What is a Negotiable Instrument?
The Negotiable Instruments Act does not define a negotiable instrument but merely states, “ a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer.” (Section 13). This section does not prohibit any other instrument that satisfies the essential features of portability.
Justice K. C. Willis defines these as, “ one the property in which is acquired by anyone who takes it bonafide and for value notwithstanding any defect in title in the person from whom he took it.”
Thomas defines it in his book “Commerce, Its theory and Practice “A negotiable instrument is one which is, by a legally recognized custom of trade or by law, transferable by delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bona-fide transferee for value, notwithstanding any defect in the title of the transferor.”
It :
(1) entitles a person to a sum of money
(2) is transferable (by customs of trade) by delivery, like cash, or by Endorsement and delivery and delivery, and
(3) is capable of being used upon by the person holding for the time being i.e. the person to whom it is transferred becomes entitled to money and also a right to further transfer it.
Characteristics of negotiable instruments
The important characteristics are as follows –
(1) Free Transferability : A negotiable instrument may be transferred by delivery if it is a bearer instrument or by endorsement and delivery if it is an instrument payable to order.
Thus, a Fixed Deposit Receipt, which is marked as ‘not transferable’is not a negotiable instrument. On the other hand all instruments which are transferable are not negotiable instruments e.g. share certificate. An instrument to be negotiable must possess other features also.
Further, a negotiable instrument may be transferred any number of times till it is discharged.
(2) Title to transferee : The transferee, who takes the instrument bona fide and for valuable consideration, obtains a good title despite any defects in the title of the transferor. To this extent, it constitutes an exception to the general rule that no once can give a better title then he himself has.
(3) Entitlement to sue : The holder can sue in his own name.
(4) Presumptions : Every negotiable instrument is subject to certain presumptions which are as under –
Presumption as to negotiable instrument
For deciding cases in respect of rights of parties on the basis of a bill of exchange, the Court is entitled to make certain presumptions. These are briefly stated as follow :
1. Consideration : That every negotiable instrument is made or drawn for a consideration. Thus, this need not necessarily be mentioned.
2. Date : That the negotiable instrument was drawn on the date shown on the face of it.
3. Acceptance before maturity : That the bill of exchange was accepted before its maturity, i.e., before it became overdue.
4. Transfer before maturity : That the negotiable instrument was transferred before its maturity.
5. Order of Endorsements : That the Endorsements appearing upon a negotiable instrument were made in the order in which they appear.
6. Stamping of the instrument : That an instrument which has been lost was properly stamped.
7. Holder is Holder in due course : That the holder of a negotiable instrument is the ‘holder in due course’, except where the instrument has been obtained from its lawful owner or its lawful custodian by means of offence or fraud.
8. Proof of dishonour : If a suit is filed upon an instrument which has been dishonoured, the Court shall, on proof of the protest, presume the fact of dishonour unless it is disproved. (Section 119)
Rules of estopped applicable to negotiable instruments
(Sections 120 to 122)
Certain rules of estoppel are applicable to negotiable instruments . These are as follows :
(1) Estoppel against denying original validity of instrument : The maker of the note and drawer of the bill of exchange or cheque are directly responsible for the bringing into existence of the instrument and, thus, cannot be allowed afterwards to deny the validity of the instrument. (Section 120)
(2) Estoppel against denying capacity of the payee to endorse : The maker of a promissory note or an acceptor of a bill shall not, in a suit by holder in due course, be allowed to deny the capacity of the payee to endorse the bill. (Section 121)
(3) Estoppel against denying signature or capacity of prior party : An endorser of a negotiable instrument shall, in a suit thereon by the subsequent holder, be allowed to deny the signature or capacity to contract of any prior party to the instrument.
Payee in a negotiable instrument
All three kinds of negotiable instruments mentioned under section 13 of the Act could be made payable in any of the following ways –
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Payable to bearer; or
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Payable to order.
Payable to bearer : The expression “bearer instrument” signifies an instrument, be it promissory note, bill of exchange or a cheque, which is expressed to be so payable or on which the last endorsement is in blank. This character of the instrument can be altered subsequently e.g. an endorsee can convert an ‘Endorsement in blank’ into an ‘Endorsement in full’. In such a case, the holder of the instrument would not be able to negotiate the instrument by mere delivery. He will be required to endorse the instrument before delivering it.
Payable to order : An instrument is payable to order when it is payable to:
(i) the order of a specified person, or
(ii) a specified person or his order, or
(iii) a specified person without the addition of the words “or his order” and does not contain words prohibiting transfer or indicating an intention that it should not be transferable.
When an instrument is not payable to bearer, the payee must be indicated with reasonable certainty
Promissory Note
The term Promissory note has been defined under Section 4 of the Negotiable Instruments Act, as under :
“A promissory note is an instrument (not being a bank note or a currency-note) in writing containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a, certain person, or to the bearer of the instrument.
Illustrations
A signs instrument in the following terms :
(a) “I promise to pay B or order Rs.500.”
(b) “I acknowledge myself to be indebted to B in Rs.1,000 to be paid on demand, for value received.”
(c) “Mr B, I O U Rs.1,000.”
(d) “I promise to pay B Rs.500 and all other sums that shall be due to him.”
(e) “I promise to pay B Rs.500, first deducting thereout any money which he may owe me.”
(f) “I promise to pay B Rs.500 seven days after my marriage with C.”
(g) “I promise to pay B Rs.500 and D’s death, provided D leave me enough to pay that sum.”
(h) “I promise to pay B Rs.500 and to deliver to him my black horse on 1” January next.”
The instruments respectively numbered as (a) and (b) are promissory notes. The instruments numbered (c), (d), (e), (f), (g) and (h) are not promissory notes.”
Essentials of a promissory note
(1) It must be in writing :
(2) Promise to pay : The promissory note must contain an express promise or undertaking to pay. An implied undertaking cannot make a document a promissory note.
(3) The promise to pay must be unconditional : The promise to pay must be unconditional or subject to only such conditions which according to the ordinary experience of mankind is bound to happen.
· “ I acknowledge myself to be indebted to B of Rs.500 to be paid on demand, for value received”. This instrument would be a promissory note.
· “I promise to pay Q Rs. 500 on A’s death provided A leaves me enough to pay the sum” is not a promissory note as it is conditional.
(4) There must be a promise to pay money only : The instrument must be payable only in money.
(5) A definite sum of money : Certainty
(a) as to the amount, and
(b) as to the persons by whose order and to whom payment is to be made
(6) The instrument must be signed by the maker : A promissory note is incomplete till it is so signed. Since the signature is intended to authenticate the instrument it can be on any part of the instrument.
Two or more persons may make a promissory note and they may be liable thereon jointly or severally (Joint family of MR Bhagwandas V. State Bank of Hyderabad 1971 SC 449). It must be clearly understood, however, that the two makers cannot be liable in alternate.
Where a pronote was shown to have been executed by two persons and later it was found that signature of one of the persons were forged, the person whose signature was forged cannot be held liable. The other person will, however, be liable.
(7) The person to whom the promise is made must be a definite person : The payee must be a certain person. Where the name of the payee is not mentioned as a party, the instrument becomes invalid. It is to be kept in mind that a promissory note cannot be made payable maker himself. Thus, a note which runs “I promise to pay myself” is not a promissory note and hence invalid. However, it would become valid when it is endorsed by the maker. This is because it then becomes payable to bearer, if endorsed in blank, or it becomes payable to the endorsee or his order, if endorsed specially.
A promissory note must point out with certainty the person who is entitled to receive the money. Where it is made payable to the bearer, the bearer is the definite person to whom payment is to be made. The words ‘certain person’ means a person who is capable of being ascertained at the time of making of the instrument. Therefore, if any person has not been named in the instrument but sufficient descripttion of such person have been included therein by which such person may be ascertained, the requirement is fulfilled (Ponnuswami V. Velliamuthu AIR 1957 Mad 355). If the payee is mentioned as ‘you’, it does not indicate any certainty about the person (Naraindas V. Purnidas AIR 1959 Orissa 176).
Section 4 of the Act recognizes three kinds of promissory notes –
(a) payable to a specified person
(b) payable to the order of a specified person
(c) payable to a bearer
A promissory note cannot be made payable to the bearer on demand. It has been prohibited under the RBI Act.
(8) Other points : The following points shall also be remembered in connection with promissory notes :
(a) Consideration need not be mentioned.
(b) Place and date of making it need not be mentioned. A promissory note on which date is not mentioned is deemed to have been drawn on the date of its delivery.
(c) An ante-dated or post dated instrument is not invalid.
(d) Place of payment also need not be mentioned in the promissory note. However, it can be made payable at any specified place.
(e) It cannot be made payable to bearer on demand or payable to bearer after a certain time. (Section 31 of the Reserve Bank of India Act)
(f) It may be made payable on demand or after a certain time. A demand promissory note becomes time barred on expiry of three years from the date it bears.
(g) It must be duly stamped as per the state laws in which it is executed, under the Indian Stamp Act. A promissory note which is not stamped is a nullity. Stamping may be before or after the execution.
(h) A promissory note cannot be made payable to the maker himself. Such a note is nullity. But, if it is endorsed by the maker to some other person, or endorsed in blank, it becomes a valid promissory note (Gay V. Landal (1848) LT CP 286).
(i) Where two or more persons sign the promissory note, their liabilities will be joint as well as several. A note cannot be signed in alternative.
(j) It is usual to mention in a promissory note the words ‘for value received’, but such a statement is not essential for the validity of the note, because the note is presumed to be for consideration unless contrary proved.
(k) A promissory note is not invalid by reason only that it contains any matter in addition to promise to pay e.g. a recital that the maker has deposited the title deeds with the payee as a collateral security.
Promissory note payable on demand
Mumbai October 25 , 200X
On demand I promise to pay Ravi Naik or order the sum of Rupees one thousand only, for value received.
Rs. 1000 Ram Laxman
Promissory note payable after date with interest
Mumbai October 25, 200X
On month after date I promise to pay Ravi Naik or to his order the sum of Rupees one thousand only, with interest @ 12% per annum until payment..
Rs. 1000 Ram Laxman
Joint Promissory note
Mumbai October 25, 200X
On month after date we promise to pay Ravi Naik or to his order the sum of Rupees one thousand only, with interest @ 12% per annum until payment..
Rs. 1000 Ram and Laxman
Joint and Several Promissory Note
Mumbai October 25, 200X
On month after date we jointly and severally promise to pay Ravi Naik or to his order the sum of Rupees one thousand only, with interest @ 12% per annum until payment..
Rs. 1000 Ram and Laxman
BILL OF EXCHANGE
A Bill of Exchange has been defined under section 5 of the Act as “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of certain persons or to the bearer of the instrument.”
In England it has been defined as “ an unconditional order in writing, addresses by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed rate or determinable future time a sum certain in money or to the order of a specified person, or to the bearer.”
Characteristic features of a Bill of Exchange
(i) It must be in writing : The Bill of Exchange must be in writing.
(ii) Order to pay : There must be an order to pay. It is of the essence of the bill that its drawer orders the drawee to pay money to the payee. The term ‘order’ does not mean command. Any request or direction or other words, which show an intention of the drawer to cause a payment being made by the drawee is sufficient. Politeness may be admissible but excessive politeness may prompt one to disregard it as an order.
(iii) Unconditional order : This order must be unconditional, as the bill is payable at all events. It is absolutely necessary for the drawer’s order to the drawee to be unconditional. The order must not make the payment of the bill dependent on a contingent event. A conditional Bill of Exchange is invalid.
