14. The Negotiable Instrument Act 1881 – Business Law

14

The Negotiable Instrument Act 1881

Learning Objectives

In this chapter, the students come to know

  • Negotiable instruments like promissory note, bill of exchange and cheque.

  • Types of negotiable instrument.

  • Maturity period of negotiable instrument.

  • Negotiation, assignment of instrument.

  • Crossing of cheque.

  • Dishonour of instrument.

  • Noting and protesting

  • Hundi

14.1 INTRODUCTION TO NEGOTIABLE INSTRUMENTS

In India, there is a reason to believe that instruments to exchange were in use from early times and we find that papers representing money were introduced into the country, by one of the Mohammedan sovereigns of Delhi in the early part of the fourteenth century.

The word ‘hundi’, a generic term used to denote instruments of exchange in vernacular is derived from the Sanskrit root ‘hund’, meaning ‘to collect’ and well expresses the purpose to which instruments were utilized in their origin. With the advent of British rule in India, commercial activities increased to a great extent. The growing demands for money could not be met by mere supply of coins; and the instrument of credit took the function of money which they represented.

Before the enactment of the Negotiable Instrument Act, 1881 the law of negotiable instruments as prevalent in England was applied by the courts in India when any question relating to such instruments arose between the Europeans. When the parties were Hindu or Mohammedans their personal law was held to apply. Though, neither the law books of the Hindus nor those of the Mohammedans, contain any reference to negotiable instruments such as, the customs prevailing among the merchants of the respective community were recognized by the courts and applied to the transactions among them. During the course of time, there had developed in the country a strong body of usage relating to hundis which even the Legislature could not, without hardship to Indian bankers and merchants, ignore. In fact the Legislature felt the strength of such local usages and though fit to exempt them from the operation of the Act, with a provision that such usage may be excluded altogether by appropriate words. In the absence of any such customary law, the principles derived from the English law were applied to the Indians, as rules of equity justice and good conscience.

The history of the present act is a long one. The act was originally drafted in 1866 by the India Law Commission and introduced in December 1867 in the Council and it was referred to a Select Committee. Objections were raised by the mercantile community to the numerous deviations from the English Law which it contained. The Bill had to be redrafted in 1877. After the lapse of a sufficient period for criticism by the Local Governments, the High Courts and the Chambers of Commerce, the Bill was revised by a Select Committee. In spite of this Bill could not reach the final stage. In 1880 by the Order of the Secretary of State, the Bill had to be referred to a new Law Commission. On the recommendation of the new Law Commission, the Bill was re-drafted and again it was sent to a Select Committee which adopted most of the additions recommended by the new Law Commission. The draft thus prepared for the fourth time was introduced in the Council and was passed into law in 1881, being the Negotiable Instruments Act, 1881.

Negotiable instrument means a promissory note or bill of exchange or cheque payable either to order or to the bearer.

An instrument, the property in which is acquired by anyone, who takes it bonafide and for value notwithstanding any defect in the title of any prior party is known as a negotiable instrument.

14.2 ESSENTIALS OR CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

The important characteristics of the negotiable instrument are the following:

  1. Negotiable instrument must be payable either to order or to bearer.
  2. Negotiable instruments are freely transferable from one person to another.
  3. It is transferable infinitum (i.e., indefinitely). It means it can be transferred for any number of times.
  4. The holder in due course gets a good title to negotiable instrument even though the title of transferor is defective.
  5. The holder of the instrument is presumed to the owner of the property contained in it.
  6. A negotiable instrument may name more than one payee, jointly or alternatively.
14.3 PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENTS

A negotiable instrument is subject to certain presumptions. These have been recognized by the Negotiable Instrument Act under Sections 118 and 119, with a view to facilitate the business transactions. These are detailed below:

  1. Every negotiable instrument was made, accepted and endorsed for consideration. Consideration is not required to be mentioned on the instrument.
  2. Every negotiable instrument bearing a date was made or drawn on such date.
  3. Every accepted bill was accepted within a reasonable time after its date and before maturity.
  4. Every transfer of a negotiable instrument was made before its maturity.
  5. A lost promissory note or bill was duly stamped and signed.
  6. The holder of a negotiable instrument is a holder in due course.
  7. Endorsement appearing upon negotiable instrument was made in the order in which they appear thereon.

However, these legal presumptions are rebuttable by evidence to the contrary.

14.4 PROMISSORY NOTE—SECTION 4

A ‘promissory note’ is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to—

(a) A certain person

(b) The order of a certain person

14.5 ESSENTIALS CHARACTERISTICS OF A PROMISSORY NOTE

To be a promissory note, an instrument must possess the following essentials.

14.5.1 In Writing

The promissory note should be in writing. It could be in hand writing or printing. An oral promise to pay is not sufficient.

14.5.2 Express Promise to Pay

The promissory note must contain express promise to pay. Mere acknowledgement of indebtedness is not sufficient.

Example

‘Mr. B I.O.U 10,000’. There is no promise to pay and therefore this is not a valid promissory note.

14.5.3 Definite and Unconditional Promise

If a promise to pay is dependent upon an event which is certain to happen although the unconditional time of its happening is uncertain, the promise to pay is unconditional.

Example

‘I promise to pay Bina 5,00,000 on D's death’. The promise is not conditional but definite since death of D is certain. Therefore, the promissory note is valid.

14.5.4 Signed by Maker

The promissory note must be signed by the maker. The signatures may be made on any part of the instrument. An agent of a trading firm can sign a promissory note on behalf of the firm.

14.5.5 Promise to Pay a Certain Sum

The promissory note should contain the promise to pay a certain sum of money. It should contain the promise to pay only money and nothing else.

Examples

  1. ‘I promise to pay Balwant 2500 and all other sums which shall be due to him’. Since the amount payable is not certain, it is not a valid promissory note.
  2. ‘I promise to pay Blawant 1200 and to deliver to him my rabbit on 1 March 2011’. It is not a valid promissory note since the promisor is required to deliver rabbit which is not ‘money’.

14.5.6 Payee Must Be Certain

The name of the payee must be specified in the promissory note otherwise it will be invalid.

14.5.7 Stamped

The promissory note must be stamped. The stamp duty is paid as per the Stamp Act.

14.5.8 Parties

The person who makes the promissory note is called as maker. His liability is primary and unconditional. The person to whom money is to be paid, is called as payee.

Case Study

‘I promise to pay Blawan 1200 after deducting there from any money which he owes me’. Is it valid promissory note? Why?

Case Study

‘I promise to pay Balwant 100, 10 days after my marriage with C’. Is it valid promissory note? Why?

Case Study

‘I promise to pay B 2000 on D's death, provided D leaves me enough to pay that sum’. Is it valid promissory note? Why?

Case Study

‘I acknowledge myself to be indebted to B in 5000 to be paid on demand for value received’. Is it valid promissory note? Why?

Case Study

State giving reasons, whether the following instruments are valid promissory notes:

  1. X promises to pay Y by a promissory note, a sum of 5000, 15 days after the death of B.

  2. X promises to pay Y by a promissory note, 5000 and all other sums which shall be due.

Case Study

Referring to the provisions of the Negotiable Instruments Act, 1881 examine the validity of the following promissory notes:

  1. I owe you a sum of 1000. ‘A’ tells ‘B’.

  2. ‘X’ promises to pay ‘Y’ a sum of 10,000, six months after ‘Y’s marriage with ‘Z’.

14.6 BILL OF EXCHANGE—SECTION 5

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—

  1. A certain person.
  2. The order of a certain person.
  3. The bearer of the instrument.

Examples

  1. ‘A’ wrote and signed an instrument ordering ‘B’ to pay 500 to ‘C’ This is a bill of exchange.
  2. ‘On demand pay to ‘A’ or order the sum of 500 for value received’.

The characteristics of bill of exchange are almost similar to the promissory note. The essentials characteristics of a bill of exchange are following:

  1. It must be in writing.
  2. It must contain an express order to pay.
  3. The order to pay must be definite and unconditional.
  4. It must be signed by the drawer.
  5. The sum contained in the order must be certain.
  6. The order must be to pay money only.
  7. Drawer, drawee and payee must be certain. The drawer and payee may be same person.
  8. It must be stamped.

