NEGOTIABLE INSTRUMENTS ACT, 1881

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 transferable by delivery’.

According to Section 13 of the Negotiable Instruments Act, ‘a negotiable instrument means a

promissory note, bill of exchange or cheque payable either to order or to bearer’. ‘A negotiable
instrument may be made payable to two or more payees jointly, or it may be made payable in
the alternative to one or two, or one or some of several payees’ [Section 13(2)].
The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheques,
and declares that to be negotiable they must be made payable in any of the following forms:
1. Payable to order: A note, bill or cheque is payable to order which is expressed
to be ‘payable to a particular person or his order’. For example, (i) Pay A, (ii) Pay
A or order, (iii) Pay to the order of A, (iv) Pay A and B, and (v) Pay A or B are
various forms in which an instrument may be made payable to order. But it
should not contain any word prohibiting transfer, e.g., ‘Pay to A only’ or ‘Pay to
A and none else’ is not treated as ‘payable to order’ and therefore, such a
document shall not be treated as negotiable instrument because its negotiability
has been restricted. It may be noted that documents containing express words
prohibiting negotiability remain valid as a document (i.e., as an agreement) but
theyare not negotiable instruments as they cannot be negotiated further. There is,
however, an exception in favour of a cheque. A cheque crossed ‘Account Payee
only’ can still be negotiated further, of course, the banker is to take extra care
like a blood-hound in that case.
2. Payable to bearer: ‘Payable to bearer’ means ‘payable to any person whosoever
bears it’. Anote, bill or cheque is payable to bearer which is expressed to be so
payable or on which the only or last endorsement is an endorsement in blank.
Thus, a note, bill or cheque in the form ‘Pay to A or bearer’, or ‘Pay A, B or
bearer’, or ‘Pay bearer’ is payable to bearer. Also, where an instrument is
originally ‘payable to order’, it may become ‘payable to bearer’ if endorsed in
blank by the payee. For example, a cheque is payable to A. A endorses it merely
byputting his signature on the back and delivers it to B with the intention of
negotiating it (without making it payable to B or B’s order). In the hands of B, the
cheque is a bearer instrument.
It is important to note that the above definition is subject to the provisions of Section 31
of the Reserve Bank of India Act, 1934, which as amended by the Amendment Act of 1946,
provides as under:
1. No person in India other than the Reserve Bank or the Central Government can
make or issue a promissory note ‘payable to bearer’.

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 2. No person in India other than the Reserve Bank or the Central Government can
draw or accept a bill of exchange ‘payable to bearer on demand’.

3. A cheque ‘payable to bearer on demand’ can be drawn on a person’s account

with a banker. The effect of the above provisions is that:
(i)
A promissory note cannot be originally made ‘payable to bearer’, no matter
whether it is payable on demand or after a certain time. It must be made
‘payable to order’initially. However, on being endorsed in blank it can
become ‘payable to bearer’ or ‘payable to bearer on demand’ subsequently
and it shall be valid in that case.
(ii) A bill of exchange may be originally made ‘payable to bearer’ but it
must be payable otherwise than on demand (say, payable three months
after date) in that case. If it is ‘payable on demand’ then it must be made
‘payable to order’. However, on being endorsed in blank subsequently, it
can become ‘payable to bearer on demand’.
(iii) A cheque drawn on a bank can be originally made ‘payable to bearer on
demand’ and it shall be valid. In fact, cheques are always payable on
demand.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT:

1. Easy negotiability: They are transferable from one person to another without any
formality. In other words, the property (right of ownership) in these instruments passes
by either both 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. 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 the 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 or bahi),
under the Transfer of. PropertyAct, notice to the debtor is necessary in order to make the
transferee entitled to sue in his own name, otherwise he has always to join his transferor,
i.e., the original creditor before he can recover his claim from the debtor.
3. Better title to a bona fide transferee for value: A bona fide transferee of a
negotiable instrument for value (technically called a holder in due course) gets the
instrument ‘free from all defects’. He is not affected by any defect of title of the
transferor or any prior party. Thus, the general rule of the law of transfer of title
applicable in the case of ordinary chattels that ‘nobody can transfer a better title than that
of his own’ does not apply to negotiable instruments. Aman may sell to another a stolen

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 radio set but the true owner may claim back the radio set from the buyer even though he
may have got it in good faith for consideration.
4. Presumptions: Certain presumptions apply to all negotiable instruments. These
presumptions shall be discussed later in this unit.