(iv) Signature of the drawer : The drawee must sign the instrument. The instrument without the proper signature will be inchoate (unclear or unformed or undeveloped) and hence ineffective. It is permissible to add the signature at any time after the issue of the bill.
(v) Drawee : A bill, in order to be perfect, must indicate a drawee who should be called upon to accept or pay it.
(vi) Parties : The drawer, the drawee (acceptor) and the payee- the parties to a bill are to be specified in the instrument with reasonable certainty.
(vii) Certainty of amount : The sum must be certain.
(viii) Payment in kind is not valid : The medium of payment must be money and money only. The distinctive order to pay anything in kind will vitiate the bill.
(ix) Stamping : A Bill of Exchange, to be valid, must be duly stamped as per the Indian Stamp Act.
(x) Cannot be made payable to bearer on demand : A Bill of Exchange as originally drawn cannot be made payable to the bearer on demand.
Bill of Exchange payable to order on demand
Mumbai December 25, 200X
On demand pay Mr. Ravi Naik or order the sum of Rupees one thousand only.
Rs. 1000/- Thomas Mathew
To.
Mr._______________
__________________
Order Bill payable on presentment or sight
Mumbai December 25, 200X
On presentment (or sight) pay Mr. Ravi Naik or order the sum of Rupees one thousand only.
Rs. 1000/- Thomas Mathew
To.
Mr._______________
__________________
Ordinary bill payable to the order after date or sight with interest
Mumbai December 25, 200X
Three months after the date (or sight or presentment) pay Mr. Ravi Naik or order the sum of Rupees one thousand only with interest thereon at 18% per annum.
Rs. 1000/- Thomas Mathew
To.
Mr._______________
__________________
Bill payable to bearer
Mumbai December 25, 200X
Fifteen days after date (or sight) please pay the bearer the sum of Rupees one thousand only.
Rs. 1000/- Thomas Mathew
To.
Mr._______________
__________________
PARTIES TO THE BILL OF EXCHANGE
1. Drawer : The maker of a bill of exchange or cheque is called drawer.
2. Drawee : The person who is directed to pay by the drawer.
3. Acceptor : One who accepts the bill. Generally the drawee is the acceptor but a stranger may accept it on behalf of the drawee.
4. Payee : Person to whom the sum stated in the bills is payable.
5. Holder : Section 8 of the Negotiable Instruments Act states that “The ‘holder’ of a promissory note, bill of exchange or cheque means “any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.”
6. Holder in due course : A person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque (if payable to bearer).
7. Endorser : Holder who endorses the bill in favour of any other person.
8. Endorsee : Person in whose favour the bill is endorsed by the endorser.
9. Drawee in case of need : When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need such person is called as the ‘drawee in case of need’.
10. Acceptor for honour : When a bill of exchange has been noted and protested for non-acceptance or for better security, any other person accepts it supra protest for honour of the drawer or of any of the endorsers, such person is called the ‘Acceptor for honour’.
Special benefits of Bill of Exchange
Following special benefits associated with the Bill of Exchange :
1. A Bill of Exchange is a double secured instrument i.e. where the drawee fails to honour the order, the holder of the instrument may look to the drawer for payment.
2. In case of immediate requirement a Bill may be discounted with a bank.
3. The drawer or any endorser thereof may mention a person as ‘drawee in case of need’ to be resorted to for payment by the payee in case of dishonour of the bill by the drawee.
Distinction between a promissory note and a bill of exchange
The distinctive features of these two types of negotiable instruments are tabulated below :
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Promissory Note
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Bill of Exchange
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It contains a promise to pay.
The liability of the maker of a note is primary and absolute (S.32).
It is presented for payment without any previous acceptance by the maker.
The maker of a promissory note stands in immediate relationship with the payee and is primarily liable to the payee or the holder.
It cannot be made payable to the maker himself. The maker and the payee cannot be the same person.
In the case of a promissory note there are only two parties, viz., the maker (debtor) and the payee (creditor).
A promissory note cannot be drawn in sets.
A promissory note can never be conditional.
In case of dishonour no notice of dishonour is required to be given by the Holder.
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It contains an order to pay.
The liability of the drawer of a bill is secondary and conditional.
If a bill is payable some time after sight, it is required to be accepted either by the drawee himself or by some one else on his behalf, before it can be presented for payment.
The maker or drawer of an accepted bill stands in immediate relationship with the acceptor and the payee.
The drawer and payee or the drawee and the payee may be the same person.
There are three parties, viz, drawer, drawee and payee, and any two of these three capacities can be filled by one and the same person.
The bills can be drawn in sets.
A bill of exchange too cannot be drawn conditionally, but it can be accepted conditionally with the consent of the holder.
A notice of dishonour must be given in case of dishonour of a Bills of Exchange.
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BILLS IN SETS
Section 132 : Set of Bills
Bills of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All the parts together make a set; but the whole set constitutes only one bill, and is distinguished when one of the parts if a separate bill, would be extinguished.
Exception : When a person accepts or endorses different parts of the bill in favour of different persons, he and subsequent endorser of each part are liable on such parts as if it were a separate instruments.
Section 133 : Holder of the first acquired part entitled to all
As between holders in due course of different parts of the same set, he who first acquired title to his part is entitled to the other parts and the money represented by the bill.
Foreign bills are generally drawn in set of two or three and such a bill is said to have been drawn in set. All these parts form one bill. Each part of the bill is numbered and contains a reference to other parts. This operates as a notice to the holder taking up that all parts constitute one bill and puts him on guard to make inquiries as to the remaining parts of the bill. A person who negotiates a bill drawn in set is bound to deliver up all the parts in his possession.
All parts of the Bill are sent to the destination through different routes so as to ensure safe transmission of at least one part to the drawee and its acceptance by him at the earliest possible opportunity and also to avoid unnecessary inconvenience that may be caused due to loss in transit.
Kinds of bills
(1) Accommodation Bill (Sections 43-45)
All bills are not genuine trade bills, as some times they may be drawn for accommodating a party. An accommodation Bill is quite similar to that of a Bill of Exchange but it is distinguished from an ordinary bill by the fact that such a bill is not supported by any consideration or transaction. The drawer does not give any consideration to the drawee. The relationship between the drawer and drawee are not that of a debtor and creditor.
The party lending his name to oblige the other party is known as the accommodation or accommodating party and the party being obliged is known as accommodated party. The accommodating party is not liable to the accommodated party on the instrument as there is no consideration and the instrument was drawn only to help the accommodated party. But the accommodating party is liable to the ‘holder for value’.
Rules for Accommodation Bill
1. An accommodation bill creates no obligation of payment between the parties to the transaction. The accommodation party is not liable to the accommodated party on the maturity date.
2. No party for whose accommodation a negotiable instrument has been made, drawn, accepted or endorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.
3. An accommodation bill can be negotiated even after its maturity i.e. when it becomes overdue, with all benefits of a ‘holder in due course’ to the transferee. (Section 59)
4. Non-presentment of the accommodation bill to the acceptor for payment does not discharge the drawer from his liability.
5. In the case of dishonour of an accommodation bill, failure to give notice of dishonour does not discharge the liability of prior parties as against the case in the Ordinary bill.
(2) Fictitious Bill
A Bill of Exchange in which the name of both the drawer and the payee are fictitious i.e. imaginary. Such a bill cannot be enforced by law but it is good in the hands of a holder in due course if it has been accepted by a genuine person. This is provided that he can show that the first Endorsement on the bill and the signature of the supposed drawer (being the holder as well) are in the same hand writing, and the acceptor is liable on the bill to him. In this connection section 42 of the Act states:
“An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relived from the liability to any holder in due course claiming under an Endorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.”
(3) Forged Bill
A bill in which name of the drawer or the payee has been forged. Such a bill cannot be enforced by law and does not hold good even in the hands of holder in due course.
CHEQUE
“A Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.” (section 6).
(a) "a cheque in the electronic form" means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;
(b) "a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
(c) "clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.'.
Characteristics
1. A cheque is an unconditional order on a specified banker where the drawer has his account.
2. A cheque can be drawn for a certain sum of money.
3. Cheque is payable by the banker only on demand.
4. A cheque does not require acceptance by the banker as in the case of bill of exchange.
5. A cheque may be drawn up in three forms i.e.
(i) Bearer cheque is one which is either expressed to be so payable or on which the last or only endorsement is an endorsement in blank);
(ii) Order cheque is one which is expressed to be so payable or which is expressed to be payable to a particular person without containing any prohibitory words against its transfer or indicating an intention that it shall not be transferable (Section 18); and
(iii) Crossed cheque is a cheque which can be collected only through a banker.
6. The cheque is a revocable mandate and the authority can be revoked by countermanding payment.
7. The cheque is determined by notice of death or insolvency of the drawer.
8. All cheques are bills of exchange but all bills of exchange are not cheques.
Difference between Cheque and Bill of Exchange
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Cheque
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Bill of Exchange
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1. Drawee
Cheque can be drawn only on a banker.
2. Time of payment
A cheque is payable on demand.
3. Grace period
Cheque is payable on demand and no grace period is allowed.
4. Notice of dishonour
Notice of dishonour is not necessary.
5. Payee
A cheque can be drawn to bearer and made payable on demand.
6. Acceptance
A cheque is not required to be presented for acceptance. It needs to be presented only for payment.
7. Stamping
No stamp duty is payable on cheques.
8. Crossing
A cheque may be crossed.
9. Noting and protesting
There is no system for noting and protesting in case of dishonour.
10. Discharge of drawer
The drawer does not get discharged from his liability because of delay in presenting the cheque to the bank for payment.
11. Liability of drawee for dishonour
In case of dishonour of cheque the drawee is liable to the drawer and not to the payee.
12. Validity period
A cheque is usually valid fro a period of six months.
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1. The drawee may be any person.
2. A bill may be drawn payable on demand or on expiry of certain period after date or sight.
3. While calculating maturity three day’s grace is allowed.
4. A notice of dishonour is required.
5. A bill cannot be made bearer if it is payable on demand. A bill drawn ‘payable to bearer on demand’ is void.
6. Bills sometimes, require presentment for acceptance and it is advisable to present them for acceptance even when it is not essential to do so.
7. Affixation of proper stamps is necessary in case of Bills of Exchange.
8. A bill of exchange cannot be crossed.
9. In case of dishonour of a bill proper noting and protesting is necessary.
10. The drawer of the bill stands discharged from his liability if it is not duly presented for payment.
11. In case of dishonour of the bill by non-payment on an accepted bill of exchange the drawee becomes liable to the payee.
12. A bill may be drawn for any period.
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Bank draft
A bank draft is an order drawn by an office of a bank upon another of the same bank instructing the later to pay a specified sum to a specified person or his order. These are also knows as Managers Cheques or Cashiers Cheques.
A draft can be drawn either against cash deposited at the time of its purchase or by debiting the buyer’s current/ savings account the banker maintains. The buyer of the draft should furnish particulars of the person to whom the amount of the draft should be paid and where (at the time he requests the draft). The banker charges for his services a small commission. The draft like a cheque, can be made payable to drawer on demand without any legal objection thereto.
Specific features of a draft
1. It is only issued by a bank on another bank or on one of its branches. It cannot be issued by an individual.
2. It cannot be made payable to bearer.
The legal position with respect to bank drafts was clarified in the case of Tukaram Bapuji Nikam V. Belgaum Bank Ltd. AIR 1976 Bom 185, as follows :
1. The relationship of the purchaser of draft and the bank from which the draft has been purchased is merely that of the debtor and creditor.
2. The purchaser of the bank draft can call upon the bank from which he has purchased it to cancel the draft and pay back the money to him at any time before the draft has been delivered to the payee.
