IIPM CH.

5 NEGOTIABLE INSTUMENTS ACT

CHAPTER 5
NEGOTIABLE INSUTRUMENTS ACT 1881
5.1 DEFINITION OF A NEGOTIABLE INSTRUMENT
[SECTION 13]
The word 'negotiable' means transferable from one person to another, and the term 'instrument' means 'any
written document by which a right is created in favour of some person.' Thus, the negotiable instrument is a
document by which rights vested in a person can be transferred to another person in accordance with the
provisions of the Negotiable Instruments Act, 1881.
The term 'negotiable instrument' has been defined as A 'negotiable instrument' means a promissory note, bill
of e!change or che"ue payable either to order or to bearer.#
MAIN FEATURES OF A NEGOTIABLE INSTRUMENT
An instrument may be negotiable either by
$1% Statute &romissory notes, bills of e!change and che"ues are negotiable instruments under the Negotiable
Instruments Act, 1881' or
$(% By usage )an* notes, ban* drafts, share warrants, bearer debentures, dividend warrants, scripts and
treasury bills
An instrument is to be called 'negotiable' if it possesses the following characteristic features+
1% Freely transferable - Transferability may be by
$a% delivery, or
$b% by endorsement and delivery.
(% Holder's title free from defects: The holder $of the negotiable instrument% in due course ac"uires a good title not
withstanding any defect in a previous holder's title. A holder in due course is one who receives the instrument
for value and without any notice as to the defect in title of the transferor.
,% The Holder can sue in his own Name - Another characteristic feature of a negotiable instrument, is that its holder
in due course, can sue on the instrument in his own name.
-% A negotiable instrument can be transferred infinitum, i.e., can be transferred any number of times till its maturity.
.% A negotiable instrument is sub/ect to certain presumptions.
Presumptions as to negotiable instruments [Sections 118-119]
1) As to Consideration - 0very negotiable instrument is deemed to have been made, drawn, and accepted
endorsed, negotiated or transferred for consideration.
2 As to date- 0very negotiable instrument bear the date on which it is made or drawn.
! As to Acceptance- 0very bill of e!change was accepted within a reasonable time after the date mentioned
therein and before the date of its maturity.
"% As to Transfer- 0very transfer of a negotiable instrument was made before the date of its maturity in case of an
instrument payable otherwise than on demand.
# As to the order of Endorsements - The endorsements appearing on it were made in the order in which they
appear thereon.
$ As to lost Instruments - 1here an instrument has been lost or destroyed, that it was duly stamped and the
stamp was duly cancelled.
% As to holder-in-due course - The holder of the instrument is a holder in due course.
& As to dishonour - If a suit is filed upon an instrument, which has been dishonoured, the 2ourt shall, on proof of
the protest, presume the fact of dishonour unless it is disproved.
5.2 PROMISSORY NOTE
[Section 4]
Defnition
A promissory note is an instrument in writing $not being a ban* note or a currency note% containing an
unconditional underta*ing, signed by the ma*er to pay a certain sum of money to, or to the order of, a certain
person or to the bearer of the instrument
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30
IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
Examples of Promissory Notes
3A4 signs instruments in the following terms+
#I ac*nowledge myself to be indebted to ')' in 5s. 1666, to be paid on demand, for value received.#
7ollowings are Not &romissory Notes.
$i% #8r. ), I.9.:. $I owe you% 5s. 1666.#
$ii% #I promise to pay ) 5s. 1.66 on ;'s death, provided he leaves me enough to pay that sum,#
$iii% #I promise to pay ) 5s. .66 seven days after my marriage with 2.#
Essentials or Characteristics of a Promissory Note
7rom the definition, it is clear that a promissory note must have the following essential elements.
$1% In writing - A promissory note must be in writing. 1riting includes print and typewriting.
$(% Promise to pay - It must contain an underta*ing or promise to pay. Thus, a mere ac*nowledgement of
indebtedness is not sufficient.
Notice that the use of the word <promise' is not essential to constitute an instrument as promissory note.
$,% Unon!itiona" - The promise to pay must not be conditional. Thus, instruments payable on performance or
nonperformance of a particular act or on the happening or nonhappening of an event are not promissory
notes.
$-% Signe! #y t$e %a&er ' The promissory note must be signed by the ma*er, otherwise it is of no effect.
