

• “A person taking a cheque crossed generally or specially,
bearing in either case the words ‘not negotiable’, shall not
have, and shall not be capable of giving, a better title to the
cheque than that which the person from whom he took it
had.”
 Who may cross a cheque
Section 125 permits the crossing being made even after
issue of a cheque in the following ways:
• (1) Where a cheque is uncrossed, the holder may cross it
generally or specially
• (2) Where a cheque is crossed generally, the holder may
cross it specially
• (3) Where a cheque is crossed generally or specially, the
holder may add the words ‘not negotiable’
• (4) Where a cheque is crossed specially, the banker to
whom it is crossed may cross it again specially to another
banker as his agent for collection
 When a banker may dishonour a
customer’s cheque
• Insufficient funds to the credit of the customer
• Where the customer’s funds are not applicable to the payment
of the cheque
• Where the cheque is ambiguous or of doubtful legality
• Where the cheque is mutilated
• Where the cheque has become stale.
• Where the customer’s signature does not agree with his
specimen signatures.
• Where the cheque is post dated.
• Where the cheque is presented at a branch other than the one
where the customer has the account.
 When a banker must dishonour a
customer’s cheque
• When the banker receives notice of the customer’s death,
insolvency or insanity.
• When the customer countermands payment
• Garnishee order
• Notice of assignment
• Defective title of the party
• Loss of cheque
• When the cheque is irregular
• Closing of account
 Protection to paying banker

• Protection in case of order cheques

• Protection in case of bearer cheques
• Crossed cheques
 Protection in case of order cheques
[Sec 85(1)]
• “Where a cheque payable to order purports to be indorsed by
or on behalf of the payee, the drawee is discharged by
`payment in due course`.”

• The banker can debit his customer’s account with the amount
so paid even though-
(1)the indorsement by the payee may turn out to be a
forgery or
(2)the indorsement might have been placed on the cheque by
the payee’s agent without his authority.
 Protection in case of bearer cheque
[Sec 85(2)]

• “Where a cheque is originally expressed to be

payable to bearer, the drawee is discharged by
payment in due course to the bearer thereof, not
withstanding any indorsement whether in full or
blank appearing thereon, and not withstanding that
any such indorsement purports to restrict or exclude
further negotiation.”

• As regards bearer cheques, the rule is

“Once a bearer cheque, always a bearer cheque”
 Protection of collecting banker
The collecting banker may collect the proceeds of the
cheque 

1. As an agent of his customer

• Crossed cheques [Sec 131] 
Banker is not liable if
(1) he acted in good faith and without negligence
(2) The cheque was already crossed
(3) he acted as an agent
• Open cheques [Sec 131]
 Protection of collecting banker
2. As a holder in due course
• If a collecting banker acquires a cheque for value and in
good faith, he collects it for himself and has all the
privileges of a holder in due course
 Bouncing of cheques
• A cheque is said to be bounced or dishonoured by non
payment when the drawee of the cheque makes default
in payment upon being duly required to pay the same.
Amendments
1) By Banking, Public Financial Institutions and
Negotiable Instruments Laws (Amendment) Act,1988
• Came into force on April 1,1989
• Chapter XVII “Penalties in case of dishonour of certain
cheques for insufficeincy of funds in the accounts” was
inserted
• Includes sections 138 to 142
 Bouncing of cheques
2.) By Negotiable Instruments (Amendment and Miscellaneous
Provisions) Act, 2002
• Effective from February 6, 2003
• Amended sections138, 141 and 142
• Inserted five new sections –section 143 to 147- in chapter
XVII
Salient features
• Dishonoured cheques considered an offence
• Punishable with imprisonment (up to two years)
• Fine (up to twice the amount of the cheque)
• Or both
 Requirements to be satisfied

1. Cheque should be dishonoured due to insufficiency of funds.

2. Cheque should be issued by drawer in favour of another
person for the discharge of legally enforceable debt or other
liability, in whole or in part.
• When cheque issued for meeting social obligations is
dishonoured, it is not considered an offence.
3. Cheque should be presented to bank in due time. (within six
months from the date on which it is drawn or within the
period of its validity, whichever is earlier)
 Requirements to be satisfied

4. Payee should make demand for payment by giving a

written notice to drawer within 30 days of awareness of
dishonour of cheque.
5. Drawer fails to make payment within 15 days
6. The payee should make a written complaint of the offence
to a court not inferior to that of a metropolitan magistrate
or a first class judicial magistrate, within one month of the
date on which the course of action arose under the said
provisions.
Thank you