3. If the sole object of the issue of the draft was to transit the money to another person, a fiduciary relationship is created between the purchase of the draft and the bank which issued it, and the purchaser of the draft can countermand payment only if the bank has not actually parted with the money held by it as agent thus terminating the relationship of principal and agent.
4. Ordinarily, a bank issuing a draft cannot refuse to pay the amount thereof, unless there is some doubt as to the identity of the person presenting it as being or properly representing the person in whose favour it was drawn, or in other words, unless there is reasonable ground for disputing the title of the person presenting the draft; and
5. Once the draft has been delivered to the payee or his agent, the purchaser is not entitled to ask the issuing bank to stop payment of the draft to the payee on other grounds such as matters relating to consideration.
6. The issuing bank can after the issue of a draft pay back the amount of the draft to the purchaser of the draft only with the consent of the payee.
Marked Cheques
Since a cheque is not required to be presented for acceptance the drawee of the cheque i.e. the banker, is under no liability, to the person in whose favour the cheque is drawn. However, he is liable to his customer (drawer), if he wrongly refuses to honour the cheque. In such a case, action can be taken by the drawer against the banker for the loss of his reputation.
In certain cases a cheque is marked or certified by the banker on whom it is drawn as ‘good for payment’. Such a certification or marking does not amount to acceptance but it is very similar to it and protects the person to whom the cheque is issued against the cheque being refused for payment subsequently. In the United States, these are known as cashiers’ cheques. Banks in India, as a rule, do not mark or certify cheques in this manner and bankers in India, are not liable even if a bank has marked a cheque as “good for payment”.
Crossing of cheques
A cheque may be a open cheque or a crossed cheque. An open cheque is one that can be paid by the paying banker across the counter while crossed cheque cannot be paid across the counter.
Crossing of cheques is a universally adopted practice. Crossing on a cheque is a direction to the paying banker that the payment shall not be made across the counter. The payment on a crossed cheque can be collected only through a banker.
Cheques are usually crossed as a measure of safety. Crossing is made by drawing two parallel traverse lines across the face of the cheque with or without the addition of certain words. The usage of crossing distinguishes cheques from other bills of exchange.
In this regard section 123 of the Negotiable Instruments Act states:
“Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof, between two traverse lines, or of two parallel traverse lines simply, either with or without the words ‘not negotiatble’ that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally”.
Who may cross the cheque
Crossing of a cheque is an instance of an alteration which is authorized by the Act. Thus, the following parties may cross a cheque :
(1) Drawer : The drawer of the cheque may cross the cheque generally or specially.
(2) Holder : Where the drawer does not cross the cheque, the holder may cross it generally or specially. Even if the cheque is already crossed the holder may add the words ‘not negotiable’.
(3) Banker : Where a cheque crossed specially the collecting banker may again cross it specially to another banker as its agent for collection. This is the only case where the Act allows a second special crossing by a banker and for the purpose of collection
Types of crossing
Crossing may be either (1) general or (2) special.
(1) General crossing : Section 123 of the Act refers to general crossing. Where a cheque bears across its face two traverse lines with or without the words “and Co.” or any abbreviation thereof or the words ‘not negotiable, the cheque is said to have been crossed generally.
“Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to the banker” (Section 126).
The payee may get the cheque collected through a bank of his choice.
(2) Special crossing Special crossing implies the specifications of the name of the banker on the face of the cheque. The object of special crossing is to direct the drawee banker to pay the cheque only if it is presented through the particular bank mentioned.
In the case of special crossing the addition of two parallel transverse lines is not essential though generally the name of the bank to which the cheque is crossed specially is written between the two parallel transverse line (Section 124).
Section 126 of the Act provides that –
“Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection.”
Section 127 of the Act provides that –
“Where a cheque is crossed specially to more than one banker, except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.”
Special crossing may take any of the following shapes :
“Account Payee” crossing or restrictive crossing
This type of crossing acts as a warning to the collecting bankers that the proceeds are to be credited into the account of the payee.
These words are a mere direction to the receiving or collecting banker. These do not affect the paying banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the person names as the payee.
It has been held that crossing cheque with the words “Account Payee” and mentioning a bank is not a restrictive endorsement so as to invalidate further negotiation of the cheque by the endorsee.
It has been decided by the courts that an “account payee” crossing is a direction to the collecting banker as to how the proceeds are to be applied after receipt. The banker can disregard the direction only at his own risk and responsibility.
Cheque marked “not negotiable”
The general rule about the negotiability is that the holder in due course of a bill or promissory note or cheque takes the instrument free from any defect which might be existing in the title of the transferor. If the holder takes the instrument in good faith, before maturity and for valuable consideration, his claim is not defeated or affected by the defective title of the transferor. In case of any dispute, it is the transferor with the defective title who is liable.
Addition of the words “not negotiable” to the crossing of a cheque, makes the position different. The principle of ‘nemo date quod non habet – (nobody can pass on a title better than what he himself has) will be applicable to a cheque with a “not negotiable” crossing.
Section 130 of the Negotiable Instruments Act provides that –
“A person taking a cheque crossed generally or specially bearing in either case the words ‘not negotiable’ shall not have or shall not be able to give a better title to the cheque than the title of person from whom he took had.”
The effect of such a crossing is that the title of the transferee would be vitiated by the defect in the title of the transferor. The transferee of such a crossed cheque cannot get a better title than the transferor himself. The transferee cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith for value.
Bankers liability on payment of crossed cheque in due course
In respect of a crossed cheque it is presumed that the banker, on whom it is drawn, has made payment to the true owner of the cheque, though in fact, the amount of the cheque may not reach the true owner. In other words, the banker making payment in due course is protected, whether the money is or is not, in fact, received by the true owner of the cheque (Section 128).
Bankers liability on wrong payment of a crossed cheque
Section 126 of the Act states that:
a. in the case of generally crossed cheque the banker shall not pay it otherwise than to a banker, and
b. in the case of a specially crossed cheque it shall not be paid by the banker otherwise than to the banker to whom it is crossed or to his agent for collection.
Where the drawee banker pays a crossed cheque otherwise than in accordance with the provisions of Section 126 it shall be liable to the true owner of the cheque for any loss he may have sustained (section 129)
Protection of banker in respect of uncrossed cheques
Section 85(2) reads:
When a banker makes payment on an uncrossed cheque in due course he is authorized to debit the account of his customer with the amount so paid irrespective of the genuineness of the Endorsement thereon.
For example, a cheque is drawn payable to N or order and it is stolen. Thereafter, the thief or someone else forges N’s endorsement and presents the cheque to the bank for encashment. On paying the cheque, the banker would be able to debit the drawer’s account with the amount of the cheque.
The original character of the cheque issued as bearer, is not altered by subsequent endorsements , so far as the paying bank is concerned, provided that the payment is made in due course. Hence the proposition that “once a bearer instrument always a bearer instrument”.
Protection in respect of crossed cheques
When a banker pays a cheque drawn by his customer in accordance with section 126 of the Act he can debit the drawer’s account with the amount paid, even though the amount of the cheque does not reach the true owner.
Prerequisites for claiming protection
The protection in both the cases referred above can be availed of only if the payment has been made in due course i.e.
a. According to the apparent tenor of the instrument,
b. In good faith and without negligence.
c. To any person in possession thereof,
d. In circumstances that do not incite any suspicion that he is not entitled to receive payment of the cheque.
Liability of drawee of cheque
Section 31 of the Act states that:
The drawee bank is under a duty to pay the cheque, provided he has in his hands sufficient funds of the drawer and the funds are properly applicable to such payment. If the banker refuses payment without sufficient cause being shown, he must compensate the drawer, not the holder, for any loss caused by such improper refusal (Section 31).
The banker must pay the cheque only when he is duly required to do so e.g. if there is an agreement between the drawer and the banker that the former shall not draw more than one cheque every week, the banker is not bound to pay the second cheque.
The amount of compensation that the drawee would have to pay to the drawer is to be measured by the loss or damage say loss of credit, suffered by the drawer. The principle is : “The lesser the value of the cheque dishonoured, the greater the damage to the credit of the drawer”.
When banker shall refuse the payment
A banker will be justified or bound to dishonour a cheque in the following cases, viz;
(i) The cheque is undated.
(ii) The cheque is stale i.e. it has not been presented within the validity period of the cheque.
(iii) The instrument is inchoate (unclear or unformed or tentative) or not free from reasonable doubt.
(iv) The cheque is post-dated and presented for payment before its ostensible date.
(v) The customer’s funds in the banker’s hands are not ‘properly applicable’ to the payment of cheque drawn by the former.
(vi) The customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank in which either he has account or his account is overdrawn.
(vii) A garnishee or other legal order from the Court attaching or otherwise dealing with the money in the hand of the banker, is served on the banker.
(viii) Authority of the banker to honour a cheque of his customer is determined by the notice of the drawer’s death, lunacy and insolvency. However, any payment made prior to the receipt of the notice of death is valid.
(ix) Notice in respect of closure of the account is served by either party on the other.
(x) The cheque contains material alterations, irregular signature of irregular endorsement.
(xi) The customer has countermanded payment.
(xii) Any ambiguity in the material part of the cheque including the defects resulting from the crossing of the cheque.
(xiii) Any difference between the amount of cheque in words and in figures.
(xiv) Any irregular endorsements.
(xv) The cheque is mutilated.
(xvi) Signature of the drawer has been forged.
Liability of payee’s banker
Section 131 of the Act provides that –
“A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.”
Section 131 of the Act confers a special protection on the collecting banker which is available to him subject to fulfillment of certain conditions. If the following conditions do not co-exist, this protection would be denied to the collecting banker :
(i) The collecting banker should have acted in good faith and without negligence: In Lloyds Savouy Co. (1933) A.C. 201, the court held that if the banker receives payment of a cheque to which the customer has no title, the onus is on him to disprove negligence. What amounts to negligence is, however a question of fact in each case. “Negligence” means want of “reasonable care” with reference to the interest of the true owner. The test of “negligence” is whether the transaction of paying in any given cheque coupled with the circumstances antecedent and present was so flagrantly out of the ordinary course that it ought to have aroused suspicion in the mind of the banker and caused him to make enquiry (Bopulal Prem Chand v. The Nath Bank Ltd. 48 Bom. L.R.393).
(ii) That the collecting banker acts only to receive payment of the crossed cheque for a customer : To make a person a customer of a bank it is essential that there must be some sort of account, either a deposit or a current account or some similar relationship. Protection under section 131 is available only when the banker is acting as an agent for collection but not to a case where the banker is himself the holder.
(iii) That crossing had been made before the cheque fell into the hands of the collecting banker : Section 131 does not provide an absolute immunity to the collecting banker and unless the banker brings himself within the conditions stipulated under this section, he is left to his common law for conversion. The onus of proving that he had taken all reasonable steps to ensure compliance with the requirements of this section lies on the banker.
It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.
Dishonour of cheque
Dishonour
Section 92 of the Act reads as under –
“A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.”
If on presentation the banker does not pay then dishonour takes place and the holder acquired at once the right of recourse against the drawer and the other parties on the cheque.
Effects of dishonour
The important point to be noted in connection with the dishonour of a cheque is that its negotiability is lost.
Types of dishonour
Dishonour of cheque can be divided into two categories i.e.
(a) Rightful dishonour : Dishonour of cheque by the drawee banker for any of the reasons specified above or for any other rightful reason. In this case there is no remedy available against the banker but the holder in due course has remedy both civil and criminal against the drawer.
(b) Wrongful dishonour : Dishonour of cheque by the banker due to negligence or carelessness by its employees. The drawer may bring an action against the bank for losses suffered by him. The payee has no action against the banker in this case.
