Acknowledgement

I take this opportunity to express our sincere gratitude to each and

every person who has directly or indirect helped me through this
project. My experience has been fulfilling and rewarding. I also
extend our sincere thanks to Dr.Dogra , Faculty, University
Institute Of Law , Ludhiana for giving us the opportunity to work on
this topic and carry out our project work. It is our pleasure to
express our sincere gratitude for his continuous support and
guidance which helped us in accomplishing this project
successfully. We thank him for providing his invaluable time,
support, and co-operation to complete the project work.
Executive Summary
“A ‘cheque’ is a bill of exchange drawn on a specified banker and
not expressed to be payable otherwise than on demand.” A
cheque is a kind of bill of exchange. It is always drawn on a bank
or a banker, and is payable immediately on demand. A cheque
requires no acceptance apart from prompt payment. With the
growth & development of commerce & trade the use of various
forms money i.e. cheque, demand draft, bankers cheque etc are
being used widely. But cheque is that instrument which has been
in news for all the wrong reasons & which is the least safe among
all the instruments. Cases of cheque bounce are not uncommon
these days. In most of the transactions be it re-payment of loan or
payment of fees for business purpose, payments are made by
cheque. These cheques bearing large amounts sometimes remain
unpaid and are returned by the bank on which they are drawn due
to insufficient balances or due to certain error on the part of bank
employees. The whole act of Liability towards dishonour of
cheques is governed by Negotiable Instruments Act, 1881. Apart
from that the resultant liability & legal recourse available to the
drawee, banker & drawer are explained henceforth.
NEGOTIABLE INSTRUMENTS ACT, 1881

Object of the Act

The main object of the Negotiable Instruments Act is to legalise the

system by which instruments contemplated by it could pass from
hand to hand by negotiation like any other goods. The purpose of
the Act was to present an orderly and authoritative statement of
leading rules of law relating to the negotiable instruments To
achieve the objective of the Act, the Legislature thought it proper to
make provision in the Act for conferring certain privileges to the
mercantile instruments contemplated under it and provide special
procedure in case the obligation under the instrument was not
discharged.

Section 4. “Promissory note” – A ‘Promissory Note’ is an

instrument in writing (not being a bank-note 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.

Essential features
An instrument is a promissory note if there are present the
following elements:-
1. Writing : The first essential is that all negotiable instruments
must be in writing. An oral engagement to pay a sum of money is
not an instrument, much less negotiable.

2. Promise to pay : Secondly, it must contain a promise to pay.

A mere acknowledgement of debt is not a promissory note. A
mere receipt for money does not amount to a promissory note,
even though it might contain the terms of repayment. In Mange Lal
Vs. Lal Chand, AIR 1995, Rajasthan High Court has held that a
document which was in the form of a letter acknowledging receipt
of certain sums and affixed with 20 paisa revenue stamp was held
to be a receipt and not a promissory note. In the case of Muthu
Sastrigal Vs. Visvanatha AIR 1914 Madras High Court, it has
been held that a document containing the following words “Amount
of cash borrowed of you by me is Rs.350. I shall in two weeks
time returning this sum with interest, get back this letter.” Has been
held to be a promissory note because there is an unconditional
undertaking to repay the borrowed money.

3. Unconditional: Thirdly, the promise to pay the money should

be unconditional, or subject only to a condition which according to
the ordinary experience of mankind is bound to happen.

4. Money only and a certain sum of money:

Fourthly, the instrument must be payable in money and money
only. If the instrument contains a promise to pay something other
than money or something in addition to money, it will not be a
promissory note. The sum of money payable must also be certain.
Negotiable instruments are meant for free circulation and if they
are value is not apparent on their face, their circulation would be
materially impeded..

5. Certainties of parties:
Fifthly, the parties to the instrument must be designated with
reasonable certainity. There are two parties to a promissory note,
viz , the person who make the note and is known as the maker and
the payee to whom the promise is made. Both the maker and the
payee must be indicated with certainity on the face of the
instrument.

