The Negotiable

Instruments Act, 1881

 Introduction
■ The law relating to negotiable instruments is contained in
the Negotiable Instruments Act, 1881 which applies and
extends to the whole of India.
■ This Act is enacted to define and amend laws relating to
promissory note, bills of exchange and cheque.
■ This Act is applicable to whole of India including Jammu
and Kashmir.
■ This act came into force on 1st March 1882.
 Negotiable Instruments
■ Definition:
The word negotiable means ‘transferable by delivery,’
and the word instrument means ‘a written document by
which a right is created in favour of some person.’

Thus, the term “negotiable instrument” literally means

‘a written document which creates a right in favour of
somebody and is freely transferable by delivery.’

A negotiable instrument is a piece of paper which entitles

a person to a certain sum of money and which is
transferable from one to another person by a delivery or
by endorsement and delivery.
Kinds of Negotiable Instruments
 Features of Negotiable Instruments
1) It should be in writing.
2) Freely transferable.
3) It should create a right of a person to receive money and a
corresponding liability of a person to pay money.
4) Holder's title free from defects –
a) A holder in due course acquires a good title irrespective of any
defect in a previous holder's title.
b) A holder in due course is one who receives the instrument:
for consideration; without notice as to the defect in the title of
the transferor; i.e. in good faith and before maturity
5) Transferability – A negotiable instrument can be transferred
infinitum, i.e., can be transferred any number of times, till its
payment.
Characteristics of Negotiable Instruments

1. Free transferability or easy negotiability

• Negotiable instrument is freely transferable from one person to
another without any formality.
• The property (right of ownership) in these instruments passes
by either endorsement and delivery (in case it is payable to
order) or by delivery merely (in case it is payable to bearer) and
no further evidence of transfer is needed.

2. Title of holder is free from all defects

• A person who takes negotiable instrument bona-fide and for
value gets the instrument free from all defects in the title. The
holder in due course is not affected by defective title of the
transferor or of any other party.
 Characteristics of Negotiable Instruments
3. Transferee can sue in his own name without giving notice
to the debtor:
• A bill, note or a cheque represents a debt, i.e., an “actionable
claim” and implies the right of the creditor to recover
something from his debtor
• The creditor can either recover this amount himself or can
transfer his right to another person
• In case he transfers his right, the transferee of a negotiable
instrument is entitled to sue on the instrument in his own name
in case of dishonour, without giving notice to the debtor of the
fact that he has become holder
• In case of transfer or assignment of an ordinary “actionable
claim” (i.e., a book debt evidenced by an entry by the creditor
in his account book, under the transfer of property act, notice
to the debtor is necessary in order to make the transferee
entitled to sue in his own name
 Characteristics of Negotiable Instruments
4. Presumptions:
Certain presumptions apply to all negotiable instruments.

Section 118 and 119 lay down the following presumptions:

(a) For consideration : that every negotiable instrument, was

made, drawn, accepted, endorsed or transferred for
consideration.
(b) As to date : that every negotiable instrument bearing a date was
made or drawn on such date.
(c) As to time of acceptance : that every bill of exchange was
accepted within a reasonable time after its date and before its
maturity.
(d) As to transfer: that every transfer of a negotiable instrument
was made before its maturity
 Characteristics of Negotiable Instruments
(e) As to time of endorsements : that the endorsements
appearing upon a negotiable instrument were made in the
order in which they appear thereon.
(f) As to stamps : that a lost promissory-note, bill of
exchange or cheque was duly stamped.
(g) As to a holder in due course: that every holder of a
negotiable instrument is holder in due course (this
presumption would not arise where it is proved that the
holder has obtained the instrument from its lawful owner,
or from any person in lawful custody thereof, by means of
an offence, fraud or for unlawful consideration and in such
a case the holder has to prove that he is a holder in due
course
(h) As to dishonour: that the instrument was dishonoured, in
case a suit upon a dishonoured instrument is filed with the
court and the fact of protest is proved
 Types of Negotiable Instruments
Negotiable instruments are of two types which are
as follows:
• Negotiable Instruments recognized by status:
e.g. Bills of exchange, cheque and promissory
notes.