$.% Certain Parties - The instrument must point out with certainty the ma*er and the payee of the promissory
note.
$=% Certain s'm o( money - The sum payable must be certain or capable of being made certain.
$>% Promise to pay money on"y - If the instrument contains a promise to pay something in addition money, it
cannot be a promissory note.
$8% N'm#er) p"ae) !ate et - These are usually found in a promissory note but are not essential in law. If a
promissory note does not bear a date, it is deemed to have been made when it was delivered.
$?% It may #e paya#"e in insta""ments
$16% It may #e paya#"e on !eman! or a(ter a !e(inite perio! - &ayable 'on demand' means payable immediately
or any time till it becomes timebarred. A demand promissory note becomes time barred on e!piry of , years
from the date it bears.
$11% It annot #e ma!e paya#"e to #earer on !eman! or e*en paya#"e to #earer a(ter a ertain perio!
$1(% It m'st #e !'"y stampe! 'n!er t$e In!ian Stamp +t - It means that the stamps of the re"uisite amount
must have been affi!ed on the instrument and duly cancelled either before or at the time of its e!ecution. A
promissory note, which is not so stamped, is a nullity.
5.3 BILL OF EXCHANGE
,Section 5]
A 'bill of e!change' is defined by as an instrument in writing, containing an unconditional order, signed by the
ma*er, 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.
Characteristic Features of a Bill of Exchange
1. It must be in writing.
(. It must ontain an or!er to pay and not a promise or re"uest.
,. The order must be 'non!itiona".
-. There must be t$ree parties, vi@., drawer, drawee and payee.
.. The parties m'st #e ertain.
=. It must be signe! #y t$e !rawer.
>. The s'm paya#"e m'st #e ertain or capable of being made certain.
8. The or!er m'st #e to pay money and money alone.
?. It must be !'"y stampe! as per the Indian Atamp Act.
16. Number, date and place are not essential.
5.4 CHEQUE
[Section 6]
A che"ue is defined as 'a bill of e!change drawn on a specified ban*er and not e!pressed to be payable
otherwise than on demandB.
Thus, a che"ue is a bill of e!change with two added features, vi@.+
$i% it is always drawn on a specified ban*er' and
$ii% it is always payable on demand and not otherwise.
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IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
Bill of Exchange and Cheque distinguished
Cheque Bill of Exchange
1% It must be drawn only on a ban*er.
(% The amount is always payable on demand.
,% The che"ue is not entitled to days of grace.
-% Acceptance is not needed.
.% A che"ue can be crossed
=% Notice of dishonour is not necessary. The
parties thereon remain liable, even if no notice of
dishonour is given.
>% A che"ue is not to be noted or protested in case
of dishonour.
8% The protection given to the paying ban*er in
respect of crossed che"ues is peculiar to this
instrument.
1% It can be drawn on any person including a
ban*er.
(% The amount may be payable on demand or after
a. specified time.
,% A usance $time% bill is entitled to three days of
grace.
-% A bill payable after sight must be accepted.
.% 2rossing of a bill of e!change is not possible.
=% Notice of dishonour is necessary to hold the
parties liable thereon. A party who does not receive
a notice of dishonour can generally escape its
liability thereon.
>% A bill is noted or protested to establish dishon
our.
8% No such protection is available in the case of
bills.
Promissory Note and Bill of Exchange distinguished
Po!i""o# No$e Bill of Exchange
1% There are only two parties C the ma*er $debtor%
and the payee $creditor%.
(% A note contains an unconditional promise by the
ma*er to pay the payee.
,% No prior acceptance is needed.
-% The liability of the ma*er or drawer is primary
and absolute.
.% No notice of dishonour need be given.
=% The ma*er of the note stands in immediate
relation with the payee.
1% There are three parties C the drawer, the drawee
and the payee although any two of these capacities
may be filled by one and the same person.
(% It contains an unconditional order to the drawee
to pay according to the drawer<s directors.
,% A bill payable <after sight< must be accepted by
the drawee or his agent before it is presented for
payment.
-% The liability of the drawer is secondary and
conditional upon nonpayment by the drawee.
.% Notice of dishonour must be given by the holder
to the drawer and the intermediate endorsers to hold
them liable thereon.
=% The ma*er or drawer does not stand in
immediate relation with the acceptor drawee.