Examples and Presumptions of Instruments

i. Examples of negotiable instruments

The following instruments have been recognized as negotiable instruments by statute or by
usage or custom:
(i) bills of exchange;
(ii) promissory notes;
(iii) cheques;
(iv) government promissory notes;
(v) treasury bills;
(vi) dividend warrants;
(vii) share warrants;
(viii) bearer debentures;
(ix) port trust or improvement trust debentures;
(x) hundis;
(xi) railway bonds payable to bearer, etc.

ii. Examples of non-negotiable instruments

These are
(i) money orders;
(ii) postal orders;
(iii) fixed deposit receipts;
(iv) share certificates;
(v) letters of credit.

iii. Examples of quasi-negotiable instruments

There are some instruments called ‘documents of title’, e.g., (i) bills of lading; (ii) dock
warrants; (iii) railway receipts and (iv) wharfinger certificates, which, like a negotiable
instrument, are capable of being transferred by endorsement and/or delivery, but the transferor
of such documents cannot give to the holder any better title to the goods than he himself
possesses. Such instruments are termed as ‘quasi- negotiable instruments’, and the provisions
of the Negotiable Instruments Act do not apply to them.

iv.Presumptions as to negotiable instruments

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 Sections 118 and 119 laydown the following presumptions in respect of negotiable instruments,
unless the contrary is proved:
1. That every negotiable instrument was made, drawn, accepted, endorsed or transferred for
consideration;

2. That every negotiable instrument bearing a date was made or drawn on such date;
3. That every bill of exchange was accepted within a reasonable time after its date and before
its maturity;
4. That every transfer of a negotiable instrument was made before its maturity;

5. That the endorsements appearing upon a negotiable instrument were made in the order in
which they appear thereon;
6. That a lost negotiable instrument was duly stamped,

7. That the holder of a negotiable instrument is a holder in due course; but 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;
8. 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.
The above presumptions are rebuttable by the defendant.

IMPORTANT TERMS:

Acceptor: In the context of negotiable instruments, an acceptor is a party who agrees to honor a
draft or bill of exchange when it is presented. Typically, this is the drawee who has agreed to
pay the amount specified in the instrument upon its maturity.

Acceptance: This refers to the act of agreeing to honor a draft or bill of exchange. When a
drawee accepts a bill, they sign it, thereby committing to pay the specified amount to the holder
of the bill when it is due.

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Acceptance for Honor: This is an acceptance made by a person (not the drawee) to pay a bill of
exchange in order to protect the credit of the drawer or another party. It is usually done when the
bill is protested for non-payment, and the acceptor for honor agrees to pay the bill in order to
preserve the drawer’s or endorser’s reputation.

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 Absolute Acceptance: This occurs when the acceptor agrees to pay the draft or bill of exchange
exactly as presented, without any conditions. It means the acceptor is unconditionally bound to
honor the payment.

•An absolute acceptance occurs when the drawee agrees to pay the bill without any conditions. It
indicates a complete agreement to the terms of the bill.

•The drawee becomes the acceptor and is fully obligated to pay the amount specified in the bill
when it matures.

•It ensures certainty and enforceability of the instrument.

Qualified or Conditional Acceptance: This is when the acceptor agrees to pay the draft or bill
of exchange only if certain conditions are met. For example, the acceptance might be subject to
certain terms or limitations. Conditional acceptance is generally not considered valid for
enforcing payment in the same way as absolute acceptance.

•A qualified or conditional acceptance occurs when the drawee accepts the bill but with specific
conditions or limitations.

•This could include accepting the bill only for a part of the amount or under certain
circumstances.

•This type of acceptance alters the original terms of the bill.

•The acceptor may not be fully bound to pay the original amount or may set conditions that must
be met for payment.

•It can lead to disputes, as the original payee may not agree to the conditions set by the acceptor.

Drawer: The person or entity who writes and signs a check or draft, instructing the drawee to
pay a specified amount to the payee.

Drawee in case of need: An entity or person named in a draft or check who is to pay the amount
in case the original drawee fails to do so. This person acts as a backup to ensure the payment is
made.

Payee: The person or entity to whom the money is to be paid. The payee is the recipient of the
funds specified in the draft or check.

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TYPES OF NEGOTIABLE INSTRUMENTS:

A) Promissory Notes:
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’.
Before analysing the essentials of a promissory note as contained in this definition, the
following facts are worth noting:
1. A promissory note payable ‘only to a particular person’ is valid if it satisfies the
requirements of the definition, but it shall not be a negotiable instrument within the meaning of
the Negotiable InstrumentsAct as its transferability is restricted. To put it differently, it would
appear from the above definition that negotiability is not essential to the validity of a
promissory note as an instrument.
As observed earlier, under Section 31 of the Reserve Bank of India Act, 1934, no person in
India except the Reserve Bank or the Central Government can make or issue a promissory note
payable to bearer. Accordingly, a promissory note cannot be originally made ‘payable to
bearer’. Thus, the words ‘or to the bearer of the instrument’included in the above definition
have become redundant and ineffective. In fact, these words ought to have been deleted after
the passing of the Reserve Bank of India Act, 1934.

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2. Bank notes (i.e., promissory notes issued by a banker payable to bearer on demand) and
currency notes (i.e., promissory notes issued by the Reserve Bank of India or the Central
Government payable to bearer on demand) are excluded from the definition of a promissory note
because both of them are treated as money. The issue of bank notes, however, is now prohibited
by the Reserve Bank of India Act. But Government promissory notes, which are issued by the
Government for raising loans, are within the definition.
3. The person who makes the promise to pay is called the ‘maker’. He is the debtor and must
sign the document. The person to whom payment is to be made (i.e., the creditor) is called the
‘payee’.