6 Signed by the maker:

Lastly, the promissory note should be signed by the maker.
Signature may be on any part of the document. Where an
instrument is in the hand writing of a person and it is addressed by
him to another, which is sufficient evidence of his signature. The
Allahabad High Court in the case of Raj Bahadur Singh Vs. Hari
Pd. Mehra AIR 1983 Patna High Court has held that if a document
satisfies all the requirements of a valid promissory note, it would
not make any difference to its character as a negotiable instrument
that it was an attested document. The Court said: Though
attestation of a promissory note is neither required nor prohibited
by law, a document which is otherwise a promissory note does not
cease to be so merely because it is attested in as much as the
document was unilateral and was not bilateral which was
necessary for being an agreement.

Kinds of promissory notes.—S.4 recognizes three kinds of

promissory notes :
(i) A promise to pay a certain sum of money to a certain person,

(2) A promise to pay a certain sum of money to the order of a

certain person,
and

(3) a promise to pay the bearer:

Section 5 : “Bill of exchange” –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.
Characteristics and requirements – An essential character of a bill
of exchange is that it contains an order to accept or to pay and that
the acceptor should accept it, in the absence of such a direction to
pay, the document will not be a bill of exchange or a hundi.
1) It must be in writing
2) The bill of exchange must contain an order to pay. The order to
pay may be in the form of a request, but it must be imperative.The
order must be such as to require the other to pay the money at all
events. Merely to give him the authority to pay is not sufficient.

Following are bills of exchange -- (1) A banker’s draft (2) A

demand draft even if it drawn upon another office of the same
bank (3) An order issued by a District Board Engineer on
Government Treasury for payment to or order of a certain person.

Section 6 : “Cheque” --- 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 the electronic form.

Explanation I – For the purpose of this section, the expression –

(a) “ a cheque in the 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 the
minimum safety standards with the use of digital signature (with or
without biometrics signature) and asymmetric crypto system ;
(2) “ a truncated cheque” means a cheque is truncated
during the course of a clearing cycle, either by the clearing house
or by the bank whether paying or receiving payment, immediately
on generation of an electronic image for transmission, substituting
the further physical movement of the cheque in writing.

Explanation II -- For the purpose of this section, the expression

“clearing house” means the clearing house managed by the
Reserve Bank of India or a clearing house recognised as such by
the Reserve Bank of India.
A cheque being a bill of exchange must possess all the essentials
of a bill and should also meet the requirements of Section 6. For
instance, in the case of Cole Vs. Milson (1951) 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 require that a bill of exchange must be
made payable to or to the order of a specified person or the
bearer. This document was made payable to “cash or order”.
Hence it was not payable to any person or to bearer and therefore
was not a bill of exchange, it could not be a cheque either.

Post dated cheque - A post dated cheque remains a bill of

exchange till the date written on the face of it. On that date it
becomes a cheque. One of the effects is that liability for criminal
prosecution under Section 138 would not be attracted and 6
months period would be reckoned from the date appearing on the
cheque.

Section 7- “Drawer”, “Drawee”- The maker of a bill of exchange or

cheque is called the “drawer” – the person thereby directed to pay
is called the “drawee”

“Drawee in case of need” - When in the bill or in any indorsement

thereon the name of any person is given in addition to the drawee
to be resorted to in case of need - such person is called a
“Drawee in case of need”.

“Acceptor” – After the drawee of a bill has signed his assent upon
the bill, or, if there are more parts thereof than one, upon one of
such parts and delivered the same, or given notice of such signing
to the holder or to some person on his behalf, he is called the
“Acceptor”.

“Acceptor for Honour” – When a bill of exchange has been noted

or protested for non-acceptance or for better security and any
person accepts it, supra protest for the honour of the drawer or of
any one of the indorsers, such person is called an “acceptor for
honour”.

“Payee”- The person named in the instrument, to whom or to

whose order the money is buy the instrument directed to be paid,
is called the “payee”

Section 8 – “Holder” – The holder of a promissory note, bill of

exchange or cheque means any person entitled in his own name
to his position thereof and to receive or recover the amount due
thereon from the parties thereto.