5.5 HOLDER AND HOLDER-IN-DUE-COURSE
[Section 8 & 9]
Holder of negotiable instrument
A holder of a negotiable instrument is a person entitled in his own name to the possession of that negotiable
instrument an! to receive or recover the amount due thereon from the parties thereto.
A 'holder in-due-course'
A 'holder indoecourse') on the other hand, is a person who for consideration became the possessor of a
negotiable instrument before the due date of payment of that instrument an! without having sufficient cause to
believe that any defect e!isted in the title of the person from whom he derived his title.
Thus, where a person receives a negotiable instrument without consideration, he may be a holder but will not
be called as a holder in due course.
5.6 CERTAIN IMPORTANT CONCEPTS AND EXPLANATIONS
+m#ig'o's Instr'ment (Section 17) - the holder may at his election treat it as either and the instrument shall be
thenceforward treated accordingly.
-$ere +mo'nt is state! !i((erent"y in Fig'res an! -or!s .Setion /01 2 the amount stated in words shall be
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IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
the amount underta*en or ordered to be paid.
In$oate Instr'ments .Setion 341 2 It means an instrument that is incomplete in certain respects.
1here one person signs and delivers to another person a duly stamped negotiable instruments an! however,
that negotiable instrument is either wholly blan* or having written thereon. Auch an instrument is thus
incomplete $inchoate%.
The ma*er of the instrument has thereby (rima facie authorises the holder thereof to ma*e or complete, for any
amount therein but not exceeding the amount covered by the stamp.
Lost or Sto"en Instr'ments .Se. 501 2 In such instances, the possessor or endorsee who has found or had
obtained the instrument by fraud shall not be entitled to receive the amount due thereon from such ma*er of the lost
instrument. $Exception C when the later $finder% person is holder in due course%.
Forge! Instr'ments - As a general rule, a forged signature does not confer a good title. 0ven a holder in due
course cannot claim payment on a forged instrument.
5.7 CHEQUE
[Section 6]
Meaning of a Cheque
A 2he"ue, in essence, is an order by the customer of the ban* directing his ban*er to pay on demand, the
specified amount, to or to the order of the person named therein or to the bearer. It has been defined as a bill of
e!change drawn on a specified ban*er and not e!pressed to be payable otherwise than on demand.
A ')he*ue in the electronic form' means a 2he"ue, which contains the e!act mirror image of a paper 2he"ue,
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.
A +truncated )he*ue+ means a 2he"ue which is truncated during the course of a clearing cycle, either by the
clearing house or by the )an* whether paying or receiving payment, immediately on generation of an electronic
image for transmission, substituting the further physical movement of the che"ue in writing.
Features of a Cheque
A 2he"ue is a bill of e!change with following features, vi@.,
$i% must be in writing'
$ii% contain an unconditional order to pay
$iii% drawn on a specified ban*er'
$iv% for a certain sum of money'
$v% the payee must be a definite person'
$vi% amount must be written both in figures and words'
$vii% it must be dated.
$viii% it is always drawn on a specified ban*er' and
$i!% it is always payable on demand and not otherwise.
Cheques in electronic form
In view of the ban*ing transforming from traditional ban*ing to eban*ing, the electronic form or electronic
image of a 2he"ue as a valid 2he"ue has also now been recogni@ed DNegotiable Instruments $Amendment%
Act, (66(E.
Dating of cheques
The drawer of a 2he"ue is e!pected to date it before it leaves his hands. A che"ue without a date is considered
incomplete and is returned unpaid by the ban*s.
A postdated che"ue is as much negotiable as a che"ue for which payment is due, i.e., the transferee of a post
dated che"ue, li*e that of the che"ue on which payment is due, ac"uires a better title than its transferor, if he is
a holder in due course.
Crossing of cheques
2rossing is a uni"ue feature associated with a che"ue affecting to a certain e!tent the obligation of the paying
ban*er and also its negotiable character. It is a peculiar method of modifying the instrument to the ban*er for
payment of the che"ue.
)rossing on a che*ue is a direction to the (aying ban,er by the drawer that (ayment should not be made
across the counter- The payment on a crossed che"ue can be collected only through a ban*er.
2rossing of a che"ue is effected by drawing two parallel transverse lines with or without the words 'and
company' or any abbreviation thereof. A che"ue that is not crossed is called an <open che"ue<.