Essentials of a Promissory Note

From the definition given in the Act, it follows that to be a valid promissory note, an
instrument must fulfil the following essential requirements:
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. The writing may be on any paper, on any bahi or
book. It may be in pencil or in ink and includes printing or typing. No particular form of
words is necessary, even a promise contained in a letter will suffice, provided the other
requirements of Section 4 are complied with. Of course the words used must import a
clear undertaking to pay, but it is not necessary that the word ‘promise’ should be used
(Balmukund vs Munnalal).
The following is the usual form of a promissory note:

Illustrations. A signs the instruments in the following terms:

(a) “I promise to pay B or order 500.”

(b) “I acknowledge myself to be indebted to B 1,000 to be paid on demand, for value

received.”
Both the above Instruments are valid promissory notes.
1. It must contain a promise or undertaking to pay: There must be a promise or an
undertaking to pay. The undertaking to pay may be gathered 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:

(a) ‘Mr B I.O.U. (I owe you) 1,000’.

(b) ‘I am liable to pay to B 500’.

(c) ‘I have taken from B 2,000 and I am accountable to him for the same with interest’.
The above instruments are not promissory notes as there is no undertaking or promise to
pay. There is only an acknowledgement of indebtedness.

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 Where, however, the acknowledgement of indebtedness contained in the document is in a
defined sum of money payable on demand, there is a valid promissory note even though the
words ‘promise to pay’ may not have been used. It is so because the phrase ‘payable on
demand’ necessarily implies ‘a promise to pay at once or immediately’.
Illustration. Where A signs the instrument in the following terms: ‘I, acknowledge myself
to be indebted to B in 1,000, to be paid on demand, for value received’, there is a valid
promissory note.
2. The promise to pay must be unconditional: Certainty is very necessary in the
commercial world. As such, 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 fulfilment of a condition. It must be payable absolutely. If an
instrument contains a conditional promise to pay, it is not a valid promissory note and will
not become valid and negotiable even after the happening of the condition (Hill vs Halford).
Illustrations. A signs the instruments in the following terms:
(a) I promise to pay B 500 seven days after my marriage with C.
(b) I promise to pay B 500 on D’s death, provided D leaves me enough to pay that
sum.
(c) I promise to pay B 500 as soon as I can.

The above instruments are not valid promissory notes as the payment is made dependent upon
the happening of an uncertain event which may never happen and as a result the sum may never
become payable.
But a promise to pay is not conditional if the amount is made payable at a particular place or
after a specified time or on the happening of an event which must happen, although the time of
its happening may be uncertain (Sec. 5, para 2). Thus, if A signs an instrument stating: ‘I promise
to pay B 500 seven days after C’s death’, the promissory note is valid because it is not considered
to be conditional, for it is certain that C will die, though the exact time of his death is uncertain.
3. 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. The signature may be in any part of the instrument and need not
necessarily be at the bottom. The intention to sign, however, must in all cases be proved. It may
be in pencil or in ink. When the maker of a pronate is illiterate, his thumb mark is sufficient. But
facsimile impressions, whether affixed in printing or by perforation or in some other form, and
impressions by a rubber stamp are not recognized as signatures unless the parties specifically
agree to treat them as such.
4. The maker must be a certain person: The instrument itself must indicate with certainty who
is the person or are the persons engaging himself or themselves to pay. In case a person signs in
an assumed name, he is liable as a maker because a maker is taken as certain if from his
description sufficient indication follows about his identity. Where there are two or more makers,
they may bind themselves jointly, or jointly and severally. But alternative promisors are not
permitted in law because of the general rule that ‘where liability lies no ambiguity must lie’.

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Thus, a note in the form ‘I, Alok Kumar promise to pay’ and signed by Alok Kumar or also
Satish Chandra is a good note as against Alok Kumar only.

5. 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 is valid even if the payee is misnamed or indicated by his
official designation only (Sec. 5, para 4), provided he can be ascertained by evidence. It may be
made payable to two or more payees jointly or it may be made payable in the alternative to one
of two, or one or some of several payees [Sec. 13(2)]. Thus alternative payees are permissible in
law. But it must be made payable to order originally. A note originally made payable to bearer is
illegal and void as per Reserve Bank of India Act, 1934. Also, a note in favour of fictitious
person is illegal and void, for it is treated as payable to bearer. A pronote made payable to the
maker himself is a nullity, the reason being the same person is both the promisor and the
promisee.