The person who draws or makes the bill is known as the drawer. His liability is secondary and conditional. The person on whom the bill is drawn is called as the drawee. On the acceptance of the bill, the drawee is called as the acceptor. He becomes liable for the payment of the bill and his liability is primary and unconditional. The person to whom the money is to be paid is known as the payee.

Case Study

An acceptor accepts a ‘Bill of Exchange’ but write on it ‘Accepted but payment will be made when goods delivered to me is sold’. Decide the validity.

14.7 DIFFERENCE BETWEEN PROMISSORY NOTE AND BILL OF EXCHANGE

Following points highlight the main difference between a promissory note and a bill of exchange.

  1. There are two parties in a Promissory Note—the maker and the payee. In a bill, there are three parties—the drawer, the drawee and the payee.
  2. A promissory note contains an unconditional promise to pay. A billofexchange contains an unconditional order to pay.
  3. The maker of a note is the debtor and he himself undertakes to pay. The drawer of a bill is the creditor who directs the drawee (his debtor) to pay.
  4. The maker of a note corresponds in general to the acceptor of a bill. But the maker of the note cannot undertake to pay conditionally whereas the acceptor may accept the bill conditionally because he is not the originator of the bill.
  5. The liability of a maker of a note is primary and absolute whereas the liability of the drawer of a bill is secondary and conditional.
  6. A note cannot be made payable to the maker himself whereas in a bill, the drawer and the payee may be one and the same person.
  7. A note requires no acceptance and it is signed by the person who is liable to pay. A bill, payable after sight or after a certain period must be accepted by the drawee before it is presented for payment.
  8. A note cannot be drawn payable to bearer. A bill can be so drawn. But in no case can a note or bill be drawn ‘payable to bearer on demand’.
14.8 CHEQUE—SECTION 7

A cheque is a bill of exchange, drawn on a specified banker and it includes ‘the electronic image of truncated cheque’ and ‘a cheque in electronic form’. The cheque is always payable on demand.

A cheque must contain all the characteristics of a bill of exchange. The essentials characteristics of a cheque can be summarized as under—

  1. It must be in writing.
  2. It must contain an express order to pay.
  3. The order to pay must be definite and unconditional.
  4. It must be signed by the drawer.
  5. The sum contained in the order must be certain.
  6. The order must be to pay money only.
  7. Drawer, drawee and payee must be certain.
  8. It is always drawn upon a specified banker.
  9. It is always payable on demand.

A cheque does not require stamping or acceptance.

The person, who draws or makes the cheque is called as drawer. His liability is primary and conditional. The bank on whom, the cheque is drawn is called as drawee. The bank makes the payment of the cheque. The person to whom money is to be paid is called as payee. The payee may be the drawer himself or a third party. A cheque is usually valid for 6 months. However, it is not invalid if it is post dated or antedated.

14.8.1 Truncated Cheque

A truncated cheque means a cheque which is truncated during the course of a clearing cycle either by the clearing house or bank whether paying or receiving payment immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.

14.8.2 Cheque in Electronic Form

A cheque in electronic form means a cheque which contains the exact mirror image of a paper cheque and is generated, written and signed in a secure system, ensuring the minimum safety standards with the use of digital signature (with or without biometric signature) and asymmetric crypto system.

14.8.3 Presentment of Truncated Cheque

In case of and reasonable suspicion about the genuineness of the electronic image of a truncated cheque (e.g., suspicion as to fraud, forgery, tampering or destruction of the instrument), the paying banker is entitled to demand any further information regarding the truncated cheque. The paying banker can also demand the presentment of truncated cheque itself for verification.

14.9 DIFFERENCE BETWEEN BILL OF EXCHANGE AND CHEQUE
Bill of Exchange Cheque
Bill of exchange can be drawn on any person. Cheque is always drawn on the bank.
Bill of exchange need not always be payable on demand. It is always payable on demand.
It cannot be payable to bearer on demand. It can be drawn, payable on bearer on demand.
It require an acceptance of drawee. It does not require an acceptance.
It requires stamp as per Stamp Act. It does not require stamp.
It cannot be crossed. It can be crossed.
Notice of dishonour is usually required. Notice of dishonour is not required.
14.10 DIFFERENCE BETWEEN ELECTRONIC CHEQUE AND TRANCATED CHEQUE
Electronic Cheque Truncated Cheque
Paper is not used at any stage in creation of an electronic cheque. A truncated cheque is nothing but a paper cheque which is truncated during the clearing cycle.
Digital signatures must be used to create an electronic image of a cheque. Thus, an electronic cheque contains digital signature. The paper cheque which is afterwards truncated, contains no digital signature. The signatures in ink appear on the truncated cheque. The original writing of a truncated cheque is on paper, duly signed in ink.
The electronic cheque is in electronic form. Trancated cheque is in paper form.
14.11 CAPACITY OF A PERSON TO BE A PARTY TO A NEGOTIABLE INSTRUMENT

A person, capable to enter into contract is capable to make or draw negotiable instrument. A person shall be liable on a negotiable instrument (by reason of making, drawing, accepting, endorsing, delivering or negotiating a negotiable instrument), only if he is capable of contracting, according to the law to which he is subject.

A minor may draw, endorse, deliver and negotiate any negotiable instrument. All the parties shall be bound on such negotiable instrument. However, the minor shall not be bound on such negotiable instrument.

An agent who signs in his name on a promissory note, bill of exchange or cheque without indicating thereon that he signs as an agent will be personally liable on instrument.

Case Study

X, a major and M, a minor, executed a promissory note in favour of P. Examine with reference to the provisions of the Negotiable Instruments Act, the validity of the promissory note and whether it is binding on X and M.

14.12 CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

A negotiable instruments may be classified as under:

14.12.1 Order Instrument—Section 13

The negotiable instrument is payable to order—

  1. Which is payable to a particular person.
  2. Which is payable to a particular person or his order.
  3. Which is payable to the order of a particular person.

14.12.2 Bearer Instrument—Section 13

The negotiable instrument is payable to bearer when—

  1. It is expressed to be payable to bearer.
  2. The last endorsement is in blank.

A promissory note cannot be made payable to bearer. The bill of exchange cannot be made payable to bearer on demand.

14.12.3 Demand Instrument—Sections 19–21

The negotiable instrument on which time for payment is not specified, is an instrument payable on demand. The negotiable instrument which is expressed to be payable on demand is also demand instrument.

A cheque is always payable on demand. A demand instrument may be presented for payment at anytime. The demand instrument is not entitled to any days of grace.

14.12.4 Time Instrument

An instrument in which the time for payment is specified is known as time instrument. The time instrument may be payable—

  1. On a specific day or
  2. After a specified period or
  3. Certain period after sight or
  4. On the happening of an event which is certain to happen.

14.12.5 Inland Instrument—Section 11

A negotiable instrument is an inland instrument if it is—

  1. Drawn or made in India.
  2. Payable in India or is drawn on a person resident in India.

Example

A bill drawn in India payable in Japan, upon a person in India is an inland instrument.

14.12.6 Foreign Instrument—Section 12

The negotiable instrument which is not an inland instrument is called as foreign instrument. The foreign instrument must be drawn outside India and made payable outside or inside India.

14.12.7 Ambigious Instrument—Section 17

An ambitious instrument means an instrument which can be constructed either as a promissory note or bill of exchange. Once the option is exercised, the instrument shall be treated accordingly.

14.12.8 Accommodation Bill

An accommodation bill means a bill which is drawn accepted without consideration. The person who becomes the holder of such a bill in good faith and for consideration after maturity may recover the amount from any party.

14.12.9 Fictitious Bill

A fictitious bill is a bill in which the name of the drawer or the payee or both is fictitious.

14.12.10 Documentary Bill

A documentary bill means a bill to which the documents of title of the goods are attached.

14.12.11 Clean Bill

A clean bill means a bill to which no document relating to the goods, is attached.

14.13 DISTINGUISH BETWEEN INLAND AND FOREIGN BILLS

An inland bills are drawn in India on a person residing in India, payable any where or drawn in India on a person residing outside India, payable in India, while a foreign bill is a bill which is not inland bill.

A foreign bills are drawn and are payable outside India, or drawn in India and payable outside India or drawn in India upon the persons resident outside India and made payable outside India.