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IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
Signifcance of crossing
As payment cannot be claimed across the counter on a crossed che"ue, crossing of che"ues serves as a
measure of safety against theft or loss of che"ues in transit.
Types of crossing
2rossing may be either
$1% General to mean as where a che"ue bears across its face an addition of the words 'and company' or any
abbreviation thereof, between two parallel transverse lines or of two parallel transverse lines simply, either
with or without the words 'not negotiable', that addition shall be deemed a crossing and the che"ue shall be
deemed to be crossed generally
$(% Special implies the specification of the name of the ban*er on the face of the che"ue
The ob/ect of special crossing is to direct the drawee ban*er to pay the che"ue only if it is presented through
the particular ban* mentioned therein. Thus, it ma*es the che"ue system still safer.
Not Negotiable Crossing
A person who ta*es such a che"ue shall not have and shall not be capable of giving a better title to the che"ue
than that which the person, from whom he too* it in the first instance, had. Thus, by including the words 'not
negotiable', the che"ue is deprived of its special feature of negotiability. A ban*, therefore, should be e!tra
careful in paying such che"ues.
Account Payee Crossing (A/c Payee Crossing)
An AFc payee crossing signifies that the drawer intends the payment to be credited only to the payeeBs account
and in none else. The addition of 'AFc payee' to a crossing has no legal sanctity and the paying ban*er may
ignore such a direction without being liable for any damages.
Not Negotiable, A/c Payee Crossing
The instrument is rendered not negotiable $ma*ing the 'paying ban*er' responsible to see that payment is made
to the person who is entitled to receive it% plus AFc payee crossing directs the collect ing ban*er to collect it for
the payee only.
Who can cross a cheque
A che"ue may be crossed by any of the following+
1. The drawer of a che"ue.
(. The holder of a che"ue.
,. The )an*er, in whose favour the che"ue has been crossed specially.
Marking of cheques
8ar*ing or certification is a method adopted when the paying ban*er verifies the customer's account and
indicates thereon that there are enough funds in his account torn that che"ue. D Sita Ram *. Bom#ay B'""ion
+ssoiation $1?=.%E. 8ar*ing only certifies the genuineness of the drawer's signature and the sufficiency of
funds.
Material alterations
An alteration is material if it alters materially or substantially the operation of the instrument and thereby the
rights and liabilities of the parties.
In +"!ons *. Cornwa"", a material alteration was defined as #an alteration, which alters the busi ness effect of
the instrument if used for any business purpose.
E6
$i% date'
$ii% the time of payment'
$iii% the place of payment'
$iv% the sum payable'
$v% the number of parties'
$vi% the relationship between parties'
$vii% legal character of the instrument'
$viii% opening a crossed che"ue'
$i!% converting an order che"ue into a bearer che"ue.
It is immaterial as to who ma*es the alteration. An alteration made by an outsider or stranger to the instrument
will be considered as an alteration made by the holder himself as it is the duty of the holder to preserve the
instrument, free from such forgeries.
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IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
Efect of Material Alteration
Any material alteration of a negotiable instrument, which has not been, consented to by either the drawee or
the payee is void as against them.
Alterations hich are not material
$i% filling blan*s of the instrument'
$ii% conversion of blan* endorsement into endorsement in full'
$iii% crossing of che"ues'
$iv% altering a general crossing into a special crossing' addition of the words 'account payee' negotiable' to a
crossing' and where a che"ue is crossed specially, the ban*er to whom crossed, crossing it specially to
another ban*er, his agent for collection'
$v% canceling the word bearer and ma*ing the che"ue payable to order' and
$vi% alteration made with the consent of the parties.
5.8 THE PAYING BANKER
The 'paying ban*er' is a term used to denote the position and duties of the draweeban*s in paying che"ues of
their customers. Thus, 'paying ban*er' is a ban*er upon whom a che"ue is drawn.
DUTIES AND RESPONSIBILITIES OF A 'PAYING-BANKER'
The drawee of a che"ue having sufficient funds of the drawer in his hands must pay the che"ue when duly
re"uired so to do. In default of such payment, the paying ban* must compensate the drawer for any loss or
damage caused by such default
E6
In Ro"in *. Stewar! it was held that even though the default arose through inadvertence, and in fact the che"ue
was subse"uently paid, the 2ourt will not award merely nominal damages, because credit of the customer was
seriously affected. This would be the case even if the customer's account was overdrawn but the ban*er had
agreed to pay his che"ues on an overdraft within certain limits. DF"eming *. Ban& o( New 7ea"an!E.
