Meaning and Characteristics of Negotiable Instruments

In the world of commerce and finance, instruments like cheques, promissory notes, and bills of exchange play a vital role in facilitating transactions by serving as a medium of payment or credit. These instruments belong to a special category called Negotiable Instruments. The law governing these instruments in India is primarily the Negotiable Instruments Act, 1881.

Meaning

A negotiable instrument is a document embodying a right to the payment of a sum of money, which by usage or statute is transferable by delivery or endorsement, and the holder of which for the time being is entitled to sue upon it in his own name.

Characteristics of Negotiable Instruments

Transferability

The most fundamental characteristic of a negotiable instrument is its free transferability. The ownership (property) of the instrument can be easily transferred from one person to another. The mode of transfer depends on how the instrument is made payable:

• If payable to bearer, it is transferred by mere delivery (physical handing over).
• If payable to order, it is transferred by endorsement (signing on the back of the instrument by the holder) and delivery.

This ease of transfer makes them convenient for commercial dealings, allowing debts to be paid and credit to be extended without the physical exchange of large sums of money.

Title passes to bona fide transferee for value

This is a crucial characteristic that distinguishes a negotiable instrument from an ordinary contractual chose in action (a right enforceable by legal action). According to the doctrine of Nemo Dat Quod Non Habet (no one can give what he does not have), a buyer of goods generally gets no better title than the seller had. However, this rule is an exception in the case of negotiable instruments.

A person who takes a negotiable instrument in good faith and for valuable consideration, without notice of any defect in the title of the person who transferred it, is called a Holder in Due Course (Section 9, NI Act). A Holder in Due Course gets a perfect title to the instrument, free from all defects in the title of the transferor. They can sue upon the instrument in their own name and recover the amount, irrespective of any defects in the title of prior parties.

Example: A obtains a promissory note from B by fraud and endorses it to C, who takes it for value in good faith, without knowing about the fraud. C is a Holder in Due Course and can recover the amount from B, even though A's title was defective due to fraud. B cannot plead A's fraud as a defence against C.

Presumption under the Act

The Negotiable Instruments Act, 1881, contains several presumptions (Section 118) that facilitate the enforcement of these instruments and add to their certainty and credibility. These presumptions are in favour of the holder, particularly a holder in due course, although they are rebuttable (can be disproved by evidence).

Key presumptions (unless the contrary is proved):

• Of Consideration: Every negotiable instrument was made or drawn for consideration, and every such instrument, when accepted, endorsed, negotiated, or transferred, was accepted, endorsed, negotiated, or transferred for consideration. (Section 118(a)).
• As to Date: Every negotiable instrument bearing a date was made or drawn on that date. (Section 118(b)).
• As to Time of Acceptance: Every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity. (Section 118(c)).
• As to Time of Transfer: Every transfer of a negotiable instrument was made before its maturity. (Section 118(d)).
• As to Order of Endorsements: The endorsements appearing on a negotiable instrument were made in the order in which they appear thereon. (Section 118(e)).
• As to Stamp: Where an instrument has been lost or destroyed and has been proved, the burden of proving that the instrument was duly stamped is on the party denying it. (Section 118(f)).
• That Holder is a Holder in Due Course: That the holder of a negotiable instrument is a holder in due course. (Section 118(g)). This is a strong presumption in favour of the person possessing the instrument.

These presumptions simplify litigation by placing the burden of proof on the party challenging the instrument's validity or a holder's status.

Definition of Negotiable Instrument

The Negotiable Instruments Act, 1881 is the primary statute governing promissory notes, bills of exchange, and cheques in India. However, the Act does not provide a single, exhaustive definition of the term "negotiable instrument" itself.

Negotiable Instruments Act, 1881

The Act defines the *main* types of negotiable instruments in its initial sections (Sections 4, 5, 6 - discussed below). It essentially adopts the characteristics developed under English Common Law and mercantile usage to identify instruments that are negotiable. The Preamble states it is an Act "to define and amend the law relating to promissory notes, bills of exchange and cheques".

While the Act deals with Promissory Notes, Bills of Exchange, and Cheques, it does not state that *only* these three are negotiable instruments. Other instruments may become negotiable by statute (e.g., Government Promissory Notes, Bank Notes, Dividend Warrants) or by custom and usage of trade (e.g., Hundis, Share Warrants, Bearer Debentures), provided they possess the essential characteristics of negotiability (free transferability and the ability to confer a good title on a bona fide transferee for value).

Therefore, the definition of "negotiable instrument" is often derived from its characteristics and judicial interpretations rather than a single statutory definition within the Act. It is a document representing a promise or order to pay a specific sum of money, transferable freely, with the potential for a bona fide transferee for value to acquire a better title than the transferor.

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Types of Negotiable Instruments

The Negotiable Instruments Act, 1881, primarily focuses on the three main types of negotiable instruments commonly used in commercial transactions:

Promissory Note (Section 4)

Section 4 defines "Promissory note":

"A 'promissory note' is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument."

Explanation:

• In Writing: Must be in written form.
• Promise to Pay: Contains a definite undertaking (promise) to pay. An acknowledgment of debt is not a promise to pay.
• Unconditional: The promise to pay must be unconditional. Payment cannot be made dependent on a contingency or the happening of an event (unless the event is certain to happen, though the time is uncertain, e.g., death).
• Signed by Maker: Must be signed by the person making the promise (the debtor).
• Certain Sum of Money: The amount payable must be certain or capable of being ascertained.
• Money Only: The payment must be in legal tender money, not in goods or services.
• Certain Parties: The maker and the payee must be certain persons (or capable of being identified).
• Payable to Certain Person, Order, or Bearer: It must be payable to a named person, or to their order (meaning to whomever they endorse it), or to the bearer (whoever possesses it). Note: A promissory note cannot be made payable to the bearer on demand (Section 31, Reserve Bank of India Act, 1934 restricts this for entities other than banks).
• Two Parties: Involves two parties:
  • Maker: The person who makes the promise and signs the note (the debtor).
  • Payee: The person to whom the payment is to be made (the creditor).