• Negotiable instruments recognized by usage

or customs of trade:

e.g. Bank notes, exchequer bills, share warrants,

bearer debentures, dividend warrants, share
certificate
 Promissory Note

■ Definition:

According to Section 4, “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.”
Specimen of a Promissory Note
 Parties to a Promissory Note
There are primarily two parties involved in a promissory note.
They are:
(i) The Maker or Drawer: The person who makes the note and
promises to pay the amount stated therein. In the above
specimen, Sanjeev is the maker or drawer.
(ii) The Payee – the person to whom the amount is payable. In the
above specimen it is Ramesh.
 Parties to a Promissory Note
In course of transfer of a promissory note by payee and
others, the parties involved may be –

(a) The Endorser – the person who endorses the note in

favour of another person. In the above specimen if Ramesh
endorses it in favour of Ranjan and Ranjan also endorses it
in favour of Puneet, then Ramesh and Ranjan both are
endorsers.
(b) The Endorsee – the person in whose favour the note is
negotiated by endorsement. In the above, it is Ranjan and
then Puneet.
Essentials of a Promissory Note
The Promissory note must be in writing.

It must contain an undertaking to pay.

There must be an express promise to pay unconditionally.

The maker & payee must be certain & signed by maker.

The maker & payee must be certain & signed by maker.

The sum payable must be certain.

The stamping of promissory note is essential under the

Indian Stamp Act, 1899.

It must contain a date and promise to pay money only.

The limitation period to file a suit is 3 yrs from acknowledgement.

 Essentials of Promissory Note

1. It must be in writing:
A promissory note has to be in writing. An oral promise
to pay does not become a promissory note
Illustrations: A signs the instruments in the
following terms:
▪ “I promise to pay B or order Rs. 500”
▪ “I acknowledge myself to be indebted to B in Rs. 1,
000 to be paid on demand, for value received”
Both the above instruments are valid promissory notes.
 Essentials of Promissory Note
2. It must contain a promise or undertaking to pay:
There must be a promise or an undertaking to pay either from express words or
by necessary implication. A mere acknowledgement of indebtedness is not a
promissory note, although it is valid as an agreement and may be sued upon as
such

Illustrations: A signs the instruments in the following terms:

▪“Mr. B I owe you Rs. 1,000” or “I am liable to pay to B Rs. 500”

The above instruments are not promissory notes as there is no undertaking or

promise to pay. There is only an acknowledgement of indebtedness. Where A
signs the instrument in the following terms:
▪“I acknowledge myself to be indebted to B in Rs. 1, 000, to be paid on demand,
for value received,” there is a valid promissory note
 Essentials of Promissory Note
3. The promise to pay must be unconditional:
• A promissory note must contain an unconditional promise to pay
• The promise to pay must not depend upon the happening of some
uncertain event, i.e., a contingency or the fulfillment of a condition
• Illustrations: A signs the instruments in the following terms:
▪ “I promise to pay B Rs. 500 seven days after my marriage with
C”
▪ “I promise to pay B Rs. 500 as soon as I can”
• The above instruments are not valid promissory notes as the
payment is made depending upon the happening of an uncertain
event which may never happen and as a result the sum may never
become payable

4. It must be signed by the maker:

• It is imperative that the promissory note should be duly
authenticated by the ‘signature’ of the maker
• ‘Signature’ means the writing or otherwise affixing a person’s
name or a mark to represent his name, by himself or by his
authority with the intention of authenticating a document
 Essentials of Promissory Note
5. The maker must be a certain person:
■ The instrument must itself indicate with certainty who is the
person or are the persons engaging himself or themselves to
pay
■ Alternative promisors are not permitted in law because of
the general rule that “where liability lies no ambiguity must
lie”

6. The payee must be certain:

■ Like the maker the payee of a pronote must also be certain
on the face of the instrument
■ A note in favour of fictitious person is illegal and void
■ A pronote made payable to the maker himself is a nullity,
the reason being the same person is both the promisor and
 Essentials of Promissory Note
7. The sum payable must be certain:
■ For a valid pronote it is also essential that the sum of money
promised to be payable must be certain and definite
■ The amount payable must not be capable of contingent additions or
subtractions
■ Illustrations: A signs the instruments in the following terms:
• “I promise to pay B Rs. 500 and all other sums which shall be due to
him”
• “I promise to pay B Rs. 500, first deducting thereout any money
which he may owe me”
■ The above instruments are invalid as promissory notes because the
exact amount to be paid by A is not certain

8. The amount payable must be in legal tender money of India:

■ A document containing a promise to pay a certain amount of
foreign money or to deliver a certain quantity of goods is not a
 Bill of Exchange
■ Definition:

Section 5 of the Negotiable Instruments Act defines a Bill of

Exchange as follows:

“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.”