Dishonour of cheque is an offence
Section 138 of the Negotiable Instruments Act states that the return of a cheque by a banker because the money standing to the credit of the accountholder is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from the account by an agreement made with the bank, is a criminal offence. The drawer shall be deemed to have committed an offence and such offence will be punishable with imprisonment for a term up to two years imprisonment or with a fine twice the amount of the cheque or both.
Provisions of section 138 of the Act are applicable only if –
(a) The cheque in question has been issued in discharge of a liability only. Unless contrary is proved, as per the provisions of section 139, a cheque is presumed to have been received by the holder in discharge of a debt or liability. A cheque given as gift will not fall in this category.
(b) The cheque is presented to the bank for payment within six months or its specific validity period, whichever is earlier.
(c) The payee or holder in due course has given notice demanding payment within thirty days of the receiving information of dishonour which should be for a reason other than insufficiency of funds.
(d) The drawer does not make payment within 15 days of the receipt of the notice. The complaint can be made only by the payee/holder in due course, within one month.
Offences by companies
If the person committing an offence under section 138 is a company, every person who was in charge of the affairs of the company and was responsible for the business of the company at the time offence was committed shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. (Section 139) However, a person shall not be punishable under section 139 if it is proved that the offence has been committed without his knowledge or consent and that he had taken all due care to prevent commission of the offence.
Action to be taken
If a cheque is dishonored for lack of funds, the drawer can be punished with imprisonment upto one year and/ or withn a fine upto double the amount of the cheque if:
· The cheque has been presented to the bank within a year from the date on which it was drawn or within its validity.
· The payee or holder makes a demand for paymenmt by giving notice in writing to the drawer within thirty days of the receipt of the information.
· The drawer of the cheque fails to make payment within fifteen days of receipt of the notice.
Classification of instruments
Negotiable instruments may be divided into following categories :
(1) Bearer and order instruments
(2) Inland and foreign instrument
(3) Ambiguous and inchoate bills
(4) Sight and time bills etc.
(5) Escrow
Bearer and order instruments
An instrument may be payable or to order his order
(a) Bearer; or
(b) A specified person or to his order.
(a) Payable to bearer : An instrument is payable to bearer when it is expressed to be so payable. The wording could be “Pay to X or bearer”. It also becomes payable to bearer when the last endorsement on it is in blank.
Any person in lawful possession of a bearer instrument is entitled to enforce payment due on it.
An instrument made ‘payable to bearer’ is transferable merely be delivery, i.e., without any further endorsement thereon (section 46 of the NI Act). However, section 49 provides that a holder of a negotiable instrument endorsed in blank may, without signing his own name, by writing above the endorser’s signature a direction to pay any other person as endorsee, convert the endorsement in blank into an endorsement in full and the holder does not thereby incur the responsibility of the endorser.
It shall be noted that a promissory note cannot be made payable to bearer and a bill of exchange cannot be made payable to a bearer on demand.
In the case of a cheque, as per Section 85(2), where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in blank or full appearing thereon and notwithstanding that any such instrument purported to restrict or exclude further negotiation. Thus, the original character of the cheque is not altered so far as the paying bank is concerned provided that the payment is made in due course. Hence the proposition that “once a bearer instrument always a bearer instrument”.
(b) Payable to order : An instrument is payable to order when it is expressed to be payable to,
(i) the order of a specified person or e.g. “Pay to order of X”,
(ii) a specified person or his order, e.g. “Pay to X or order”, or
(iii) a specified person without the addition of the words “or his order” and does not contain words prohibiting transfer or indicating an intention that it should not be transferable.
Inland and foreign instrument
Inland bills : As per Section 11 of the Act “ a promissory note, bill of exchange or cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument”.
Foreign bills : As per Section 12 any such instrument, not so drawn, made or payable shall be deemed to be a foreign instrument.
Thus, foreign bills are:
(i) bills drawn outside India and made payable in or drawn upon any person resident in any country outside India;
(ii) bills drawn outside India and made payable in India, or drawn upon any person resident in India;
(iii) bills drawn in India upon persons resident outside India and made payable outside India.
In connection with the liability of the maker or foreign bill section 134 states:
“In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liability of the acceptor and endorser by the law of the place where the instruments is made payable.”
Illustration : A bill of exchange was drawn by A in California where the rate of interest is 5%, and accepted by B, payable in Washington where the rate of interest is 6%. The bill is endorsed in India and is dishonoured. An action on the bill is brought against B in India. He is liable to pay interest at the rate of 6% only; but if A is charged as drawer, A is liable to pay interest at 5 per cent.
Protest in case of dishonour : Inland bills need not be protested for dishonour (protest is optional). Foreign bills must be protested if the law of the place of making or drawing them requires such protest.
Ambiguous and inchoate bills
Ambiguous bill Section 17 of the Act states that an instrument which may be construed either as a promissory note or as a bill of exchange (Section 17) is considered as an ambiguous instrument.
In the following cases the instrument is treated as ambiguous instrument :
1. where the drawer and drawee are the same person.
2. where the drawee is a fictitious person
3. where the drawee is a person incapable of entering into contract.
The holder of such a bill is at liberty to treat the instrument as a bill or a promissory note. The holder shall decide it once for all. After having made his choice he cannot afterwards fall back and say that it is the other kind of instrument.
Inchoate Instrument Section 20 of the Act states:
“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 give prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for an amount specified therein and not exceeding the amount covered by the stamp. 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 to be paid by him to be paid there under.”
From the above it can be said that an incomplete or blank negotiable instrument properly stamped and signed is termed as inchoate instrument.
Principles of estoppel : In case of inchoate instruments principal of estoppel is applicable i.e. when a person gives possession to his signature on a blank stamped paper to any other person, he prima facie authorizes the latter as his agent to fill it up and give to the world an instrument as accepted by him. By signing an incomplete instrument the person binds himself as drawer, maker, acceptor or endorser. Signature of a person on an inchoate instrument purports to be an authority to the holder to fill up the blank, and complete the paper as a negotiable instrument, and no action is maintained on it.
Prerequisites for applicability of rule of estoppel : For applicability of the provisions of section 20 of the Act it is necessary that –
1. the instrument is signed by the person who delivers it.
2. the instrument is delivered to another person by the signer;
3. the paper so signed and delivered must be stamped in accordance with the law prevalent at the time of signing and on delivering.
In absence of above requirements the principal of estoppel, as discussed above, will not apply and the signer can show that the instrument was filled without his authority.
Liability of the signer : In accordance with provision of section 20 the signer is liable to the ‘holder’ as well as the ‘holder in due course’ but the holder can recover only what the signer intended to be paid under the instrument, while holder in due course can recover the whole amount made payable by the instrument provided that it is covered by the stamp.
Sight (demand) and time bills etc.
Sight Bills: Bills and notes are payable either on demand or at a fixed future time. Cheques are always payable on demand.
Instrument payable on demand : Section 19 of the Act provides that –
“A promissory note or a bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand”.
A bill or promissory note is also payable on demand when it is expressed to be payable “on demand” or “at sight” or “on presentment”. The expression “on demand” means “immediately payable”. For these instruments the period of limitations begins to run from the date on which the instrument is executed except in the cases of sight bills in which the time for limitation period starts running from the date of presentment for sight.
Such an instrument must be presented within a reasonable time after its issue in order to make the drawer liable and within a reasonable time after its endorsement to render the endorser liable. It will become overdue if it remains in circulation for an unreasonable length of time.
Time Bills : An instrument made payable on a fixed date or after a specified period is a time instrument. An instrument made payable after the happening of a certain event is also a time instrument.
In the case of time bills the period of limitation starts running from the date of maturity of the instrument.
Escrow
A bill, endorsed or delivered to a person subject to the understanding that it will be paid only if certain conditions are fulfilled, is called an “Escrow”. Regarding these bills there is no liability of the drawer until the conditions agreed are fulfilled. However, the rights of a holder in due course will not be affected.
Holder and Holder in due course
Holder: Holder is defined in Section 8 as:
“The holder’ of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person entitled at the time of such loss or destruction.”
From the above definition it is clear that for being a holder a person must be entitled to –
a. the possession of the instrument in his own name; and
b. receive or recover the amount due thereon from the parties liable thereto.
‘Possession’ of the instrument by the holders refers to ‘de factor’ control and not the actual possession. The person must be named in the instrument either as a payee or as endorsee. Meaning of ‘de facto’ contract becomes clear in the event of death of the actual holder. The legal heir of a deceased holder does not have his name endorsed on the instrument but he becomes holder by operation of law.
Any person in wrongful possession of the instrument cannot be the holder. Therefore, the finder of a lost instrument payable to bearer, or a person in wrongful possession of such instrument, is not a holder.
Further, the possession of the instrument and being named in it as the payee does not make a person a ‘holder’ thereof. He shall also be entitled to receive payment and to give a valid discharge. Thus, a beneficiary cannot be termed as holder of the instrument and any payment by the drawer to the beneficiary cannot discharge him from his liability. Bacha Prasad V. Janki Rai, 1957 BLJR 331 (FB).
Any person who is in possession of the instrument as payee will not be a holder within the meaning of section 8 of the Act if he has been prohibited from receiving payment by an order of Court.
The payee may authorize his agent to receive payment and to give a valid discharge for the same but this does not make the agent the holder of the instrument since he cannot bring an action for recovery of money in the instrument in his own name.
Holder in due course
Section 9 of the Act defines a ‘holder in due course’ as:
“Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or the endorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.”
Holder in due course means a holder who takes the instrument bona fide for value before it is overdue, and without any notice of defects in the title of the person who transferred it to him.
Holder in due course for bearer instruments
In the case of an instrument payable to bearer, holder in due course means any person who for consideration became its possessor before the amount mentioned in it becomes payable.
Holder in due course for instruments payable to order
In the case of an instrument payable to order, “holder in due course” means any person who become the payee or endorsee of the instrument before the amount mentioned in it became payable.
Prerequisites for being holder in due course
A person who claims to be holder in due course’ is required to prove:
(i) That he is a holder :
(ii) That he is a holder for consideration:
(iii) Acquisition before maturity :
(iv) That he has no knowledge of defective title :
(v) The instrument was complete at the time of possession :
Privileges of a “holder in due course”
(i) In case of an inchoate instrument : As per section 20, a person, who signed and delivered to another a stamped but otherwise inchoate instrument, is estopped from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given by him provided the amount filled is covered by the stamps affixed.
In addition, if a subsequent transferor completed the instrument for a sum greater than what was the intention of the maker, the right of a holder in due course to recover the money of the instrument is not affected (section 20).
(ii) Fictitious name : If a bill of exchange is drawn on behalf of a fictitious person and is payable to his order, the acceptor is not relieved of his liability to the holder in due course because of the fictitious name. It is essential though that the holder in due course proves that the document bears the endorsement with signature in the same hand as that of the drawer and purporting to be made by the drawer (Section 42).
(iii) Title free from defects : He possesses title free from all defects. He always possesses better title than that of the transferor or any of the previous parties and can give to subsequent parties the good title that he possesses.
(iv) Lost or obtained by fraud or unlawful consideration : A person liable on a negotiable instrument cannot defend himself against a holder in due course on the ground that the instrument was lost or obtained from him by means of an offence or for an unlawful consideration (Section 58)
(v) Estoppel against denying validity of the instrument originally made : “No maker of a promissory note and no drawer of a bill of exchange or cheque and no acceptor of a bill of exchange for the honour of the drawer shall in a suit thereon by holder in due course, be permitted to deny the validity of the instrument as originally made or drawn”(Section 120)
(vi) Payees incapacity: No maker of a promissory note and no acceptor of a bill of exchange payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s capacity at the date of note or bill to endorse the same. (Section 121).