Example: Mr. Ajay signs a note stating: "I promise to pay Mr. Binod or order the sum of Rs. 50,000/- on demand." This is a promissory note. Mr. Ajay is the maker, Mr. Binod is the payee.

Bill of Exchange (Section 5)

Section 5 defines "Bill of exchange":

"A 'bill of exchange' is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument."

Explanation:

• In Writing: Must be in written form.
• Order to Pay: Contains a definite direction (order) to a third party to pay. This is different from a promise to pay in a PN.
• Unconditional: The order to pay must be unconditional.
• Signed by Maker (Drawer): Must be signed by the person issuing the order. This person is called the Drawer.
• Directing a Certain Person (Drawee): The order is directed to a specific person who is required to pay. This person is called the Drawee. The Drawee is usually a debtor of the Drawer.
• Certain Sum of Money Only: The amount payable must be certain and in money.
• Payable to Certain Person, Order, or Bearer (Payee): The payment is made to a specified person, or their order, or to the bearer. This person is called the Payee. The Payee can be the Drawer himself or a third party.
• Three Parties (initially): Involves three parties:
  • Drawer: The person who draws/issues the bill (gives the order to pay).
  • Drawee: The person on whom the bill is drawn (ordered to pay).
  • Payee: The person to whom the payment is to be made.
• Acceptance: A bill of exchange must be 'accepted' by the Drawee before it becomes legally binding on them. Acceptance means the Drawee signs the bill signifying their assent to the order of the Drawer. The Drawee becomes the Acceptor upon acceptance, and is primarily liable to pay.

Example: Mr. Chetan signs a document stating: "Mr. Deepak, Pay Mr. Eshan or order the sum of Rs. 70,000/- after 30 days." This is a bill of exchange. Mr. Chetan is the Drawer, Mr. Deepak is the Drawee, and Mr. Eshan is the Payee. Mr. Deepak must accept the bill to be bound to pay.

Cheque (Section 6)

Section 6 defines "Cheque":

"A 'cheque' is a bill of exchange drawn on a specified banker, and not expressed to be payable otherwise than on demand."

Explanation:

• Type of Bill of Exchange: A cheque is essentially a specific type of bill of exchange.
• Drawn on a Specified Banker: The Drawee must be a bank.
• Always Payable on Demand: A cheque is always payable immediately upon presentation to the bank, not at a future date.
• Three Parties: Involves three parties:
  • Drawer: The person who draws the cheque (account holder).
  • Drawee: The specified bank on which the cheque is drawn.
  • Payee: The person named to receive the payment (can be Drawer himself).
• No Acceptance Needed: Unlike a regular bill of exchange, a cheque drawn on a bank does not require 'acceptance' by the bank before payment. The bank is obligated to pay if sufficient funds are available in the drawer's account and the cheque is otherwise in order.

Example: Mr. Farhan signs an order to his bank (State Bank of India) directing it to pay Ms. Geeta or bearer the sum of Rs. 15,000/- on presentation. This is a cheque. Mr. Farhan is the Drawer, State Bank of India is the Drawee (bank), Ms. Geeta is the Payee.

Other Forms:

Besides these three, the Act also mentions Inland Instruments (Section 11), Foreign Instruments (Section 12), Ambiguous Instruments (Section 17), Inchoate Stamped Instruments (Section 20), and Accommodation Bills (Section 28 - refers to non-business transaction). Hundis are traditional Indian negotiable instruments recognized by custom and sometimes governed by the Act if they conform to the definitions.

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Distinction between Promissory Note, Bill of Exchange, and Cheque

While all three are types of negotiable instruments, they have distinct features.

Comparison Table: Promissory Note, Bill of Exchange, and Cheque

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Parties to Negotiable Instruments

Negotiable instruments involve various parties who hold different roles and have specific rights and liabilities. The primary parties are determined at the time the instrument is drawn, but additional parties can become involved through negotiation.

Primary Parties:

• Maker: In a Promissory Note, the maker is the person who signs the note and makes the promise to pay (the debtor). They are primarily and absolutely liable to pay the amount.
• Drawer: In a Bill of Exchange or a Cheque, the drawer is the person who draws the instrument and orders the drawee to pay. The drawer is secondarily liable; their liability arises if the drawee dishonours the instrument.
• Drawee: In a Bill of Exchange or a Cheque, the drawee is the person (or bank in case of cheque) who is ordered to pay the amount. The drawee is not liable on the instrument until they accept it (in case of Bill of Exchange).
• Payee: The person named in the instrument to whom the amount is to be paid. The payee is usually the first holder of the instrument. The payee can be the drawer himself in a bill of exchange or cheque.

Secondary Parties (Become involved through negotiation):

• Acceptor: In a Bill of Exchange, the drawee becomes the acceptor when they sign the bill signifying their assent to the order of the drawer. The acceptor is primarily and absolutely liable to pay the amount as per the acceptance. (Banks are drawees of cheques and do not 'accept' them in the same way, although 'certification' or 'marking' of a cheque can make the bank liable).
• Endorser: A person who is the holder of a negotiable instrument payable to order and signs on the back (or face) of the instrument or on a separate paper (allonge) for the purpose of negotiation. By endorsing, the endorser typically incurs liability to subsequent holders if the instrument is dishonoured.
• Endorsee: The person to whom the instrument is transferred by endorsement. The endorsee becomes the holder and has the right to further negotiate or receive payment.

Other Possible Parties:

• Holder (Section 8): Any person entitled in their own name to the possession of a promissory note, bill of exchange, or cheque and to receive or recover the amount due on it. The payee or an endorsee is a holder.
• Holder in Due Course (Section 9): A person who for consideration becomes the possessor of a negotiable instrument before maturity, if payable to bearer, or the payee or endorsee thereof, if payable to order, without notice that the title of the person from whom he derived title was defective. A Holder in Due Course has special privileges and a perfect title.
• Collecting Banker: A bank that collects the amount of a cheque on behalf of its customer.
• Paying Banker: The bank on which a cheque is drawn, and which pays the cheque.
• Acceptor for Honour: A person who accepts a bill of exchange for the honour of the drawer or any endorser when the bill has been noted or protested for non-acceptance (Section 124).
• Payer for Honour: A person who pays a bill of exchange, which has been protested for non-payment, for the honour of any party liable thereon (Section 125).