Illustration:
Mr. X purchases goods from Mr. Y for Rs. 1000/-
Mr. Y buys goods from Mr. S for Rs. 1000/-
Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will
be nothing but a bill of exchange.
Specimen of Bill of Exchange
 Parties to a Bill of Exchange
There are three parties involved in a bill of exchange
(i) The Drawer – The person who makes the order for
making payment. In the above specimen, Rajiv is the
drawer.
(ii) The Drawee – The person to whom the order to pay is
made. He is generally a debtor of the drawer. It is Sameer
in this case.
(iii) The Payee – The person to whom the payment is to be
made. In this case it is Tarun.

The drawer can also draw a bill in his own name thereby he
himself becomes the payee. Here the words in the bill
would be Pay to us or order.
In a bill where a time period is mentioned, just like the above
specimen, is called a Time Bill.
But a bill may be made payable on demand also. This is
 Essentials of a Bill of Exchange
1. It must be in writing
2. It must contain an order to pay. A mere request to
pay on account, will not amount to an order
3. The order to pay must be unconditional
4. It must be signed by the drawer
5. The drawer, drawee and payee must be certain. A
bill cannot be drawn on two or more drawees but
may be made payable in the alternative to one of
two or more payees
6. The sum payable must be certain
7. The bill must contain an order to pay money only
8. It must comply with the formalities as regards date,
consideration, stamps, etc
In a promissory note there are only 2 parties namely:
the maker and the payee. In a bill of exchange, there
are 3 parties which are follows the drawer, the drawee
and the payee.

A promissory note does not require any acceptance, as

it is signed by the person who is liable to pay. The Bills
of Exchange need a acceptance from the drawee.

A promissory note cannot be made payable to bearer.

On the other hand a bill of exchange can be drawn
payable to bearer. However, it cannot be payable to
bearer on demand.
 Types of Bills
1) Inland Bills –
a) Two essential conditions to make an inland instrument are:
(1) the instrument must have been drawn or made in India; and
(2) the instrument must be payable in India or the drawee must be in
India.

2) Foreign Bills – All bills which are not inland are deemed to be
foreign bills. Normally foreign bills are drawn in sets of three copies.

3) Trade Bills – A bill drawn and accepted for a genuine trade

transaction is termed as a trade bill. When a trader sells goods on
credit, he may make use of a bill of exchange.
 Types of Bills
4) Bills in Sets –
a) Foreign bills are usually drawn in sets to avoid the danger of loss.

b) They are drawn in sets of three, each of which is called “Via” and as
soon as any one of them is paid, the others become inoperative.

c) All these parts form one bill and the drawer must sign and deliver all
of them to the payee.

d) The stamp is affixed only on one part and one part is required to be
accepted.

e) But if the drawer mistakenly accepts all the parts of the same bill,
he will be liable on each part accepted as if it were a separate bill.
 Types of Bills
5) Accommodation Bill –

a) An accommodation bill is a bill in which a person lends or gives his

name to oblige a friend or some person whom he knows.

b) In other words, a bill which is drawn, accepted or endorsed without

consideration is called an accommodation bill.

c) The party lending his name to oblige the other party is known as the
accommodating or accommodation party, and the party so obliged is
called the party accommodated.

d) An accommodation party is not liable on the instrument to the party

accommodated because as between them there was no consideration and
the instrument was only for help.

e) But the accommodation party is liable to a holder for value, who takes
the accommodation bill for value, though such holder may not be a holder
in due course.
Acceptance – Section 7

A) Meaning: The acceptance of a bill is the indication by the

drawee of his assent to the order of the drawer. Section 7
states that an acceptance is the signature of the drawee of
a bill who has signed his assent upon the bill and delivered
it. Thus, an acceptor is the drawee who has signed his
assent upon the bill and delivered it to the holder.
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.
“drawee in case of need”— When in the bill or in any
endorsement 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”.
B) Essentials of Valid Acceptance –

■ In writing,
■ Signed by the drawee or his agent,
■ On bill of exchange,
■ Completed by delivery to the holder.
■ Writing the word 'Accepted' is immaterial.
■ An oral acceptance or writing of the word 'Accepted'
without the drawee's signature is not an acceptance.