(vii) All prior parties liable :” Every prior party to a negotiable instrument (maker or drawee, acceptor or endorser) is liable thereon to a holder in due course until the instrument is duly satisfied (Section 36).”This means that a holder in due course can recover the amount of the negotiable instrument from any or all of the previous parties to the instrument.
(viii) Title of previous parties : No endorser of a negotiable instrument shall in a suit thereon by a subsequent holder, be permitted to deny the signature or capacity of any prior party to the instrument (section 122) .
Distinction between a holder and a holder in due course
(i) Consideration : A holder may become the possessor or payee of an instrument even without consideration, whereas a holder in due course is one who acquires possession for consideration.
(ii) Time of possession : A holder in due course as against a holder, must become the possessor payee of the instrument before the amount thereon become payable.
(iii) Good faith : A holder in due course as against a holder, must have become the payee of the instrument in good faith i.e., without having sufficient cause to believe that any defect existed in the transferor’s title.
Capacity to incur liability under negotiable instruments
Section 26 of the Act states that every person who is capable of entering into a contract and to bind himself can make, draw, accept or negotiate a negotiable instrument, Section 27 provides that the negotiable instruments may also be drawn, accepted, and negotiated by an authorized agent on behalf of the principal. Therefore, a person not capable of entering into a contract cannot bind himself by being a party to the negotiable instrument.
Different cases of parties’ capacity to incur liability under a negotiable instrument are discussed below :
Minor : A minor is not competent to contract and, therefore, he cannot bind himself by becoming a party to the negotiable instrument. Section 26 provides that “A minor may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself.” An instrument does not void just because a minor is party to it. It remains binding on all other parties.
Lunatics : A lunatic or drunken person who is incapable of understanding the effect of contracting on his interest is on the same footing as that of minor.
Corporation : the contractual capacity of a company or corporation depends on the provisions contained in its memorandum of association or the charter. It may become a party to the negotiable instrument only if so authorized by the charter of the company. In this connection section 26 provides that “Nothing herein contained shall be deemed to empower a corporation to make, endorse or accept such instrument except in cases in which, under the law for the time being in force, they are so empowered.”
Agency : A person capable of contracting may also bind himself through his duly authorized agent acting in his name. But a general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or indorsing bills of exchange so as to bind the principal. Thus, an agent who has specifically been authorized to draw, accept and negotiate negotiable instruments only can bind his principal.
The agent has to make it clear that he is acting in a representative capacity. The form of signature must show that he intends to act as agent or that he does not intend to incur any personal liability. If this is not so done, he becomes personally liable. (Sections 27 and 28)
Legal representative : A legal representative of a deceased person who signs his personal name to a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such (Section 29),
The term “legal representative” includes heirs, executors and administrators.
Liabilities of Parties to Negotiable Instruments
Liability of drawer
Section 30 of the Act states:
“The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate to the holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided.”
(a) case of dishonour by non-acceptance
(b) case of dishonour by payment :
Liability of drawee cheque
Section 31 of the Act states:
“The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque when duly required to do so, and in default of such payment, must compensate the drawer for any loss or damage caused by such default”.
The drawee of a cheque who is always a banker is liable to the drawer if he, having sufficient funds of his customer, wrongfully refuses or fails to honour his customer’s cheque.
The liability of the drawee arises only when the cheque has been dishonored by mistake. But where the cheque is dishonoured for any of the reasons explained earlier in this chapter, the banker does not incur any liability for rightful dishonour.
Liability of maker of note and acceptor of bill
Section 32 of the Act stats:
“In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand”.
The maker of a promissory note is bound to pay the amount at maturity, according to the tenor of the note and in case of default of such payment, he is bound to compensate any party to the note for any loss sustained by reason of such default.
A promisor in case of promissory note and a drawer in the case of bill of exchange or cheque is the principal debtor. But after acceptance by the drawee the acceptor becomes the principal debtor. Therefore, in case of a bill the liability of the drawee arises only when the accepts the bills (Section 32). In the absence of a contract to the contrary, (An acceptor of a bill of exchange may become surety and the principle liability may have been agreed to be that of the drawer), the acceptor (drawee) of a bill is bound to pay the amount only at maturity, in accordance with the apparent tenor of the acceptance. In the event of the bill being accepted after maturity, he is bound for the amount to the holder on demand. In default of such payment, he is bound to compensate any party to the bill for any loss or damage caused to him by such a default.
The following persons incur liability by acceptance; (1) drawee (2) person named as drawee in case of need, and (3) acceptor for honour. Where there are several drawers, each can accept only for himself, unless they are partners.
Effect of forged Endorsement on acceptor’s liability
An acceptor of a bill already endorsed is not relieved from liability by reason that such endorsement is forged, if he knew or had reason to believe that the Endorsement was forged when he accepted the bill (Section 41).
Liability of acceptor of a bill drawn in a fictitious name
Section 42 of the Act provides that an acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an Endorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.
Liability of endorser
The endorser of an instrument by endorsing and delivering the instrument, before maturity, undertakes the responsibility that –
1. That on the due presentment it shall be accepted, (if a bill), and paid; and
2. That if it is dishonoured by the drawee, acceptor or maker, he will indemnify the holder or subsequent endorsers who are compelled to pay, provided due notice of dishonour is received by him.
But he may or make his liability conditional. In this respect, his position is better than that of a drawer or an acceptor, neither of whom can exclude his liability.
Where the holder of a negotiable instrument, without the consent of the endorser, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder to the extent as if the instrument had been paid at maturity.
Liability of parties to holder in due course
Every prior party (i.e. maker or drawer, acceptor and all intervening endorsers to an instrument is liable to a holder in due course until the instrument is satisfied (paid). Therefore, the maker and endorsers of a note are jointly and severally liable for the payment and may be sued jointly.
Liability on an instrument made drawn etc. without consideration
An instrument made, drawn accepted, endorsed or transferred without consideration creates no obligation of payment between the parties to the transaction. Further, a bill drawn or accepted without consideration does not impose any liability either on the drawer or on the acceptor to pay the holder. Similarly, if an instrument is endorsed without consideration, the endorser is not liable.
But if any party to such an instrument 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 from any party prior thereto.
Presentment of Instrument
Presentment means placing of a negotiable instrument before the drawee for any of the following purposes :
(a) Presentment of bills for acceptance
(b) Presentment of promissory note for sight.
(c) Presentment of instrument for payment
Presentment of bills for acceptance
Acceptance signifies the assent of the drawee of his liability. It is made by the drawee by signing his name across the face of the bill and its delivery.
Where presentment for acceptance is not necessary
A bill of exchange payable on demand or payable on a certain day etc. need not be presented for acceptance. But as a matter of common practice acceptance of the drawee is always obtained on a bill at the earliest opportunity after if it is drawn in order to:
a. To get additional security of the drawee’s name on the bill, and
b. To get an immediate right of recourse against the drawer in case of dishonour for non-acceptance.
Where presentment for acceptance is necessary
Presentment of the bill for acceptance is necessary in the following two cases :
(i) where the bill is payable after sight – presentment for acceptance is with a view to fixing the maturity of the instrument;
(ii) where a bill expressly stipulates that it shall be presented for acceptance before being presented for payment.
Presentment – to whom
The bill shall be presented for acceptance to a person who is capable of accepting the bill i..e. to the following :
a. The drawee or his duly authorized agent,
b. All the drawees where there are several drawees except in the case where all the drawees are partners and accepting partner is duly authorized to do so,
c. The legal representative in case of the death of the drawee,
d. The official receiver or assignee in case the drawee has become insolvent,
e. The drawee in case of need,
f. An acceptor for honour.
Time for presentment
Time for presentment of the instrument may be divided into following categories :
a. Where the presentment is optional the bill may be presented at anytime before the time for payment.
b. Where the time has been specified in the bill for presentment in the bill, it shall be presented within the specified time.
c. In case of bill payable after sight, if no time is specified therein for presentment for acceptance, it shall be presented within a reasonable time after it is drawn.
The bill shall be presented for accepted during business hours on a business day.
Place of presentment
The bill should be presented either at the residence or at the normal place of business of the drawee unless some other place has been specified in the bill.
Proof of presentment
There must be a definite proof of presentment of the bill for acceptance to the drawee.
Drawee’s time for deliberation
The drawee is entitled to have forty eight hours’ time (exclusive of public holidays) to consider whether he should accept a bill presented to him for acceptance (Section 63). If the drawee gives his acceptance, it is effective from the date of presentment.
When presentment is excused
Presentment of the bill for acceptance is excused if:
(a) The drawee is a fictitious person (Section 91) or
(b) He cannot, after reasonable search, be found (Section 61) or
(c) Where the presentment is irregular, such irregularity is excused if the bill has been dishonoured by non-acceptance on some other ground.
Effect of non-presentment
Where the presentment of the bill is compulsory for acceptance and the holder fails to do so, the drawer and the all the endorsers are discharged from the liability to him.
Who can accept
Section 26 of the Act states “that every person capable of legally entering into a contract, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, Endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque”.
As a rule a bill of exchange cannot be accepted by a person who is not a party to the bill, but as an exception to this general rule, a bill may be accepted by a stranger also for honour of any of the parties of the bill. Such person is known as acceptor for honour.
Acceptance by several drawees
It there are several drawees in a bill of exchange who are not partners, each of them can accept it for himself but none of them can accept it for another without authority.
If all the drawees in a bill happen to be partners, one of them can accept the bill so as to bind all partners because a partner is deemed to be an agent for all other partners. But in case a non-trading firm the power to draw, endorse, or accept or otherwise deal in negotiable instruments must be given by the partnership agreement. If the partnership agreement does not give such power to the to the partners, then any partner cannot accept a bill so as to bind all the partners. However, in the case of non-trading firm the authority to draw, endorse, accept and negotiate bills of exchange, negotiable instruments, cheques, hundies, is implied and so a partner can accept so as to bind all the partners.
Acceptance through agent
Section 27 of the Act says that every person capable of binding himself or of being bound, as mentioned in section 26, may so bind himself or be bound by a duly authorized agent acting in his name.
The authority of an agent to make, draw, accept or endorse notes and bills depends on the general law of agency. Sections 27 and 28 indicate that a general authority to transact business and to discharge debits does not confer upon an agent the power to endorse bills of exchange so as to bind his principal; nor can an agent escape personal liability unless he indicates that he signs as an agent and does not intend to incur personal liability. Parmode Kumar V. Damodar AIR, (1953) Orissa 179.
Essentials of a valid acceptance
1. Acceptance must be in writing
The drawee may use any appropriate word to convey his assent. It may be sufficient acceptance even if just a bare signature is put without additional words. An oral acceptance is not valid in law.
2. Acceptance must be signed
A mere signature would be sufficient for the purpose. Alternatively, the words ‘accepted’ may be written across the face of the bill with a signature underneath. An unsigned acceptance is not a valid acceptance.
3. Acceptance must be on the bill
The acceptance of the bill either on the face or on the back of it has been held to be sufficient in law. But it is necessary that it is written on the bill failing which it does not create liability as acceptor on the part of the person who signs it. Therefore, an acceptance on any other paper attached to the bill is not sufficient acceptance.
4. Acceptance must be completed by delivery
The acceptance would be complete and the drawee would be bound only when the drawee has either actually delivered the accepted bill to the holder or tendered notice of such acceptance to the holder of the bill or some person on his behalf.
A bill of exchange drawn in set requires acceptance on any one part of it. If the drawee signs his acceptance on two or more parts, he may become liable on each of them separately.