Answer:

Negotiation (Section 14)

The transferability of negotiable instruments is facilitated by the process called Negotiation. It is the means by which the title to the instrument passes from one person to another.

Definition under Section 14

Section 14 defines "Negotiation":

"When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated."

Explanation:

• Negotiation is the process by which a person becomes the 'holder' of the instrument (a person entitled to possession and to receive/recover the amount - Section 8).
• The transfer must be in such a manner that the transferee acquires the legal right to the instrument and the money due on it.

Transfer of instrument

The mode of transfer (Negotiation) depends on whether the instrument is payable to bearer or to order:

• Instruments payable to Bearer: A negotiable instrument payable to bearer is negotiated by mere delivery (physical handing over) of the instrument to the transferee (Section 47). No endorsement is required.
• Instruments payable to Order: A negotiable instrument payable to order is negotiated by endorsement and delivery (Section 46). The holder must sign on the instrument (endorsement) and then deliver it to the transferee.

Negotiation differs from mere assignment of a debt or chose in action. In assignment, the assignee takes the right subject to all equities and defects in title that existed against the assignor. In negotiation, particularly to a holder in due course, the transferee gets a better title, free from prior defects.

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Endorsement (Section 15)

Endorsement is the process by which the holder of a negotiable instrument payable to order transfers their right to another person. It is a necessary step for the negotiation of 'order' instruments.

Definition under Section 15

Section 15 defines "Endorsement":

"When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, he is said to 'endorse' the same, and is called the 'endorser'. The person in whose favour the endorsement is made is called the 'endorsee'."

Explanation:

• Signing by Maker or Holder: Only the maker (if payable to order, though less common to endorse by maker other than to make it payable to bearer) or the current holder can endorse the instrument.
• Purpose of Negotiation: The signing must be for the purpose of transferring the instrument to another person.
• Location of Signature: The signature is typically on the back of the instrument, but can also be on the face or on an 'allonge' (a slip of paper attached to the instrument when there's no more space on the back).
• Endorser: The person who endorses the instrument.
• Endorsee: The person in whose favour the endorsement is made.

Types of Endorsement

Endorsements can take different forms, affecting the future negotiation of the instrument:

Blank Endorsement (or General Endorsement) (Section 16(1))

When the endorser signs their name only on the back of the instrument, without specifying the name of the person in whose favour the endorsement is made. The instrument then becomes payable to bearer. It can be further negotiated by mere delivery.

Example: Mr. Manoj holds a cheque payable to "Mr. Manoj or order". He simply signs his name on the back and hands it over to Mr. Naveen. This is a blank endorsement. Mr. Naveen can now transfer the cheque by mere delivery.

Full Endorsement ( or Special Endorsement) (Section 16(1))

When the endorser signs their name and also adds a direction specifying the person to whom or to whose order the instrument is to be paid. The instrument remains payable to order and requires further endorsement by the endorsee for subsequent negotiation.

Example: Mr. Manoj holds a cheque payable to "Mr. Manoj or order". He signs his name on the back and writes "Pay to Mr. Naveen or order". This is a full endorsement. Mr. Naveen must now endorse it if he wants to transfer it to someone else.

Restrictive Endorsement (Section 15 Proviso)

An endorsement that restricts or prohibits the further negotiation of the instrument, or merely constitutes the endorsee as the agent of the endorser. It limits the rights of the endorsee.

Example: "Pay to Mr. Om only." (Prohibits further negotiation). "Pay to Mr. Piyush for my use." (Constitutes Piyush as agent). "Pay to Mr. Qasim for collection." (Restricts negotiation). The endorsee under such an endorsement cannot be a holder in due course with full rights.

Conditional Endorsement (Section 52)

When the endorser makes their liability dependent on the happening of a specified event, or makes the transfer subject to a condition. The liability of the endorser arises only when the condition is fulfilled.

Example: "Pay to Mr. Rakesh or order if he completes the construction work by 31st March." The endorser's liability is conditional on Rakesh completing the work. However, the maker/acceptor's liability remains unconditional.

Partial Endorsement (Section 56)

An endorsement which purports to transfer to the endorsee only a part of the amount due on the instrument is invalid. An instrument must be negotiated for the full amount.

Example: Endorsement "Pay Rs. 5,000/- out of Rs. 10,000/- to Mr. Suresh". This is invalid endorsement for negotiation.

Effect of Endorsement and Delivery:

By endorsing and delivering, the endorser transfers the instrument to the endorsee. The endorsee becomes the holder and acquires the right to receive payment. The endorser also usually assumes secondary liability: they promise that if the instrument is dishonoured by the principal party (maker/acceptor), they will compensate the subsequent holder, provided due notice of dishonour is given.

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Holder (Section 8)

In the context of negotiable instruments, a 'holder' is a person who is legally recognized as entitled to possess the instrument and receive the money due on it. Not every person in physical possession of an instrument is a holder.

Definition under Section 8

Section 8 defines "Holder":

"'Holder' of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto."

Explanation:

• Entitled in his own name to possession: The person must have a legal right to possess the instrument. Mere physical possession is not enough. For example, a thief or a finder of an instrument payable to order (which hasn't been endorsed to bearer) is not a holder because they are not legally entitled to possession.
• Entitled to receive or recover the amount: The person must have the legal right to demand and receive payment from the parties liable on the instrument. If payment is refused, they must be able to sue in their own name to recover the amount.

The payee of an instrument is the first holder. Any subsequent person who acquires the instrument by lawful negotiation (delivery for bearer instruments, endorsement and delivery for order instruments) becomes a holder.

