THE NEGOTIABLE INSTRUMENTS

ACT, 1881

MEANING OF NEGOTIABLE INSTRUMENTS

Negotiable Instruments is an instrument (the word instrument means

a document) which is freely transferable (by customs of trade) from
one person to another by mere delivery or by indorsement and
delivery.
The property in such an instrument passes to a bonafide transferee
for value.

The Act does not define the term ‘Negotiable Instruments’. However,
Section 13 of the Act provides for only three kinds of negotiable
instruments namely, bills of exchange, promissory notes and
cheques, payable either to order or bearer.
 Essential Characteristics of Negotiable Instruments
1. It is necessarily in writing.
2. It should be signed.
3. It is freely transferable from one person to another.
4. Holder’s title is free from defects.
5. It can be transferred any number of times till its satisfaction.
6. Every negotiable instrument must contain an unconditional promise
or order to pay money. The promise or order to pay must consist of
money only.
7. The sum payable, the time of payment, the payee, must be certain.
8. The instrument should be delivered. Mere drawing of instrument does
not create liability.
PROMISSORY NOTE

Meaning

According to section 4 of the NI Act, 1881, “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.”
 Parties to promissory note
1. Maker: The person who makes the promise to pay is called the Maker.
He is the debtor and must sign the instrument
2. Payee: Payee is the person to whom the amount on the note is
payable.
 Essential Characteristics of a Promissory Note

a. In writing- An oral promise to pay is not sufficient There must be an

express promise to pay. Mere acknowledgment of debt is
insufficient.
Example 1: I acknowledge myself to be indebted to B in ` 1,000, to
be paid on demand, for value received. (Valid promissory note as the
promise to pay is definite)
Example 2: “Mr. B I.O.U ` 1,000.” – Invalid promissory note as there
is no promise to pay. It is just an acknowledgement of debt.

b. The promise to pay should be definite and unconditional. Therefore,

instruments payable on performance or non-performance of a
particular act or on the happening or non-happening of an event, are
not promissory notes. However, the promise to pay may be subject
to a condition, which according to the ordinary experience of mankind,
is bound to happen.
Example 3: I promise to pay B ` 500 seven days after my marriage
with C. (the promissory note is invalid as marriage with C may or may
not happen.)
Example 4: I promise to pay B ` 500 on D’s death- as the death of D
is certain, promise in unconditional. Thus, the promissory note is valid.
Example 5: I promise to pay B ` 500 on D’s death, provided D leaves
me enough to pay that sum. Invalid promissory note as promise is
dependent on D leaving behind money which is not certain.

c. A promissory note must be signed by the maker otherwise it is

incomplete and ineffective.
d. Promise to pay money only.
Example 6: I promise to pay B ` 500 and to deliver to him my black
horse on 1st January next. – It is not a valid promissory note, as the
promisor needs to deliver its black horse which is not money.

e. Promise to pay a certain sum

Example 7: “I promise to pay B ` 500 and all other sums which shall
be due to him.”- Promissory note invalid as the amount payable is not
certain.

f. The maker and payee must be certain, definite and different

persons. A promissory note cannot be made payable to the bearer
[Section 31 of the Reserve Bank of India Act, 1934 (RBI Act)]. Only
the Reserve Bank or the Central Government can make or issue a
promissory note 'payable to bearer'.

g. Stamping: A promissory note must be properly stamped in accordance

with the provisions of the Indian Stamp Act and such stamp must be
duly cancelled by maker's signatures or initials or otherwise

BILLS 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.
 Parties to the bill of exchange

a. Drawer: The maker of a bill of exchange.

b. Drawee: The person directed by the drawer to pay is called the
'drawee'. He is the person on whom the bill is drawn. On acceptance
of the bill, he is called an acceptor and is liable for the payment of
the bill. His liability is primary and unconditional.
c. Payee: The person named in the instrument, to whom or to whose order
the money is, by the instrument, directed to be paid
 Essential characteristics of bill of exchange
(a) It must be in writing.
(b) Must contain an express order to pay.
(c) The order to pay must be definite and unconditional.
(d) The drawer must sign the instrument.
(e) Drawer, drawee, and payee must be certain. All these three parties
may not necessarily be three different persons. One can play the role
of two. But there must be two distinct persons in any case. As per
Section 31 of RBI Act, 1934, a bill of exchange cannot be made
payable to bearer on demand.
(f) The sum must be certain.
(g) The order must be to pay money only.
(h) It must be stamped
 CHEQUE [SECTION 6]

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.

Payable on demand means- It should be payable whenever the holder

chooses to present it to the drawee (the banker).
The expression “Banker” includes any person acting as a banker and
any post office saving bank [Section 3]

Explanation: For the purposes of this section, the expressions-

(a) Cheque in the electronic form-means a cheque drawn in electronic

form by using any computer resource, and signed in a secure system
with a digital signature (with/without biometric signature) and
asymmetric crypto system or electronic signature, as the case may
be;
(b) “a truncated cheque” means a cheque which is truncated during 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.

 Whereas a cheque is also a bill of exchange but is drawn on a banker

and payable on demand
 Parties to Cheque

1. Drawer: The person who draws a cheque i.e., makes the cheque
(Debtor). His liability is primary and conditional.
2. Drawee: The specific bank on whom cheque is drawn. He makes the
payment of the cheque. In case of cheque, drawee is always banker.
3. Payee: The person named in the instrument (i.e., the person in whose
favour cheque is issued), to whom or to whose order the money is, by
the instrument, directed to be paid, is called the payee. The payee
may be the drawer himself or a third party.

Essential Characteristics of a cheque

According to the definition of cheque under section 6, a cheque is a
species of bill of exchange. Thus, it should fulfil:
a. all the essential characteristics of a bill of exchange
b. Must be drawn on a specified banker.
Note: These two additional features
c. It must be payable on demand. distinguish a cheque from bill. Thus,all
cheques are bills while all bills are not
cheques.
 CROSSING OF CHEQUES [SECTION 123 – 131]
There are two types of cheques,

 open cheques and crossed cheques

 A cheque which can be presented to the banker and can be

paid at the counter of the bank is called an open cheque. If the
drawer loses an open cheque, the finder of it may go to the bank
and get payment unless its payment has been stopped.

 When a cheque bears across its face two parallel transverse

lines, the cheque is said to be crossed. The lines are usually
drawn on the left hand top corner but may be drawn anywhere.

Meaning of crossing: Crossing of a cheque means an instruction to

the drawee i.e., the paying bank that the payment is not to be made
at the counter but through a bank.

Objects of Crossing: A crossing is a warning to the bank not to

make payment of the crossed cheque over the counter. Crossing
operates as a caution to the paying banker.

i) Crossing affects the mode of payment of cheque- An open or

uncrossed cheque is payable to the payee or holder at the counter
of the bank. In such a case, if a wrong person takes away the payment
 of cheque, it is difficult to trace him.

ii) Crossing does not affect the transferability or negotiability of

cheque- a crossed cheque can be negotiated just the same way as
an open cheque, person acquiring a crossed cheque in good faith
becomes its holder in due course just as in case of open cheque.

iii) Crossing is a material alteration but crossing of cheque by the holder

does not in any way affect his rights in respect of cheques.

TYPES OF CROSSING:

(a) General Crossing: Where a cheque bears across its face two parallel,
transverse lines without any words or with words ‘and company’ or/and
‘not negotiable’ written in between these two parallel lines, it is called
general crossing. Where a cheque is crossed generally, the banker on
whom it is drawn shall not pay it otherwise than to a banker (Sec.
126)

(b) Special Crossing: where the lines of crossing bear the name of a
banker either with or without any additional words. The effect is that
its payment can be obtained only through particular banker whose
name appears between the lines.