5. Acceptance may be either general or qualified
In general acceptance, the acceptor assents to the order of the drawer, without qualification. On the other hand an acceptance of a bill is said to be qualified where the drawee does not accept it according to the apparent tenor of the bill but attaches some conditions or qualification which have the effect of either reducing his liability or acceptance or the liability subject to certain conditions.
Effect of qualified acceptance : The holder of a bill is entitled to require an absolute and unconditional acceptance. He also reserves a right to treat the bill dishonoured, if it is accepted subject to any qualification as may be imposed by the acceptor. However if the holder agrees to qualified acceptance he does so at his own peril, since thereby he discharges all parties prior to himself, unless he has obtained their consent.
Instances of qualified acceptance : According to the Explanation to Section 86 of the Act, an acceptance is to be treated as qualified.
(i) Acceptance subject to event :
(ii) Acceptance for part payment:
(iii) Specific place :
(iv) Specific time :
Presentment of promissory note for sight
A promissory note does not require acceptance since the payment is to be made by the maker himself. But, a promissory note payable at a certain period “after sight” must be presented to the maker for sight. The presentment is to be made by a person entitled to demand payment who is usually the holder. Again, the note must be presented within a reasonable time after it is made and in business hours on a business day. In default of such presentment, the maker is not liable to pay anything to the holder. In the case of such a note without presentment the maturity of the note cannot be fixed.
Presentment of instrument for payment
Presentment of a bill of exchange means its exhibition to the drawee or acceptor by the holder with a request for payment in accordance with its apparent tenor (Section 64 (1)). Presentment may be made through a registered letter if such a mode of presentment is authorized by agreement or usage. If the bill is paid, the holder would have to hand it over to the payer. In default of presentment by the holder, the drawer and all the endorsers would be discharged from their liability to the holder.
Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification:
Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the payment is made accordingly.".
(1) By whom and to whom presentment is to be made : Presentment is to be made either by the holder or by somebody on behalf of the holder. Promissory notes are to be presented to the maker; bills of exchange are to be presented to the acceptor; and cheques are to be presented to the drawee.
(2) Time of presentment for payment : Presentment should be made during the usual business hours (Section 65).
(a) If the bill is made payable a specified period after date of sight, it must be presented or payment at its maturity (Section 66).
(b) If the bill payable on demand, if must be presented for payment within a reasonable time after is receipt the holder (Section 74)
(3) Place of presentment for payment :
(a) If the bill is drawn is accepted payable at a specified place and not elsewhere, it must be presented for payment at such a place in order to charge any party to the bill (Section 68).
(b) If however the bill is accepted payable at a special place (the word” and not elsewhere” being omitted) then to charge the drawer (but not the acceptor), presentment should be made at the place specified (Section 69).
(c) If no place of payment is specified then the bill should be presented for payment at the place of business (if any) or the residence of the drawee or acceptor of (if he has no fixed place of business or residence) to him in person wherever he can be found (Section 70 and 71).
(4) Presentment of promissory note payable by installment : A promissory note payable by installments must be presented for payment on the third day after the day fixed for payment of each installment.
(5) Presentment of cheque to drawer : It is the duty of the holder of a cheque to present it at the bank upon which it drawn. If payment is refused by the bank, the holder may sue the drawer. If the holder sues the drawer without first presenting the cheque at the bank, the suit will be dismissed.
If the holder does not present the cheque at the bank in time, the position of the bank may become unsound and it may not be possible for the banker to honour the cheque; in this case, the drawer is not liable if the bank refuses payment on presentment. The rule is that the cheque must be presented before the relation between the drawer and his banker has been altered to the prejudice of the drawer.
(6) Distinction between drawer of bills and drawer of cheques : If a bill is not presented in time, the drawer is absolutely discharged; but the drawer of a cheque, in case of delay in presentment is discharged only if he has suffered some loss or injury and that too, to the extent of such loss only. Therefore, if the bank remains solvent, the drawer will remain bound after presentment and refusal, although months (short of the period of limitation) have elapsed since the drawing.
(7) Presentment of cheque to charge any other person : In order to charge the drawer, the cheque must be presented before the relation between the drawer and his banker has been altered to the prejudice of the drawer, but in order to charge any person other than the drawer of cheque, it must be presented within a reasonable time (Section 73).
(8) Presentment of instrument to agents etc : Presentment for acceptance or payment may be made not only to the drawer maker of acceptor but also to his duly authorised agent or where he is dead to his legal representative, or where he has been declared an insolvent, to his assignee (Section 75).
When presentment is unnecessary
(a) Presentment for payment is not necessary in any of the following cases :
(1) if the maker, of acceptor intentionally prevent the presentment of the instrument;
(2) if the instrument being payable at his place of business, he (i.e. maker, drawer or acceptor) closes such place on a business day during the usual business hours;
(3) if the instrument being payable at some other specified place, neither he nor any person authorized to pay it at tends at such place during the usual business hours;
(4) if the instrument not being payable at any specified place, he (i.e. maker etc.) cannot after due search be found.
(b) No presentment for payment is necessary as against any party sought to be charged with payment if he has engaged to pay notwithstanding non-presentment.
(c) No presentment for payment is necessary as against any party if, after maturity and with the knowledge that instrument has been presented :
(1) he makes a part-payment on account of the amount due on the instrument; or
(2) he promises to pay the amount due thereon in whole or in part; or
(3) he otherwise waives his right to take advantage of any default in presentment for payment.
MATURITY
Section 22 of the Negotiable Instruments Act states: :
“The maturity of a promissory note or bill of exchange is the date at which it falls due.
Days of grace
Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be so payable.
Negotiable instruments, except cheques, may be made payable either on demand or on a specified date or after a specified period of time. Cheques are always payable on demand. The date on which a negotiable instrument falls due for payment is the date of maturity of the instrument.
An instrument payable on demand or on sight become payable immediately on the date of execution and there is no question of its maturity. Thus, the question of maturity arises only in case of instruments payable otherwise than on demand.
Time instruments are given three days of grace and should be presented for payment only on the last day of grace. Presentment of instrument earlier than third day will be premature. Thus, an instrument will be deemed to have been dishonoured only if it remains unpaid after the expiry of the grace period.
Rules for calculating maturity
1. Payable after stated number of months : If a note or bill is made payable a specified number of months after the date or after insight, or after a certain event, it matures or becomes payable three days after the corresponding date of the month after the stated month.
If the month in which the instrument becomes payable does not have a corresponding date, the period shall terminate on last day of the month.
2. When made payable after stated number of days : If a note or bill is made payable after a certain number of days after date or after sight or after a certain event, the maturity is calculated by excluding the day on which the instrument is drawn or presented for acceptance or sight or on which the event happens.
3. If grace period ends on Sunday or another holiday : If the date on which a bill or note is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day. Thus, if the maturity falls on Sunday, it shall be deemed to be payable on Saturday.
Payment in due course
Under Section 10 of the Negotiable Instrument Act –
“Payment in due course” means payment in accordance with the apparent tenor of the instruments in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.”
The essentials for a payment in due course are:
(i) Payment on or after the maturity : The payment should be made in accordance with the apparent tenor of the instrument. A payment before maturity is not a payment in accordance with the apparent tenor of the instrument; and as such it is not a payment in due course.
(ii) Payment in cash only : The payment should be made in money only, because the instrument is expressed to be payable in money. A different form of payment may however be adopted but only with the consent of the holder of the instrument.
(iii) Payment to a person in possession : That the person to whom payment is made should be in possession of the instrument. Therefore, payment must be made to the “holder” or a person authorized to receive payment on his behalf. Suppose, the instrument is payable to a particular person or order and is not endorsed by him. Payment to any person in actual possession of the instrument in such case, will not amount to payment in due course. However, in the event of the instrument being payable to bearer or endorsed in blank, the payment to a person who possess the instrument is, in the absence of suspicious circumstances, payment in due course.
(iv) Payment in good faith: The payment should be made in good faith i.e. without negligence, and under circumstances which do not afford a reasonable ground for believing that the person to whom payment is made is not entitled to receive the amount. If suspicious circumstances are there, then person making the payment shall put on an enquiry. If he does not make the enquiry, the payment would not be in due course.
Payment of Interest
The Act lays down following principles under sections 79 and 80 regarding payment of interest :
1. If rate is specified : If the rate of interest has been specified in the Bill of Exchange or the promissory, the interest has to be calculated on the principal amount of the instrument at the specified rate from the date of the instrument till the date of actual payment or until such other date after the suit has been launched as the Court may direct (Section 76).
2. If rate has not been specified : As per section 80 of the Act, where the rate of interest has been specified in the Bill or the note, as the case may, it has to be calculated at the rate of 18% P.A. from the date it ought to have been paid.
3. Endorser’s liability to pay interest : If an endorsed instrument is dishonoured the liability of the endorser to pay interest arises from the date he receives notice of dishonour.
Negotiation and Assignment
Who may negotiate
As per Section 51 of the Act a negotiable instrument may be negotiated by the following person :
(1) Sole maker,
(2) Drawer,
(3) Payee,
(4) Endorsee,
(5) All of several joint makers, drawers, payees or endorsees.
A maker of drawer can negotiate only when the instrument is drawn to his own order. In case of restrictive Endorsements the endorsee must exercise his power of negotiation strictly in accordance with the express terms of his authority. Therefore, if negotiability is excluded by the respective endorsement, the endorsee, as holder, cannot negotiate.
Further, explanation to section 51 provides that a maker or a drawer or endorsee or negotiate an instrument, only if –
1. the instrument falls into his possession in a lawful manner; or
2. he is the holder thereof.
Time of negotiation
Section 60 of the Act provides that a negotiable instrument may be negotiated until the payment or satisfaction thereof by the maker or drawer or acceptor or drawee, as the case may be, at or after the maturity but not after the payment. Thus, negotiability of a negotiable instruments terminates only on payment or satisfaction at or after maturity. Any payment before maturity does not stop negotiability of the instrument.
Types of negotiation
Under the Act, negotiable instruments may be negotiated either
1. by delivery when these are payable to bearer; or
2. by endorsement and delivery when these are payable to order.
Endorsement
As per section 15 of the Act Endorsement means –
“When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face of or on a slip of a paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the endorser.”
Form of Endorsement
The Act does not lay down any directions about the form of Endorsement. Only requirement of Endorsement is that the transferor shall use appropriate writing on an instrument so as to transfer his right, title and interest therein to some other person.
Essentials of Endorsement
(a) On the instrument :
(b) Endorser :
(c) Signed :
(d) Blank or full :
(e) Intention to transfer rights :
(f) Delivery :
Different types of the endorsements
(a) Blank or general
(b) Special or in full
(c) Restrictive – Section 50 permits restrictive endorsements which take away the negotiability of such instruments. “Pay the contents to C only”, “Pay C for my use.”
(d) Conditional
(i) Sans Recourse – when endorser excludes his liability “pay to X or order at his own risk” or “Pay to C without recourse to me.”
(ii) Sans Frais When the endorser does not want the endorsee or any subsequent holder to incur any expenditure on his account on the instrument, all endorsers are liable to him.
(iii) Facultative – Endorsee must give notice of dishonour of the instrument to the endorser, but the latter may waive this duty of the endorsee by writing in the endorsement “ notice of dishonour waived.” The endorsee remains liable to the endorsee for the non payment of the instrument.
(iv) Contingent . The endorser may make an endorsement so as to make the endorsee entitled to receive the amount due under the instrument only in case of happening or non happening of a certain event. “Pay X on his marriage to Y”.
Liability of endorser on dishonour
Under Section 35 that except in the case of a contract to contrary, every endorser of a negotiable instrument is liable to every subsequent party to it provided due notice of dishonour is given to or received by him.