Protection in case of crossed cheques
A ban*er paying the che"ues crossed generally to a ban*er or to the specified ban*er, is protected even if it
turns out to be a payment to a wrong payee.
Payment in due course [Section 10]
&ayment in due course means payment in accordance with the apparent tenor of the instrument made in good
faith and without negligence. They are as follows+
!" Payment must be in accordance ith the apparent tenor of the instrument
#" Payment must be made in good faith and ithout negligence
$" Payment must be made to the person in possession of the instrument
%" Payment must be made to the person entitled to recei&e"
'" Payment must be made in money only.
When banker must refuse payment
A paying ban*er must refuse payment on che"ues if any of the following circumstances e!ist+
1" 1here the customer countermands the payment $stopped by the drawer%
(. 9n receipt of a notice of customer's death
,. 9n customer's becoming insolvent
-. 9n receipt of a notice of the customer's insanity
.. 9n receipt of Garnishee order
.. 9n assignment of 2redit balance
>. 9n suspicious misuse by trustee
When banker may refuse payment
1. 1here the che"ue is postdated.
(. 1here the funds of the customer are insufficient.
,. 1here a che"ue is not duly presented.
-. Not properly signed /oint holders
.. 8aterial alteration or irregularity
.. &resented after validity period
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IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
5.9 DISHONOUR OF A CHEQUE ON GROUNDS OF INSUFFICIENCY OF FUNDS
[Aections 1,8 to 1-(E
Aection 1,8 to 1-( of the Negotiable Instruments Act provide for criminal penalties in the event of dishonour of
che"ues for insufficiency of funds. The drawer, under Aec. 1,8, may be punished with imprisonment upto (
years $earlier I year% or with a fine up to twice the amount of the che"ue or with both. The enhancement in the
penal provisions was made by Negotiable Instruments $Amendment% Act (66( w.e.f. ..(.(66,.
In order to attract the aforesaid penalties, following conditions must be satisfied+
(!)" Insufficiency of funds
The 2ourts have held the following amounting to dishonour for insufficiency of funds+
$i% Atoppayment instructions to the payeeban* DET 8 T9 Corpn. Lt!. *. I! Te$no"ogies 8 Engross P.
Lt!- $1??=%E.
$ii% 5e"uest to the payee not to present the che"ue till further information D%o!i Cement Lt!. *. :'$i"
:'mar Nan!i $1??8%E.
$iii% 2he"ue received bac* from the payeeban* with the remar*s 'Account 2losed' DG.%. %itta" Stain"ess
Stee" *s. Nagar;'na In*estments $1??>% and N.E.P. C. %ion Lt!. *s. %agna Leasing Lt!. $1???%E.
(#)"Payment against an enforceable debt
($)" Che*ue should be presented to the paying ban+ ithin the &alidity period $generally = months from the date on
which it is drawn%
(%)" Payee to ser&e ,efault Notice- demanding payment ithin $. days
(')" ,raer liable upon failure to pay ithin $. days/
Upon failure Complaint in writing; Ofence triable by 1
st
Magistrate
The payee having failed to receive the payment within ,6 days< of notice of dishonour of the cheu"e, shall have
to ma*e a police complaint in this regard. This is a cogni@able offence and shall be tried by a 8etropolitan
8agistrate or a Hudicial 8agistrate of the 7irst 2lass.
Ofences by companies
A director, manager, secretary or other officer of the company shall be liable to be proceeded against and
punished accordingly in case the offence has been committed with the consent or connivance, or is attributable
to any neglect on his part in this regard. Ra;nees$ +ggarwa" *. +ni" B$a""a $(661%.
Iowever, a (erson will not be liable in a case.
$i% where such person proves that the offence was committed without his *nowledge, or
$ii% where he had e!ercised all due diligence to prevent the commission of such offence'
$iii% where he is nominated as a ;irector of a company by the 2entral Government or Atate Government or
financial institutions.
POWER OF COURT TO TRY CASES SUMMARILY [SECTION 143]
This is a non-obstante clause. It overrides the provisions contained in the 2ode of 2riminal &rocedure, 1?>,. It
has been now provided that offences for dishonour of che"ues shall be tried by a Hudicial magistrate of the first
class or by a 8etropolitan 8agistrate.