“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”. Thus, an acceptor is the drawee who has
signed his assent upon the bill and delivered it to the holder.
 Acceptor for honour
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 endorser whom he names, or generally for
honor.
 Holder – Section 8

1) The "holder" of a promissory note, bill of exchange or

cheque means any person entitled in his own name –
a) to the possession thereof; and
b) to receive or recover the amount due thereon from the
parties thereto.
2) His rights and title are dependent on the transferor. He
has a right to demand and receive but does not have a
right to sue.
 Holder in Due Course – Section 9

A holder in due course is one who receives the instrument:

a) for consideration;
b) without notice as to the defect in the title of the
transferor; i.e. in good faith; and
c) before maturity.

Note –
a) His rights and title are independent on the transferor.
b) He has a right to demand and receive and also have a
right to sue.
 Payment in Due Course – Section 10
a) Payment in due course refers to a payment in keeping
with the evident tenor of the instrument, in good faith &
without negligence to any person in possession thereof.

b) A payment will be regarded as a payment in due course

if:
■ Payment is done as per apparent tenor of instrument
■ It is made in good faith & without negligence
■ It is made to the person who possesses the instrument
who is entitled as holder to obtain payment;
■ Payment is made in money & money only.
 Classification of Negotiable Instruments –
A) Bearer Instruments – There are two important conditions
for negotiable instruments to become payable to bearers.
1) parties to the transactions must express it to be so
payable; or
2) The only endorsement for it should be an endorsement in
blank.
b) A person who is a holder of a bearer instrument can obtain
the payment of the instrument.

B) Order Instruments –
a) They are payable when the instruments expressly state
them to be so.
b) They may be payable to order only to a specific person.
c) There should be no prohibition on their transferability.
 Classification of Negotiable Instruments –
C) Inland Instruments –
a) An inland instrument is one which is either:
1) drawn and made payable in India, or
2) drawn in India upon some persons resident , even though
it is made payable in a foreign country.

D) Foreign Instruments –
a) Every instrument that is not inland automatically becomes
a foreign instrument.
b) These instruments are drawn in a foreign country but may
be payable within or outside India.
c) it must be drawn in India and made payable outside India
and drawn on a person resident outside India.
 Classification of Negotiable Instruments –
E) Demand Instruments – Negotiable instruments in which no
time is mentioned is called as demand instruments.

F) Time Instruments – Time instruments carry a fixed future

date for payment , payable at a fixed date in the future.

G) Ambiguous Instruments –
a) An ambiguous instrument is basically one that may be
either a bill or a note for its holder.
b) Under such circumstances, the holder of such instruments
may treat them either as bills of exchange or as promissory
notes.
c) For example, sometimes the drawee may be a fictitious
person or he may be incompetent to contract.
 Classification of Negotiable Instruments –
H) Incomplete instruments –
a) Incomplete instruments lack certain essential requirements of
typical negotiable instruments.
b) In such cases, the holder of the instrument has the authority
to complete it up to the amount mentioned therein.
c) This, in turn, results in the creation of legally binding
negotiable instrument payable by law.
d) Not only the first holder but also any subsequent holder who
procures such instruments can complete them.

When the amount stated in words and figures are different –

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.
 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.