The foreign bills may be of five kinds:

  1. A bill drawn in India on a person resident outside India and made payable outside India.
  2. A bill drawn outside India and made payable in India.
  3. A bill drawn outside India on any person resident outside India.
  4. A bill drawn outside India on a person resident in India.
  5. A bill drawn outside India are made payable outside India.

The inland bills are drawn in a single copy but foreign bills are drawn in triplicate.

In the inland bills, dishonour requires noting. The protest is optional but in foreign bills, dishonour requires protesting.

14.14 INCOMPLETE INSTRUMENT OR INCHOATE INSTRUMENT—SECTION 20

Where one person signs and delivers to another, a paper stamped in accordance with the law relating to negotiable instruments then in force in India and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete as the case may be, upon it a negotiable instrument for any amount specified therein; and not exceeding the amount covered by the stamp. Such instrument is called as inchoate instrument.

The person so signing shall be liable upon such instrument in the capacity in which he signed the same to any holder in due course for such amount; provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid there under.

14.15 DISTINGUISH BETWEEN AMBIGUOUS INSTRUMENT AND INCHOATE INSTRUMENT
Ambiguous Instrument Inchoate Instrument
Ambiguous instrument can be negotiated. Inchoate instrument is not a negotiable instrument. It can be negotiated only after amounts are filled in.
The holder of ambiguous instrument can sue on it after electing to treat it either as promissory note of bills of exchange. The holder of inchoate instrument can sue only after amounts are filled in.
14.16 MATURITY OF A NEGOTIABLE INSTRUMENT—SECTIONS 22–25

Cheques are always payable on demand but other instruments like bills and notes, may be made payable on specified date or after specified time. Maturity of a negotiable instrument means the date on which the negotiable instrument falls due for payment. The negotiable instrument which is payable otherwise than on demand is entitled to three days of grace.

14.16.1 Calculation of Days

Type of Instrument Date of Maturity
Negotiable instrument payable on a specified day. Specified day + third day.
Negotiable instrument payable on a stated number of days after date. Date on which negotiable instrument is drawn + stated number of days + third day.
Negotiable instrument payable on stated number of days after sight. Date on which negotiable instrument is presented for sight + stated number of days + third day.
Negotiable instrument payable on stated number of days after happening of a certain event. Date on which such event happens + stated number of days + third day.
Negotiable instrument payable on stated number of months after date. Corresponding day of the relevant month* (i.e., Date on which negotiable instrument is drawn + stated number of months) + third day.
Negotiable instrument payable in installment. Each installment is entitled to three days of grace.

If the day of maturity of the negotiable instrument is a public holiday instrument is payable immediately preceding business day. But if the day of maturity of the negotiable instrument is an emergency or unforeseen public holiday, the instrument is payable immediately on the succeeding business day.

Examples

  1. A negotiable instrument dated 29 January 1878 is made payable at one month after date. The instrument is at maturity on the third day after the 28 February 1878.
  2. A negotiable instrument, dated 30 August 1878 is made payable three months after date. The instrument is at maturity on the 3 December 1878.
  3. A promissory note or bill of exchange, dated 31 August 1878 is made payable three months after date. The instrument is at maturity on the 3 December 1878.

Case Study

As certain, the date of maturity of a bill payable 100 days after sight and which is presented for sight on 4 May 2000.

Case Study

Promissory note dated 1 February 2001 payable two months after dale was presented to the maker for payment 10 days after maturity. What is the date of maturity?

14.17 A NEGOTIABLE INSTRUMENT MADE WITHOUT CONSIDERATION

A negotiable instrument made, drawn, accepted, endorsed or transferred without consideration creates no obligation of payment between the parties to the transaction.

But if any such party has transferred the instrument to a holder for a consideration, such holder and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.

No party, for whose accommodation a negotiable instrument has been made, drawn, accepted or endorsed can, if he has paid the amount there of recover thereon such amount from any person who became a party to such instrument for his accommodation.

14.18 NEGOTIATION—SECTION 14

A negotiation means transfer of a negotiable instrument to any other person so as to constitute that person the holder of such negotiable instrument. When a negotiable instrument is transferred by negotiation, the rights of the transfree may rise higher than those of the transferor, depending upon the circumstances. When the transfer is made by assignment, the assignee has only those rights which the assignor possessed.

Two methods of the negotiation of instrument are follows:

14.18.1 Negotiation by Delivery

A bearer instrument may be negotiated by delivery. The delivery must be voluntary.

14.18.2 Negotiation by Endorsement and Delivery

An order instrument can be negotiated only by way of endorsement and delivery.

14.19 ENDORSEMENT—SECTIONS 15 AND 16

An endorsement means, signing on the face or back of a negotiable instrument or on a slip of paper annexed to the negotiable instrument by the holder of the negotiable instrument. The endorsement is made for the purpose of negotiating such negotiable instrument.

The endorsement must be in writing. The endorsement shall not be valid unless it is signed. The endorsement shall be valid only if the negotiable instrument is signed by the holder. The person to whom the instrument is endorsed is called the endoresee. In other words, ‘endorsement’ means and involves the writing of something on the back of an instrument for the purpose of transferring the right, title and interest therein to some other person.

14.20 KINDS OF ENDORSEMENTS—SECTIONS 16, 50, 52 AND 56

Different kinds of possible endorsements are following:

14.20.1 Blank or General Endorsement

A general endorsement means an endorsement, made by the endorser without writing the name of the endorsee. It is also known as endorsement in blank. The general endorsements only contain a sign on the back of instrument. With the general endorsement, the order instrument is converted into a bearer instrument.

Example

Where bill is payable to ‘Mohan or order’ and he writes on its back ‘Mohan,’ it is an endorsement in black by Mohan and property in the bill can pass by mere delivery.

14.20.2 Special or Full Endorsement

A special endorsement means an endorsement made by a holder by signing his name and adding a direction to pay the amount to a specified person. It is also known as endorsement in full. A blank endorsement can be turned into special one by addition or an order making the bill payable to the transferee.

Example

A bill made payable to Mohan or order and endorsed ‘pay to the order of Sohan’ would be specially endorsed and Sohan endorses it further.

14.20.3 Restrictive Endorsement

An endorsement which restricts the right of further negotiation is called as restrictive endorsement.

Examples

  1. ‘Pay A only’.
  2. ‘Pay A on account of B’.

14.20.4 Partial Endorsement

An endorsement which purports to transfer only a part of the amount of the instrument is called as partial endorsement. The partial endorsement is not valid at law.

Example

A holds a bill for 10,000 and endorses it as ‘pay B or order 500’. The endorsement is partial and invalid.

14.20.5 Conditional or Qualified Endorsement

An endorsement is conditional which limits the liability of the endorser. An endorser may limit his liability in any of following ways:

Sans Recourse—The endorser relieves himself from the liability to all subsequent endorsees. It is a type of endorsement on a negotiable instrument by which the endorser absolves himself or declines to accept any liability on the instrument of any subsequent party. The endorser signs the endorsement, putting his-signature along with the words, SANS RECOURSE.

Facultative—The endorser waives any of his rights.

Contingent—The endorser makes his liability dependent upon happening of some event.

Example

The holder of bill endorse it—‘pay A or order on his marrying B’. In such case, the endorser will not be liable until A marry to B.

14.21 NEGOTIATION BACK

If a negotiable instrument is negotiated by the holder; but the endorser again becomes the holder of such negotiable instrument then it is called as negotiation back.

Example

A, holder of bill endorses it to B, B endorses it to C and C to D and D endorses it again to A.

14.21.1 Effects of Negotiation Back

The effects of negotiation back are following:

  1. The holder cannot enforce the payment against an intermediate party to whom he was previously liable.
  2. The holder can enforce the payment against all the parties to whom he was not previously liable.
  3. However, the holder can sue all the prior parties (including all intermediate parties to whom he was previously liable) if he had made sans the recourse endorsement.

Case Study

A bill of exchange is drawn payable to X or order. X indorses it to Y, Y to Z, Z to A. A to B and B to X. State with reasons whether X can recover the amount of the bill from Y. Z, A and B if he has originally indorsed the bill to Y by adding the words ‘Sans Recourse’.