In the case of summary trial, the ma!imum sentence that may be passed by the 8agistrate shall be
imprisonment for a term not e!ceeding one year and an amount of fine not e!ceeding five thousand rupees.
The trial shall, so far as practicable, consistent with the interests of /ustice, be continued from day to day.
7urther, every trial shall be conducted as e!peditiously as possible and an endeavour shall be made to
conclude the trial within si. months from the date of filing of the complaint.
0very offence punishable under Negotiable Instruments Act shall be compoundable $Aection 1->%
5.10 THE COLLECTING BANKER
9ne of the principal functions of a ban*er is to receive instruments from his customer in order to collect the
proceeds and credit them to his customer's account. 1hen acting in this capacity he is called a #col lecting
ban*er#.
1hile collecting his customer's che"ues, a ban*er acts either+
(i) 0an+er as 1older for &alue - 1hen, to oblige a customer, a ban* pays the proceeds of a che"ue drawn upon
another ban*er, before collection, he is treated as a holder for value. Aimilarly, where, a customer pays in a
che"ue and the ban*er e!pressly or impliedly permits him to draw against it before it is cleared, the ban*er
will be regarded as a holder for value.
(ii) 0an+er as Agent - A collecting ban*er acts, as an agent of the customer if he credits the customer's account
with the amount of the che"ue after it is actually realised.
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IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
Duties and responsibilities of a collecting banker
;ue 2are and ;iligence in 2ollection of 2he"ues
&resentation for payment by the ne!t wor*ing day after the receipt of the che"ues.
Notice of ;ishonour
5.11 BIILS OF EXCHANGE AND PROMISSORY NOTE
Kinds of bills
)ills are of different *inds. Aome of these are+
!" Inland 0ill
An inland bill+
$a% must be drawn and made payable in India, or
$b% must be drawn in India upon a person resident in India although it may be payable outside India.
E6
J of )ombay draws a bill on K of ;elhi payable at Kor*shire $:.L.%.
#" 2oreign 0ills
A foreign bill of e!change is
$a% drawn in India upon a person resident outside India and made payable outside India, or
$b% drawn outside India and payable in India.
E6
J of )ombay draws a bill of e!change on K of Mondon payable at Mondon.
$" Trade and Accommodation 0ills
A trade bill is a bill of e!change issued in respect of a genuine trade transaction. Auch bills are
drawn by the seller on the buyer in respect of payment of the price of the goods sold and purchased.
Aince an accommodation bill is drawn and accepted without any consideration, it creates no obliga
tion of payment between the parties to the transaction.
)ut, however, all bills are not genuine bills i.e-, they do not represent a trade transaction but are
drawn as a convenient mode of accommodating a friend.
E6 Thus, J may be in need of money and approaches his friend K who instead of lending money
directly, draws and accepts a bill of e!change, say, for 5s. .,666. If the credit of K is good it lends a
currency to the bill and it can be discounted with the ban*ers or any other person.
9n maturity, J remits the amount with K who in turn pays it in honouring the bill of e!change on
presentment.
Thus, it provides an accommodation to the party and is, therefore, called an 'Accommodation )ill'. The
language and form of an accommodation bill is, however, similar to a genuine trade bill.
%" Time 0ills (3sance 0ills)
Time bills, also called as usance bills, are bills payable at a fi!ed period after date or sight of the bills. Thus,
a bill of e!change drawn payable at , months after the date it is drawn is a time or usance bill.
Similarly, a bill drawn payable at ?6 days after sight is again a time or usance bill. A time bill may also be
made payable at a fi!ed period after an event which is certain to happen.
Ience, a bill payable at ?6 days after the death of the drawer will be a valid time bill.
'" ,emands 0ills
A bill of e!change or a promissory note is payable on demand when
$i% It is made payable 'on demand' or 'at sight' or 'on presentationB.
$ii% No time for payment is mentioned therein $Aection 1?%.
4" Clean and ,ocumentary 0ill
It is a common practice in home as well as foreign trade to deliver to the ban*er along with the bills
of e!change, the documents of title to the goods. /E6- Morry 5eceipt, 5ailway 5eceipt or )ill or Mading%.