A cheque is a kind of bill of exchange but it has additional

qualification namely-
1- it is always drawn on a specified banker and
2-it is always payable on demand without any days of
grace.
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.
 Crossing a cheque
❖ Crossing a cheque refers to drawing two parallel transverse
lines on the cheque on the corner of the cheque.
❖ By crossing the cheque the drawer instruct the banker to not to
pay it over the counter but only credit to the account of the
person named therein.
❖ It means the banker should pay the money only through
banker.
❖ It adds to the security and thus ensures payment to the payee
or to his order.
❖ The crossing of cheque had developed gradually as a means of
protection against misusing of cheques.
❖ Payment is made to payee’s banker only, and not directly to
❖ the person presenting it at the counter. This ensures that
payment is made to the actual payee.
 Crossing a cheque
Who can cross a cheque?
The drawer of a cheque
The holder of a cheque – Where a cheque is issued uncrossed it
may be crossed by the holder generally or specially
The banker in whose favour the cheque has been crossed specially
may again cross it specially in favour of another banker. The
later bank in such a case acts as the agent of the former.
 Kinds of Crossing on a cheque
1) General crossing – Section 123
Two parallel transverse lines are drawn on the face of the cheque,
generally, on the top left corner of the cheque.
Holder or payee cannot get the payment at the counter but
through the bank only
Including the name of the banker is not essential, hence, the
amount can be encashed by any banker
The words, “& Company”, “Not Negotiable”, “A/C. Payee” may or
may not be written
It can be converted into Special Crossing.
 Kinds of Crossing on a cheque
Effect of General Crossing –
the banker on whom it is drawn shall only pay to a banker.
this type of cheque cannot be paid at counter.
The payment should be made through an account only
General crossing gives protection and avoids fraudulent
withdrawals.
It is the liability of the paying banker to verify proper payment in
proper account.
The banker is answerable to his customer, if he pays the money to
a third person without the direction of his customer
 Kinds of Crossing on a cheque
2) Special Crossing – Section 124
It is also known as Restricted Crossing
Two transverse lines are not necessary to be drawn
Name of the banker is added across the face of the cheque
The Name of the Banker may or may not carry the
abbreviated word, ‘& Co.’, ‘Account payee’ or ‘Not Negotiable’
Payment can be made only through the bank mentioned in the
Crossing.
Specially Crossed Cheques can never be converted to General
Crossing.
 Kinds of Crossing on a cheque
Effect of Special Crossing –
It prevents the fraudulent transactions
It is direction to the paying banker to pay the amount to the
account holder of that bank, but not to others.
If a cheque specially crossed on a particular bank, and if such
cheque is presented in another bank, the paying bank should
refuse the payment.
Special crossing gives more protection than general crossing.
3) Account Payee Crossing – It has developed in the trade and in
common to use these terms on the left side of the cheque
between the two transverse lines. However, there is no law
mentioned about this type of crossing. The terms mean that the
amount should not be paid at counter but should be credited into
the account of the payee only. However, the meaning of other
crossings is also the same. This type of crossing only gives
additional protection to the cheque.

Effect of Account Payee Crossing – It is only in the form of direction

to the receiving bank that the drawer desires to pay the particular
cheque into bank which keeps the account of the payee. The
collecting banker should credit the cheque only to the mentioned
account of the payee. If the banker credits the cheque to
another’s account and not to the account of the payee, the banker
shall be held responsible for his negligence, and shall be held
liable to pay the compensation.
4) Not Negotiable Crossing – Section 130

A person taking a cheque crossed generally or specially, bearing in

either case the words not negotiable shall not have, and shall not
be capable of giving, a better title to the cheque than that which
the person from whom he took it had.
It gives more protection than General Crossing and Special Crossing
It is a warning upon the paying and collecting bankers. Both of
them should be very careful in the transaction of this type of
cheques.
Note – The words “Not Negotiable” do not mean “not transferable”.
Objective –
The true owner is protected by this type of crossing more perfectly.
If it is stolen, the finder cannot cash it so easily. The good title
cannot be passed to him.
He will be compelled to return it to the true owner.
The owner’s right is preserved safely against any subsequent holder.

Effects –
It gives more protection and safe to the holder of the cheque.
A third person cannot cash it so easily.
It can be transferred like any other cheque.
If the banker is negligent and transfers the amount of that cheque
to another account, he will
be held responsible and he will be liable to make the compensation
 Maturity – Section 22 23 and 24
A) Meaning of Maturity –
The maturity of a promissory note or bill of exchange is the date
at which it falls due.
B) Days of grace –
a) Every promissory note or bill of exchange which is not
expressed to be payable on demand, at sight or presentment
is at maturity on the third day after the day on which it is
expressed to be payable.
b) All instruments except for the instrument payable on demand
are entitled for 3 days grace period.
 C) Calculation of days of maturity
Where a negotiable instrument is payable on specified date
then it shall become payable on that specified date + 3
days of grace.