Meaning and Rights of a Holder

A holder possesses the following rights:

• Right to Possess: The holder has the legal right to the physical possession of the instrument.
• Right to Receive Payment: The holder can demand payment from the parties liable on the instrument (maker, acceptor, drawer in case of dishonour, endorsers in case of dishonour and notice).
• Right to Sue: If the instrument is dishonoured (payment is refused), the holder can sue any party liable on the instrument in their own name to recover the amount due.
• Right to Negotiate: The holder can further negotiate the instrument, transferring their rights to another person (unless negotiation is restricted).

While a holder has these rights, their title is subject to any defects in the title of prior parties. A holder who is not a holder in due course does not get a better title than their transferor had.

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Holder in Due Course (Section 9)

A Holder in Due Course is a special type of holder who acquires the instrument in specific circumstances and is accorded privileged rights under the Act. The definition is provided in Section 9.

Definition under Section 9

"'Holder in due course' means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it became payable, and without notice that the title of the person from whom he derived his title was defective."

Explanation: A person is said to have a defective title if they obtained the instrument or the acceptance thereof by means of fraud, coercion, or unlawful consideration, or for an unlawful object, or the consideration for which he took it was a forged one.

Meaning and Essentials of Holder in Due Course

For a person to qualify as a Holder in Due Course, they must fulfil the following conditions:

• Must be a Holder: They must first satisfy the definition of a holder under Section 8.
• Must have taken for Consideration: They must have given valuable consideration for the instrument. Consideration does not necessarily have to be adequate, but it must be real and lawful. Receiving the instrument as a gift (gratuitously) does not make one a holder in due course.
• Must have become Possessor (Bearer) or Payee/Endorsee (Order): The mode of acquiring possession must be appropriate for the type of instrument. For a bearer instrument, mere possession for consideration before maturity is sufficient. For an order instrument, they must be the payee or have received it by proper endorsement and delivery (i.e., be an endorsee).
• Must have acquired the instrument Before Maturity: They must have become the holder before the amount mentioned in the instrument became due for payment. If they acquire it after maturity, they are only a holder, not a holder in due course, and take it subject to existing defects. (This applies to time instruments, not demand instruments). For a cheque (payable on demand), they must acquire it within a reasonable time after issue and before it is dishonoured.
• Must have acted in Good Faith: They must have acquired the instrument honestly.
• Must be Without Notice of Defective Title: At the time they acquired the instrument, they must not have had knowledge or reason to believe that the title of the person from whom they received it was defective. Ignorance or negligence does not amount to notice; there must be actual knowledge or wilful abstention from inquiry, or gross negligence that amounts to constructive notice. A title is defective if obtained by fraud, coercion, unlawful means, or for unlawful consideration.

Example: A obtains a promissory note from B by threatening him (coercion - defective title). A endorses the note to C for cash. C knows about the coercion. C is a holder but not a holder in due course because he had notice of the defective title. B can plead coercion as a defense against C. If C did not know about the coercion and acquired for value before maturity, C would be a holder in due course.

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Privileges/Rights of a Holder in Due Course

The status of a Holder in Due Course confers significant privileges and rights that are not available to an ordinary holder. These rights are crucial for the free circulation and confidence in negotiable instruments.

Better title than the transferor

This is the most important privilege and an exception to the maxim Nemo Dat Quod Non Habet. A holder in due course acquires a title that is free from all defects in the title of any prior party. Even if the instrument originated from fraud, illegality, or was obtained by a prior holder through improper means, a holder in due course who takes it in good faith for value without notice acquires a perfect title and can enforce the instrument against all prior parties liable on it.

Example: A obtains a cheque from B by fraud. A endorses the cheque to C, who is a holder in due course. C can recover the amount from B, even though A's title was defective due to fraud. B cannot resist payment to C on the ground that A obtained the cheque by fraud. B's remedy is against A.

Free from equities

A holder in due course holds the instrument free from all 'equities' or personal defences that might have been available against prior parties. These personal defences include things like fraud, coercion, absence or failure of consideration, misrepresentation, set-off, etc., as between prior parties. These defences cannot be raised against a holder in due course.

Example: A makes a promissory note payable to B for goods sold. The goods are later found to be defective, giving A a right to damages or set-off against B. B endorses the note to C, a holder in due course. When C demands payment from A, A cannot refuse to pay or claim set-off based on the defective goods sold by B. A must pay C the full amount and pursue his claim regarding the defective goods separately against B.

However, certain defences are considered 'real' defences and can be raised even against a holder in due course. These include defences based on fundamental invalidity of the instrument itself, such as:

• Forged signature (except where estoppel applies).
• Instrument being void from the beginning (e.g., executed by a minor).
• Material alteration (unless consented to or the alteration is not apparent).
• Absence of delivery where delivery is essential (though usually delivery is presumed).

Subject to these few real defences, the holder in due course's title is paramount.

Other Privileges of a Holder in Due Course:

• Right to sue all prior parties: A holder in due course can sue any prior party to the instrument (maker, acceptor, drawer, all prior endorsers) in their own name. (Section 36).
• Liability of prior parties absolute: The liability of all prior parties to a holder in due course is absolute and not conditional.
• Estoppel against denying validity: A prior party who signs a negotiable instrument is usually estopped from denying its validity, or the capacity of prior parties, or the genuineness of prior signatures, when sued by a holder in due course. (Section 120-122).

These privileges make the negotiable instrument a highly secure form of credit and payment mechanism for those who acquire it legitimately and without suspicion.

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Presentment

For a negotiable instrument to be properly dealt with, particularly for demanding payment or obtaining acceptance, it must be 'presented' to the appropriate party. Presentment is the act of showing the instrument to the person liable to pay or accept it, and demanding payment or acceptance. The rules regarding presentment are specified in Sections 61 to 77 of the Negotiable Instruments Act, 1881.

Purpose of Presentment

The purpose of presentment is to fix the liability of the parties. Unless an instrument is properly presented and dishonoured, the holder generally cannot sue the parties secondarily liable (like the drawer or endorsers in a bill or cheque, or endorsers in a promissory note).