(c) A/c payee crossing: When the words “A/C payee” or “A/C payee only”
are added to a general or special crossing, it is called restrictive
crossing. The effect of “Account payee” crossing is that the banker
 is supposed to collect the cheque on behalf of that payee only whose
name appears on the face of the cheque. Such a cheque can not be
endorsed.

(d) Not negotiable Crossing:

 This requires writing of words “not negotiable” in addition to the
two parallel lines. These words may be written inside or outside
these lines.
 The addition of the words not negotiable does not restrict the
further transferability of the cheque, but it entirely takes away
the main feature of negotiability, which is that a holder with a
defective title can give a good title to the subsequent holder in
due course.
 A cheque with such crossing is not negotiable but continues to
be transferable as before. Ordinarily, in a negotiable instrument,
if the title of the transferor is defective, the transferee, if he
is a HDC, will have a good title. When the words” not negotiable”
are written, even a HDC will get the same title as that of
transferor. Thus, if the title of the transferor is defective,
the title of transferee will also be so.

Who my cross? [Section 125]

A cheque may be crossed by the following parties:
(a) By Drawer: A drawer may cross it generally or specially.
(b) By Holder: A holder may cross an uncrossed cheque generally or
specially. If the cheque is crossed generally, the holder may cross
specially. If cheque crossed generally or specially, he may add words
 “not negotiable”.
(c) By Banker: A banker may cross an uncrossed cheque, or if a cheque is
crossed generally he may cross it specially to himself. Where a cheque
is crossed specially, the banker to whom it is crossed may again cross
it specially to another banker, his agent, for collection.

PROTECTION OF LIABILITY OF THE PAYING BANKER:

The banker who makes the payment of a crossed cheque is called the
paying banker.

(a) Cheque payable to order [Section 85(1)]: Where a cheque payable

to order purports to be indorsed by or on behalf of the payee, the
banker is discharged by payment in due course. The banker, in other
words, can debit his customers account even though the indorsement
by the payee might turn out to be forgery or the indorsement might
have been placed by the payee’s agent without his authority.

(b) Cheque payable to bearer [Section 85(2)]: As regards bearer

cheque, the rule is “once a bearer always a bearer”. A banker gets a
good discharge by payment in due course of the amount on a bearer
cheque to the holder of the cheque. It does not matter whether the
apparent holder is the owner of the cheque or not.

(c) Payment of cheque crossed generally: Where a cheque is crossed

generally, the banker on whom it is drawn shall not pay it otherwise
than to a banker.

(d) Payment of cheque crossed specially: Where a cheque is crossed

specially, the banker on whom it is drawn shall not pay it otherwise
than to the banker to whom it is crossed, or his agent for collection.
(e) Payment in due course of crossed cheque [Section 128]: Where the
banker on whom a crossed cheque is drawn has paid the same in due
course, the banker paying the cheque, and (in case such cheque has
come to the hands of the payee) the drawer thereof, shall
respectively be entitled to the same rights, and be placed in the same
position in all respects, as they would respectively be entitled to and
placed in if the amount of the cheque had been paid to and received
by the true owner thereof

(f) Payment of crossed cheque out of due course [Section 129]: Any
banker paying a cheque crossed generally otherwise than to a banker,
or a cheque crossed specially otherwise than to the banker to whom
the same is crossed, or his agent for collection, being a banker, shall
be liable to the true owner of the cheque for any loss he may sustain
owing to the cheque having been so paid.

EXCEPTION: Payment of a cheque on which drawer signatures were

forged: If any drawee banks made the payment on a cheque on which
drawer signatures were forged then such bank shall be liable to the
true owner. Thus, the paying banker shall be liable if it makes the
payment of the cheque on which drawers’ signature was forged.

PROTECTION OF LIABILITY OF THE COLLECTING BANKER

The bank which receives the payment of a crossed cheque on behalf of its customer is
known as the collecting banker.
Section 131- Non liability of banker receiving payment of cheque: A banker who has
in good faith and without negligence received payment for a customer of a cheque
crossed generally or specially to himself shall not, in case the title of the cheque proves
 defective, incur any liability to the true owner of the cheque by reason only of having
received such payment.

In order to avail such a protection, the banker needs to prove the following:
(a) That the banker had received the payment of crossed cheque
(b) That the collection was made by the bank on behalf of the customer
(c) That the collecting bank must have acted in good faith and without negligence.

ACCEPTOR AND ACCEPTOR FOR HONOR

ACCEPTOR AND ACCEPTOR FOR HONOUR

“Acceptor” [Section 7] - An acceptor is the drawee who has signed

his assent upon the bill and delivered it to the holder.

“Acceptor for honour” [Section 7] - When a bill of exchange has

been dishonoured by non-acceptance and any person accepts it for
honour of the drawer or of any indorsers, such person is called "an
Acceptor for honour".
The payment which he makes is known as “payment for honour. In
other words, it is an undertaking by a third party to accept and pay a
bill of exchange that was dishonored, either by non-acceptance or by
non- payment by the party on whom it was drawn. It is also called
acceptance supra protest.
How acceptance for honor must be made: A person desiring to
accept for honor must, [by writing on the bill under his hand], declare
that he accepts under protest the protested bill for the honor of the
drawer or of a particular indorser whom he names, or generally for
honor.
 Example 8: The acceptor for honor may write across the bill of
exchange “Accepted Supra Protest” or “Accepted for AB (the name
of drawee)”.

Essentials of valid acceptance for honor

1. The holder must consent to acceptance for honor. The holder cannot
be compelled to assent to acceptance for honor.
2. The bill must have been noted or protested for the non-acceptance or
for better security.
3. Acceptance for honor can be made by a person who is not already
liable on the bill.
4. It must be made by writing on the bill.
5. It must be for the whole amount due on the bill
6. Acceptance must be for the honor of any party already liable on the
bill.
7. Acceptance for honor must be made before bill is overdue
8. Stranger paying for honor must, before payment, declare before a
Notary Public the party for whose honor he pays and the Notary Public
must have recorded such a declaration.
 Rights and liabilities of an acceptor for honour (Sections 111 & 112)
1. Acceptor for honor binds himself to all the subsequent parties to pay
the amount of the bill if the drawee does not pay.
2. The party for whose honor he accepts to pay the amount and all prior
parties are liable to compensate the acceptor for honor for all loss or
damage sustained by him in consequence of such acceptance. The
liability of an acceptor for honor is conditional and he is liable only
if the drawee fails to pay the bill.

The bill of exchange should be presented at its maturity to the drawee

for payment and it must be dishonoured by the drawee and noted or
protested for non-payment to charge an acceptor for honor.

HOLDER AND HOLDER IN DUE COURSE

“Holder” [Section 8] — 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.
Broadly speaking, a holder means the owner of a negotiable instrument.
What is required is a right to possession. A person in possession of an
instrument without having a right to possess cannot be called a holder.
Example : A person who finds or steals a bearer instrument or takes
an instrument under forged indorsement is not a holder. The reason is
that the holder of a negotiable instrument must have right to
receive or recover the money thereon from the parties thereto.
Example : An agent holding an instrument for his principal is not a
holder. The reason being that, although agent can receive payment
of the instrument, he has no right to sue on the instrument in his own
name.