1here the ban*er is instructed to deliver to the drawee of the bill the documents of title against
acceptance of the bill, the bill is called as ;ocuments against Acceptance of )ill $;FA )ill% and where the
documents are to be released only against payment, it is called as ;ocuments against &ayment ad )ill
$;I& )ill%.
Parties to a Bill of Exchange
1. The 0rawer the person who draws or ma*es the bill.
(. The 0rawee the person on whom the bill is drawn.
,. The 1ayee the person to whom the amount of the bill is payable.
-. The Holder is the original payee but where the bill has been endorsed, the endorsee.
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.. The endorser is the person who endorses a bill.
=. The endorsee is the person to whom the bill is negotiated by endorsement.
Acceptor for Honour
An acceptor for honour is a person who, on the refusal by the original drawee to accept the bill or to fur nish
better security when demanded by the notary, accepts the bill in order to safeguard the honour of the drawer or
any endorser.
Acceptor for honour must specify as to whose honour he is accepting the bill of e!change . 1here the acceptor
does not e!press for whose honour it is made, it shall be
Parties to A Promissory Note
1. The 2a,er the person who ma*es the note promising 'to pay the amount stated therein.
2- The 1ayee the person to whom the amount of the note is payable.
!- The Holder is either the original payee or any other person in whose favour the note been endorsed.
"- The 3ndorser the person who indorses the note in favour of another person.
#- The 3ndorsee the person in whose favour the note is negotiated by indorsement.
ACCEPTANCE
The acceptance of a bill is the indication by the drawee of his assent to the order of the drawer.
It has been defined as the signature of the drawee of a bill who has signed his assent upon bill and delivered it
or given notice of such signing to the holder to some person on his behalf.
An acceptance to be valid must be
/a in writing,
/b signed by the drawee or his agent,
/c on bill of e!change, and
/d completed by delivery to the holder or by notice of acceptance to him or some person on his behalf
D<ag;i*an %a';i =it$"ani *. %>s Ran$a$o!as %eg$a;i) 1?-.E
An acceptance of a bill may be general or "ualified.
(a) General Acceptance
(b) 5ualified Acceptance
Who may Accept
A bill of e!change may be accepted by the following persons
$1% The drawee of the bill
$(% 1here there are more than one drawees, by all or some of them.
$,% A drawee in case of need.
$-% An agent of any of the person mentioned above.
$.% An acceptor for honour.
$=% An agent of the acceptor for honour.
$>% In case no drawee is mentioned in the bill and a person accepts it, he becomes an acce(tor by esto((el-
Acceptance for Honour
1hen a bill of e!change has been noted or protested for nonacceptance or for better security and any person
accepts it supra protest for honour of the drawer or of anyone of the endorsers, such person is called an
acceptor for honour.
After acceptance of the bill by the acceptor for honour, the payee, at the due date, has to present the bill first to
the drawee for payment and if it is also dishonoured for payment by the drawee and noted or protested as the
case may be it should then be presented to the acceptor for honour for payment.
PRESENTMENT
&resentment of a negotiable instrument is made for two purposes.
!" Presentment for acceptance - It is only bills of e!change that re"uire presentment for acceptance and that too
not all but certain *ind of bills only. )ill payable on demand or on a fi!ed date need not be presented for
acceptance.
#" Presentment for payment - A negotiable instrument must be presented for payment to the ma*er, acceptor or
drawee, thereof, as the case may be, by the holder or his agent.
DISHONOUR
!" ,ishonour by Non-Acceptance (Section 91)
$I% 1hen the drawee does, not accept it within -8 hours from the time of presentment for acceptance'
$(% when presentment for acceptance is e!cused and it remains unaccepted'
$,% when the drawee is a person incompetent to contract'
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IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
$-% when the drawee could not be found after a reasonable search.
$.% where the acceptance is "ualified'
$=% where one or more of the several drawees refuse to accept the bill.
#" ,ishonour by Non-Payment
Notice of Dishonour
1hen a negotiable instrument is dishonoured by nonacceptance or nonpayment, the holder must give notice
of dishonour to the drawer and all other parties whom he see*s to ma*e liable. 0ach party receiving notice of
dishonour must in order to render any prior party liable to himself give notice of dishonour to such party within a
reasonable time after he has received it. The notice may be oral or in writing though for safety it is advisable to
give a written notice.