Presentment for acceptance

Presentment for Acceptance is relevant only for Bills of Exchange that are payable after sight, or after a certain event, or on a specified date. Promissory Notes (which contain a promise by the maker, not an order to a drawee) and Cheques (payable on demand to a bank) do not need to be presented for acceptance.

Section 61: Presentment for acceptance

"A bill of exchange payable after sight must, if no time or place is specified therein for presentment, be presented to the drawee thereof for acceptance, if he can, after reasonable search, be found, by a person entitled to demand acceptance, within a reasonable time after it is drawn, and in business hours on a business day."

Explanation:

• Who presents: The holder or someone on their behalf.
• To whom: To the drawee or someone authorized to accept on their behalf.
• When: Within a reasonable time (if not specified) and during business hours on a business day.
• Why: To get the drawee's acceptance, which makes the drawee primarily liable. If the drawee refuses to accept, the bill is dishonoured by non-acceptance.

Failure to present a bill payable after sight for acceptance within a reasonable time discharges the drawer and all endorsers from their liability towards the holder (Section 84). If the bill is payable on demand or after a specified date, presentment for acceptance is not mandatory, but the holder may still present it. If the drawee accepts, good; if not, it's dishonoured.

Presentment for payment

Presentment for Payment is required for all negotiable instruments (Promissory Notes, Bills of Exchange, and Cheques) to make the parties liable. The holder must present the instrument to the party liable to pay (maker in PN, acceptor in Bill, bank in Cheque) and demand payment.

Section 64: Promissory notes, etc., must be presented for payment

"Promissory notes, bills 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."

Explanation:

• To whom: To the maker (PN), acceptor (Bill), or drawee bank (Cheque).
• By whom: The holder or someone authorized on their behalf.
• When:
  • PN/Bill payable on demand: Must be presented within a reasonable time after it is received by the holder (Section 66).
  • PN/Bill payable after sight/date/event: Must be presented on the day it matures (Section 66).
  • Cheque: Must be presented for payment within a reasonable time of its issue or within a reasonable time of receiving it (Section 84(1)).
• Where: At the proper place specified in the instrument or as agreed, or at the usual place of business/residence (Section 69, 70).

Failure to present for payment at the proper time (unless excused) discharges all parties secondarily liable (drawer, endorsers) (Section 64). The party primarily liable (maker, acceptor) is not discharged by delay in presentment unless the instrument is payable at a specified place and the maker/acceptor suffers actual damage from the delay (Section 76, 84A).

Answer:

Dishonour (Sections 91, 92)

A negotiable instrument is said to be dishonoured when the party primarily liable refuses or fails to accept or pay the instrument upon proper presentment.

Dishonour by non-acceptance (Section 91)

Section 91: Dishonour by non-acceptance

"A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted."

Explanation:

• This applies only to Bills of Exchange (as Promissory Notes don't require acceptance, and cheques are payable on demand).
• The drawee must refuse or fail to accept the bill upon proper presentment for acceptance.
• Dishonour by non-acceptance occurs immediately upon refusal to accept or failure to accept within 48 hours (Section 63). The holder can then sue the drawer and endorsers immediately without waiting for the date of maturity for payment.

Example: A draws a bill on B payable 30 days after sight, in favour of C. C presents the bill to B for acceptance, but B refuses to accept it. The bill is dishonoured by non-acceptance. C can immediately sue A (drawer) and any prior endorsers.

Dishonour by non-payment (Section 92)

Section 92: 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."

Explanation:

• This applies to all three types of instruments.
• The party primarily liable (maker, acceptor, or drawee bank) fails or refuses to pay the amount due upon proper presentment for payment on the due date.

Example: A makes a promissory note payable to B on a certain date. On the due date, B presents the note to A for payment, but A refuses to pay. The note is dishonoured by non-payment.

Example: A draws a bill on B payable after 3 months, in favour of C. B accepts the bill. On the due date, C presents the bill to B (acceptor) for payment, but B refuses to pay. The bill is dishonoured by non-payment.

Example: A draws a cheque on Bank X payable to B. B presents the cheque to Bank X for payment, but the bank refuses to pay (e.g., due to insufficient funds). The cheque is dishonoured by non-payment.

Upon dishonour by non-payment, the holder can sue the party primarily liable and also all prior parties secondarily liable (drawer, endorsers), provided due notice of dishonour is given to the parties secondarily liable.

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Notice of Dishonour

When a negotiable instrument is dishonoured (by non-acceptance or non-payment), the holder must give notice of dishonour to all parties who are secondarily liable, if the holder intends to hold them liable. This requirement is specified in Section 93.

Obligation to give notice (Section 93)

Section 93: Notice of dishonour

"When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment, the holder thereof, or some party thereto who is secondarily liable, must give notice that the instrument has been so dishonoured to all other parties whom the holder seeks to make secondarily liable thereon."

Explanation:

• To whom notice given: Notice must be given to all parties secondarily liable whom the holder wishes to sue (e.g., drawer and endorsers in a bill or cheque, endorsers in a promissory note). The party primarily liable (maker, acceptor, drawee bank) does not need notice of dishonour.
• By whom notice given: The holder or any party secondarily liable who has been served with notice.
• Why: Giving notice preserves the holder's right to recover from the secondarily liable parties. Failure to give notice to any party discharges that party from their liability to the holder (and to all prior parties who would have had recourse against them).
• Mode of notice (Sections 94, 95, 96): Notice can be oral or written, given personally or by post, or by any usual means. It must be given within a reasonable time after dishonour.

Example: A draws a bill on B in favour of C, and C endorses it to D. If B (acceptor) dishonours the bill, D must give notice of dishonour to C and A if he wants to hold them liable. If D gives notice only to C, A is discharged from liability to D. C, upon receiving notice from D, must give notice to A if he wants to hold A liable.