“Holder in due course” [Section 9]— ”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 the payee or indorsee thereof, (if
payable to order),
before the amount mentioned in it became payable, and
without having sufficient cause to believe that any defect existed
in the title of the person from whom he derived his title.

Example : A draws a cheque for ` 5,000 and hands it over to B by

way of gift. B is a holder but not a holder in due course as he does not
get the cheque for value and consideration. His title is good and
bonafide. As a holder he is entitled to receive ` 5000 from the bank
on whom the cheque is drawn.

Example : On a Bill of Exchange for ` 1 lakh, X’s acceptance to the

Bill is forged. ‘A’ takes the Bill from his customer for value and in good
faith before the Bill becomes payable. State with reasons whether ‘A’
can be considered as a ‘Holder in due course’ and whether he (A) can
receive the amount of the Bill from ‘X’.
Answer: According to section 9 of the Negotiable Instruments Act,
 1881, ‘holder in due course’ means any person who for consideration
becomes the possessor of a promissory note, bill of exchange or
cheque if payable to bearer or the payee or indorsee thereof, if
payable to order, before the amount in it became payable and without
having sufficient cause to believe that any defect existed in the title
of the person from whom he derived his title.
As ‘A’ in this case prima facie became a possessor of the bill for value
and in good faith before the bill became payable, he can be considered
as a holder in due course.
But where a signature on the negotiable instrument is forged, it
becomes a nullity. The holder of a forged instrument cannot enforce
payment thereon. A holder in due course is protected when there is
defect in the title. But he derives no title when there is entire absence
of title as in the case of forgery. Hence ‘A’ cannot receive the amount
on the bill.

ESSENTIALS TO BECOME HOLDER IN DUE COURSE (HDC):

a) The holder must have paid valuable consideration:

i) To become a holder in due course, a person must obtain a negotiable
instrument by paying valuable and lawful consideration for it.
ii) When given as a gift or has been inherited, the transferee cannot
be a holder in due course.
b) A holder must acquire the instrument before its maturity in order
to attain the status of holder in due course.
c) The holder must have obtained the instrument in good faith.
d) The instrument must be complete and regular on the face of it.
e) He must have received the instrument as a holder- i.e. A HDC may be
either payee, or the possessor (if the instrument is payable to
 bearer), or the indorsee (if the instrument is payable to order).

PRIVILEGES OF BEING A HOLDER IN DUE COURSE:

(i) In case of Inchoate Instrument: A person signing and delivering to
another a stamped but otherwise inchoate instrument (Inchoate
negotiable instrument means an incomplete instrument because the
amount is not filled.) is debarred from asserting, as against a holder
in due course, that the instrument has not been filled in accordance
with the authority given by him, the stamp being sufficient to cover
the amount (Section 20).
Example : A signs his name on a blank but stamped instrument which
he gives to B with an authority to fill up as a note for a sum of ` 3
000 only. But B fills it for ` 5,000. B then transfers it to C for a
consideration of 5000 who takes it in good faith. Here in the case, C
is entitled to recover the full amount of the instrument because he is
a holder in due course whereas B, being a holder cannot recover the
amount because he filled in the amount in excess of his authority.

(ii) In case of fictitious bill: In case a bill of exchange is drawn payable

to the drawer’s order in a fictitious name and is indorsed by the
same hand as the drawer’s signature, it is not permissible for acceptor
to allege as against the holder in due course that such name is
fictitious (Section 42)1.

(iii) In case of conditional instrument or ‘escrow’: In case a bill or note

is negotiated to a holder in due course, the other parties to the bill or
note cannot avoid liability on the ground that the delivery of the
instrument was conditional or for a special purpose only.

(iv) In case of instrument obtained by unlawful means or for unlawful

consideration; The person liable in a negotiable instrument cannot set
 up against the holder in due course the defenses that the instrument
had been lost or obtained from the former by means of an offence or
fraud or for an unlawful consideration (Section 58). Thus, a holder in
due course acquires a title free from all defects.

(v) In case original validity of the instrument is denied; No maker of a

promissory note, and no drawer of a bill or cheque and no acceptor
of a bill for the honour of the drawer shall, be permitted to deny the
validity of the instrument as originally made t o a holder in due
course (Section 120). In short, a holder in due course gets a good
title to the bill.

(vi) In case Payee’s capacity to indorse is denied: No maker of a

promissory note and no acceptor of a bill payable to order shall, , be
permitted to deny the payee’s capacity, at the date of the note or
bill, to indorse the same to a holder in due course (Section 121). In
short, a holder in due course gets a good title to the bill.

“Payment in due course” [Section 10]—”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 a
reasonable ground for believing that he is not entitled to receive
payment of the amount therein mentioned.
CLASSIFICATION OF NEGOTIABLEINSTRUMENTS

“Bearer instrument” and “order instrument” [Section 13]

Bearer Instrument: It is an instrument

 where the name of the payee is blank or
 where the name of payee is specified with the words “or bearer”
 or where the last indorsement is blank.
 Such instrument can be negotiated by mere delivery.

Order Instrument: It is an instrument

 which is payable to a person or
 Payable to a person or his order or
 Payable to order of a person or where the last indorsement is in full,
such instrument can be negotiated by indorsement and delivery.

“Inland instrument” and “Foreign instrument” [Sections 11 & 12]

A promissory note, bill of exchange or cheque drawn or made in India

 and made payable in, or drawn upon any person resident in India shall
be deemed to be an inland instrument.
Example : (i) A promissory note made in Kolkata and payable in
Mumbai.

(ii) A bill drawn in Varanasi on a person resident in Jodhpur (although

it is stated to be payable in Singapore)

“Foreign instrument”
Any such instrument not so drawn, made or made payable (as that of
Inland Instrument), shall be deemed to be foreign instrument. In
other words,

Liability of maker/ drawer of foreign bill

 In the absence of a contract to the country, the liability of the maker
or drawer of a foreign promissory note or bill of exchange or cheque is
regulated in all essential matters by the law of the place where he made
the instrument, and the respective liabilities of the acceptor and indorser
by the law of the place where the instrument is made payable (Section
134).

Example: A bill of exchange is drawn by A in Berkley where the rate of

interest is 15% and accepted by B payable in Washington where the rate
of interest is 6%. The bill is indorsed in India and is dishonoured. An
action on the bill is brought against B in India. He is liable to pay interest
at the rate of 6% only. But if A is charged as drawer, he is liable to pay
interest at 15%.

Inland instrument-when B.o.E/ P/N, Foreign instrument-when

Cheque B.o.E/ P/N, Cheque, IS NOT

drawn /made in India Drawn in India

made payable in/drawn

Made in India
upon person resident in
India

Made payable in
India

Inchoate and Ambiguous Instruments

Inchoate Instrument:
 It means an instrument that is incomplete in certain respects.
 The drawer/ maker/ acceptor/ indorser of a negotiable instrument
 may sign and deliver the instrument to another person in his
capacity leaving the instrument, either wholly blank or having written
on it the word incomplete. Such an instrument is called an inchoate
instrument and this gives a power to its holder to make it complete by
writing any amount either within limits specified therein or within the
limits specified by the stamp’s affixed on it.
 The person signing and delivering the inchoate instrument is liable
both to a holder and holder in due course. However, there is a
difference in their respective rights. The holder of such an
instrument cannot recover the amount in excess of the amount
intended to be paid by the signor. The holder in due course can,
however recover any amount on such instrument provided it is covered
by the stamp affixed on the instrument.