6. The sum payable must be certain: For a valid promissory note, 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 instruments in the following terms:

(a) ‘I promise to pay B 500 and all other sums which shall be due to him’.
(b) ‘I promise to pay B 500, first deducting any money which he may owe me’.
(c) ‘I promise to pay B 500 and all fines according to rules’.
(d) ‘I promise to pay B 100 on or before 15 August 2004, and a similar sum monthly
every succeeding month’.
The above instruments are invalid as promissory notes because the exact amount to be paid
by A is not certain.
But, according to Section 5, para 3, the sum does not become indefinite merely because:
(i) There is a promise to pay the amount with interest, provided the rate of interest is
stated;
(ii) The amount is to be paid at an indicated rate of exchange or according to the course
of exchange; or
(iii) The amount is payable by instalments, even with a provision that on default being
made in payment of an instalment, the balance unpaid shall become due.
7. 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 promissory note. Similarly, a promise to deliver paddy either in the alternative or in
addition to money does not constitute a promissory note. Thus, an instrument signed by A,
saying, ‘I promise to pay B 500 and to deliver to him my black horse on 1st January next’ is
not a valid promissory note.
8. Other formalities: Though it is usual and proper to state in a note the place where it is
made and the date on which it is made, their omission will not render the instrument invalid.

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 Even where the amountis made payable at a certain time after the date, omission of the date
does not invalidate the instrument and the date of execution can be independently
ascertained or proved. The words ‘value received’ are also not an essential part of the form
of a pronote, because, as per Section 118, consideration is presumed until the contrary is
proved. But a promissory note must be properly stamped as required by the Indian Stamp
Act and each stamp must also be duly cancelled. The maker’s signature with the date across
the stamp cancels the stamp effectively. Although an unstamped or inadequately stamped
promissory note is invalid, but the amount of loan can be recovered if proved otherwise.

Bill of Exchange
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 moneyonly to, or to the order of, a
certain person or to the bearer of the instrument’.
At the very outset the following two facts must be noted:
(i) Although a bill of exchange directing to pay‘onlyto a particular person’ is valid
if it satisfies the requirements of the definition but it shall not be a negotiable
instrument within the meaning of the Negotiable Instruments Act as its
transferability is restricted.
(ii) Although a bill of exchange maybe originallydrawn ‘payable to bearer’ but in
such a case it must be payable otherwise than on demand (say, three months after
date). In other words, a bill cannot be drawn ‘payable to the bearer on demand’.
If it is ‘payable on demand’, then it must be made ‘payable to order’ (Sec. 31 of
the Reserve Bank of India Act).
Parties to a bill of exchange: There are three parties to a bill of exchange viz., drawer, drawee
and payee. The person who makes the bill is called the ‘drawer’. The person who is directed to
pay is called the ‘drawee’. The person to whom the payment is to be made is called the ‘payee’.
The drawer, or, if the bill is endorsed to the payee, the endorsee, who is in possession of the bill
is called the ‘holder’. The holder must present the bill to the drawee for his acceptance. When
the drawee accepts the bill, by writing the words ‘accepted’ and then signing it, he is called the
‘acceptor’.
It is not necessary, however, that three separate persons should answer to the description of
drawer, drawee and payee. One person may fill any two of these positions. Thus, one may
become ‘drawer and payee’ (when the bill is drawn ‘Pay to me or my order’), or ‘drawee and
payee’ (when the bill is subsequently endorsed in favour of the drawee), or ‘drawer and
drawee’ (when one draws a bill upon himself). In the last case, the holder may treat the
instrument as a bill of exchange or as a promissory note. What is required is that the three
parties, drawer, drawee and payee must be pointed out in the bill with certainty.
Drawee in case of need: Sometimes the name of another person may be mentioned in a bill of
exchange as the person who will accept the bill, if the original drawee does not accept it. Since
another person so named is to be approached in case of need, he is known as ‘drawee in case of
need’. (Sec. 7)

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 Acceptor for honour: When a bill of exchange has been noted or protested for non-acceptance
or for better security, and any person accepts it supra protest for honour of the drawer or of any
one of the endorsers, such person is called an ‘acceptor for honour’(Sec. 7). Thus any person
may voluntarily become a party to a bill as an ‘acceptor for honour’.
Now let us explain some other aspects of a bill of exchange. These are:

Essentials of a bill of exchange

To be a valid bill of exchange an instrument must comply with the requirements of the
definition given in Section 5, which are as follows:
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. But an order may be expressed in polite language.
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 in the alternative because of the rule of law that ‘where liability lies, no ambiguity
must lie’. But a bill may be made payable in the alternative to one of two or more payees (Sec.
13).
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.
It will be seen that the fundamental essentials of a bill enumerated above are more or less
similar to that of a promissory note. As such the rules that apply to promissory notes in regard
to those essentials are in general applicable to bills of exchange as well. (For details of these
essentials, see notes to promissory note.)