Where the note, bill or cheque is lost or destroyed, its holder is the
person so entitled at the time of such loss or destruction.

Section 9 – “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 the
bearer, Or the payee or indoresee, thereof if payable to order,
before the amount mentioned in it becomes payable and without
having sufficient cause to believe that any defect existed in the title
of the person from whom he derived his title.
The phrase “in good faith and for value” has been split up by
Section into four elements all of which must concur to make a
holder in due course. They are:
(1) The holder must have taken the instrument for value (2) He
must have obtained the instrument before maturity (3) The
instrument must be complete and regular on its face (4) He must
have taken the instrument in good faith and without notice of any
defect either in the instrument or in the title of the person
negotiating it to him.

1. Consideration

A negotiation instrument contains a contract and therefore must be

supported by consideration. A person who takes a bill or note
without consideration cannot enforce it. In order, however, to
secure free circulation of negotiable securities the doctrine of
consideration has been relaxed in certain respects. Firstly, if a
person wants to enforce a simple contract, he must prove that he
has given consideration for it. But in case of negotiable
instruments consideration is always present to have been given.
“The presumption in such a case is that the instrument was given
for good consideration and if the defendant intends to set up a
defence that value has not been given… the burden of proving that
lies on him

2. Before Maturity
In order to be holder in due course, the holder must have obtained
the instrument before its maturity. It was laid down as early as
1825 in Down Vs. Halling that “if a bill or note or cheque be taken
after it is due “, the person taking it takes at his peril. “He cannot
have no better title to it than the party from whom he takes it, and
therefore, cannot recover upon it if it turns out that it has been
previously lost or stolen.

3. Complete and Regular

The third requirement is that the instrument should be complete
and regular on the face of it. And “face” for this purpose includes
back also. It is the duty of every person who takes a negotiable
instrument to examine its form, for if it contains any material
defect, he will not become a holder in due course

4. Good faith
The last requirement is that the holder should have received the
instrument in “good faith”. There are two methods of ascertaining
a person’s good faith, “subjective” and “objective”. In subjective
test the court has to see the holder’s own mind and the only
question is “did he take the instrument honestly?” In objective
test, on the other hand, we have to go beyond the holder’s mind
and see whether he exercised as much care in taking the security
as a reasonably careful person ought to have done. Subjective test
requires “honesty”, objective “due care and caution”.
Section 10 – “Payment in due course” - “Payment in due course”
means payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in
possession thereof under circumstances which do not afford
reasonable ground for believing that he is not entitled to receive
payment of the amount mentioned therein.

Negotiation

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.

Section 14 which defines negotiations runs as follows:

14. Negotiation -- When a promissory note, bill of exchange or

cheque is transferred to any person, so as to constitute that person
the holder thereof, the instrument is said to be negotiated.

An instrument payable to order can be transferred by endorsement

and delivery.

Assignment and Negotiations distinguished

The negotiation of an instrument should be distinguished from

transfer by assignment. When a person transfers his right to
receive the payment of a debt that is called “assignment of the
debt”. Where, for example, the holder of a life insurance policy
transfers the right to receive the payment to another person, that
is an assignment. When the holder of a bill, note or cheque
transfers the same to another, he, in essence, gives his right to
receive the payment of the instrument to the transferee. Thus in
both “negotiation”, and “assignment” there is the transfer of the
right to receive the payment of a debt. But with this the similarity
ends, for the rights which the transferee of an instrument by
negotiation acquires are substantially superior to those of an
assignee. The points of difference may be now stated:

(1) 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) An assignment does not bind the debtor unless a

notice of the assignment has 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. The acceptor
of a bill and the maker of a promissory note are liable on maturity
to the person who is at the time the holder in due course of the
instrument.

(3) There are a number of presumptions in favour of a

holder in due course. For example, he is presumed to have given
consideration for the instrument. The burden lies upon the
opposite party to show that he had given consideration. But there
are no such presumptions in favour of an assignee, he has to
prove that he has given consideration for the assignment.