Illustration : A bill is drawn by A upon B and is payable to C or order. C endorses the bill to D, who in turn endorses it to E. If B dishonours the bill, the holder, E has a right of action against all the parties i.e. D, C and A.
Effect of endorsement
(a) The endorsement of an instrument, followed by delivery, transfers to the endorsee the property in the instrument with right of further negotiation i.e. the endorse may further endorse it to some other person.
(b) A holder of an instrument deriving title from a holder in due course has rights thereon of the holder in due course (Section 53).
Negotiation by unauthorized parties
Right and liabilities in case of loss of instrument
1. The holder of negotiable instrument shall give a notice to all parties liable on the instruments. He shall also give a public notice.
2. Under Section 45A, the loser of a bill of exchange has a right to apply to the drawer for a duplicate of the lost bill, giving security to the drawer to indemnify him against all persons. If the drawer does not grant the application the loser may compel him to provide him with a duplicate.
3. When a negotiable instrument payable to order has been lost, the finder or the endorsee from the finder, is not entitled to receive the amount of it from maker, acceptor or holder, or from any party prior to such holder. He is bound to return the instrument to the real owner.
4. If the instrument lost by one is payable to bearer or endorsed in blank, the third person acquiring it bona fide and for valuable consideration before maturity, is entitled both to retain the instrument against the real owner and to compel payment from the prior parties thereon i.e. if the possessor of a lost instrument is a holder of it in due course, he is entitled to receive the amount due thereon from the acceptor or holder or from any party prior to such holder.
5. The holder of the lost instrument shall give a notice for payment on maturity date to the drawer. If the drawer or acceptor refuses payment, he must give notice of dishonour to the drawer, acceptor as well as to all prior parties failing which he will lose his right to take against the person liable on the instrument.
Stolen instrument
The position in case of stolen instrument is same as in the case of lost instrument. The thief does not get any title to the instrument. But, if a stolen instrument, payable to bearer, is negotiated to a holder in due course, such holder in due course gets a good title.
Instruments obtained by fraud
Free consent of parties is one of the most important for a valid contract. Absence of consent or absence of free consent vitiates all contracts including contracts relating to negotiable instruments. Thus, if an instrument is obtained from any maker, acceptor or holder by means of an offence or fraud, the possessor is not ordinarily entitled to receive the amount under it from the acceptor or holder, or from any party prior to such holder. But if such instrument, payable to bearer is transferred to holder in due course he will get good title. Even if the instrument is negotiated by endorsement, the holder in due course gets good title. The endorsement will be valid though the title of the endorser is defective.
Rights and obligations of a person who has obtained an instrument by unlawful consideration
A negotiable instrument given for a consideration which is illegal either because it is immoral and contrary to public policy or because it is specially interdicted or prohibited by the statute is void and creates no obligations between the parties. If the possessor endorses it in favour of some other person, the endorsee also would not be entitled to claim payment, unless he is holder in due course. The endorsee would be regarded as a holder in due course if it is endorsed to him for valuable consideration without any notice having been received by him as to the consideration being unlawful.
Effect of forgery
Forged instrument : In relation to negotiable instruments forgery means fraudulent making or altering a writing on the instruments to the prejudice of another man’s right. If the signature of the maker, drawer or acceptor is forged on the instrument, it is said to be a forged instrument and, in the eyes of law, a negotiable instrument with forged signature is a null and void. Such an instrument fails to create any right or obligations. In the case of forged instrument even a holder in due course also does not get a good title. It is also to be noted here that a forgery cannot be ratified since the forger does not act and does not purport to act on behalf of the person whose signature he forges.
Forged Endorsement : When signature of the endorser is forged on the instrument it is said to be a forged endorsement. In the eyes of law, a forged endorsement is not an endorsement at all.
If the instrument is payable to a person or to his order, it cannot be negotiated except with the signature of the person. Therefore, if the instrument is negotiated under the forged signature of the person to whom the instrument has been made payable the endorsee does not receive any title even though he is a purchaser for value and in good faith, for the endorsement is a nullity. But in case of bearer instrument or instruments endorsed in blank which can be negotiated by mere delivery, a forged endorsement is immaterial and it does not affect the title of the holder because he derives his title through delivery and not through Endorsement.
Negotiation of over due and dishonoured instruments
The holder of an instrument, who has acquired it after dishonour, has as against the other parties only the rights thereon of his transferor. Negotiation after maturity does not convey a good title to the transferee because of defective title of the transferor himself. Only a holder in due course gets a good title even if title of the transferor is defective but to become holder in due the instrument should have been acquired before maturity.
However, in case of Accommodation Bills, the proviso to Section 59 lays down that, any person who becomes holder of an accommodation bill after maturity, in good faith for consideration becomes the holder in due course.
Negotiable instruments without consideration
A negotiable instruments made, drawn, accepted or negotiated without consideration or for a consideration which fails, creates no obligation of payment between the parties but if such an instrument is transferred for a valuable consideration, such holder and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor.
Discharge from liability on Notes, bills and cheques
Discharge of the Instrument
An instrument is said to be discharged when –
(a) All the rights under it are extinguished.
(b) It ceases to be negotiable.
(c) Even a holder in due course does not acquire any right under it.
In short, an instrument is discharged only when the part primarily and ultimately liable on the instrument is freed from liability.
Discharge of a party to an instrument does not discharge the instrument itself. Consequently, the holder in due course may proceed against the other parties liable for the instrument.
Different modes of discharge from liability
Parties to negotiable instruments are discharged from liabilities when the right of action on the instrument is extinguished. The right of action on a negotiable instrument is extinguished by the following methods :
(a) By payment in due course : The parties primarily liable to make payment on an instrument are discharged from liability to all parties if the instrument is payable to bearer or endorsed in blank, and such maker, acceptor or endorser makes payment in due course of the amount due thereon i.e. when the payments have been made to the holder of the instrument at or after maturity in good faith and without notice of any defect in the title to the instrument (Section 82).
(b) By cancellation of acceptor’s endorser’s name : The maker, acceptor and endorser respectively of a negotiable instrument are discharged from liability to a holder who cancels the acceptor’s or endorser’s name with the intent to discharge him and to all parties claiming under such holder i.e. if the holder of a bill cancels the signature of acceptor with an intention to discharge him, both maker and the acceptor of such negotiable instrument are discharged from the liability to the holder and to all parties claiming under such a holder [Clause (a) Section 82)]. However, it is to be noted that any cancellation under mistake or without the authority of the holder is inoperative.
(c) By release : the holder of an instrument may release any of the parties to the instrument by any method other than cancellation of names e.g. a separate agreement of waiver, or release. The release may be express or implied [ Clause (b) of Section 82]. The party so released and all subsequent parties who have a right against the party so released will also stand released and discharged from the liability.
(d) By allowing more than 48 hours to the drawee for acceptance : If the holder of a bill of exchange allows the drawee more than forty-eight hours, exclusive of public holidays to decide whether he will accept the bill, all prior parties not consenting to such an allowance of more than 48 hours are discharged from liability to such holder. This is because the holder must treat the instrument as dishonoured if the drawee fails to signify his acceptance within forty-eight hours, and then the holder must give notice to the drawer and to all prior parties, and must not allow time unless they give their consent that more time should be allowed (Section 83).
(e) Dissenting parties discharged by qualified or a limited acceptance : The holder of a bill is entitled to unqualified acceptance. If he elects to take a qualified acceptance, he does so at his own peril and discharges all parties prior to himself unless he obtains their consent to such an acceptance are discharged. All previous parties are discharged in the following cases :
(1) when acceptance is qualified,
(2) when acceptance is for a part of the sum,
(3) when acceptance substitutes a different place or time of payment,
(4) when acceptance is not signed by the drawee not being partners.
But, if the prior parties subsequently approve of such acceptance by the holder, they will not be discharged.
(f) By payment, alteration not being apparent : If a person makes payment on an altered note, bill or cheque, and the alteration is such that it is not apparent the payment is deemed to have been made in due course and the person (banker or other person) who is liable to pay the amount is protected (Section 89).
Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image.
Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.".
(g) By negotiation back : If a bill of exchange which has been negotiated is, at or after maturity held by the acceptor in his own right all right to action thereon are extinguished (Section 90).
(h) By delay in presenting the cheque within a reasonable time : If a cheque is not presented for payment within a reasonable time after its issue the drawer is not liable for the delay. However, if the drawer suffers some loss due to failure of the bank, the drawer is discharged as against the holder to the extent of losses suffered by him.
For example, if X draws 10 cheques of Rs.250 each, but when the cheques ought to be presented, has only Rs.2,000 at the bank and subsequently the bank fails before the cheques are presented, X will be released from liability to the extent of Rs.2,000 but will remain liable for the balance. If he had the full amount of Rs.2,500 at the bank, he will be discharged in full.
(i) By operation of law : A negotiable instrument is also discharged by operation of law under any of the following circumstances :
(a) By lapse of time i.e., when the claim under the instrument becomes barred by the Limitation Act on the expiry of the period prescribed for the recovery of the amount due on the instrument; or
(b) By merger, i.e., when the debt, under the instrument is merged in the judgement debt obtained against the acceptor make or endorser.
(c) Under the law of insolvency i.e. when the acceptor, maker, or endorser, who becomes insolvent, is discharged by an order of the Court made in the insolvency proceedings.
(j) By payment by the drawee of a cheque payable to order or to bearer : Payment in due course discharges the bank from liability even if the payment is made to a wrong person. A cheque is said to have been paid in due course when it has been paid in good faith, after taking proper care to ascertain the genuineness of the endorsements. But if the drawer’s signatures is forged, the banker can, under no circumstances, claim discharge on payment.
The bank is discharged by payment in due course to the bearer notwithstanding any endorsement thereon, whether in full or in part and whether or not such endorsement purports to restrict or exclude further negotiation. The endorsee under an endorsement in full cannot recover the amount from the banker who has paid it to the bearer (Section 85).
The rule of the discharge applicable to a cheque payable to order also applies, to a draft drawn by one of the bank upon another payable to order or demand (Section 85A).
(k) By material alteration of the instrument without assent of all parties liable : Material alteration is that change in the negotiable instrument which affects the validity of the instrument or rights of the parties thereto. Validity of the instrument is affected only when the alteration is material. Any material alteration of a negotiable instrument renders the same void as against any one who is party thereto at the time of making such alterations. Following have been held to be material alterations :
1. Alterations of the date of the instrument
2. Alteration of the sum payable
3. Alteration of the time of payment
4. Alteration in the place of payment
5. Alteration in the rate of interest
6. Alteration by addition of new party
7. Alteration by adding the place of payment
8. Tearing off the material part of the instrument
A change is said to be material when –
(a) it changes the identity of the contract between the parties
(b) it changes the rights and liabilities of the parties of the parties or any of the parties of the instrument.
(c) It alters the operation of the instrument.
Alterations not considered as material alterations : Certain alterations, though material, do not have the effect of vitiating the instrument. Those are as under :
1. Alterations made before the issue of instrument
2. Alterations made to correct a mistake
3. Alterations made to carry out common intention of parties
4. Alterations made with the consent of the parties
5. Alterations which are not considered material e.g.
(a) Filing up of amount in an inchoate instrument
(b) Conversion of an Endorsement in blank into an Endorsement in full
(c) Crossing of a cheque after it has been issued.
Dishonour
A bill may be dishonoured for non-acceptance as well as non-payment. Cheques and promissory notes may be dishonoured by non-payment only. When a negotiable instrument is dishonoured the holder is required to give a notice to all the previous parties so as to make them liable to the instrument. Except in the cases where notice of dishonour is waived, the holder’s failure to give notice of dishonour to previous parties, he loses his right to bring any action against them.