Where a negotiable instrument is payable on a stated

number of days after date or after sight or after
happening of certain event then it shall become payable
on –
■ The date on which the negotiable instrument is drawn
+ 3 days of grace.
■ The date on which negotiable instrument is presented
for sight + 3 days of grace.
■ The date on which the event happens + 3 days of
grace.
 C) Calculation of days of maturity
Where a negotiable instrument is payable on a stated number of
months after date or after sight or after happening of certain
event then it shall become payable on –

■ The corresponding day of relevant month (The date on

which the negotiable instrument is drawn) + 3 days of
grace.
■ The corresponding day of relevant month (The date on which
negotiable instrument is presented for sight) + 3 days of grace.
■ The corresponding day of relevant month (The date on
which the event happens) + 3 days of grace.

■ If the last day of grace is a public holiday, then the

instrument will be due on preceding business day – Sec 25
■ If the day of maturity is an emergency or unforeseen
holiday, then the maturity day will be the following business
 When Banker may Refuse Payment –

a) When the cheque is post-dated.

b) When the banker has no sufficient funds of the drawer with him
and there is no communication between the bank and the
customer to honour the cheque.
c) When the cheque is of doubtful legality.
d) When the cheque is not duly presented, e.g., it is presented
after banking hours
e) When the cheque on the face of it is irregular, ambiguous or
otherwise materially altered.
f) When the cheque is presented at a branch where the customer
has no account.
g) When some persons have joint account and the cheque is not
signed jointly by all or by the survivors of them.
h) When the cheque has been allowed to become stale, i.e., it has
not been presented within 3 months of the date mentioned on
it.
 When Banker must Refuse Payment –

a) When a customer countermands payment i.e., where or

when a customer, after issuing a cheque issues instructions
not to honour it, the banker must not pay it.
b) When the banker receives notice of customer’s death.
c) When customer has been adjudged an insolvent.
d) When the banker receives notice of customer’s insanity.
e) When an order of the Court, prohibits payment.
f) When the customer has given notice of assignment of the
credit balance of his account.
g) When the holder’s title is defective and the banker comes to
know of it.
h) When the customer has given notice for closing his account.
 Presentment – Section 61 to section 67

Presentation means showing the instrument the drawee, acceptor

or maker for acceptance, sight or payment. There are three
kinds of presentments:
1. Presentment of bills of exchange for acceptance.
2. Presentment of promissory notes for sight.
3. Presentment of negotiable instrument for payment.
 A) Presentment for Acceptance

a) Only Bills of exchange requires presentment for

acceptance.
b) Bill of exchange should be presented within a reasonable
time, on business day and during business hours to the
drawee for acceptance.
c) Following bills must be presented for acceptance –
1) A bill payable after sight – Presentment is necessary in
order to fix maturity of the bills
2) Express condition – A bill in which there is an express
condition shall be presented for acceptance before it is
presented for payment.
d) In case it is not presented for acceptance the bill is
dishonored due to non-acceptance and no party is liable.
B) Bills of exchange should be presented to whom for acceptance?

The following are the persons to whom a bill of exchange

should be presented –
a) The drawee or his agent
b) If there are many drawees, bill must be presented to all of
them.
c) The legal representatives of the drawee if drawee is dead.
d) The official receiver or assignee of insolvent drawee.
e) To a drawee in case of need, if there is any
f) The acceptor for honour.

C) Drawee’s time for deliberation –

Holder of the bills of exchange should allow 48 hours to the
drawee for accepting the bill of exchange.
B) Bills of exchange should be presented to whom for acceptance?

D) Presentment for payment –

a) Promissory notes, bill of exchange and cheques must be
presented for payment to the maker, acceptor or drawee
thereof respectively, by or on behalf of the holder as
hereinafter provided.
b) In default of such presentment, the other parties
thereto are not liable thereon to such holder.