14.22 DISTINCTION BETWEEN NEGOTIATION AND ASSIGNMENT
Negotiation Assignment
Negotiation means transfer of a negotiable instrument to any other person, so as to constitute that person the holder of such negotiable instrument. Transfer of a right to receive the payment of a debt by one person (viz., assignor) to another person (viz., assignee) by way of a written document is called as assignment.
If a negotiable instrument is transferred by way of negotiation, Negotiable Instrument Act, 1881 applies. Where any right is transferred by way of assignment, the Transfer of Property Act applies.
Negotiation can be made for transferring negotiable instruments only. Assignment can be made of any right.
A bearer instrument can be negotiated merely by delivery and an order instrument can be negotiated by endorsement and delivery. Assignment is valid only if it is made in writing, and is signed by the assignor.
Notice of negotiation is not required to be given to any party. Notice of assignment must be given by the assignee to the debtor.
Every negotiable instrument is negotiated for consideration. Assignment can be without consideration.
Negotiation does not require payment of stamp duty. Assignment requires payment of stamp duty.
14.23 CROSSING OF CHEQUE

A cheque is either ‘open’ or ‘crossed’. An open cheque can be presented by the payee to the paying banker and is paid over the counter. A crossed cheque cannot be paid across the counter. Crossing means a direction given by the drawer of the cheque to the drawee bank, not to pay the cheque at the counter of the bank but to pay it to a person who presents it through a banker.

The crossing makes it possible to trace the person to whom the payment has been made. Thus, it makes the cheque safe and protects the holder of the cheque:

14.23.1 Modes or Types of Crossing—Sections 123–131(A)

14.23.1.1 General Crossing

The cheque must contain two parallel transverse lines. The cheque must be paid only to a banker. In the case of general crossing, the holder cannot get payment over the counter of bank.

Example

 

14.23.1.2 Special Crossing

The cheque must contain the name of a banker. The cheque must be paid only to the banker to whom it is crossed. A special crossing may be made only once. The special crossing cannot be converted into general crossing. The paying banker will pay only to the banker whose name appears across the cheque or to his collecting agent.

Example

 

14.23.1.3 Not Negotiable Crossing

The cheque must contain the words ‘not negotiable’. The cheque must be crossed generally or specially. The title of the transferee shall not be better than the title of the transferor. Not negotiable crossing does not restrict transferability but restrict negotiability only.

Example

 

14.23.1.4 A/c Payee Crossing

i.e., Restrictive Crossing The cheque must contain the words ‘A/c Payee’ or ‘A/c Payee only’. It is also known as restrictive crossing. The cheque does not remain negotiable anymore.

The cheque must be crossed generally or specially. It warns the collective banker that the proceeds are to be credited only to the account of the payee.

Example

 

14.24 BOUNCING OR DISHONOUR OF CHEQUES—SECTIONS 31 AND 138

A cheque is said to be bounced or dishonoured by non-payment when the drawee of cheque makes a default in payment in when cheque is presented to him for payment.

14.24.1 Liability of Drawee on Dishonour

In case of default by the drawee (i.e., Banker), the drawee shall compensate the drawer for loss caused to him. The liability of a drawee arises by non-payment, if the following three conditions are fulfilled on the dishonour of cheque:

  1. The drawer has sufficient funds in the account; and
  2. Such funds are properly applicable to payment of the cheque.
  3. The drawee is duly required to pay the cheque.

14.24.2 Liability of Drawer on Dishonour

On the dishonour of the cheque, the drawer is punishable with imprisonment upto two years or fine not exceeding twice the amount of cheque or both if the following conditions are satisfied:

  1. The cheque was issued to discharge a legally enforceable debt.
  2. The cheque was returned or dishonoured for insufficiency of funds.
  3. The cheque was presented within six months from which it was drawn or validity period of the cheque.
  4. The payee or the holder in due course has made a demand from the drawer within 30 days of dishonour.
  5. The drawer of cheque has failed to make a payment within 30 days of demand made.
  6. A complaint can be made only by the payee or the holder within one month of expiry of 30 days of the receipt of notice by the drawer.
14.25 HOLDER—SECTION 8

14.25.1 Meaning of ‘Holder’

A person is a holder of a negotiable instrument who is entitled in his own name:

  1. To the possession of negotiable instrument in his own name.
  2. To recover the amount due on a negotiable instrument from the parties liable on negotiable instrument.

It is not every person in possession of the instrument who is called a holder. To be a holder, the person must be naked in the instrument as the payee or the endorsee or he must be the bearer thereof. A person who has obtained the possession of instrument by theft or under forged instrument is not a holder.

14.25.2 Meaning of ‘Holder in Due Course’—Section 9

  1. He must be a holder.
  2. He must have become the holder for consideration.
  3. He must have obtained the possession of negotiable instrument before maturity.
  4. He must have obtained the negotiable instrument in good faith i.e., without a sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
14.26 PRIVILEGES OF A HOLDER IN DUE COURSE

A holder in due course, is in a privileged position. He enjoys the following privileges:

  1. Every prior party to a negotiable instrument is liable to a holder in due course (Section 36).
  2. A holder who derives the title from a holder in due course, has the same rights as that of a holder in due course (Section 53).
  3. No prior party can set up a defence that the negotiable instrument was drawn, made or endorsed by him without any consideration (Section 43).
  4. No prior party can set up a defence that the negotiable instrument was lost or was obtained from him by an offence or fraud or for an unlawful consideration. Thus, a holder in due course gets a valid title to the negotiable instrument, even though the title of the transferor was defective (Section 58).
  5. No prior party can allege that the negotiable instrument was delivered conditionally or for a special purpose only (Section 46).
  6. A holder in due course can claim full amount of the negotiable instrument (but not exceeding the amount covered by the stamp) even though such amount is in excess of the amount authorized by the person delivering an inchoate negotiable instrument (Section 20).

Case Study

The drawer, ‘D’ is induced by ‘A’ to draw a cheque in favour of P who is an existing person. ‘A’ instead of sending the cheque to ‘P’ forgoes his name and pays the cheque into his own bank. Whether ‘D’ can recover the amount of the cheque from ‘A’s banker. Decide.

Case Study

A found a negotiable instrument lying on the road and transferred it to B who received it in good faith and for consideration. Can B recover the amount due on the instrument?

14.27 DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE
Holder Holder in Due Course
A person becomes a holder even if he obtains the negotiable instrument without any consideration. A person becomes a holder in due course, only if he obtains the negotiable instrument for consideration.
A person becomes a holder, even if he does not the negotiable instrument in good faith. For being a holder in due course, a person must obtain the negotiable instrument in good faith.
A person becomes a holder even if he obtains the negotiable instrument after the maturity of the negotiable instrument. A person becomes a holder in due course only if he obtains the negotiable instrument before its maturity.
A holder is not entitled to the privileges which are available for HDC. A holder in due course is entitled to various privileges as specified under the Negotiable Instruments Act, 1881.
A holder cannot sue all the prior parties. A holder in due course can sue all the prior parties.
14.28 PAYMENT IN DUE COURSE—SECTION 10

Any person liable to make payment under negotiable instrument must make the payment of amount due, there under in due course in order to obtain valid discharge against the holder. A payment in due course means payment in accordance with the apparent tenor of instrument in good faith to any person in possession thereof. The payment will be a payment in due course if—

  1. Payment is made as per apparent tenor.
  2. Payment is made in good faith.
  3. Payment is made without negligence.
  4. Payment is made to holder of negotiable instrument.
  5. Payment is made in money only.
14.29 PROTECTION TO PAYING BANKER—SECTION 85

A paying banker is one who makes the payment of cheque on behalf of customer.

Nature of cheque Conditions subject to which protection is available to paying banker.
Cheque payable to order Payment is made in due course. The protection shall be available notwithstanding, that any endorsement subsequently turns out to be a forgery.
Cheque originally payable to bearer Payment is made in due course. Payment is made to the bearer of the cheque.
The protection shall be available notwithstanding that any endorsement appears on the cheque.
Cheques crossed generally Payment is made in due course.
Payment is made to any banker.
Cheques crossed specially Payment is made in due course.
Payment is made to the banker to whom the cheque is crossed.
14.30 LIABILITY/DUTY OF THE PAYING BANKER AND COLLECTING BANKER—SECTION 129

The paying banker shall be liable to the true owner of the cheque for any loss sustained by him in the following two cases:

  1. Where the paying banker pays a cheque crossed generally, otherwise than to a banker.
  2. Where the paying banker pays a cheque crossed specially, otherwise than to the specified banker.