(4) An assignment attracts stamp duty, but endorsement

does not.

Section 15 – Endorsement - When the maker or holder of a

negotiable instrument signs the same, otherwise than as such
maker, for the purpose of negotiation on the back or face thereof
or on a slip of paper annexe thereto, or so signs for the same
purpose a stamp paper intended to be completed as a negotiable
instrument, he is said to endorse the same, and is called the
“endorser.”
An endorsement is completed by the delivery of the instrument to
the endorsee. Indeed “every contract on a bill whether it be the
drawer’s, the acceptor’s or and endorser’s, is incomplete and
revocable until delivery of the instrument in order to give effect
thereto.” “An endorsement means an endorsement completed by
delivery.” Thus where a person endorses an instrument to another
and keeps it in his papers where it is found after his death and
delivered o the endorsee, the latter gets no right on the instrument.
This is further reinforced by the provisions in Section 57 which
says that a legal representative cannot buy delivery only negotiate
an instrument endorsed by the deceased.

Types of Endorsements

1) Endorsement in Blank –

Section 16 – Endorsement “In blank” and “in full”, “endorsee”. (1)

if the endorser signs his name only, the endorsement is said to be
“in blank”, and if he adds a direction to pay the amount mentioned
in the instrument to, or the order of, a specified person, the
endorsement is said to be “in full”, and the person so specified is
called the “endorsee” of the instrument. (2) the provisions of this
act relating to a payee shall apply with the necessary modifications
to an endorsee.

2) Endorsement in full – (Section 16)

Where the endorser adds to his signature the name of a person
whom or to whose order he wants the instrument to be paid, that is
an endorsement in full. If, for example, A, the holder of a cheque
wants to make an endorsement in full to be, he would write thus:
“pay be or order. Sd. A.” He may not add the words “or order”. An
endorsement to “A” will be equivalent to endorsement to “A or
order

3) Endorsement sans Recourse – (Section 52)

52 - Endorser who excludes his own liability or makes it conditional

– the endorser of a negotiable instrument may by express words in
the endorsement, exclude his own liability thereon or make such
liability or the right of the endorsee to receive the amount due
thereon depend upon the happening of a specified event, although
such event may never happen.
Where an endorser so excludes his liability and afterwards
becomes the holder of the instrument, all intermediate endorsers
are liable to him.

4 ) Conditional Endorsement ( S. 52)

52 The endorser can also insert a condition I his endorsement.
He may for example say that “ pay B or order on his marriage”, or “
on the arrival of a ship”. A condition of this kind does not affect the
position of the party who has to pay the instrument on its maturity.
He may pay to the endorsee and will be discharged from liability
whether the condition has been fulfilled or not. But as between
the endorser and endorsee the condition is operative. If the
endorsee obtains the payment without the condition being fulfilled
he will hold the same in trust for the endorsee .

5) Partial Endorsement ( S. 56)

56 Endorsement for part of sum due – 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 to
be due on the instrument; but where such amount has been partly
paid, a note to that effect may be endorsed on that instrument,
which may then be negotiated for the balance

An instrument cannot be endorsed for a part of its amount only if,

for example, the instrument is for Rs. 100/- it cannot be endorsed
for Rs. 50/- only but if the amount due has already been partly
paid, a note to that effect may be endorsed on the instrument and
it may then be negotiated for the balance. When an instrument has
been partly paid but the fact of part payment is not entered on it
and, if it is endorsed to a bonafide holder, it will be a instrument of
full value ion his hand. Shaik Md. Hussain V/s. M Reddaiah
( 1979)
The transfer of an instrument to two different persons will mean
part transfer in favour of one and part in favour of the other, it will
also be inoperative under Sec. 56. Such persons, however,
become joint owners of the instrument and may recover as joint
payees whatever may be their mutual rate.