E) Hours for presentment –

Presentment for payment must be made during the usual
hours of business and, if at a banker’s, within banking
hours.
B) Bills of exchange should be presented to whom for acceptance?
 What is Endorsement ?
Endorsement means signing at the back of the instrument
for the purpose of negotiation. The act of the signing a
cheque, for the purpose of transferring to the someone
else, is called the endorsement of Cheque. If no space is
left on the instrument then the Endorsement may be
made on a separate slip to be attached to the instrument.

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 (attached) thereto, or so signs for the same
purpose a stamped paper intended to be completed as a
negotiable instrument, he is said to endorse the same, and
is called the “endorser”.
 Kinds of Endorsement
(a) Endorsement in Blank / General – An endorsement is said
to be blank or general when the endorser puts his signature
only on the instrument and does not write the name of
anyone to whom or to whose order the payment is to be
made.

(b) Endorsement in Full / Special – An endorsement is 'special'

or in 'full' if the endorser, in addition to his signature also
mention the name of the person to whom or to whose order
the payment is to be made.

There is direction added by endorser to the person specified

called the endorsee, of the instrument who now becomes its
payee entitled to sue for the money due on the instrument.
 Kinds of Endorsement
(c)Conditional Endorsement – An endorsement is conditional or
qualified which limits or negatives the liability of the endorser.

(d) Restrictive Endorsement – Restrictive endorsement seeks to

put an end the principal characteristics of a Negotiable
Instrument and seals its further negotiability. This may sound
a little unusual, but the endorsee is very much within his rights
if he so signs that its subsequent transfer is restricted. This
prevents the risk of unauthorized person obtaining payment
through fraud or forgery and the drawer losing his money.
 Kinds of Endorsement
Partial Endorsement – Instrument which transfers the amount
mentioned in the instrument partially and not fully is called as
partial endorsement.
- As per section 56 is invalid under law.

(e) Endorsement Sans Recourse – Sans Recourse which means

without recourse or reference.
As such a when the property in a negotiable instrument is
transferred sans recourse, the endorser, negatives his liability
and excludes himself from responsibility to all subsequent
endorsees. It is one of the commonest forms of qualified
endorsement and virtually prohibits negotiation since the
endorser says in effect.
 Negotiation
When the instrument is transferred from one
person to another with a view to make the other
person as holder then the instrument is deemed
to have been negotiated. It’s essential feature is
transferability. A negotiable instrument may be
transferred from one person to another in either
of the followings way-

1-By negotiation
2-By assignment under Transfer of Property
act
Delivery – Section 46

The making, acceptance or indorsement of a promissory note,

bill of exchange or cheque is completed by delivery which may
be actual or constructive.
 Negotiation
The transfer of an instrument by one party to another so
as to constitute the transferee a holder is called
Negotiation.

Negotiation means as the process by which a third party is

constituted the holder of the instrument so as to entitle
him to the possession of the same and to receive the
amount due thereon in his own name.

Who may negotiate instrument – Section 51

Every sole maker, drawer, payee or endorsee, or all of
several joint makers, drawers, payees or endorsees, of a
negotiable instrument may, indorse and negotiate the
same.
 Modes of negotiation
■ By delivery
■ Ex-A the holder of a negotiable instrument payable
to bearer , delivers it to B’s agent to keep it for B.
The instrument has negotiated.

■ By endorsement
 Negotiation by delivery [Section 47]

■ Subject to the provisions of section 58, 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 (except
in the hands of a holder for value without notice of the
condition) unless such event happens.
■ Examples:
■ 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.
 Negotiation by endorsement [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 endorsement 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 take place
when the instrument is delivered to the agent, clerk or
servant of the endorsee on his behalf or when the endorser,
after endorsement, holds the instrument as an agent of the
endorsee.
 Assignment
When a holder of a bill note or cheque transfer
the same to another, he in fact gives his right
to receive the payment of the instrument to
the transferee.
 Difference between Assignment &
Negotiation
■ Mode of transfer- The transfer by negotiation
requires only delivery with or without endorsement
of a bearer or order instrument. Whereas the
transfer by assignment requires a separate written
document such as transfer deed signed by the
transferor.
■ Notice of transfer-Not require in negotiation
■ Consideration-consideration must be proved in
assignee.
■ Title-
■ Right to sue
 Capacity of minor
Not having power to contract but he may
become promisee.
 Discharge
“Discharge means release from obligation”.
■ By Payment
■ By express waiver
■ By cancellation
■ By material alteration or lapse of time.
 Modes of discharge:

3) By delay in presenting cheques: If a cheque is not presented

within a reasonable time of its issue, and the bank fails and
drawer suffers actual damages through such delay, he is
discharged from the liability to the holder to the extent of
such damage.