14.30.1 Duties of Collecting Banker

The collecting banker shall verify with due diligence and ordinary care:

  1. The prima facie genuineness of the cheque to be truncated.
  2. As to whether any fraud, forgery or tampering is apparent on the face of the instrument.
14.31 WHEN BANKER MUST REFUSE TO HONOUR A CUSTOMER'S CHEQUE

The authority of the banker to honour the customer's cheque comes to an end he must refuse to honour issued by the customer is in the following cases:

  1. When a customer countermands payment i.e. stop payment.
  2. When an order garnishee of court prohibits payment.
  3. When the banker receives notice of death of the customer.
  4. When the customer has been adjudged as insolvent.
  5. When bank receives notice of customer's insanity.
  6. When the customer has given notice of assignment of funds.
  7. When the holder's title is defective and the banker comes to know about it.
  8. When the customer has given a notice for closing of account.
  9. When there is loss of cheque and the customer has informed the bank.
  10. Materially altered cheque, mutilated cheque, cheque of doubtful validity and incomplete cheque.
  11. When there is signatures mismatch.
  12. When the banker has received an application for closure of account.
  13. When there is irregular endorsement.
14.32 BANKER MAY REFUSE TO HONOUR A CUSTOMER'S CHEQUE

The banker may refuse to pay customer's cheque in the following cases:

  1. Insufficient funds.
  2. Funds not applicable.
  3. Presentment at different branch.
  4. Presentment after banking hours.
  5. Stale cheque i.e., outdated cheque.
  6. Post dated cheque.
  7. Undated cheque.
14.33 EFFECT OF NON-PRESENTMENT OF CHEQUE WITHIN REASONABLE TIME

No liability of the drawer, if the bank fails conditions:

  1. The drawer has sufficient balance when he issues the cheque and when the cheque ought to be presented for payment.
  2. The holder fails to present the cheque within a reasonable time of issue of the cheque.
  3. Meanwhile (i.e., after issue of the cheque but before presentation of the cheque by the holder) the bank fails and consequently the drawer suffers actual damages.
14.34 MATERIAL ALTERATION—SECTIONS 87–89

An alteration is called as material alteration if it alters the character or operation (i.e., the legal effect) of a negotiable instrument or the rights and liabilities of any of the parties to a negotiable instrument. The material alteration renders the instrument void but it alters only those persons who have already become parties at the date of alteration.

Examples

  1. Alteration of the date of instrument.
  2. Alteration of the amount payable.
  3. Alteration in the time of payment.
  4. Alteration in the place of payment.
  5. Alteration in rate of interest.
  6. Addition of new party to an instrument.

However, following are not considered as material alteration as it is authorized under act:

  1. Filling blanks of an inchoate instrument (Section 20).
  2. Conversion of a blank endorsement into an endorsement in full (Section 49).
  3. Crossing of cheques (Section 125).
  4. Conversion of general crossing into a special crossing or not negotiable crossing or A/c Payee Crossing (but not vice-versa).
  5. Additional of the words ‘on demand’ to a note in which no time or payment is expressed.
  6. Conversion of a bearer instrument into an order instrument by deleting the word ‘Bearer’.
  7. Correction of mistake in instrument.
  8. An alteration made before the instrument is issued and made with the consent of parties.

14.34.1 Effect of Material Alteration—Sections 87 and 88

The effect of a material alteration of a negotiable instrument is only to discharge those who become parties, thereto prior to the alteration; But if an alteration is made in order to carry out the common intention of the original parties, it does not render the instrument void. Any material alteration if made by an indorsee, discharges his indorser from all liability to him in respect of the consideration thereof.

The alteration must be so material that it alters the character of the instrument to a great extent. In Hongkong and Shanghai Bank versus Lee Shi (1928), it has been held that an accidental alteration will not render the instrument void. It is necessary to show that the alteration has been made improperly and intentionally. The effect of making the material alteration without the consent of the party bound is exactly the same as that of cancelling the deed.

In short, we can conclude that all the parties to the negotiable instrument not consenting to the material alteration are discharged.

14.35 ACCEPTANCE OF BILL

An acceptance means the drawee signs the bill and delivers it to the holder of the bill or gives a notice of acceptance to the holder of the bill. On the acceptance of a bill, the drawee becomes the acceptor.

14.35.1 Essentials of a Valid Acceptance

The acceptance on the bill should be in written. Writing may be either on the face or back of the bill. Valid acceptance is said when the drwaee sign the instrument. Writing the word ‘Acceptance’ is not necessary. It means, if the bill is signed with or without the word ‘accepted’ it is valid. After the signature delivery or intimation to the holder is given that the bill has been accepted.

14.35.2 Types of Acceptance

The acceptance may be either general or qualified. A general acceptance is absolute. It is an acceptance of bill without any qualification. A qualified acceptance of bill means acceptance of a bill subject with some qualification (e.g., accepting the bill subject to the condition that the payment of bill shall be made only on happening of an event specified therein).

14.35.3 Effect of Qualified Acceptance

The holder may object to the qualified acceptance. In such a case, it shall be treated that the bill is dishonoured due to non-acceptance.

He may give his consent to the qualified acceptance. In such a case, all the prior parties not consenting to it are discharged.

Example

Accepted payable on giving up bill of landing.

14.36 DISHONOUR BY NON-ACCEPTANCE

A bill is dishonoured by non-acceptance, if it is duly presented for acceptance but the bill is not accepted.

Following are cases where the bill is dishonoured by non-acceptance:

  1. Where a bill is not accepted by the drawee within 48 hours of presentment of bill. If the holder allows to the drawee more than 48 hours for acceptance, all the prior parties not consenting to the same are discharged from liability to such holder.
  2. In case, there are two or more drawees who are not partners, if the bill is not accepted by all the drawees.
  3. Where the drawee is a fictitious person.
  4. When the drawee cannot be found even after a reasonable search.
  5. When the drawee is incompetent to contract.
  6. Where the drawee gives a qualified acceptance and the holder does not give his consent to the qualified acceptance.

14.36.1 Effects

The holder gets an immediate right to sue all the prior parties without waiting for the maturity of the bill. A promissory note or a cheque cannot be dishonoured by non-acceptance since a promissory note or a cheque does not require any acceptance.

14.37 ACCEPTANCE FOR HONOUR

The person who accepts the bill for the honour of any other person is called as an ‘acceptor for honour’.

14.37.1 Conditions for ‘Acceptance for Honour’

The bill must have been noted for non-acceptance. The acceptance is given:

  1. For the honour of any party, already liable under the bill;
  2. By any person who is already not liable under the bill;
  3. With the consent of the holder of the bill.

The acceptance must be made in writing on the bill.

14.37.2 Liability of Acceptor for Honour

He is liable to pay the amount of the bill if the drawee does not pay on maturity. He is liable only to the parties, subsequent to the party for whose honour the bill is accepted.

14.37.3 Rights of Acceptor for Honour

He is entitled to recover the amount paid by him from the party for whose honour the bill was accepted and from all the parties prior to such party.

14.38 PAYMENT FOR HONOUR

A person who pays a bill for honour of any other person is called as ‘payer for honour’.

14.38.1 Conditions for ‘Payment for Honour’

The bill must have been noted for non-payment. The payment for honour is made—

  1. For the honour of any party, already liable under the bill;
  2. By any person (whether or not he is already liable under the bill);
  3. With the consent of the holder of the bill.

The payment must be recorded by Notary Public.

14.38.2 Rights of Payer for Honour

The payer for honour is entitled to all the rights of a holder. He can recover all the sums paid by him from the party for whose honour he pays and all the parties prior to such party.

14.39 DISHONOUR BY NON-PAYMENT

A negotiable instrument shall he dishonoured by non-payment if default in payment is made by the maker of a promissory note or acceptor of bill.

A bill which does not require acceptance shall be dishonoured by non-payment if default in payment is made by the drawer. A cheque shall be dishonoured by non-payment by the drawee.

14.40 NOTICE OF DISHONOUR

A notice of dishonour may be given by the holder or any party liable on the negotiable instrument. The notice of dishonour must be given to all the parties to whom the holder seeks to make liable. The notice of dishonour must disclose the fact of dishonour of negotiable instrument. A party (other than the party primarily liable on the negotiable instrument) to whom the notice of dishonour is not given is discharged from liability on the negotiable instrument. The notice may be oral or in writing. It must be given within reasonable time of dishonour.