When notice is excused (Section 98)

In certain situations, the requirement of giving notice of dishonour is dispensed with or excused. Section 98 lists the circumstances where notice is not necessary to make the secondarily liable parties liable:

• (a) When notice is dispensed with by prior agreement: If the party entitled to notice has expressly or impliedly waived the requirement of notice.
• (b) When the drawer is also the acceptor or has no reason to believe the instrument would be honoured: If the drawer of a bill is also the acceptor, or if the drawer has countermanded payment, or has no funds in the hands of the drawee to meet the bill and no reason to believe the drawee will honour it. The drawer is liable without notice.
• (c) When the party entitled to notice cannot be found: After due search.
• (d) When presentment is excused: If presentment for acceptance or payment is excused (Section 76), and the instrument is dishonoured, notice is not necessary.
• (e) When the party secondarily liable is the party primarily liable: Notice to oneself is not required.
• (f) When the notice is given by mistake or oversight, but is not received in consequence of negligence of party to whom it is sent. (This is a less clear ground).
• (g) When the party entitled to notice knows the facts which entitle him to notice as a secondary party.
• (h) When the omission to give notice is caused by accident or other circumstance rendering it impracticable to give notice.

Example: A draws a cheque on his bank. He knows there are insufficient funds in his account. The cheque is dishonoured. The holder does not need to give notice of dishonour to A (drawer) to make him liable, as A had no reason to believe the cheque would be honoured.

Noting and Protest (Sections 99, 100)

When a promissory note or bill of exchange is dishonoured, the holder may cause the dishonour to be formally recorded by a notary public. This is called Noting. If requested by the holder, the notary may also issue a certificate of dishonour, called a Protest. Noting and protest are not mandatory for inland instruments (except sometimes for bills payable after sight), but they are necessary for claiming damages and for summary procedure in certain cases, and are compulsory for dishonour of foreign bills (Section 104).

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Discharge of Negotiable Instruments and Parties

A negotiable instrument and the parties liable on it can be discharged from their obligations in various ways. Discharge means the termination of liability.

Discharge of the Instrument vs. Discharge of Parties

It is important to distinguish between the discharge of the instrument itself and the discharge of one or more parties liable on it. When the instrument is discharged, all rights under it are extinguished, and no party is liable. When a party is discharged, their liability towards the holder ceases, but the instrument may continue to be operative, and other parties may remain liable.

Discharge of the Instrument (Sections 82-89):

A negotiable instrument is discharged in the following principal ways:

Discharge by payment (Section 82)

Section 82(a): "Subject to the provisions of section 78, a promissory note, bill of exchange or cheque is discharged by payment in due course by or on behalf of the maker, drawee or acceptor thereof, respectively."

Explanation: Payment in due course means payment in good faith, according to the apparent tenor of the instrument, to the person in possession thereof, who is entitled to receive payment, at or after maturity (Section 10). When payment in due course is made by the party primarily liable (maker, acceptor, or drawee bank), the instrument is discharged, and all parties are released from liability.

Example: The maker of a promissory note pays the amount to the holder in due course on the due date. The promissory note is discharged by payment in due course.

Discharge by cancellation (Section 82)

Section 82(c): "Subject to the provisions of section 78, a promissory note, bill of exchange or cheque is discharged by cancellation by the holder of the name of the maker, drawee or acceptor, with intent to discharge him, and of all the parties thereto against whom such maker, drawee or acceptor was a party liable."

Explanation: If the holder intentionally cancels the name of the principal party liable on the instrument (maker, drawee, or acceptor), with the intention of discharging them, the instrument is discharged, and all parties secondarily liable (who would have had recourse against the principal party) are also discharged.

Discharge by release (Section 82)

Section 82(b): "Subject to the provisions of section 78, a promissory note, bill of exchange or cheque is discharged by the acceptor of a bill of exchange by his becoming the holder of it at or after its maturity in his own right." (This is effectively discharge by merger of roles).

Discharge by release also occurs when the holder of the instrument intentionally discharges the principal debtor or any party liable on the instrument by agreement or by any act that would amount to a release in contract law. If the principal debtor is released, the instrument is generally discharged. If a party secondarily liable is released, only that party is discharged, and the holder's rights against prior parties may be affected.

Discharge by operation of law

An instrument can also be discharged by operation of law in circumstances such as:

• Insolvency: Discharge of the debtor by the court in insolvency proceedings.
• Limitation: If a suit on the instrument becomes time-barred under the Limitation Act, the remedy to enforce it is extinguished, effectively discharging the parties' liability (though the debt itself may not be extinguished).
• Merger: When the holder's right on the instrument merges into a higher right (e.g., obtaining a court decree on the instrument).
• Material Alteration (Section 87): Any material alteration of a negotiable instrument renders it void as against all parties who had become parties before the alteration, unless they consented to it. (Unless the alteration was made to correct a mistake and to carry out the original intention). This discharges the instrument.

Discharge of Parties:

A party liable on an instrument can be discharged even if the instrument itself is not discharged. This happens when their liability to a particular holder or all subsequent holders ceases, but the instrument remains valid for other parties.

• Discharge of Secondarily Liable Parties by Failure of Presentment (Section 64).
• Discharge of Secondarily Liable Parties by Failure to Give Notice of Dishonour (Section 93).
• Discharge of Endorser by Acceptance of Principal Party (Section 83): When a bill is drawn payable to drawer's order, and accepted by drawee, any endorser is discharged unless he expressly agrees to be liable.
• Discharge by Allowing Drawee More than 48 Hours for Acceptance (Section 85): If the holder allows the drawee more than forty-eight hours to consider whether to accept, all prior parties not consenting thereto are discharged.
• Discharge of Surety-like Endorsers: Rules similar to discharge of surety in contracts of guarantee (Sections 133-139, read with Section 39) can apply to the discharge of endorsers in certain circumstances, e.g., giving time to the principal debtor without the endorser's consent.

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Answer:

Crossing of Cheques

A Cheque, being a bill of exchange payable on demand drawn on a bank, is a common method of payment. To enhance the safety of payment and reduce the risk of theft or misappropriation, a cheque can be 'crossed'. Crossing provides instructions to the paying bank regarding the manner in which the cheque should be paid.