Ambiguous Instrument:
 Section 17 of the Act, reads as: “Where an instrument may be
construed either as a promissory note or bill of exchange, the holder
may at his election treat it as either, and the instrument shall be
thenceforward treated accordingly.“
 Thus, an instrument which is vague and cannot be clearly identified
either as a bill of exchange, or as a promissory note, is an ambiguous
instrument. In other words, such an instrument may be construed
either as promissory note, or as a bill of exchange.
 Section 17 provides that the holder may, at his discretion, treat it as
either and the instrument shall thereafter be treated accordingly.
Thus, after exercising his option, the holder cannot change that it is
the other kind of instrument.

Where amount is stated differently in figures and words [Section

18]

If the amount undertaken or ordered to be paid is stated differently

in figures and in words, the amount stated in words shall be the
amount undertaken or ordered to be paid.

Demand and Time Instrument

Demand Instruments (Section 19):

 A promissory note or bill of exchange in which no time for payment is
mentioned, is payable on demand.
 Bills and notes are payable either on demand or at a fixed future
time. Cheques are always payable on demand.
 A bill or promissory note is also payable on demand when it is
expressed to be payable on demand, or "at sight" or "presentment".
 The expression “after sight” means, in a promissory note, after
presentment for sight, and, in a bill of exchange after acceptance, or
noting for non-acceptance, or protest for non-acceptance.
 Time instrument (Section 22): A bill or note which is payable:

a) After a fixed period or

b) After sight or
c) On a specified day or
d) On the happening of an event which is certain to
e) happen is known as time instrument.

“AT SIGHT”, “ON PRESENTMENT”, “AFTER SIGHT” [SECTION

21]

In a promissory note or bill of exchange the expressions “at sight” and

“on presentment” means on demand.
The expression “after sight” means, in a promissory note, after
presentment for sight, and, in a bill of exchange after acceptance, or
noting for non-acceptance, or protest for non-acceptance.

“MATURITY OF NEGOTIABLE INSTRUMENT”

Where bill or note is payable at a fixed period after sight, the

question of maturity becomes important. The maturity of a note or
bill is the date on which it falls due.

Days of grace: A note or bill, which is not expressed to be payable

on demand, at sight or on presentment; is at maturity on the third day
after the day on which it is expressed to be payable. Thus, a time
instrument payable after sight is allowed three days grace period
(Section 22).
 Calculation of maturity [Section 23]:

 In calculating the date at which a promissory note or bill of exchange,

made payable at stated number of months after date or after sight,
or after a certain event, is at maturity, the period stated shall be held
to terminate on the day of the month, which corresponds with the day
on which the instrument is dated, or presented for acceptance or
sight, or noted for non- acceptance, or protested for non-acceptance,
or the event happens or, where the instrument is a bill of exchange
made payable at stated number of months after sight and has been
accepted for honor, with the day on which it was so accepted

 If the month in which the period would terminate has no

corresponding day, the period shall be held to terminate on the last
day of such month.

Example 17:
(a) A negotiable instrument dated 29th January, 2019, is made payable at
one month after date. The instrument is at maturity on the third day
after the 28th February, 2019, i,e, on 3rd March 2019.
(b) A negotiable instrument, dated 30th August, 2019, is made payable
three months after date. The instrument is at maturity on the 3rd
December, 2019.
(c) A promissory note or bill of exchange, dated 31st August, 2019, is
made payable three months after date. The instrument is at maturity
on the 3rd December, 2019.
Calculating maturity of bill or note payable so many days after date or
sight [Section 24]
In calculating the date at which a promissory note or bill of exchange
made payable at certain number of days after date or after sight or
after a certain event is at maturity, the day of the date, or of
presentment for acceptance or sight, or of protest for non-
acceptance, or on which the event happens, shall be excluded.

Example 18: Bharat executed a promissory note in favour of Bhushan

for ` 5 crores. The said amount was payable three days after sight.
Bhushan, on maturity, presented the promissory note on 1st January,
2019 to Bharat. Bharat made the payments on 4th January, 2019.
Bhushan wants to recover interest for one day from Bharat. As per
Section 24 of the Negotiable Instruments Act, 1881 states that
where a bill or note is payable after date or after sight or after
happening of a specified event, the time of payment is determined by
excluding the day from which the time begins to run.
Therefore, in the given case, Bharat will succeed in objecting to
Bhushan’s claim. Bharat paid rightly “three days after sight”. Since
the bill was presented on 1st January, Bharat was required to pay only
on the 4th and not on 3rd January, as contended by Bhushan.

When the day of maturity is a holiday [Section 25]

When the day on which a promissory note or bill of exchange is at

maturity is a public holiday, the instrument shall be deemed to be due
on the next preceding business day.

Explanation: The expression “Public Holiday” includes Sundays and any

other day declared by the Central Government, by notification in the
Official Gazette, to be a public holiday.

Negotiation by delivery [Section 47]

Subject to the provisions of section 58 [Instrument obtained by
unlawful means or for unlawful consideration], a promissory note, bill
of exchange or cheque payable to bearer is negotiable by delivery
thereof.

Exception: A promissory note, bill of exchange or cheque delivered on

condition that it is not to take effect except in a certain event is not
negotiable unless such event happens.
 Example 19:
(1) A, the holder of a negotiable instrument payable to bearer, delivers it
to B’s agent to keep for B. The instrument has been negotiated.
(2) A, the holder of a negotiable instrument payable to bearer, which is in
the hands of A’s banker, who is at the time the banker of B, directs
the banker to transfer the instrument to B’s credit in the banker’s
account with B. The banker does so, and accordingly now possesses the
instrument as B’s agent. The instrument has been negotiated, and B
has become the holder of it.

Negotiation by indorsement [Section 48]

Subject to the provisions of section 58, a promissory note, bill of
exchange or cheque payable to order, is negotiable by the holder by
indorsement and delivery thereof.

Importance of Delivery in Negotiation [Section 46]

 Delivery of an instrument is essential whether the instrument is

payable to bearer or order for effecting the negotiation.
 The delivery must be voluntary, and the object of delivery should be
to pass the property in the instrument to the person to whom it is
delivered. The delivery can be, actual or constructive.
 Actual delivery takes place when the instrument changes hand
physically.
 Constructive delivery takes place when the instrument is delivered
 to the agent, clerk or servant of the indorsee on his behalf or when
the indorser, after indorsement, holds the instrument as an agent of
the indorsee.
 The contract on a negotiable instrument until delivery remains
incomplete and revocable.
 The rights in the instrument are not transferred to the indorsee
unless after the indorsement the same has been delivered.
 If a person makes the indorsement of instrument but before the same
could be delivered to the indorsee the indorser dies, the legal
representatives of the deceased person cannot negotiate the same by
mere delivery thereof

INDORSEMENT OF INSTRUMENT (Section 15)

INDORSEMENT: 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 annexed thereto, or
so signs for the same purpose a stamped paper intended to be
completed as a negotiable instrument,
 he (maker/holder) is said to indorse the same, and is called the
“indorser”.

Various Kinds of Indorsement:

1. Indorsement in Blank (only signature): Where the indorser just puts
is signature without specifying the indorsee, the indorsement is said
to be in blank (Section 16). The effect of such an indorsement is to
render the instrument payable to bearer.