Special benefits of bill of exchange

The special benefits of using bills of exchange in the world of commerce are as follows:
1. A bill of exchange is a double secured instrument. If the bill is dishonoured by the
acceptor, the holder or the payee may look to the drawer of the bill for payment.
2. In case of immediate need of money, a bill can be discounted with a bank by the
payee.
3. Two separate trade debts can be discharged by a bill of exchange. Hence, where A
buys goods on credit from B for 1,000 to be paid three months after date and B buys
goods on credit from C on similar terms for similar amount, an order by B to A to pay
the sum of 1,000 to C will discharge two separate trade debts.

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Cheque
Section 6, as substituted by the Negotiable Instruments (Amendment and Miscellaneous
Provisions) Act, 2002 defines a cheque as follows:
‘A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a
cheque in the electronic form’.
‘Explanation I: For the purposes of this Section, the expression:
(a) ‘a cheque in the electronic form’ means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and signed in a secure
system ensuring the minimum safety standards with the use of digital signature
(with or without biometrics signature) and asymmetric crypto system;
(b) ‘a truncated cheque’ means a cheque which is truncated during the course of a
clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in
writing.
Explanation II: For the purposes of this Section, the expression ‘clearing house’ means the
clearing house managed by the Reserve Bank of India or a clearing house recognised as such
by the Reserve Bank of India’.
Thus, a cheque is a bill of exchange with two distinctive features, namely:

(i) It is always drawn on a bank, and

(ii) It is always payable on demand.

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Features

● Must be in writing
● Must be in unconditional
● Must be drawn on a specified banker
● Certain sum of money
● Certain payee
● Dated

Types of Cheques:

1. Bearer Cheque: This can be cashed by anyone who presents it at the bank. No
identification is required, and the cheque is payable to the bearer.
2. Order Cheque: This cheque is payable to a specific person or entity. The payee must
endorse the cheque (sign it on the back) to transfer it to someone else.
3. Crossed Cheque: This type has two parallel lines drawn across it. It can only be deposited
into a bank account and not cashed directly. It is used to prevent fraud.
4. Open Cheque: An open cheque can be cashed at the bank or deposited into an account. It
does not have the crossing lines found on a crossed cheque.
5. Post-Dated Cheque: This is a cheque dated for a future date. It can only be presented for
payment on or after the date specified on the cheque.
6. Stale Cheque: A cheque presented for payment after a certain period (typically 3 months)
from its issue date. It is generally considered invalid after this period.
7. Travelers' Cheque: Used as a safe alternative to cash when traveling. They can be
replaced if lost or stolen and are often issued in specific denominations.
8. Manager's Cheque: Issued by a bank on behalf of a customer, it guarantees payment
because the bank itself is the payer.

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Dishonor of Cheques:

A cheque is said to be dishonored when the bank refuses to pay the amount specified. Common
reasons include:

1. Insufficient Funds: The account lacks sufficient funds to cover the amount of the cheque.
2. Signature Mismatch: The signature on the cheque does not match the signature on record
with the bank.
3. Stale Cheque: The cheque is presented after the validity period (typically six months) has
expired.
4. Post-Dated Cheque: The cheque is presented before the date specified on it.
5. Account Closed: The account on which the cheque is drawn has been closed.
6. Alterations: Unauthorized alterations or changes on the cheque.
7. Stop Payment Order: The drawer has instructed the bank to stop payment on the cheque.

When a cheque is dishonored, the bank will typically issue a "Cheque Return Memo" or "Cheque
Bounce Memo" detailing the reason for dishonor.

This can have legal implications for the drawer, including potential penalties or legal action
under laws related to dishonored cheques.

Maturity Of Negotiable Instruments

‘Maturity’ means the date on which the payment of an instrument falls due. An instrument
payable on demand or at sight such as a cheque becomes payable immediately on the date of its
execution and there is no question of its maturity. Its payment falls due at once on the date of
its issue. The question of maturity, therefore, arises only in the case of a promissory note or a
bill of exchange which is expressed to be payable otherwise than on demand.
Every promissory note or bill of exchange expressed to be payable on a specified day, or at a
certain period after date or after sight, or at a certain period after the happening of an event
which is certain to happen is at maturity on the third day after the day on which it is expressed
to be payable (Sec. 22). A time bill or note is as such entitled to three days of grace and
matures or falls due on the last day of grace (and not on the date on which it is expressed to be
payable). For example, a bill of exchange drawn on 1 January, if expressed payable three
months after date, is at maturity on 4 April. Such a bill or note must be presented for payment
only on the last day of grace, and if dishonoured, the suit can be filed on the next day after
maturity. Any presentment for payment earlier to the third day of grace is invalid, even if the
word ‘punctually’ is added to a fixed date.

