Professional Documents
Culture Documents
continued….
Other modes
Special Crossing -Across its face it bears an addition of the
name of a banker with or without the words “ Not
Negotiable”.
Restrictive Crossing-” Account payee” are added to the
general or special crossing. The amount has to be credited
to the account of the payee. They are not negotiable.
Not Negotiable Crossing- It means that the title of the
transferee cannot be better than the transferor. It is
crossed so, as a protection to the drawer or holder of the
cheque against miscarriage or dishonesty in the course of
transit by making it difficult to get cashed, until it reaches
its destination.
Crossing after issue of the cheque
If the cheque is not crossed, the holder of the cheque may
cross it either generally or specially.
If the cheque is crossed generally, the holder may cross it
specially
The holder may add the words "Not Negotiable” to the
crossing
If it is crossed to specified banker, it may be again
crossed to another specified banker, or agent for
collection.
Parties to a Negotiable Instrument
Capacity of parties- Every person capable of contracting may
bind himself and be bound by the making, drawing,
acceptance, indorsement, delivery and negotiation of the NI
The capacity of the party to a NI is co-extensive with the
capacity of his or her contract capacity to contract
Minor can draw, indorse, deliver and negotiate such
instruments as to bind all other parties other than himself.
Minor can also acquire all rights under it, and if he is a holder
he is entitled to sue all the prior parties to the instruments.
If minor is one of the parties and all others are adults, then
other than the minor all are liable. Adults are not discharged
from liability even if the minor is discharged.
Holder ( Sec 8)
A person who is entitled to hold the negotiable instruments
in his own name, to possess the instrument and to recover
or receive its amount due from the parties thereto is called
a holder.
To be a holder the person must be named in the
instrument as a payee, or the endorsee or a bearer thereof
Holder in due course (HDC)
If a person proves that he acquired the instrument
for a valuable consideration, then he is known as
holder in due course.
The holder in due course should show that for
consideration he became the payee or indorsee of
the instrument , if it is payable to the order.
In such cases, the instrument should have been
indorsed and delivered to him, as his title to the
instrument will be incomplete without delivery.
Other essentials to be a holder in due
course
The HDC should have acquired the instrument any time
before the amount became payable.
If a person takes the instrument after the day the amount
becomes payable, such a person cannot take the place of
HDC, and the rights acquired by him are only co-extensive
with that of his immediate transferor.
The HDC should have acquired the title without notice of the
defect in the title
Privileges of a HDC
The presumption is that the HDC obtains title to the
instrument free from equity.
If the instrument is stamped but otherwise inchoate, the
person who has signed and delivers is prevented from
asserting against the HDC as the stamp in itself is
sufficient to cover the amount, though the instrument was
incomplete
Until the instrument is duly satisfied, every prior party to a
NI is liable thereon to a holder in due course.
Cont….
Continued..
If the bill or note is negotiated to a HDC , then the
negotiating parties cannot avoid liability if there was a
condition or special purpose attached to it.
Once the NI passes through the hands of the HDC, the NI
get cleansed of all its defects, provided the holder is not a
party to the fraud
No defence can be set up against the holder in due course
The validity of the instrument as originally made or drawn
cannot be denied by the maker/ drawer/ acceptor for honor
The endorser cannot deny the signature or capacity to the
contract of any prior party to the instrument
Liabilities of Parties (Drawer)
Liability of the drawer- the drawer is liable to compensate in
case of dishonor by the drawee or acceptor, provided due
notice has been given to or received by the drawer.
The liability of the drawer in case of bill is secondary in
nature. It is the acceptor who is primarily liable to make the
payment.
By drawing a bill, the drawer undertakes that on
presentment of the same to the acceptor, it will be accepted
and duly honored and
If it is dishonored by the acceptor or not accepted, the
drawer will compensate to the holder or the indorser,
provided due notice is given to him.
Cont…..
Continued…..
The drawer can also limit his or her liability by using the
sans recourse indorsement
If the holder fails to give notice , then the drawer is not
liable and beyond this he is discharged from his/her
liability.
This is not only with reference to the bill but also upon the
original debt.