2. Indorsement in Full (name and signature): Where along with

indorser's signature, the name of the indorsee is specified, the
indorsement is called 'indorsement in full' (Section 16). Thus, where
the instrument states, 'Pay X or order' and is signed by A, the payee,
it constitutes 'indorsement in full'.
3. Partial indorsement: An indorsement which purports to transfer
only a part of amount of the instrument is called as partial
indorsement. As per section 56, such an indorsement is invalid under
law.
Example 23: A is a holder of a bill for ` 10000. A indorses it thus:
“Pay B or order ` 5000”. This is partial indorsement and invalid for the
purpose of negotiation.

Exception: Second part of section 56 states that if a bill has been

paid in part, the fact of the part payment may be indorsed on the
instrument and it may then be negotiated for the residue.
Example 24: A bill may be indorsed: Pay A or order ` 5000 being the
unpaid residue of the bill. It is a valid indorsement.

4. Restrictive Indorsement: An indorsement is restrictive when the

indorser while making indorsement restricts or excludes the right of
the indorsee to further transfer the instrument. An indorsement is
“restrictive” when it prohibits or restricts the further negotiability
of the instrument. It merely entitles the holder of the instrument to
receive the amount on the instrument for a specific purpose.
 Example: D signs the following indorsements on different
negotiable instruments payable to bearer:
(a) Pay the contents to G only
(b) Pay G for my use

These indorsements exclude the right of further negotiation by G.

Conditional indorsement: Section 52 gives power to an indorser to

insert in the indorsement by express words, a stipulation negating
(excluding) or limiting his own liability to the holder by making such
liability or the right of the indorsee to receive the amount due
thereon upon the happening of a specified event although such event
may never happen.
Conditional indorsement can be achieved by an indorser in any of the
following ways:

(1) Sans recourse indorsement- By excluding his liability e.g. the holder
of a bill may indorse it thus: ‘Pay A or order without recourse to me,
or Pay A or order sans recourse, or Pay A or order at his own risk’. In
these cases, the holder does not incur any liability on the bill as an
indorser.
(2) Liability dependent upon a contingency- By making his liability
dependent upon the happening of a specified event which may never
happen, in such a case the liability of the holder as an indorser, arises
only upon the happening of the event specified, and is extinguished if
the event becomes impossible, or the conditions specified are not
fulfilled. But the indorsee can sue the prior parties before the
 happening of the event.

(3) Facultative indorsement – An indorser by express words abandons

some right or increases his liability under an instrument. It means
endorser can be sued if the bill gets dishonored without any notice of
dishonor

(4) ‘Sans frais’ indorsement – Where the indorser shall not be liable to
pay any expenses which might have been incurred on dishonor of the
bill.

CONVERSION OF INDORSEMENT IN BLANK INTO

INDORSEMENT IN FULL [SECTION 49]

The holder of a negotiable instrument indorsed in blank may—

 without signing his own name, by writing above the indorser’s
signature a direction to pay to any other person as indorsee,
convert the indorsement in blank into an indorsement in full; and
the holder does not thereby incur the responsibility of an
indorser.

According to Section 55, if a negotiable instrument, after having been

indorsed in bank, is indorsed in full, the amount of it cannot be
claimed from the indorser in full, except by the person to whom it has
been indorsed in full, or by one who derives title through such person.
 Example 26: A is the payee holder of a bill. A indorses it in blank and
delivers it to B. B indorses it in full to c or order. C without
indorsement transfers the bill to D. D as the bearer is entitled to
receive payment or to sue drawer, acceptor, or A who indorsed the bill
in blank, but he cannot sue B or C. C can sue B as he received the bill
form by indorsement in full. If, however, C instead of passing the bill
to D without indorsement passes it by a regular indorsement, D can
claim against all prior parties.

Essentials of a valid indorsement

(a) Signature of indorser: The indorsement must be signed. The

indorsement may be made by the indorser either by merely signing his
name on the instrument or by specifying in addition to his signature,
the person to whom or to whose order the instrument is payable.

(b) Who may indorse or negotiate- Every sole maker, drawer, payee or
indorsee, or all of several joint makers, drawers, payees or indorsee’s
of a negotiable instrument may indorse and negotiate the same unless
negotiability of such instrument has been restricted or excluded as
mentioned in Section 50.

(c) Effect of indorsement: The indorsement of a negotiable instrument

followed by delivery transfers to the indorsee the property therein
with the right of further negotiation, but the indorsement may by
express words, restrict or exclude such right, or may merely
constitute the indorsee an agent to indorse the instrument, or to
receive its contents for the indorser, or for some other specified
person.
Example : B signs the following indorsements on different
negotiable instruments payable to bearer,—
(a) “pay the contents to C only”.
(b) “pay C for my use”.
(c) “pay C on order for the account to B”.
(d) “the within must be credited to C”.
(e) The above indorsements exclude the right of
further negotiation by C

Where an indorser so excludes his liability and afterwards becomes

the holder of the instrument all intermediates indorsers are liable to
him.

A is the payee and holder of a negotiable instrument. Excluding

personal liability by an indorsement, “without recourse”, he transfers
the instrument to B, and B indorses it to C, who indorses it to A. A is
not only reinstated in his former rights, but has the rights of an
indorsee against B and C.
 INSTRUMENT OBTAINED BY UNLAWFUL MEANS OR FOR
UNLAWFUL CONSIDERATION [SECTION 58]
 When a negotiable instrument has been lost, or
 has been obtained from any maker, acceptor or holder thereof by
means of
o an offence or
o fraud, or
o for an unlawful consideration,

no possessor or indorsee who claims through the person who found or

so obtained the instrument is entitled to receive the amount due
thereon from such maker, acceptor or holder, or from any party prior
to such holder, unless such possessor or indorsee is, or some person
through whom he claims was, a holder thereof in due course.

INSTRUMENT ACQUIRED AFTER DISHONOR OR WHEN OVERDUE

[SECTION 59]
The holder of a negotiable instrument, who has acquired it after
dishonour, whether by—
 non-acceptance
 or non-payment,
 with notice thereof, or
 after maturity,
has only, as against the other parties, the rights thereon of his
transferor.

Accommodation note or bill: Provided that any person who, in good

faith and for consideration, becomes the holder, after maturity, of a
promissory note or bill of exchange made, drawn or accepted without
consideration, for the purpose of enabling some party thereto to
raise money thereon, may recover the amount of the note or bill from
any prior party.

Instrument negotiable till payment or satisfaction [Section 60]

A negotiable instrument may be negotiated (except by the maker,
drawee or acceptor after maturity) until payment or satisfaction
thereof by the maker, drawee or acceptor at or after maturity, but
not after such payment or satisfaction.

Cancellation of indorsement: Where the holder of a negotiable

instrument, without the consent of the indorser, destroys or impairs
the indorser’s remedy against a prior party, the indorser is discharged
from liability to the holder to the same extent as if the instrument
had been paid at maturity (Sec. 40).

Negotiation Back (“taking up of a bill”)

 In the course of negotiation, if a negotiable instrument is
circulated/negotiated back by an indorser to any of the prior party
on the negotiable instruments, it is termed as negotiation back.
 The person who becomes the holder in due course under this
negotiation back cannot make any of the intermediate indorsers
liable on the instruments.
 But where an indorser had excluded his liability, by the use of the
 words ‘sans recourse’ or ‘without recourse to me’ and after that
becomes the holder of the instrument in his own right under the
‘negotiation back’ all intermediate indorsers are liable to him and
in case of dishonour, he can recover the amount from all or any
one of them.