Rules for Calculating Maturity

Sections 23 to 25 lay down the following rules for calculating the maturity of a time bill or
note:

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 1. If it is made payable a stated number of months after date or after sight, or after a
certain event, it matures (or becomes payable) three days after the corresponding date of
the month after the stated number of months.
Illustration: A negotiable instrument, dated 30 August 1977, is made payable three
months after date. The instrument was at maturity on 3 December 1977.
2. If the month in which the period would terminate has no corresponding date, the
period shall be held to terminate on the last day of such month.
Illustrations:
(a) A negotiable instrument dated 30 January 1977, is made payable at one month
after date. The instrument is at maturity on the third day after 28 February 1977
(i.e., 3 March 1977)
(b) A promissory note or bill of exchange, dated 31 August 1977, is made payable
three months after the date. The instrument is at maturity on 3 December, 1977

3. If it is made payable a certain number of days after date or after sight, or after a
certain event, the maturity is calculated by excluding the day on which the instrument is
drawn or presented for acceptance or sight or on which the event happens. Note that
only one day is to be excluded.
Illustrations:
(a) A bill of exchange dated 1 March, is made payable 20 days after date. The
period of 20 days will be counted from 2 March, and the bill will be at maturity
on 24 March.
(b) A bill of exchange, dated 1 January, and payable 20 days after sight, is
presented for acceptance on the 5 January. The bill shall mature on 28 January.
4. If the date on which a bill or note is at maturity is a public holiday, the instrument
shall be deemed to be due on the next preceding business day. 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. Thus, if the maturity of an
instrument falls on Sunday, it shall be deemed to be due on Saturday. If the maturity
falls on an emergency holiday, the instrument shall be deemed to be due on the next
succeeding business day.
example :- A bill drawn on May 12, 2012 is payable three months after date. The date of
maturity falls on August 15, 2012 which is a public holiday. As such the date of maturity would
be August 14.

5. If an instrument is payable by installments, three days of grace are to be allowed on

each installment (Sec. 67).

Payment in Due Course

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 The payment of the amount due under a negotiable instrument must amount to ‘payment in due
course’ in order to operate as a valid discharge of the instrument against the holder. Section 10
provides that in order to constitute a payment of a negotiable instrument as a ‘payment in due
course’, the following conditions must be fulfilled:
1. The payment must be in accordance with the apparent tenor of the instrument: It
should be made at or after maturity. A payment before maturity is not a payment in due
course so as to discharge the instrument. Thus, if a bill of exchange is paid before the last
day of grace and is subsequently endorsed over, it is valid in the hands of a holder in due
course and the acceptor will be liable to pay again on the instrument. Similarly, if the
banker makes payment of a post-dated cheque before the date mentioned therein, he acts
against the apparent tenor of the instrument i.e., against the true intentions of the drawer
and hence the payment will not be treated as payment in due course.
2. The payment must be made in good faith and without negligence: It must be honestly
made in the bona fide belief that the person demanding payment is legally entitled to it.
The payer must not be guilty of any negligence in making the payment. If there are
suspicious circumstances and the payer fails to make necessary inquiry which may reveal
the defects, the payment is not a payment in due course. Thus, if a specially endorsed bill
of exchange is paid without inquiry as to the payee or if a cheque with forged signature
of the drawer is paid, it will amount to negligence on the part of the payer and the
payment will not be treated as payment in due course.
3. The payment must be made to a person in possession of the instrument under
circumstances which do not arouse suspicion about his title to possess the instrument and
to receive payment of the amount therein mentioned. A payment cannot be a payment in
due course if it is made without requiring production of the instrument and, therefore, the
payer must insist on seeing the instrument before making the payment and must obtain
the instrument on payment.
4. The payment must be made in money only, unless the holder agrees to accept payment
in any other medium or by cheque or draft.
To sum up, ‘payment in due course’ implies payment: (i) according to the apparent tenor of the
instrument at or after maturity (ii) in good faith and without negligence (iii) in money (or by
cheque if acceptable to the holder) (iv) to a person who is legally entitled to the instrument and
is in possession of the same.

SUMMARY:
Payment in Due Course

Payment in due course refers to the proper and timely payment of a negotiable instrument. Key
aspects include:

1. Timing: Payment must be made at the proper time specified in the instrument (e.g., on its
maturity date).
2. Place of Payment: Payment should be made at the place designated in the instrument.
3. Instrument Presentation: The holder must present the instrument for payment in
accordance with its terms.

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 4. Conditions for Payment: The payment must be made to the proper person (i.e., the
holder) and in the correct amount.

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 .

Note : The "evident tenor" of a negotiable instrument refers to the clear and explicit terms
contained within the document itself. This includes the key details such as the amount, the
parties involved, the payment terms, and any conditions of transfer. The evident tenor is
important because it establishes the rights and obligations of the parties without the need for
external evidence, ensuring that the instrument is legally enforceable as it stands.