CROSSING OF CHEQUES

A crossed cheque is one on which two parallel transverse lines

with or without words ‘& Co.’ are drawn. The payment of such
cheque can be obtained only through a banker. Thus crossing is a
direction to the drawee banker to pay the amount of money on a
crossed cheque generally to a banker so that the party who
obtains the payment can be easily traced. This mode of payment is
considered to be very safe.

TYPES OF CROSSING: There are two types of crossing, viz.,

General crossing, and

Special crossing.
Another type of crossing known as ‘restrictive crossing’ has
developed out of business usage.

GENERAL CROSSING

A cheque is said to be crossed generally when it bears across its

face an addition of –
(i) The words ‘& Co.’ between two parallel transverse lines, either
with or without words ‘not negotiable’; or,
(ii) Two parallel transverse lines simply, either with or without the
words ‘not negotiable’ (Sec. 123 of Negotiable Instruments Act,
1881).
When a cheque is crossed generally, the drawee banker shall not
pay it, unless it is presented by a banker (Sec 126, Para 1,
Negotiable Instruments Act, 1881).

Specimens of general crossing:

i)

The above cheque bears an abbreviation “& Co,” between two

parallel transverse lines.

ii)

The above cheque has two parallel lines marked across its face.

iii)

The above cheque bears the words “not negotiable” between two
parallel transverse lines.

SPECIAL CROSSING

When a cheque bears across its face an addition of the name of a

banker, either with or without the words ‘not negotiable’, the
cheque is deemed to be crossed specially (Sec. 124 of the
Negotiable Instruments Act, 1881).
Transverse lines are not necessary in case of a special crossing.
The payment of a specially crossed cheque can be obtained only
through the particular banker whose name appears across the
face of the cheque or between the transverse lines, if any.

Where a cheque is crossed specially the banker on whom it is

drawn shall pay it only to the banker on whom it is crossed, or his
agent for collection (Sec.126, Para 2 of the Negotiable Instruments
Act, 1881).

Specimens of special crossing:

i)

The above cheque bears across its face an addition of the name of
the banker viz. “HDFC bank.”

ii)

The above cheque bears across its face the banker viz. “HDFC
bank” in addition to the words “Not Negotiable.”

iii)

The above cheque bears across its face the name of the banker
viz. “HDFC bank” in addition to an abbreviation “& Co.”

RESTRICTIVE CROSSING
In addition to the two statutory types of crossing discussed above,
there is another type which has been adopted by commercial and
banking usage. In this type of crossing the words ‘A/c Payee’ are
added to the general or special crossing.

The words ‘A/c Payee’ on a cheque are a direction to the

collecting banker that the amount collected on the cheque is to be
credited to the account of the payee. If he credits the proceeds to a
different account, he is prima facie guilty of negligence and will be
liable to the true owner for the amount of the cheque. It should
however be noted that ‘A/c Payee’ cheques are negotiable.

Specimens of Restrictive crossing:

i)

The above cheque bears the words “A/c Payee” in between two
parallel transverse lines.

ii)

The cheque bears the words “A/c Payee” and “Not Negotiable”
between two parallel transverse lines.

* Not negotiable crossing (Sec. 130 of the Negotiable Instruments

Act, 1881).

The effect of the words ‘not negotiable’ on a crossed cheque is

that the title of the transferee of such a cheque cannot be better
than that of its transferor. The addition of the words ‘not negotiable’
does not restrict the further transferability of the cheque.
It only takes away the main feature of negotiability, which is, that a
holder with a defective title can give a good title to a subsequent
holder in due course. Anyone who takes a cheque marked ‘not
negotiable’ takes it at his own risk.

The object of crossing a cheque ‘not negotiable’ is to afford

protection to the drawer or holder of the cheque against
miscarriage or dishonesty in the course of transit by making it
difficult to get the cheque so crossed cashed, until it reaches its
destination.

NOTING AND PROTEST

Sec. 99 When a promissory note or bill of exchange has been
dishonoured by non-acceptance or non payment, the holder may
cause such dishonour to be noted by a notary public upon the
instrument, or upon a paper attached thereto, or partly upon each.
Such note must be made within a reasonable time after dishonour
and must specify the date of dishonour, the reason, if any, assign
for such dishonour or if the instrument has not been expressly
dishonoured the reason why the holder treats it as dishonoured,
and the notary’s charges.