DISCHARGE FROM LIABILITY ON NOTES,BILLS AND CHEQUES

When a party, who is liable on a negotiable instrument, ceases to

be liable he is said to be discharged from liability. Discharge from
liability of a party to an instrument is different from the discharge
of negotiable instrument itself. When only some of the parties to an
instrument are discharged from liability but others continue to be
liable thereon, it is only discharge of some of the parties from
liability.

Modes of discharge from liability on Instruments

The parties to a negotiable instrument may be discharged in the

following ways:

• Cancellation

• Release
discharge of
parties from
• Payment
liability by
 As per section 82, the maker, acceptor or indorser of a negotiable
instrument is discharged from liability thereon by cancellation,
release or payment

Thus, the parties to the negotiable instrument may be discharged in

the following ways—

(a) By cancellation [Section 82 (a)]

When the holder of a negotiable instrument or his agent cancels the
name of a party on the instrument with an intention to discharge him,
such party and all subsequent parties, who have a right of recourse
against the party whose name is cancelled, are discharged from
liability to the holder.

(b) By release [Section 82 (b)]

Where the holder of a negotiable instrument releases any party to
the instrument by any method other than cancellation, the party so
released is discharged from liability.
For example discharge by an agreement between the parties, and
includes waiver, release, accord and satisfaction.

The party so released and all parties subsequent to him who have a
 right of action against the party so released are discharged from
liability. Thus, the effect of release is the same as that of cancelling
a party’s name

(c) By payment [Section 78]3

When payment on an instrument is made in due course, both the
instrument and the parties to it are discharged subject to the
provision of Sec. 82(c). The payment on an instrument may be made by
any party to the instrument. It may even be made by a stranger
provided it is made on account of the party liable to pay.

(d) By the holder allowing the drawee of a bill more than 48 hours to
accept [Section 83]
If the holder of a bill of exchange allows the drawee more than forty
eight hours, exclusive of public holidays, to consider whether he will
accept the same, all previous parties not consenting to such allowance
are thereby discharged from liability to such holder.

(e) By the Holder agreeing to a qualified or limited acceptance of bill of

exchange [Section 86]:
If the holder of a bill agrees to a qualified acceptance all prior parties
whose consent is not obtained to such an acceptance are discharged
from liability.

(f) By the Drawer not duly presenting a cheque for payment [Section
84]:
If a holder does not present a cheque within reasonable time after its
issue, and the bank fails causing damage to the drawer, the drawer is
 discharged as against the holder to the extent of the actual damage
suffered by him.

(g) By the bill coming to the acceptor’s hands after maturity (Section
90)
If a bill of exchange which has been negotiated is, at or after
maturity, held by the acceptor in his own right, all rights of action
thereon are extinguished.

(a) Discharge by material alteration

 If a material alteration is made by an indorsee, the indorser will be
discharged from his liability even in respect of the consideration
thereof.” If the holder of a negotiable instrument makes a material
alteration of instrument he loses his right of action against those
parties who would otherwise have been liable towards him.
 It is generally an accepted rule of law that a material alteration of an
instrument by a party to it, without the consent of the other party,
renders it void.

 By material alteration the identity of original instrument is

destroyed and those parties who had agreed to be liable on the
original instrument cannot be made liable on the new contract
contained in the altered instrument to which they never consented.

 It makes no difference whether the alteration is made by a party who

is in possession of the same, or by a stranger while the instrument
was in the custody of a party, because the party in custody of
 instrument is bound to preserve it in its integrity. The rule is
defended on the ground that no man shall be permitted to take the
chance of committing a fraud without running any risk of loss by the
event when it is detected.

Any alteration is material

(a) which alters the business effect of the instrument if used for any
business purpose.
(b) which causes it to speak a different language in legal effect form
which it originally spoke or which changes the legal identity or
character of the instrument.

“The following alteration are specifically declared to be material:

any alteration of (i) the date, (ii) the sum payable, (iii) the time of
payment, (iv) the place of payment, or the addition of a place of
payment.”
Following are the examples of material alteration: -
(a) Alteration of date.
(b) Alteration of rate of interest (if specified.
(c) Alteration of the sum payable
(d) Alteration in the time of payment, e.g., a bill payable 3 months
after date is altered to be payable 1 month after date.
(e) Alteration of the place of payment e.g., change of bank at which the
bill is. Likewise, alteration by addition of place for payment e.g. where
a place of payment is not given but is subsequently added without the
acceptor’s consent.
(f) Alteration by addition of parties .

(g) Alteration by tearing material part of the instrument.

(h) Alteration by increasing or affixing stamps.
(i) Alteration by erasure of an “account payee” crossing
(j) Alteration of an order cheque to a bearer cheque, except by or
with consent of the drawer.

The following alterations do not affect the liability of parties

thereto:

(a) If the alteration is unintentional and due to pure accident (e.g.

accidental disfigurement of document).
(b) Alteration made by a stranger without the consent of holder and
without any fraud and negligence on his part.
(c) An alteration made to correct a clerical error or a mistake, thus, if
instead of 1823, the date entered was 1832, the agent of drawer held
entitled to correct mistake.
(d) Alteration made to carry out common intention of original parties is
permitted by Section 87. For example, where the words “or order”
after the name of payee, inserted subsequently.
(e) Alteration with the consent of the parties liable thereto.
(f) An alteration made before the completion or the issue of negotiable
Instrument.
(g) A material alteration doesn’t affect the liability of those parties who
 become liable after the alteration is made.
(k) An alteration which is not material e.g. when a bill payable to bearer is
converted to bill payable to order/or an incomplete name of a person
converted into the complete name of same person.

(h) Alterations permitted (Exceptions to Section 87)

(a) Section 20 – Incomplete instrument (e.g. column of sum left blank)
can be filled up by the holder.
(b) Section 49 – It enables the holder of an instrument indorsed in blank
to convert it into indorsement in full (by writing above the indorser’s
signature a direction to pay to any other person as indorsee). Thus,
addition of parties allowed here.
(c) Section 125- the holder of an uncrossed cheque may cross it or may
convert general into special crossing or may make it ‘not negotiable’.
(d) Apparent alteration – The alteration should be apparent on the face
of the instrument otherwise it remains a valid security in the hands
of a holder in due course.

Example: A promissory note was made without mentioning any time

for payment. The holder added the words “on demand” on the face
of the instrument. As per the above provision of the Negotiable
Instruments Act, 1881 this is not a material alteration as a promissory
note where no date of payment is specified will be treated as payable
on demand. Hence adding the words “on demand” does not alter the
business effect of the instrument.
 DISHONOUR OF NEGOTIABLE
INSTRUMENTS

Dishonour of a bill
A bill may be dishonoured by:
(a) Non-acceptance, or
(b) Non- payment.

Dishonor of Negotiable
Instruments

Non Acceptance
Non Payment

Dishonour by Non-acceptance
A bill of exchange is said to be dishonoured by non-acceptance in any
one of the following ways (Section 91):
(a) When a bill is duly presented for acceptance, and the drawee, or one
of several drawees not being partners, refuse acceptance within
forty eight hours from the time of presentment, the bill is
dishonored.
(b) where presentment is excused, and the bill is not accepted.
(c) Where the drawee is incompetent to contract, the bill may be
treated as dishonored.
(d) Where the drawee is a fictitious person.
(e) Where the drawee could not be found even after reasonable search
(f) When a drawee gives a qualified acceptance, the holder may treat
the instrument dishonored.