Meaning of Crossing

Crossing involves drawing two parallel transverse lines across the face of the cheque. These lines are usually accompanied by certain words. Crossing does not affect the negotiability of the cheque (unless "Not Negotiable" is added) but directs the drawee bank to pay the money only through a bank, not over the counter directly to the presenter.

Section 123 to 131A of the Negotiable Instruments Act, 1881, deal with the crossing of cheques.

Types of Crossing

The Act recognizes different types of crossing, each with a specific effect:

General Crossing (Section 123)

A cheque is generally crossed if it bears across its face an addition of:

• (a) two parallel transverse lines, or
• (b) two parallel transverse lines with the words "and company" or any abbreviation thereof, between them.

Explanation: This is the simplest form of crossing. The presence of just the two parallel lines is sufficient. Words like "& Co." are common but not essential for a general crossing. A general crossing instructs the drawee bank to pay the amount of the cheque only to a banker, not over the counter. The receiving banker then collects the payment from the drawee bank on behalf of the payee or holder.

Example: A cheque with just two parallel lines across its face.

Special Crossing (Section 124)

A cheque is specially crossed if it bears across its face an addition of:

• (a) an addition of the name of a banker, or
• (b) an addition of the name of a banker, with or without the words "not negotiable".

Explanation: In a special crossing, the name of a specific banker is written across the face of the cheque, with or without the parallel lines (though lines are usually used). The instruction to the drawee bank is to pay the amount only to the banker whose name is specified in the crossing, or to that banker's agent for collection. This provides an extra layer of security as the payment must pass through a named bank.

Example: A cheque with "State Bank of India" written across its face, with or without parallel lines.

General crossing can be converted into special crossing, but special crossing cannot be converted into general crossing. The holder can add to a general crossing the name of a banker, thereby making it a special crossing. If a cheque is specially crossed to a banker, that banker may again specially cross it to another banker, his agent, for collection (Section 125).

Account Payee Crossing (or Account Payee Only) (Section 130, read with Section 131)

This is a common addition to a general or special crossing. The words "Account Payee" or "A/c Payee" or "Account Payee Only" are added between the parallel lines of a general crossing or within a special crossing.

Explanation: These words are not defined in the Act itself, but their effect is well-established by banking practice and judicial decisions, and are referred to in Section 131. The addition of "Account Payee" is a direction to the collecting banker (the bank receiving the cheque for deposit) that the proceeds of the cheque are to be credited only to the account of the payee named on the cheque. It does not restrict the negotiability of the cheque itself, but it alerts the collecting banker to a potential irregularity if someone other than the named payee is presenting the cheque for credit to their account. If the collecting banker credits the proceeds to someone else's account and the payee suffers loss, the collecting banker might be liable for negligence.

Example: A cheque with parallel lines and the words "A/c Payee Only" written between them.

Not Negotiable Crossing (Section 130)

The words "Not Negotiable" may be added to a general or special crossing.

Section 130:

"A person taking a crossed cheque bearing in addition thereto 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."

Explanation:

• This crossing fundamentally affects the characteristic of negotiability related to acquiring a better title.
• A cheque with a "Not Negotiable" crossing remains transferable, but its negotiability is restricted in the sense that the transferee, even if taking in good faith for value, does not acquire the privileges of a holder in due course.
• The transferee takes the cheque subject to all equities and defects in title that existed between prior parties. If the transferor's title was defective, the transferee's title will also be defective, and the true owner can recover the cheque or the amount from the transferee.

Example: A steals a "Not Negotiable" crossed cheque payable to B and transfers it to C, who takes it for value in good faith. C is not a holder in due course and does not get a good title. B, the true owner, can recover the amount from C or the bank if it paid C. If the cheque did not have the "Not Negotiable" crossing, C might have qualified as a holder in due course, acquiring a good title.

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Payment of Cheques

The payment of a cheque involves the drawee bank honouring the order of the drawer to pay the specified amount. The Act contains provisions related to proper payment and protection for the paying banker.

Payment in Due Course (Section 10)

A bank that pays a cheque must make the payment 'in due course' to get a valid discharge from its liability to the drawer. As defined in Section 10 (applicable to all negotiable instruments):

Section 10: Payment in due course

"'Payment in due course' means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned."

Explanation:

• In Good Faith and Without Negligence: The paying banker must act honestly and reasonably diligently.
• Apparent Tenor: Payment must be made according to what appears on the face of the instrument (e.g., payee's name, amount, date, crossing).
• To Person in Possession: Payment must be made to the person who physically presents the instrument.
• Entitled to Receive Payment: The person presenting must appear to be the rightful recipient (e.g., named payee, or endorsee, or bearer for bearer cheque). The bank must not have reasonable grounds to suspect that the presenter is not entitled to payment (e.g., forged endorsement).
• At or after maturity: For time instruments. For cheques (on demand), at or after issue.

If the paying bank makes a payment that is not in due course (e.g., pays a forged cheque, pays a crossed cheque over the counter), it does not get a valid discharge and may be liable to the drawer or the true owner.

Duties of Paying Banker

• Duty to Honour Cheque (Section 31): The bank is under a contractual duty to its customer (the drawer) to honour the cheques drawn on it, provided there are sufficient funds in the customer's account and the cheque is otherwise in order (properly signed, not stale or post-dated, not materially altered, etc.). Wrongfully dishonouring a cheque when funds are available amounts to a breach of contract with the customer, for which the bank can be sued for damages (exemplary damages possible for traders).
• Duty to Pay in Due Course (Section 10).
• Duty to Follow Crossing (Sections 123, 124, 126): The paying bank must follow the instructions in a crossing. For a general crossing, pay only to a banker. For a special crossing, pay only to the named banker. Paying a crossed cheque over the counter is a violation of duty and invalidates the payment.
• Duty to Check Endorsements (for order cheques): For cheques payable to order, the paying bank must satisfy itself that the endorsement history appears regular. However, the Act provides protection for paying banks against forged endorsements on order instruments (Section 85(1)).
• Duty to Check Signature: The bank must verify the drawer's signature. Paying a cheque with a forged drawer's signature is not payment in due course and the bank cannot debit the customer's account.