14.40.1 When Notice of Dishonour Is Unnecessary or Excused?

In the following circumstances or situation, the notice of dishonour is not necessary:

  1. When the notice of dishonour is dispensed with, by a party.
  2. Where the drawer of the cheque has countermanded payment, notice to drawer is not required to be given.
  3. When the party entitled to notice, cannot be found even after due search.
  4. Where the party bound to give notice, is unable to give notice without any fault of his own.
  5. When it is dispensed with or waived by the party.
  6. When the party charged could not suffer damage for want to notice.
  7. When the omission to give notice, is caused by unavoidable circumstances i.e. death.
  8. Where the acceptor is also drawee e.g. where firm draws on its branch.
14.41 NOTING AND PROTESTING—SECTIONS 99–104(A)

Recording the fact of dishonour of a negotiable instrument on the negotiable instrument is known as noting. The notice or minute must be recorded by notary public within a reasonable time after dishonour and must contain the fact of dishonour, the date of dishonour, reason if any.

The dishonoured bill is handed over to a Notary Public. The Notary Public presents it again for acceptance/payment. If the drawee or acceptor refuses to accept or pay the bill, the Notary Public records the fact of dishonour on the bill. Noting is optional. It is not mandatory to get the feet of dishonour noted.

When the instrument is dishonoured and noting is carried out a certificate issued by the Notary Public, stating the fact of dishonour. This process is known as protesting.

14.42 DRAWEE IN CASE OF NEED

The name of any person may be given in a bill as ‘drawee in case of need’. His liability arises on the bill, only when the bill is not accepted by the drawee named in the bill. The bill is not dishonoured until it has been dishonoured by the drawee in case of need.

14.43 DISCHARGE OF A NEGOTIABLE INSTRUMENT

The discharge in relation to a negotiable instrument may be either (i) discharge of instrument or (ii) discharge of one or more parties.

The negotiable instrument is discharged:

14.43.1 Payment in Due Course

The negotiable instrument is discharged if the party is primarily liable to the payment in due course. When the payment is made, the negotiable instrument must be cancelled or the fact of payment must be recorded on the negotiable instrument.

14.43.2 Cancellation

Where the holder cancels the name of the party primarily liable on the negotiable instrument with intent to discharge him, the negotiable instrument is discharged.

14.43.3 Release

Where the holder releases or renounces his rights against the party primarily liable on the negotiable instrument, the negotiable instrument is discharged.

14.43.4 Negotiation Back

Where a party primarily liable on a negotiable instrument becomes the holder of the negotiable instrument, the negotiable instrument is discharged.

14.44 DISCHARGE OF A PARTY

When any particular party is discharged, the instrument continues to be negotiable and the undischarged parties remain liable on it.

Example

Non presentment of bill on due date discharge the endorsers from their liability but the acceptor remain liable on it.

The party may be discharge in following ways:

14.44.1 By Payment

A payment by a party who is secondarily liable on a negotiable instrument discharges the holder and all the parties, subsequent to the party, making payment of the negotiable instrument.

14.44.2 By Cancellation

Where the holder cancels the name of any party, liable on the negotiable instrument (other than the party primarily liable on the negotiable instrument), such a party and all parties subsequent to him are discharged.

14.44.3 By Release

Where the holder releases any party, liable on the negotiable instrument (other than the party primarily liable on the negotiable instrument) such a party and all parties subsequent to him are discharged.

14.44.4 By Allowing Drawee More Than 48 Hours to Accept

All prior parties not consenting to the same are discharged from liability to such holder.

14.44.5 By Qualified Acceptance

Where a holder of the bill consents to qualified acceptance, all the prior parties who did not consent to qualified acceptance are discharged.

14.44.6 By Material Alteration

Every party not consenting to a material alteration of a negotiable instrument is discharged.

14.44.7 By Negotiation Back

Where a party already liable on the negotiable instrument becomes the holder of negotiable instrument, such a party and all intermediate parties to whom such a party was previously liable shall be discharged.

14.44.8 By Operation of Law

A party is discharged if the negotiable instrument becomes time barred. A party is discharged if he is declared as an insolvent by the court.

14.45 HUNDI

A hundi means a bill of exchange drawn in local language. The Negotiable Instruments Act, 1881 applies to hundies if there is no local usage of trade or custom prevailing in the area in which hundi is drawn. However, if there is any custom or usage prevailing in such an area, the same will apply to the hundies and therefore Negotiable Instruments Act, 1881 shall not apply to hundies.

The different types of the hundies are following:

14.45.1 Nam Jog Hundi

It means the hundi payable to a party, named in the hundi or to his order.

14.45.2 Diiani Jog Hundi

It means the hundi payable to the dhani or the owner i.e., the bearer.

14.45.3 Darshani Hundi

It means the hundi payable at sight.

14.45.4 Miadi Hundi or Muddati Hundi

The hundi that is payable after a specified period of time.

14.45.5 Shahjog Hundi

The hundi that is payable to a Shah.

14.45.6 Jokhmi Hundi

The hundi drawn in respect of goods shipped on the vessel and is payable only when the goods reach their destination safely.

14.45.7 Peth

Duplicate copy of the hundi.

14.45.8 Perpeth

Triplicate copy of the hundi.

14.45.9 Khoka

The hundi which has already been paid or discharged.

LIST OF LANDMARK JUDGEMENTS
  1. M/s. Tailor Priya vs. Gulab Chand (1965)

    The negotiability involves two elements, namely transferability free from equities and transferability by delivery or endorsement.

  2. Ashok Yeshwant Badave vs. Surendra Madhavrao (2001)

    Past dated cheque remains bills of exchange. It becomes a cheque on the date of cheque. Therefore period of 6 months should be calculated from the date of cheque and not from the date when the installment was handed over to drawee.

  3. Great Western Rail Co. vs. London and County Banking Co. (1901)

    Everyone who takes a cheque marked ‘not negotiable’, takes it at his own risk.

  4. National Bank vs. Sil Ke (1891)

    Writing word ‘A/c Payee’ does not make the chequenegotiable. An A/c payee cheque remains transferable.

  5. Punjab National Bank vs. BOB (1944)

    In the case of cheque, liability is only of drawer. The holder of a cheque has no remedy against the banker.

  6. 6.United Bank of India vs. Center Scientific Supplies Co. Ltd (1999)

    The bank is liable if amount of cheque is increased by forgery.

  7. Bank of Bihar vs. Mahabir Lal (1964)

    The bank is liable if it honours a forged cheque. But if such forgery was due to negligence of customers bank will not be liable.

  8. Pooja Granites vs. Ispat Finances (2004)

    The cheque must be presented within six months to drawee bank.

  9. NEPC Micon Ltd vs. Magma Leasing Ltd (1999)

    If a cheque is returned with remark ‘A/c closed’, it would be offence u/s 138.

  10. Vinod Tanna vs. Zaher Siddiqui (2002)

    No prosecution if a cheque returned for signature difference.

  11. Modi Cements Ltd vs. Kuchil Kumar Nandi (1998)

    Stop payment instructions to the banker in the case of cheque cannot stop prosecution of drawer.

  12. SMS Pharmaceuticals Ltd vs. Neeta Bhalla (2005)

    The managing director of a company, deemed to be in charge and responsible to conduct of business of company. Therefore, if the offence is committed by company, its director in charge of affairs will be personally liable.

  13. Sil Import, USA vs. Exim Aides Silk Expoerters (1999)

    Notice of dishonour of cheque to the drawer of cheque can be sent by fax.

  14. Rajneesh Agrawal vs. Amit J. Bhalla (2001)

    Notice of dihonour of cheque to M.D., who has signed the cheque on behalf of company is sufficient. It is not necessary to send notice to company.

  15. Sadanandan Bhadram vs. Sunil Kumar (1998)

    The drawee can deposit cheque any number of times but he can send notice only once he sends notice of dishonour of cheque he forfeits his right of presenting cheque again.

  16. Sivaram vs. Jayaram (1966)

    Specified place means full address of exact location. Mere mentioning name of city is not specified place.