The effect of dishonoured by non-acceptance is that the holder of

the bill can start an action against the drawer and the indorsers
and need not wait for maturity of the bill

Dishonour by non-payment

A promissory note, bill of exchange and cheque is said to be

dishonoured by non- payment when the maker of the note, acceptor of
the bill or drawee of the cheque makes default in payment upon being
duly required to pay the same (Sec. 92).
 Notice of Dishonour
When negotiable instrument is dishonoured either by non-acceptance
or by non- payment, the holder must give a notice of dishonour to the
drawer or his previous holder in order to make them liable on the
instrument.

Object of notice of Dishonour

 The object of notice of dishonour is to inform (or warn) the party or
the person who is liable on instrument about the dishonour of the
instrument.
 The notice is necessary whatever the nature of the instrument i.e.,
whether it is payable at sight or on demand or whether it is an
 accommodation bill.
 In order to make the drawer liable, on the dishonour by the drawee
or the acceptor, it is necessary that a ‘notice of dishonour’ must have
been given to him.
 The omission on the part of holder to give due notice of dishonour
would discharge the drawer not only from his liability upon the cheque,
but also upon the original debtor consideration.

By and to whom notice should be given [Section 93]

P/N, BoE, Cheque

Dishonoured by
non-acceptance non- payment

Holder/some party thereto liabile thereon

give notice of dishonour

to parties whom holder seeks liable

severally jointly

Notice by whom: Notice of dishonour must be given by the holder, or

by a person liable on the instrument. But it is not necessary that the
notice should always come from the holder, for he is entitled to avail
himself of a notice given by any party liable on the instrument.

Notice to whom:

 Notice of dishonour must be given to all parties other than the maker
or the acceptor or the drawee whom the holder seeks to make liable.
 Notice of dishonour to the acceptor of a bill or to the maker of a note
or the drawee of cheque is not necessary as per section 93 of the Act.
They are the parties primarily liable upon the instrument, on the due
 date and at the proper place. It is they who dishonour the instrument
by no-acceptance or non-payment and notice to them will merely be
notice of fact already known to them

Modes of giving Notice

 Notice of dishonour may be given to a duly authorized agent of

the person to whom it is required to be given, or, where he has died,
to his legal representative or, where he has been declared insolvent,
to his assignee;
 may be oral or written; may, if written, be sent by post; and may be
in any form; but it must inform the party to whom it is given, either
in express term or by reasonable in intendment, that the instrument
has been dishonoured, and
 in what way, and that he will be held liable thereon; and it must be
given within reasonable time after dishonour, at the place of business
or (in case such party has no place of business) at the residence of
the party for whom it is intended.
 If the notice is duly directed and sent by post and miscarries, such
miscarriage does not render the notice invalid (Section 94).

Party receiving must transmit notice of dishonor

Any party receiving notice of dishonour must, in order to render any
prior party liable to himself, give notice of dishonour to such party
within reasonable time, unless such party otherwise receives due
notice as provided by Section 93 (Section 95).
Thus, a person receiving notice must transmit it to prior parties whom
he wishes to make liable to himself because the holder may have
omitted to give notice to some of the prior parties.
 Agent of presentment
When instrument is deposited with an agent for presentment, the
agent is entitled to the same time to give notice to his principal as if
he were the holder giving notice of dishonour, and the principal is
entitled to a further like period to give notice of dishonour (Section
96).

When party to whom notice given is dead

When the party to whom notice of dishonour is dispatched is dead,
but the party dispatching the notice is ignorant of his death, the
notice is sufficient (Section 97).

When notice of dishonor is unnecessary [Section 98]

No notice of dishonour is necessary, -

(a) Waiver: When it is dispensed with by the party entitled thereto; a

waiver of notice may be made at the time of drawing or indorsing the
instrument, or before or after the time for giving notice has arrived.
A waiver by a party to receive notice ensures for the benefit of all
the parties coming after him.
(b) in order to charge the drawer, when he has countermanded
payment.
(c) No damage: when the party charged could not suffer damages for
want of notice.
(d) when the party entitled to notice cannot after due search be found;
or the party bound to give notice is, for any other reason, unable
without any fault of his own to give it.
(e) to charge the drawers, when the acceptor is also a drawer.
(f) in the case of a promissory note which is not negotiable.
(g) Promise to pay - when the party entitled to notice, knowing the facts,
promises unconditionally to pay the amount due on the instrument.

Example 36: Is notice of dishonour necessary in the following cases:

(1) X having a balance of ` 1,000 with his bankers and having no
authority to over draw, drew a cheque for ` 5,000/-. The cheque was
dishonored when duly presented for repayment.
(2) X, drawer of a Bill informs Y, the holder of the bill that the bill would
be dishonored on the presentment for payment.
Answer: Notice of dishonour is not necessary in both the cases.
[Section 98 of the Negotiable Instruments Act, 1881].

DISHONOUR OF CHEQUES FOR

INSUFFICIENCY OF FUNDS IN THE
ACCOUNTS [SECTION 138 TO 142]

DISHONOR OF CHEQUE FOR INSUFFICIENCY, ETC., OF FUNDS

IN THE ACCOUNTS [SECTION 138]
 Where any cheque drawn by a person on an account maintained by
him with a banker—
 for payment of any amount of money
 to another person from that account
 for the discharge, in whole or in part, of any debt or other liability,
[A cheque given as gift or donation, or as a security or in discharge
of a mere moral obligation, or for an illegal consideration, would be
outside the purview of this section]
 is returned by the bank unpaid

 either because of the—

 amount of money standing to the credit of that account is
insufficient to honor the cheque, or
 that it exceeds the amount arranged to be paid from that account
by an agreement made with that bank,
such person shall be deemed to have committed an offence and shall,
be punished with imprisonment for a term which may extend to two
years, or with fine which may extend to twice the amount of the
cheque, or with both.

Provided that this section shall not apply, unless—

a) Cheque presented within validity period: The cheque has been
presented to the bank within a period of three months from the
date on which it is drawn or within the period of its validity,
whichever is earlier.
 b) Demand for the payment through the notice: the payee or the
holder in due course of the cheque, as the case may be, makes a
demand for the payment of the said amount of money by giving
a notice, in writing, to the drawer of the cheque, within 30 days
of the receipt of information by him from the bank regarding
the return of the cheque as unpaid, and
c) Failure of drawer to make payment: the drawer of such cheque
fails to make the payment of the said amount of money to the
payee or, as the case may be, to the holder in due course of the
cheque, within fifteen days of the receipt of the said notice.

Explanation: For the purpose of this section, “debt or other liability”

means a legally enforceable debt or other liability.

Example 37: X issued a post-dated cheque to Y on the account of

discharge of its liability. Further, X instructed to the bank to stop
the payment due to unavailability of the adequate amount in the
account. Here, in this instance section 138 of the Act is attracted
as when a cheque is dishonoured on account of stop payment
instructions sent by the drawer to his banker in respect of a post-
dated cheque irrespective of insufficiency of funds in the account. A
post-dated cheque is deemed to have been drawn on the date it bears
and the three months period for the purposes of section 138 is to be
counted from that date. So, X will be liable for dishonour of cheque.
Once a cheque is issued by the drawer, a presumption under section
139 must follow.