Holder
The ‘holder’ of a negotiable instrument means any person entitled to possess the instrument in
his own name and to receive or recover the amount due thereon from the parties liable thereto
(Sec. 8). Thus, in order to be called a ‘holder’, a person must satisfy the following two
conditions:
1. He must be entitled to the possession of the instrument in his own name: Actual
possession of the instrument is not essential. What is required is a right to possession
under some legal or valid title. He should be a ‘de jure holder’ and not necessarily a ‘de
facto holder’. It means that the person must be named in the instrument as the payee or
the endorsee, or he must be the bearer thereof, if it is a bearer instrument. However, the
heir of a deceased holder or any other person becoming entitled by operation of law is a
holder although he is not the payee or endorsee or bearer thereof.
If a person is in possession of a negotiable instrument without having a right to possess
the same, he cannot be called the holder. Thus, although a thief, or a finder on the road,
or an endorsee under a forged endorsement, may be having the possession of the
instrument, he cannot be called its holder because he does not acquire legal title thereto
and hence is not entitled in his own name to the possession thereof. Similarly, a
beneficial owner claiming through a benamidar in whose favor the instrument had been
made or drawn is not a holder because he is not entitled to the possession in his own

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 name and cannot by himself maintain an action on the instrument (Subba Narayana vs
Ramaswami).
2. He must be entitled to receive or recover the amount due thereon from the parties
liable thereto: In order to be called a holder, besides being entitled to the possession of
the instrument in his own name, the person must also have the right to receive or recover
the amount of the instrument and give a valid discharge to the payer. Thus, one may be
the bearer or the payee or endorsee of an instrument but he may not be called a holder if
he is prohibited by court order from receiving the amount due on the instrument.
It may, thus, be concluded that both the above conditions must be satisfied by a person to be
called a holder. For instance, where an instrument payable to order is, without endorsement,
entrusted by the payee to his agent, the agent does not become the holder of it, although he may
receive its payment, because he has no right to sue on the instrument in his own name.
The holder of a negotiable instrument is a very important party to the instrument as such. It is
he alone who can sue upon a negotiable instrument, can negotiate it (with certain exceptions)
and can give a valid discharge for it.
SUMMARY:

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.

● It is not every person in possession of the instrument who is called a holder. To be a

holder, the person must be named in the instrument as the payee, or the endorsee, or he
must be the bearer thereof.
● A person who has obtained possession of an instrument by theft, or under a forged
endorsement, is not a holder, as he is not entitled to recover the instrument
● An agent holding an instrument for his principal is not a holder although he may receive
its payment.
● The holder implies de jure (holder in law) holder and not de facto (holder in fact) holder.

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

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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.

Rights and Privileges of a Holder in Due Course (HDC)

A Holder in Due Course (HDC) is a person who has acquired a negotiable instrument in a way
that provides certain protections. The key rights and privileges include:

1. Right to Payment: The HDC has the right to demand payment from the maker or drawer
of the instrument.
2. Free from Defenses: An HDC is protected from most defenses that could be raised by
the parties who are obligated to pay the instrument. This includes personal defenses like
fraud, duress, or lack of consideration.
3. Priority: HDCs have priority over claims by previous holders or parties who may have a
claim against the instrument.

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 4. Negotiability: The HDC can transfer the instrument freely, and the new holder will also
benefit from HDC status if the requirements are met.
5. Presumption of Good Faith: HDCs are presumed to have taken the instrument in good
faith, for value, and without notice of any claims or defenses against it.

Negotiation
According to Section 14, ‘when a promissory note, bill of exchange or cheque is transferred to
any person, so as to constitute that person the holder thereof, the instrument is said to be
negotiated’. Thus, negotiation implies a transfer of negotiable instrument so as to constitute
the transferee a holder thereof, who should be entitled in his own name to sue on the
instrument and recover the amount due thereon. Handing over a bearer instrument to a servant
for safe keeping is not negotiation; there must be a transfer with intention to pass title and in
the manner prescribed by the Act.
Every maker, drawer, payee or endorsee, and if there are several makers, drawers, payees or
endorsees, all of them jointly can negotiate an instrument, provided the negotiability of such
instrument has not been restricted or excluded by any express words used in the instrument.
But the maker, drawer, payee or endorsee cannot negotiate an instrument, unless he is in
lawful possession or is holder thereof (Sec. 51). The case when a maker or drawer has to
endorse an instrument arises where the instrument is made or drawn payable to his own order,
e.g., ‘pay to myself or order’.
A negotiable instrument may be negotiated until payment or satisfaction thereof by the maker,
drawee or acceptor at or after maturity, but not after such payment or satisfaction (Sec. 60).
Thus, negotiability of an instrument stops only when the party ultimately liable thereon pays it
at or after maturity. It can be negotiated even at or after maturity if it has not been paid or
satisfied. A payment before maturity does not stop negotiability. The acceptor or maker who
receives the instrument after payment but before maturity may reissue it.

Modes of Negotiation
There are two ways of negotiating or transferring a negotiable instrument:
1. Negotiation by mere delivery: A negotiable instrument payable to bearer is
negotiable by delivery thereof (Sec. 47). Thus, a bearer instrument may be negotiated by
delivery only. It does not require signature of the transferor (i.e., endorsement) and the
transferee becomes the holder thereof by mere possession. The transferor of a bearer
instrument is not liable on its dishonour because by not signing as endorser he has not
added his credit to the instrument.
2. Negotiation by endorsement and delivery; A negotiable instrument payable to order
is negotiable by the holder by endorsement and delivery thereof (Sec. 48). Thus, the
negotiation of an order instrument requires two formalities—first the holder should
endorse it and then deliver to his endorsee.