  17. Braja Kishore Dikshit vs. Purna Chandra Panda (1957)

    The person who is holder of Negotiable instrument after paying valuable consideration and become possessor/payee/endoresee before date whom amount is payable and without knowledge and defect in the title of person, transferring the instrument in good faith is only holder in due course.

  18. Dhanumal Parasmal vs. P. Kuppura (1977)

    Material alteration means it should change the character or identity of instrument.

  19. SBI vs. Kerala State Co-op. Marketing Federation (1995)

    Change in name of party, dates sum payable, time of payment, place of payment, the signature of drawer, without the consent of drawer would be material alteration.

TEST YOUR KNOWLEDGE
1. Explain the various characteristic of a Negotiable Instrument. (Ref. Para-14.2)
2. What are the presumptions applicable to all the negotiable instruments, as provided under the Negotiable Instrument Act, 1881? (Ref. Para-14.3)
3. What is a promissory note and what are its elements? (Ref. Para-14.4,14.5)
4. Define the bill of exchange and explain its salient features. (Ref. Para-14.6)
5. In what ways does a ‘promissory note’ differ from a ‘bill of exchange’. (Ref. Para-14.7)
6. Define the cheque. Mention its character. (Ref. Para-14.8)
7. In what respect bill of exchange differ from a cheque? (Ref. Para-14.9)
8. Write down the difference between electronic cheque and truncated cheque. (Ref. Para-14.10)
9. Who can be party to negotiable instrument? (Ref. Para-14.11)
10. How can negotiable instrument be classified? (Ref. Para-14.12)
11. What is demand instrument? (Ref. Para-14.12)
12. What do you understand by time instrument? (Ref. Para-14.12)
13. What do you understand by ambiguous instrument? (Ref. Para-14.12)
14. Distinguish between ‘inland bill’ and ‘foreign bill’. (Ref. Para-14.13)
15. What is inchoate instrument? Explain the provisions relating to inchoate instrument. (Ref. Para-14.14)
16. What are the differences between an ambiguous instrument and inchoate instrument? (Ref. Para-14.15)
17. State briefly the rules laid down under Negotiable Instrument Act, 1881 for determining the date of maturity of bills of exchange. (Ref. Para-14.16)
18. Can a negotiable instrument be drawn without consideration? (Ref. Para-14.17)
19. Write a short note negotiation. (Ref. Para-14.18)
20. What do you understand by endorsement? Explain different kind of endorsement. (Ref. Para-14.19,14.20)
21. When the term ‘negotiation back’ used in Negotiable Instrument Act? What are the effects of negotiation back? (Ref. Para-14.21)
22. What are the difference between ‘negotiability’ and ‘assignability’? (Ref. Para-14.22)
23. What do you understand by the crossing of cheque? What is object of crossing? (Ref. Para-14.23)
24. Explain clearly the meaning of ‘general’ and ‘special crossing’ of cheque. (Ref. Para-14.23)
25. Write short note on restrictive crossing. (Ref. Para-14.23)
26. Write short note on not-negotiable crossing. (Ref. Para-14.23)
27. A cheque marked ‘not negotiable’ is not tranferable. Comment. (Ref. Para-14.23)
28. Write a short note on crossing of cheque. (Ref. Para-14.23)
29. Explain the meaning of ‘holder’ and ‘holder in due course’. (Ref. Para-14.25)
30. State the privileges of a ‘holder in due course’ under the Negotiable Instrument Act. (Ref. Para-14.26)
31. What are the main differences between a holder and a holder in due course? (Ref. Para-14.27)
32. When payment will be a payment in due course? (Ref. Para-14.28)
33. A paying banker is always protected. Comment. (Ref. Para-14.29)
34. State the cases in which a banker is justified or bound to dishonour cheque. (Ref. Para-14.31)
35. State the grounds on the basis of which a cheque may be dishonour by bank? (Ref. Para-14.32)
36. What will be effect of non-presentment of cheque within reasonable time? (Ref. Para-14.33)
37. When is an alteration of an instrument as material alteration under act? (Ref. Para-14.34)
38. Which kind of alteration to an instrument is allowed under the act and not regarded as material alteration? (Ref. Para-14.34)
39. Which are the essentials elements of a valid acceptance of bill of exchange? (Ref. Para-14.35)
40. When can a bill of exchange be dishonoured by ‘non-acceptance’ and ‘non-payment’ under the provisions of Negotiable Instrument Act, 1881? (Ref. Para-14.36)
41. Explain the meaning of ‘acceptance for honour’ under the Negotiable Instrument Act, 1881. (Ref. Para-14.37)
42. Explain the meaning of ‘payment for honour’ under the Negotiable Instrument Act, 1881. (Ref. Para-14.38)
43. When notice of dishonour is unnecessary? (Ref. Para-14.40)
44. Explain the provisions of negotiable Instrument Act, 1881 relating to ‘notify’ and ‘protesting’ of bill of exchange which has been dishonoured by the acceptor. (Ref. Para-14.41)
45. When the negotiable instrument is discharged? (Ref. Para-14.43)
46. When party to negotiable instrument is discharged? (Ref. Para-14.44)
47. Write a short note on ‘hundi’. (Ref. Para-14.45)
MULTIPLE CHOICE QUESTIONS
  1. The negotiable instruments includes
    1. promissory note.
    2. bill of exchange.
    3. cheque.
    4. all of these.
  2. The Negotiable Instruments Act includes cheque, bill of exchange and
    1. promissory note.
    2. hundi.
    3. bank draft.
    4. customary note.
  3. Which one of the following is not the characteristic of a negotiable instrument?
    1. It must be in writing.
    2. It must be freely transferable.
    3. It must be registered.
    4. It must contain definite amount of money.
  4. A person who receives a negotiable instrument in good faith and for valuable consideration is known as
    1. holder for consideration.
    2. holder for value.
    3. holder in due course.
    4. holder in rights.
  5. A negotiable instrument drawn in India on a person residing in India and payable outside India is known as
    1. inland instrument.
    2. foreign instrument.
    3. incomplete instrument.
    4. none of these.
  6. A negotiable instrument in which no time for payment is specified is payable
    1. after acceptance.
    2. after sight.
    3. after one month.
    4. on demand.
  7. A negotiable instrument may be drawn to be payable
    1. on demand.
    2. after sight.
    3. after one month.
    4. either (i) or (ii) or (iii).
  8. A cheque is always payable on demand
    1. True
    2. False
  9. A promissory note cannot be made payable to bearer.
    1. True
    2. False
  10. Which of the following is not an essential of a valid promissory note?
    1. It must be signed by maker.
    2. It must be stamped.
    3. It must be in writing.
    4. It must be registered.
  11. Which of the following is not an essential of a valid bill of exchange?
    1. It must be signed.
    2. It must be stamped.
    3. It must be in writing.
    4. It must be registered.
  12. Which of the following is not an essential of a valid cheque?
    1. It must be signed.
    2. It must be drawn on bank.
    3. It must be in writing.
    4. It must be registered.
  13. A bill of exchange payable to bearer on demand is
    1. valid.
    2. voidable.
    3. invalid.
    4. conditional.
  14. A person who is directed to pay the amount of bill of exchange is known as
    1. drawer.
    2. drawee.
    3. payee.
    4. creditor.
  15. Generally bill of exchange has ________ parties.
    1. two
    2. three
    3. four
    4. any number
  16. Generally promissory note has ________ parties.
    1. two
    2. three
    3. four
    4. any number
  17. A bill of exchange dishonoured due to non-acceptance by the drawee becomes
    1. void.
    2. voidable.
    3. invalid.
    4. none of these.
  18. All cheques are bills of exchange.
    1. True
    2. False
  19. All bills of exchange are not cheques.
    1. True
    2. False
  20. On acceptance of a bill of exchange by the drawee, he is legally known as
    1. acceptor.
    2. acceptor for honour.
    3. drawee in case of need.
    4. none of these.
  21. A negotiable instrument drawn in favour of a minor is
    1. void.
    2. voidable.
    3. valid.
    4. invalid.
  22. A negotiable instrument drawn by minor is
    1. void.
    2. voidable.
    3. valid.
    4. invalid.
  23. Which of the following is not competent to draw a valid negotiable instrument?
    1. Insolvent.
    2. Company.
    3. Agent.
    4. Both (ii) and (iii).
  24. A holder is a person who is entitle to the instrument in his own name and the term includes