Penalty: According to Section 138 of the Act, the dishonour of cheque

is a criminal offence and is punishable with imprisonment up to 2 years
or fine up to twice the amount of cheque or both.
 PRESUMPTION IN FAVOR OF HOLDER [SECTION 139]
When a cheque is dishonoured, it shall be presumed, unless the
contrary is proved, that the holder of a cheque received the cheque
of the nature referred to in section 138 for the discharge, in whole
or in part, or any debt or other liability.
Presumption prescribed here is a “rebuttable presumption” as the
provisions clearly provides that the person issuing the cheque is at
liberty to prove to the contrary. The effect of this presumption is
to place the evidential burden on the accused.

DEFENCE WHICH MAY NOT BE ALLOWED IN ANY PROSECUTION

UNDER SECTION 138 [SECTION 140]
It shall not be a defence in a prosecution of an offence under section
138 that the drawer had no reason to believe when he issued the
cheque that the cheque may be dishonoured on presentment for the
reasons stated in that section.

OFFENCES BY COMPANIES [SECTION 141]

(1) If the person committing an offence under section 138 is a company,
every person who, at the time the offence was committed—
 was in charge of, and
 was responsible to the company for the conduct of the business of the
company,
as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly.
 Exception: Provided that nothing contained in this sub-section shall
render any person liable to punishment if he proves that the offence
was committed without his knowledge, or that he had exercised all
due diligence to prevent the commission of such offence.

Explanation: For the purpose of this section

(a) “Company” means any body corporate and includes a firm or other
association of individuals; and
(b) “Director”, in relation to a firm, means a partner in the firm.

Example 38: A promoter who has borrowed a loan on behalf of

company, who is neither a director nor a person-in-charge, sent a
cheque from the company’s account to discharge its legal liability.
Subsequently, the cheque was dishonoured and the complaint was
lodged against him. So, according to Section 138 of the Negotiable
Instruments Act, 1881, where any cheque drawn by a person on an
account maintained by him with a banker for payment of any amount
of money to another person from/out of that account for discharging
any debt or liability, and if it is dishonoured by banker on sufficient
grounds, such person shall be deemed to have committed an offence
and shall be liable.
However, in this case, the promoter is neither a director nor a person-
in-charge of the company and is not connected with the day-to-day
affairs of the company and had neither opened nor is operating the
bank account of the company.
Further, the cheque, which was dishonoured, was also not drawn on an
account maintained by him but was drawn on an account maintained
by the company. Therefore, he has not committed an offence under
 section 138.

COGNIZANCE OF OFFENCES [SECTION 142]

(1) Notwithstanding anything contained in the Code of Criminal
Procedure, 1973—
(a) Cognizance on written complaint: Notwithstanding anything
contained in Code of Criminal Procedure, 1973, a written complaint
should have been made to a metropolitan or a first-class judicial
magistrate by the payee, or holder in due course of the cheque.
(b) Limitation for filing of complaint: such complaint is made within one
month of the date on which the cause of action arises under clause
(c) of the proviso to section 138.
Provided that the cognizance of a complaint may be taken by the court
after the prescribed period, if the complainant satisfies the court
that he had sufficient cause for not making a complaint within such
period.
(c) Jurisdiction of court: no court inferior to that of a Metropolitan
Magistrate or a Judicial Magistrate of the first class shall try any
offence punishable under section 138.

(2) Jurisdiction of courts for the trial of offence [Section 142 (2)]:
The offence under section 138, which deals with the dishonor of
cheque, shall be inquired into and tried only by a court within whose
local jurisdiction,—
(a) if the cheque is delivered for collection through an account, the
branch of the bank where the payee or holder in due course, as the
case may be, maintains the account, is situated; or
(b) if the cheque is presented for payment by the payee or holder
in due course, otherwise through an account, the branch of the
drawee bank where the drawer maintains the account, is situated.

Explanation— For the purposes of clause (a), where a cheque is

delivered for collection at any branch of the bank of the payee or
holder in due course, then, the cheque shall be deemed to have been
delivered to the branch of the bank in which the payee or holder in
due course, as the case may be, maintains the account.”

Example 39: Mr. A holds an account in Navrangpura Branch,

Ahmedabad of “XYZ” Bank, issues a cheque payable in favour of B. B,
who holds an account with the M.S University Road Branch, Vadodara
of the “PQR” bank, deposits the said cheque at Surat Branch of ‘PQR
bank’ and the cheque is dishonoured. The complaint will have to be filed
before the court having jurisdiction where the M.S University Road
branch is situated.

POWER OF COURT TO TRY CASES SUMMARILY [SECTION 143]

(1) Trial of Offence: All offences under this Chapter shall be tried
by a Judicial Magistrate of the first class or by a Metropolitan
Magistrate.

In case of summary trial: Provided that in the case of any conviction

in a summary trial under this section, it shall be lawful for the
Magistrate to pass a sentence of imprisonment for a term not
exceeding one year and an amount of fine exceeding five thousand
rupees.
 During the proceeding of the case, court can convert summary trial
into regular trial, if it deems fit.

(2) Speedy and efficient Disposal: Every trial under this section
shall be conducted as expeditiously as possible and an endeavour shall
be made to conclude the trial within six months from the date of
filing of the complaint.

POWER TO DIRECT INTERIM COMPENSATION [SECTION 143A]

(1) Notwithstanding anything contained in the Code of Criminal Procedure,

1973, the Court trying an offence under section 138 may order the
drawer of the cheque to pay interim compensation to the
complainant—
(a) in a summary trial or a summons case, where he pleads not guilty to
the accusation made in the complaint; and
(b) in any other case, upon framing of charge.

(2) The interim compensation under sub-section (1) shall not exceed
twenty per cent. of the amount of the cheque.

(3) The interim compensation shall be paid within sixty days from the
date of the order under sub-section (1), or within such further
period not exceeding thirty days as may be directed by the Court
on sufficient cause being shown by the drawer of the cheque.

(4) If the drawer of the cheque is acquitted, the Court shall direct the
complainant to repay to the drawer the amount of interim
 compensation, with interest at the bank rate as published by the
Reserve Bank of India, prevalent at the beginning of the relevant
financial year, within sixty days from the date of the order, or within
such further period not exceeding thirty days as may be directed by
the Court on sufficient cause being shown by the complainant.

(5) The amount of fine imposed under section 138 or the amount of
compensation awarded under section 357 of the Code of Criminal
Procedure, 1973, shall be reduced by the amount paid or recovered as
interim compensation under this section.

OFFENCES TO BE COMPOUNDABLE [SECTION 147]

Notwithstanding anything contained in the Code of Criminal

Procedure, 1973, every offence punishable under this Act shall be
compoundable.

POWER OF APPELLATE COURT TO ORDER PAYMENT PENDING

APPEAL AGAINST CONVICTION [SECTION 148]

(1) In an appeal by the drawer against conviction under section 138, the
Appellate Court may order the appellant to deposit such sum which
shall be a minimum of twenty per cent of the fine or compensation
awarded by the trial Court:
Provided that the amount payable under this sub-section shall be in
addition to any interim compensation paid by the appellant under
section 143A.
(2) The amount referred to in sub-section (1) shall be deposited within
sixty days from the date of the order, or within such further period
not exceeding thirty days as may be directed by the Court on
sufficient cause being shown by the appellant.

(3) The Appellate Court may direct the release of the amount deposited
by the appellant to the complainant at any time during the pendency
of the appeal:
Provided that if the appellant is acquitted, the Court shall direct the
complainant to repay to the appellant the amount so released, with
interest at the bank rate as published by the Reserve Bank of India,
prevalent at the beginning of the relevant financial year, within sixty
days from the date of the order, or within such further period not
exceeding thirty days as may be directed by the Court on sufficient
cause being shown by the complainant.