4) Forgery of Endorser’s signature in case of Cheque: The Bank

is discharged by PIDC even if the signature of endorser is
forged.

5) By qualified acceptance: If the holder of a bill of exchange

agrees to accept qualified acceptance, all the previous parties
whose consent is not obtained to such acceptance are
discharged from liability, unless the holder gives notice
thereof and the parties give their assent to such qualified
acceptance.
 Modes of discharge:

One or more parties to a negotiable instrument may be

discharged from liability in either of the following ways:
1) By cancellation, Release or Payment:
a) By cancellation: Cancellation of acceptor’s name will
discharge the instrument and cancellation of any other party
will discharge the party.
b) By release: Release of acceptor will discharge the instrument
and release of any other party will discharge the party.
c) By payment: When the amount due on the instrument is paid
by the party primarily liable on the instrument, the instrument
is discharged.
2) By allowing drawee more than 48 hours: If the holder of a
bill of exchange allows the drawee more than 48 hours,
exclusive of public holiday(s) to consider whether he will
accept the same, all previous parties not consenting to such
allowance are discharged from liability to such holder.
 Modes of discharge:

6) By material alteration.: Any material alteration of a

negotiable instrument renders the same void as against
anyone who is a party thereto at the time of making such
alteration and does not consent thereto, unless it was made
in order to carry out the common intention of the original
parties. Again, it may be noted that alteration should be
material and immaterial alterations will not affect the
instrument and will not discharge any liability.

7) Discharge of Bank: As per Section 89, bank is discharged by

payment in due course in case of alteration not apparent
from records.

8) As per Section 90, when the acceptor of bill of exchange or

maker of promissory note becomes holder on or after
maturity, the instrument is discharged.
 Dishonor
■ It may be by non acceptance or non payment
■ A bill of exchange can be dishonored by non
acceptance in the following ways-
■ 1-Does not accept 48 hours from the time of
presentment
■ 2-drawee is fictitious person
■ 3-Drawee has become insolvent or dead
■ 4-Drawee is incompetent
DISHONOUR OF BILL OF EXCHANGE/ PROMISSORY NOTE
 Dishonor of bill of exchange/ promissory note by non-
payment – Section 92 (makes default in payment)
Notice of dishonor (Section 93 & 94): By whom notice to be given:
When an instrument is dishonored either by non-acceptance or by non-
payment, the holder thereof or some party thereto who remains liable
thereon must give notice of dishonor.

To whom notice is to be given: Notice must be given to such parties

whom the holder proposes to charge with liability severally or jointly, e.g.,
the drawer and the endorsers. Notice may be given either to the party
himself or to his agent, or to his legal representative on his death, or to
the official assignee on his insolvency. It is not necessary to give notice to
the maker of a note or the drawee or acceptor of a bill or cheque.

Effect of non-service of notice: If a notice of dishonor is not sent to any

prior party who is entitled to such notice within a reasonable time, he is
discharged from liability.

Mode of service of notice : The notice, if written, may be given by post at

the place of business or at the residence of party for whom it is intended.
Noting – Section 99

When a promissory note or bill of exchange has been dishonored by

non-acceptance or non-payment, the holder may cause such dishonor
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 dishonor, and
must specify the date of dishonor, the reason, if any, assigned for such
dishonor, or, if the instrument has not been expressly dishonored, the
reason why the holder treats it as dishonored, and the notary’s
charges.
 Protest – Section 100
When a promissory note or bill of exchange has been dishonored
by non-acceptance or non-payment, the holder may, within a
reasonable time, cause such dishonor to be noted and certified
by a notary public. Such certificate is called a protest.

Protest for better security. When the acceptor of a bill of exchange

has become 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 acceptor, and on its 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 of foreign bills – Section 104- Foreign bills of exchange

must be protested for dishonor when such protest is required by
the law of the place where they are drawn.