Kinds of Dishonour
1. Dishonour by non-acceptance
2. Dishonour by non-payment
Dishonour by non-acceptance : Section 91 provides that –
“A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of the several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where the presentment is excused and the bill is not accepted.
Where the drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonoured”.
A dishonour by non-acceptance may take place in any one of the following circumstances :
(a) when the drawee either does not accept the bill within forty-eight hours of presentment or refuses to accept it;
(b) when one of several drawees, not being partners, makes default in acceptance;
(c) when the drawee gives a qualified acceptance;
(d) when presentment for acceptance is excused and the bill remains unaccepted;
(e) when the drawee is incompetent to contract;
(f) when the drawee is a fictitious person and could not be found after reasonable search.
Presentment for acceptance is not necessary : Presentment of the bill for acceptance is not necessary to treat an instrument as dishonoured in any of the following cases :
(i) Where the drawee cannot be found, or
(ii) Where the drawee is incompetent to contract, or
(iii) Where the drawee is a fictitious person.
Effect of dishonour for non-acceptance : In the case of dishonour by non-acceptance, the holder becomes entitled immediately to have recourse against the drawer or the endorser. Dishonour by non-acceptance constitutes a material ground entitling the holder to take action against the drawer and he need not wait till the maturity of the bill.
Dishonour by non-payment
In accordance with the provisions of Section 92 of the Act –
“A promissory note, bill of exchange or cheque is dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same”.
Thus, an instrument is said to have been dishonoured by non-payment only when the party primarily liable i.e.
(a) the acceptor of a bill,
(b) the maker of a note, and
(c) the drawee of a cheque,
make default in payment.
Distinction between dishonour by non-acceptance and by non-payment
In case of dishonour of a bill by non-acceptance no action lies against the drawee as he is not a party to the bill. The holder of the bill can proceed only against the drawer or endorser, if any. In the case of dishonour of a bill by non-payment action lies against the drawee also as he becomes a party to the instrument. On dishonour by non-payment the drawee can be sued.
Notice of dishonour
By whom notice to be given
When an instrument is dishonoured either by non-acceptance or by non-payment
1. The holder thereof or some party thereto who remains liable thereon must give notice of dishonour (Section 93).
2. Any party receiving notice of dishonour must also transmit it to within a reasonable time to all the parties prior to him in order to render them liable to himself unless such party otherwise received due notice as provided under Section 93 (Section 95).
Illustration : A draws a bill in favour of B on X : B endorses it to C; C endorses it to D; D endorses it to E; E endorses it to F.
If the bill is dishonoured by X, F, the holder, may give notice to all his prior parties to make all of them.liable to himself. But if he gives notice of dishonour only to E and A his right to claim will be valid against E and A only.
In this case if E does not transmit the notice to D, C, and B he will not have any claim against them. In order that E also has right of action against D, C and B, E must transmit to all his prior parties i.e. D, C and B.
Where several persons are required to give notice of dishonour to their prior parties, a person may take advantage of notice of dishonour served by other person to any person to whom he is also required to give notice. Thus, serving of notice of dishonour is necessary and not the fact that who serves the notice.
Notice by agent
Notice for dishonour can also be given by a duly authorized agent. When an instrument is deposited with the agent for presentment and if the instrument is dishonoured, the agent himself can give notice of dishonour to all prior parties on behalf of the holder. Further the agent may also give such notice to his principal who, in turn, may serve notice to all his prior parties (Section 96).
To whom notice is to be given
Notice must be given to all such parties to whom the holder proposes to charge with liability severally or jointly, e.g., the drawer and the endorsers. Notice may be given either to the party himself or to his agent, or to his legal representative on this death, or to the official assignee on his insolvency. It is not necessary to give notice to the maker of a note or the drawee or acceptor of a bill or cheque (Section 93).
Where the party to whom notice is to be given is dead, the notice addressed to him due to ignorance will not become invalid and such a notice is sufficient to bind the estate of the agent. However, where the holder or any other person who is giving notice is aware of the fact of the death of the party to whom notice is to be given, in that case the notice shall be addressed to his legal representative otherwise it will not be treated as a valid notice. Similarly, in case of insolvency the notice must be given to the Official Assignee.
Effect of non-service of notice
Notice of dishonour is so necessary that an omission to give notice discharges all parties. The parties are discharged not only on the bill but also in respect of the original consideration. Notice of dishonour is a condition precedent to the continuation of the liability of the drawer under Section 30 and of the endorsee under Section 35 of the Act.
Contents of notice
The notice of dishonour may be given in any form but it must inform the party to whom it is given, either in express terms or by reasonable intendment. The notice need not be signed but it must inform the party to whom it is given :
(a) that a specified instrument has been dishonoured
(b) that the instrument has been dishonoured by non-acceptance or non-payment
(c) that he will be held liable thereon.
The notice must give an exact descripttion of the instrument dishonoured, for mis-descripttion, which misleads the addressee, vitiates the notice.
Place of service of notice
The notice, if in writing, may be given by post at the place of business or at the residence of party for whom it is intended. The notice is not rendered invalid by miscarriage in post. Parties may also fix by an agreement a place to which notice of dishonour may be forwarded and a notice sent to such specified place is valid even if it takes longer time. If the holder does not know the place at which the notice of dishonour shall be served, he must exercise due diligence to ascertain the place.
Time of serving the notice
After dishonour of the instrument a notice of dishonour shall be given within a reasonable time. In determining what is reasonable time for giving notice of dishonour, regard must be had to the nature of the instrument and the usual course of dealing with respect to similar instrument. In calculating such time, public holidays are excluded.
Under section 106 of the Act, the reasonable time for giving notice of dishonour of an instrument is as under :
(a) Where the holder of the instrument and the party to whom notice is given carry on business or live in different places, the notice of dishonour must be posted by the next post, if there be one on the same day. In other case, on the next day after the day of the dishonour.
(b) If the parties live or carry on business in the same place, it is sufficient if the notice is dispatched so that it reaches its destination on the day next after the day of dishonour.
(c) A party receiving notice of dishonour, who seeks to enforce his right against the prior party, transmit the notice within a reasonable time if he transmits it within the same time after its receipt as he would have had to give notice if he had been the holder (Section 107).
When notice of dishonour is unnecessary (Section 98)
In a suit against the drawer or endorser on an instrument being dishonoured, the notice of dishonour is not necessary in the following cases :
(a) When it has been dispensed with by an express waiver by the party entitled to it.
(b) When the drawer has countermanded payment of a cheque.
(c) When the party charged would not suffer damage for want of notice.
(d) When the party entitled to notice after due search, cannot be found.
(e) Where there are been accidental omission to give the notice, provided the omission has been used by an unavoidable circumstances, e.g., death or dangerous malady of the holder or his agent, or other inevitable accident or over whelming catastrophe not attributable to the default, misconduct or negligence of the party tendering notice.
(f) When one of the drawers is acceptor.
(g) Where the drawer and the acceptor are the some person. However, any partnership between the drawer and drawee of a bill does not give rise to the presumption that they are partners in respect of the drawing of the bill, or that the bill was drawn by one of them on behalf of both. In this type of case the rule mentioned above does not apply.
(h) In the case of promissory not which is not negotiable.
(i) When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument.
Duties of holder on dishonour of an instrument
The holder shall take the following steps in case of dishonour of an instrument :
1. Notice of dishonour : The holder shall send a notice of dishonour to all the parties to whom he desires to charge in accordance with the provisions of the Act.
2. Noting and protesting : When a bill is dishonoured by non-acceptance and a promissory note is dishonoured by non-payment the holder may cause such dishonour to be noted and/or by the notary public.
3. Suit for recovery : After fulfilling the formalities of noting and protesting the holder may bring a suit against the parties liable to pay for the recovery of the amount due on the negotiable instrument.
Noting and Protesting
Noting
In this connection section 99 of the Act provides as under :
“When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a notary public upon the instrument, or upon a paper attached thereto, or partly upon each.
Such note must be made within a reasonable time after the dishonour, and must specify the date of dishonour, the reason, if any, assigned for such dishonour, or, if the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonoured, and the notary’s charges”
Mode of noting
Therefore, noting is a convenient mode of authenticating the fact that a bill or note has been dishonoured. When a bill is to be noted it is taken to the notary public who represents it for acceptance or payment, as the case may be, and if the drawee or acceptor still refuses to accept or pay the bill, the bill is noted.
Noting is optional
Noting is not required in case of cheques because in such a case the banker returning the cheque give reason in writing for the dishonour of the same, which is accepted as authentic evidence of dishonour. In case of inland bills noting is not compulsory.
Advantages of noting
1. Under section 104A, wherever protest is required to be made within a specified time, it is sufficient if noting is made within that time.
2. A bill of exchange may be accepted for honour after it has been noted.
3. A bill of exchange may be paid for honour after it has been noted.
Time for noting
As per section 105, the noting shall be made by the notary public within a reasonable time. It has been held that the noting shall take place on the day of dishonour or not later than the next business day unless the holder is prevented by circumstances beyond his control.
Protest
Section 100 of the Act provides that –
“When a promissory note or bill of exchange has been dishonoured by non-acceptance or non-payment, the holder may, within a reasonable time, cause such dishonour to be noted and certified by a notary public. Such certificate is called a protest.”
When an instrument is dishonoured, the holder may cause the fact not only to be noted, but also to be certified by a Notary Public that the bill has been dishonoured. Such a certificate is referred to as a protest.
Advantage of protest
Neither noting nor protesting is compulsory in the case of inland bills, But under Section 104 every foreign bill of exchange must be protested for dishonour when such a protest is required by the law of the country where the bill was drawn. The advantage of both noting and protesting is that this constitutes prima facie good evidence in the Court of the fact that instrument has been dishonoured in accordance with the provisions of section 119, the Court is bound to recognize a protest. Provisions of section 104A shall also be noted which provide that –
“For the purpose of this Act, where a bill or note is required to be protested within a specified time or before some further proceeding is taken, it is sufficient that the bill has been noted for protest before the expiration of the specified time or the taking of the proceeding; and the formal protest may be extended at any time thereafter as of the date of noting.”
Thus, where a document has been noted within the time required by law, legal proceeding cannot be vitiated on account of protest not having been made.
Protest in absence of notary public
The Act does not provide the place where the protest shall be made. The Act is also silent about the cases where services of notary public are not available at the place of dishonour of the bill. In this connection the Bill of Exchange Act provides that any householder or substantial resident of the place may, in the presence of two witnesses, give a certificate, signed by them, attesting the dishonour of the bill, and such certificate operates as a formal protest of the bill.
Contents of protest
Section 101 provides that the protest must contain the following particulars :
1. The instrument itself or literal transcriptt of the instrument of everything written or printed thereon.
2. The name of the person for whom and against whom the instrument has been protested.
3. The fact and reasons of dishonour, i.e. a statement that payment or acceptance or better security, as the case may be, was demanded by the notary public from the person concerned and he refused to give it, or did not answer, or that he could not be found.
4. The time and place of dishonour.
5. The signature of the notary public.
6. In the case of acceptance for honour or payment for honour, the names of the persons by whom and for whom it is accepted or paid.
Notice of protest
When a promissory note or a bill of exchange is required by law to be protested, notice of such protest in lieu of notice of dishonour must be given in the same manner as notice of dishonour (Section 102).
Protest for better security
A bill may be protested even for better security before the maturity of the bill. In this connection section 101 of the Act provides as under :
“When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand better security of the acceptor, and on its being refused may, within a reasonable time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security.”
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