Liability of the Drawee
The relationship between the banker( drawee) and customer is
that of debtor and creditor.
The banker has to undertake to honor the customers cheque until
the funds are available with the bank in the customers account.
Banker can refuse to honor the customers in certain instances
like,
a) bankers lien,
b) no amount to honor in the customers account,
c) post dated fund presented before the date,
d) if the instrument is ambiguous,
e) if the customer been declared insolvent,
f) if the customer has countermanded the cheque,
g) if the bankers receives the notice of death or insanity
Liability of the Drawee Bank for
Wrongful Dishonour
Both the maker and the acceptor are liable to make the
payment.
The liability of the maker in case of note and acceptor in
case the bill is absolute, Unconditional and primary. The
liability exists only when he signs and delivers the note
But to make the acceptor liable only signature is not
enough, it has to be accepted i.e. notice of acceptance
should be given and the bill has to be delivered.
As the acceptor is not the originator of the bill as in case of
the note, the acceptor can have an option to give a qualified
acceptance.
Liability of endorser
Every indorser after dishonor is liable as upon an instrument
payable on demand to every subsequent holder.
The indorser is in a position of a new drawer and the liability
of the indorser is conditional.
By endorsing the bill the endorser undertakes that the
instrument will be accepted and paid as per the tenor of
presentment.
If it is dishonored, he will compensate the holder or
subsequent indorsers who is compelled to pay for it subject to
due notice of dishonor.
The indorsers liability as per this provision
(sec 35) will not commence until the indorsed instrument is
delivered to the transferee. The indorser has to make good
the loss but he can make qualified indorsement by using
‘sans recourse indorsement’
Liability of the other parties
Every prior party to the indorsement will be liable to the
subsequent party until the instrument is duly discharged or
satisfied.
If the indorser knows that bill was forged, he cannot later deny
the liability by pleading forgery as a reason.
The indorser cannot challenge the holder’s title. He will be
liable twice. One to the holder and the other to the true owner
of the instrument.
Acceptor of the bill drawn in fictitious name and payable to the
drawer’s order is not, by reason that such name is fictious,
relieved from liability to any holder in due course.
Negotiation
Negotiation of an instrument may be either by delivery or by
indorsement. Delivery of NI is an essential ingredient in order
to bind the parties as they are incomplete and revocable.
The delivery should be with an intention to passing of the
property . A PN , BOE or Cheque is considered to be
completed only when it is delivered i.e., actual or constructive
As between the immediate parties, delivery to be effectual must
be made by the party making , accepting or indorsing the
instrument or by a person authorized by such person
For other parties, other than HDC it has to been shown that the
instrument was delivered conditionally or for special purpose
only and not for the purpose of transferring absolutely the
property therein. All the NI’s are negotiable by delivery after
indorsement.
Endorsements / Indorsements
> After the Amendment Act of 1988, the NI Act provide for
criminal penalties in the event of dishonor of cheques for
insufficiency of funds.
> The drawer may be punished under sec 138 with
imprisonment for two years (after 2002 Amendment Act) or
with fine which may extend to twice the amount of the
cheque or with both.
> (The Amendment has inserted five new sections 143- 147
for the procedure to be followed for the trial)
Conditions to attract criminal penalty
under sec 138 are:
The cheque is dishonored due to insufficiency of funds
The payment for which the cheque was issued was for the
discharge of a legally enforceable debt or liability in whole or
part of it. ( If it is a gift , then the liability will not arise)
The cheque has to be presented to the paying bank within
six months from the date that it was drawn.
The payee or the HDC should have been given a notice of
dishonor of the cheque from the bank.( The court to take
cognizance of the complaint, if it given by the payee or the
HDC)
The drawer will be liable only if he fails to make the payment
within days of such notice period.
The payee or HDC of the cheque should have made a
written complaint within one month of cause of action.
Discharge of a Negotiable Instrument
Discharge of parties
a) By cancellation
b) Release
c) Payment
d) If the holder gives more time to the drawee
than 48 hours
e) by default in presenting the cheque within a
reasonable time
f) Dissenting parties discharged by qualified or limited
acceptance
g) Material alteration etc………..
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