When a promissory note or a bill of exchange has been

dishonoured by non acceptance of non payment, in order to create
a proof of this fact the holder may approach a notary public and
have the fact of dishonour noted either on the instrument itself or
on a separate piece of paper or partly upon each.

Noting must be made within a reasonable time after dishonour.

Upon such request being received the notary inquires from the
party liable to pay and if he still dishonours, the notary makes a
note of the fact of dishonour. The note should contain the following
particulars: (1) The fact that the instrument has been dishonoured;
(2) That date on which it was dishonoured; (3) The reason, if any
assigned for the dishonour; 4) If the instrument has not been
expressly dishonoured the reason why the holder treats it as
dishonoured, and (5) Notary charges.

The advantage of noting is that it creates evidence of the fact of

dishonour and things connected with it. But even so noting is not
compulsory except for foreign bills. The holder may at his choice
have the fact of dishonour noted or not.

Protest
Sec: 100 – When a promissory note or a bill or exchange has been
dishonoured by non acceptance or non payment, the holder may,
within a reasonable time, cause such dishonour to be noted and
certified by a notary public. Such certificate is called a protest.

Protest for better security – When the accepter of a bill of

exchange has insolvent, or his credit has been publicly impeached
before the maturity of the bill, the holder may, within a reasonable
time, cause a notary public to demand better security of the
accepter, and on it being refused may, within a reasonable time,
cause such facts to be noted and certified as aforesaid. Such
certificate is called a protest for better security.

Protest is one step further to noting. Where the holder gets the fact
of dishonour noted, he may also have the dishonour and noting
certified by the notary public. Thus the holder will get the certificate
from the notary public certifying the fact of dishonour. Such a
certificate is called a protest. The advantage is that the fact of
dishonour becomes easily provable and the court can raise a
presumption in terms of the protest certificate that the instrument
has been dishonour.

PROTEST FOR BETTER SECURITY :

Protest for better security is a measure of protection against the
consequences of the accepters insolvency. When the accepter of
a bill of exchange becomes insolvent all his credit has been
publicly impeached, and this has happened before the maturity of
the bill, the holder may approach a notary public and ask him to
demand from the acceptor a better security than the mere bill. This
should be done within a reasonable time. If the acceptor refuses to
oblige with any security, the holder should have the fact of refusal
noted and certified by the notary. Such a certificate is called a
protest for better security. This should be done within a reasonable
time after the acceptors refusal to provide security

Contents of Protest
Section 101 requires a protest to contain certain particulars for its
validity The omission of any one of such particulars for its invalid.
The particulars are as follows:
It should contain the instrument itself or a literal transcript of it and
o9f everything written or printed on the instrument.
The name of the person for whom and against whom the
instrument has been protested, that is, the name of the party
making the protest and against whom the protest is made.
It should contain a statement that acceptance, or payment or
better security has been demanded from such person by the
notary public, the terms of his answer, or a statement that he gave
no answer or that he could not be found.
When the protest is against the dishonour of a bill or note, the
protest should specify the time and place of dishonour. When the
protest is against refusal of better security, the place and time of
refusal should be noted.
The subscription of the notary public making the protest.
Where there has been acceptance or payment for honour, the
protest should specify the name of the person who accepted or
paid for honour and for whose honour he did so and also the
manner in which such acceptance or payment was offered and
effected.

Clause ( c ) of the section requires the notary before preparing his

certificate to make a demand for acceptance, payment or security.
This section concludes with the provision that the notary may
make such demand either in person or by his clerk or, where
authorised by agreement or usage, by registered post.

The drawer has failed to pay within 15 days from the date of the
receipt of the notice.

If the aforementioned ingredients are satisfied then the person who

has drawn the cheque shall be deemed to have committed an
offence.

Punishment
Maximum 2 years imprisonment on the defaulting party with fine
which may extend to twice the amount of cheque or with both.