    1. payee of instrument.
    2. bearer of instrument.
    3. endorsee of instrument.
    4. all of these.
  25. A person becomes a ‘holder in due course’ of a negotiable instrument, if he receives it
    1. in good faith.
    2. for value.
    3. before maturity.
    4. all of these.
  26. A holder in due course can recover the amount of the instrument irrespective of any defect in the title of prior parties.
    1. True
    2. False
  27. A negotiable instrument payable to order can be transferred by
    1. simple deliver.
    2. endorsement.
    3. endorsement and delivery.
    4. registered post.
  28. In case, a finder or a thief of a bearer negotiable instrument transfers it to a person who receives the same in good faith and for valuable consideration then such a transferee is
    1. entitled to receive the payment.
    2. not entitled to receive the payment.
    3. punishable for helping a thief.
    4. conditional owner of the instrument.
  29. A negotiable instrument is complete and operative when:
    1. it is in writing.
    2. it is signed.
    3. it is delivered to the party concerned.
    4. all of the above.
  30. A slip of paper attached to the back of instrument for signing endorsements is known as
    1. allonge.
    2. escrow.
    3. zickri chit.
    4. peth.
  31. An endorsement made by an endorser by signing his name and also by writing the name of the endorsee is known as
    1. general endorsement.
    2. special endorsement.
    3. restrictive endorsement.
    4. none of these.
  32. An endorsement by which the endorser excludes his liability by express words is known as
    1. facultative endorsement.
    2. restrictive endorsement.
    3. sans recourse endorsement.
    4. contingent endorsement.
  33. When during the course of negotiation, the negotiable instrument comes back to the original endorser, it is known as
    1. negotiation back.
    2. reverse endorsement.
    3. facultative endorsement.
    4. back recourse endorsement.
  34. The liability of the maker of a promissory note is
    1. primary.
    2. secondary.
    3. conditional.
    4. none of these.
  35. The liability of the acceptor of a bill of exchange is
    1. primary.
    2. secondary.
    3. conditional.
    4. none of these.
  36. On the acceptance of the bill of exchange by the drawee, the liability of the drawer becomes
    1. primary.
    2. secondary.
    3. extinct.
    4. none of these.
  37. The presentment for acceptance is required in case of a
    1. bill of exchange.
    2. promissory note.
    3. cheque.
    4. both (i) and (ii).
  38. The presentment for payment is required in case of a
    1. bill of exchange.
    2. promissory note.
    3. cheque.
    4. all of these.
  39. Which of the following bill of exchange must be presented for acceptance of the drawee?
    1. A bill payable on demand.
    2. A bill payable on fixed date.
    3. A bill payable 30 days after date.
    4. None of these.
  40. Which of the following note must be presented for sight?
    1. A note payable at sight.
    2. A note payable after sight.
    3. A note payable on demand.
    4. All of the above.
  41. A negotiable instrument should be presented for payment to the party who is
    1. primarily liable.
    2. secondarily liable.
    3. willing to make payment.
    4. any person who can make payment.
  42. A bill of exchange is treated as dishonoured due to non-acceptance where the drawee
    1. does not accept within 48 hours of presentment.
    2. is incompetent to contract.
    3. gives a conditional acceptance.
    4. in all the above cases.
  43. In case of dishonour of a cheque, the holder's remedy is against the
    1. drawee of cheque.
    2. drawer of cheque.
    3. indorsee of cheque.
    4. both (i) and (iii).
  44. With reference to negotiable instrument the ‘noting’ may be done in case of
    1. promissory note.
    2. bill of exchange.
    3. cheque.
    4. both (i) and (ii).
  45. The liability of which of the following parties comes to an end when negotiable instrument is discharged?
    1. Primarily liable party.
    2. Secondarily liable party.
    3. Subsequent liable party.
    4. None of the parties.
  46. Material alteration of a negotiable instrument without the consent of the parties, discharge the parties who have become liable
    1. after such alteration.
    2. prior to such alteration.
    3. because of alteration.
    4. without such alteration.
  47. Which of the following is not a material alteration?
    1. Alteration of date.
    2. Alteration of amount.
    3. Alteration of time of payment.
    4. Alteration correcting clerical mistake.
  48. A cheque is said to contain a general crossing when two parallel lines are drawn across the face of the cheque
    1. without any words.
    2. with words ‘& Co.’
    3. with words ‘not negotiable’.
    4. in all the above cases.
  49. A cheque is said to contain a special crossing when two parallel lines are drawn across the face of the cheque and by writing between the lines the
    1. name of bank.
    2. name of bank and ‘& Co.’
    3. a/c payee only.
    4. in (i) and (ii) cases.
  50. After receiving an uncrossed cheque its holder can make on it
    1. general crossing.
    2. special crossing.
    3. either (i) or (ii).
    4. neither (i) nor (ii).
  51. The payment of a crossed cheque can be obtained
    1. at the counter.
    2. by depositing in account.
    3. by the payee only.
    4. both (i) and (iii).
  52. The payment of a cheque containing special crossing can be obtained
    1. by depositing in any bank.
    2. by depositing in named bank.
    3. at the counter of named bank.
    4. either (i) or (iii).
  53. The payment of a negotiable instrument becomes due
    1. at maturity.
    2. before maturity.
    3. after maturity.
    4. on third day of maturity.
  54. The negotiable instruments payable on demand are due for payment
    1. from third day of date of issue.
    2. from the date of issue.
    3. after 15 days of date of issue.
    4. after 30 days of date of issue.
  55. The negotiable instruments payable on a specified date are due for payment
    1. from the specified date.
    2. from the date of issue.
    3. from third day after specified date.
    4. after presentment for sight.
  56. Which of the following negotiable instrument is not entitled to days of grace?
    1. A bill of exchange payable on specified date.
    2. A promissory note payable on specified date.
    3. A promissory note payable ‘after sight’.
    4. A cheque.
  57. A negotiable instrument made without any consideration at all is
    1. void between all parties.
    2. voidable between all parties.
    3. void between immediate parties.
    4. voidable between immediate parties.
  58. In which of the following circumstances a banker may refuse to make the payment of his customer's cheque?
    1. Where cheque is post dated.
    2. Where cheque is stale.
    3. Where funds are insufficient.
    4. In all the above cases.
  59. A hundi is an indigeneous negotiable instrument, written in local language of people which may be in the form of either a bill of exchange or a promissory note.
    1. True
    2. False
  60. A hundi which is payable ‘at sight’ is known as
    1. miadi hundi.
    2. zikri hundi.
    3. darshani hundi.
    4. none of these.
  61. A hundi which is payable to the holder or bearer is known as
    1. nam jog hundi.
    2. firman hundi.
    3. jawabi hundi.
    4. dhani jog hundi.
  62. A letter of protection given by a drawer to the holder of a hundi which enables him to receive payment in case of dishonour is known as
    1. zickri chit.
    2. perpeth.
    3. khoka.
    4. purja.
  63. The duplicate of a hundi is known as
    1. perpeth.
    2. peth.
    3. khoka.
    4. purja.
  64. A hundi when paid up and cancelled is then called
    1. perpeth.
    2. purja.
    3. khoka.
    4. none of these.
ANSWERS—MULTIPLE CHOICE QUESTIONS
1 (iv) 2 (i) 3 (iii) 4 (iii) 5 (i)
6 (iv) 7 (iv) 8 (i) 9 (i) 10 (iv)
11 12 13 (iii) 14 (ii) 15 (ii)
16 (i) 17 (iv) 18 (i) 19 (i) 20 (i)
21 (iii) 22 (i) 23 (i) 24 (iv) 25 (iv)
26 (i) 27 (iii) 28 (i) 29 (iv) 30 (i)
31 (ii) 32 (iii) 33 (i) 34 (i) 35 (i)
36 (ii) 37 (i) 38 (iv) 39 (iv) 40 (ii)
41 (i) 42 (iv) 43 (ii) 44 (iv) 45 (i)
46 (ii) 47 (iv) 48 (iv) 49 (iv) 50 (iii)
51 (ii) 52 (ii) 53 (i) 54 (ii) 55 (iii)
56 (iv) 57 (iii) 58 (iv) 59 (i) 60 (iii)
61 (ii) 62 (i) 63 (ii) 64 (iii)