Protection to Paying Banker

The Act provides certain protections to the paying banker who makes a payment in good faith and in the ordinary course of business, even if there are issues with the cheque or the presenter's title.

• Protection in case of Forged Endorsement (Section 85(1)): Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee bank is discharged by payment in due course even if the endorsement turns out to be forged. This is a significant protection for the paying bank; they are not expected to verify the genuineness of endorsements. The bank must ensure the apparent tenor is correct and pay in good faith and without negligence.
• Protection in case of Bearer Cheques (Section 85(2)): Where a cheque is originally expressed to be payable to bearer, the drawee bank is discharged by payment in due course to the bearer, notwithstanding any endorsement, whether in blank or full, appearing thereon, and whether that endorsement purports to restrict or exclude further negotiation. Once a cheque is 'bearer' from the start, it remains bearer, and the bank is protected if it pays the bearer in due course.
• Protection for Crossed Cheques (Section 128, 129): A paying bank that pays a crossed cheque in accordance with the crossing (General: pay to banker; Special: pay to named banker) is protected if the payment is made in good faith and without negligence, even if the true owner's title was defective. If the bank pays a crossed cheque improperly (e.g., general crossing over the counter), it is liable to the true owner for any loss sustained.
• Protection in case of Altered Cheques (Section 89): If a cheque is materially altered, but the alteration is not apparent, and the bank pays it in due course, it is protected as if the cheque had not been altered. However, if the alteration is apparent, the bank must refuse payment.

These provisions protect banks acting honestly and diligently, enabling them to facilitate payments efficiently without fear of excessive liability for issues they cannot reasonably detect.

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Dishonour of Cheques and Penalties (Section 138)

Dishonour of a cheque by non-payment is a breach of contract. While the holder can sue the drawer for the amount and damages under civil law, the Negotiable Instruments Act, 1881, specifically introduced provisions (Chapter XVII, Sections 138 to 142) to criminalize the dishonour of cheques for insufficient funds, aiming to enhance the credibility of cheques as a reliable mode of payment in commercial transactions. Section 138 defines the offence.

Offence under Section 138

Section 138: Dishonour of cheque for insufficiency, etc., of funds in the account

"Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque, or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both:" (Subject to provisos regarding conditions).

Ingredients of offence under Section 138

For a person (drawer) to be held liable for the offence under Section 138, all the following conditions must be met:

• (a) Drawing of Cheque: The accused must have drawn a cheque on an account maintained by him with a bank.
• (b) Purpose of Payment: The cheque must be issued for the discharge, in whole or in part, of any legally enforceable debt or other liability. A cheque given as a gift, or for an unenforceable or time-barred debt, or for an illegal transaction does not fall under this section.
• (c) Dishonour of Cheque: The cheque must be returned by the bank unpaid. The reason for dishonour is typically "insufficient funds" or "exceeds arrangement". Other reasons like "drawer's signature differs" might not attract Section 138 unless it's a deliberate attempt to evade payment.

Statutory Compliance after Dishonour (Provisos to Section 138): In addition to the above, the following steps must be strictly complied with by the holder after the dishonour:

• (d) Presentment within Validity: The cheque must have been presented to the bank within its period of validity (usually 3 months from issue date, unless otherwise specified) or within 6 months from the date on which it is drawn, whichever is earlier. (Period updated from 6 months to 3 months by RBI directive, but Section 138 still refers to six months; however, practical presentment period is 3 months). Let's stick to the Act wording unless specifically instructed otherwise: Cheque presented within six months from date of issue or within period of its validity, whichever is earlier. (Note: RBI circulars make validity 3 months, overriding the 'six months' implicitly for banks).
• (e) Demand for Payment by Notice: The payee or the holder in due course of the cheque must make a demand for the payment of the said amount of money by giving a notice in writing to the drawer, within thirty days of the receipt of information from the bank regarding the return of the cheque as unpaid.
• (f) Failure to Pay within 15 Days: The drawer of such cheque fails to make the payment of the said amount of money to the payee or the holder in due course within fifteen days of the receipt of the said notice.

If all these conditions are met, the offence under Section 138 is deemed to have been committed, and a criminal complaint can be filed.

Procedure after offence (Section 142):

• A criminal complaint must be filed by the payee or the holder in due course.
• The complaint must be made within one month of the date on which the cause of action arises (i.e., the date on which the 15-day period for payment after notice expires).
• The complaint must be filed in a court not inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class.

Defences available

The accused (drawer) can raise various defences in a Section 138 case to rebut the presumption of guilt. Some common defences include:

• Cheque not issued for legally enforceable debt or liability: If the cheque was given as a gift, or for an illegal transaction, or for a debt that is not legally recoverable (e.g., a time-barred debt unless a fresh promise was made to pay it).
• Cheque not drawn on account maintained by accused.
• Statutory conditions not fulfilled by the complainant: Failure to present the cheque within validity, failure to send legal notice within 30 days of dishonour memo, failure to file complaint within one month of cause of action.
• Payment was stopped for a valid reason: If the drawer stopped payment due to a dispute, provided the dispute existed prior to the issue of the cheque or arose from the underlying transaction. The Supreme Court has clarified that stopping payment itself is an act of dishonour and attracts Section 138 if the reason for dishonour is insufficient funds. However, if the underlying dispute shows the cheque was not for a legally enforceable debt, it's a valid defence.
• Material alteration of the cheque.
• Cheque was stolen or lost and payment was stopped for that reason.
• Signature on the cheque is forged.
• Absence of dishonest intention: While the offence is based on statutory conditions, the underlying principle relates to dishonesty in issuing cheques without sufficient funds for a debt. Proving lack of dishonest intention might weaken the prosecution's case, although the strict compliance with statutory conditions is paramount.

The burden of proving these defences lies on the accused, as the law presumes the cheque was for a debt and the drawer had knowledge of insufficiency (Section 139).

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