Notice of dishonour unnecessary
$1% 1hen it is !ispense! wit$ #y t$e party entitled thereto.
$(% 1hen the payment $as #een o'nterman!e! by the drawer or endorser.
$,% 1hen the party $arge! o'"! not s'((er !amages (or want o( notie.
$-% 1hen the party entit"e! to notie annot a(ter reasona#"e sear$ #e (o'n!.
$.% 1here the party "ia#"e to gi*e notie is 'na#"e, without any fault of its own, to give it, e.g. death or
serious illness of the holder or his agent or any other accident.
$=% 1here the promissory note is not negotia#"e.
$>% In case the !rawer $imse"( is aeptor, no notice is necessary to charge the drawer.
$8% 1hen the party entit"e! to notie) &nowing t$e (ats) promises 'non!itiona""y to pay the amount
due on the instrument.
NOTING
Noting is a convenient method of authenticating the fact of dishonour. 1here an instrument is dishonoured, the
holder, besides giving the above notice, should get the bill or promissory note 'noted' by the notary public.
The notary public presents the instrument, notes down in his register date of its dishonour and the reason, if
any, given by the acceptor. If the instrument has been e!pressly dishonoured, the reason why the holder treats
it as dishonoured and the notary's charges should be metioned. 'Noting' must be made within a reasonable time
after dishonour.
Noting is not com(ulsory in the case of an inland bill or note, but foreign bills must be protested, if s re"uired by
the law of the place where drawn.
PROTESTING
The protest is the formal notarial certificate attesting the dishonour of the bill and based upon the noting. After
the noting has been made, the formal protest may be drawn up by the notary at his leisure. 1hen the protest is
drawn up it relates bac* to the date of noting.
A protest to be valid must contain the following particulars+
1. The instrument itself, or a literal transcript thereof.
(. The names of the parties against whom the instrument is protested.
,. The fact and reasonFreasons for dishonour.
-. &lace and time of dishonour or refusal to give better security.
.. Aignature of the notary public.
.. In the event of an acceptance for honour or of a payment for honour, the name of the person by whom or
the person for whom, and the manner in which, such acceptance or payment was offered and effected.
COMPENSATION
Compensation to holder
The holder is entitled to the amount due upon the instrument with interest plus the e!penses properly incurred
in noting and protesting it.
Compensation to Endorser
If an endorser of a bill has paid the amount due thereon, he is entitled to the amount so paid plus e!penses
with interest N = per cent per annum from the date of his paying to the date of his receiving bac* amount.
Compensation against banker
2ompensation that may be claimed include damages to credit and reputation of the drawer, and the 2ourt
would normally award e!emplary or vindictive damages.
5.12 HUNDIS
Iundis are instruments written in an oriental language. The word 'hundi' appears to have been derived, from
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IIPM CH. 5 NEGOTIABLE INSTUMENTS ACT
the Aans*rit wor* 'hund' which means 'to collect'. These hundis were, therefore, originally used for the collection
of debts. Iundis have been in circulation in India from very early times, long before the Negotiable Instrument
Act, 1881.
It is to be noted that The Negotiable Instruments Act does not a((ly to hundis, but where, by any words in the
instrument itself, the usages regarding such instruments are e!cluded, or where it is e!pressly indicated that
the legal relations of the parties thereto shall be governed by the Negotiable Instruments Act 1881, the Act
becomes applicable. In the absence of any of the above indications, hundis shall be governed by local usages
applying to such documents D:an$ya"a" *. Ram&'mar, 1?.=E.
Kinds of hundis
Shah-6og 1undi - A Ahah/og hundi is drawn by one merchant on another as*ing the latter to pay the said
hundi to a 'Ahah'. 'Ahah' is a respectable and responsible person, a man of worth and *nown in the ba@ar.
,arshni 1undi (payable at sight) - A darshni hundi must be presented for payment within a reasonable
time after its receipt by the holder.
7uddati 1undi or 7iadi 1undi Iundi payable agter a specified period of time.
Nam 6og 1undi - A hundi payable to the specified person is called Nam/og hundi.
Nishan"6og 1undi 8 This hundi is payable only to the persons who presents it.
,hani"6og 1undi- A dhani/og hundi is payable to a dhani, owner.
2irman-6og and ,e+hanhar 1undis There are payable to order.
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