DISHONOUR OF NEGOTIABLE INSTRUMENTS:

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 A negotiable instrument may be dishonoured by: (i)
non-acceptance or (ii) non- payment.As presentment for
acceptance is required only in case of bills of exchange, it is
only the bills of exchange which may be dishonoured by
non-acceptance. Of course any type of negotiable
instrument—promissory note, bill of exchange or
cheque—may be dishonoured by non-payment. There are
various aspects of dishonour. These are:

i. Dishonour by non-acceptance
A bill of exchange is said to be dishonoured by non-acceptance in the following
cases:
1. When the drawee or one of several drawees (not being partners) makes default in acceptance
upon being duly required to accept the bill. It may be recalled that the drawee may require 48
hours’ time (exclusive of public holidays) to consider whether he will accept or not (Sec. 63).
2. Where the presentment for acceptance is excused and the bill is not accepted, i.e., remains
unaccepted.
3. Where the drawee is incompetent to contract.

4. Where the drawee makes the acceptance qualified.

5. If the drawee is a fictitious person or after reasonable search cannot be found (Sec. 61).
It is important to note that where a ‘drawee in case of need’ is named in a bill of
exchange, the bill is not dishonoured until it has been dishonoured by such
drawee (Sec. 115).
ii. Dishonour by non-payment
A promissory note, bill of exchange or 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).
Also, a promissory note or bill of exchange is dishonoured by non-payment
when presentment for payment is excused expressly by the maker of the note or
acceptor of the bill and the note or bill remains unpaid at or after maturity (Sec.
76).
iii. Effect of dishonour

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As soon as a negotiable instrument is dishonoured (either by non-acceptance or
by non-payment) the holder becomes entitled to sue the parties liable to pay
thereon. The drawer of cheque, maker of note, acceptor and drawer of bill and all
the endorsers are liable severally, and jointly to a holder in due course. The
holder must, however, give ‘notice of dishonour’ to all parties against whom he
intends to proceed. He may (at his option) also have the instrument ‘noted and
protested’ before a notary public.
Noting
‘Noting’ is the authentic and official proof of presentment and dishonour of a negotiable
instrument. The question of noting does not arise in the case of dishonour of a cheque because
in such a case the bank, while refusing payment, returns back the cheque giving reasons in
writing for the dishonour of the same, and that itself acts as an authentic evidence of the fact of
dishonour. Even in the case of inland bills or notes, noting is not compulsory (Sec. 104).
According to Section 99, when a promissory note or a bill of exchange has been
dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be
noted by a Notary Public upon the instrument, or upon a paper attached thereto, or partly upon
each. For this the holder takes the bill or note to the notary public who makes a demand for
acceptance or payment upon the drawee or acceptor or maker formally and on his refusal to do
so notes the same on the bill or note. Thus ‘noting’ means recording the fact of dishonour on
the dishonoured instrument or on a paper attached thereto for the purpose. Noting must be
made within a reasonable time after dishonour and must specify: (i) the date of dishonour; (ii)
the reason assigned for such dishonour; and (iii) the notary’s charges.

Protest
‘Protest’ is a formal certificate of dishonour issued by the notary public to the holder of the bill
or note, on his demand (noting is merely a record of dishonour on the instrument itself) (Sec.
100).
Protest for better security: Such protest can be made in the case of bills only. 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 a certificate is called a protest
for better security (Sec. 100).
It may be noted that in spite of such a protest the holder shall have to wait till the date of
maturity to take any action against the acceptor, drawer or endorsers. The only advantage of
protest for better security is that it enables the bill to be accepted for honour, for Section 108
provides that when a bill of exchange has been noted or protested for non-acceptance or for
better security, the same can thereafter be accepted for honour.
Noting and protest of inland bills or notes is not compulsory, but foreign bills must be
protested for dishonour if so required by the law of the place where they are drawn (Sec. 104).

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The protest must contain the following particulars (Sec. 101):
1. The instrument itself or a literal transcript of the instrument and of everything
written or printed thereupon.
2. The name of the person for whom and against whom the instrument has been
protested.
3. The fact and the reasons for dishonour, i.e., a statement that payment or
acceptance, or better security, as the case may be, was demanded by the notary
public from the person concerned and he refused to give it or did not answer, or
that he could not be found.
4. The place and time of dishonour.

5. The signature of the Notary Public.

6. In the case of acceptance for honour or payment for honour, the names of the
persons by whom and for whom it is accepted or paid.

SUMMARY:

Noting – Section 99

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

nonpayment, 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 a 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 a certificate is called a protest for better security.

DIFFERENCE: CHEQUES VS. BILLS OF EXCHANGE VS.

PROMISSORY NOTE:

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