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Negotiable

Instruments Act, 1881

Presented by Advocate N.P . Noronha


1

Object of the Act

The main object of the Negotiable Instruments Act is


to legalise the system by which instruments
contemplated by it could pass from hand to hand by
negotiation like any other goods. The purpose of the
Act was to present an orderly and authoritative
statement of leading rules of law relating to the
negotiable instruments To achieve the objective of
the Act, the Legislature thought it proper to make
provision in the Act for conferring certain privileges
to the mercantile instruments contemplated under it
and provide special procedure in case the obligation
under the instrument was not discharged.
2

Meaning

The word negotiable means transferable from one person to


another in return for consideration and instrument means a
written document by which a right is created in favour of some
person. Thus the term negotiable instruments literally means a
written document which creates a right in favour of somebody
and is freely transferable. Free negotiability is an important
characteristics of a negotiable instrument.
A negotiable instrument is a document which entitles a person to
a sum of money and which is transferable from one person to
another by mere delivery or by indorsement and delivery.
The term negotiable instruments has not been defined in the
Negotiable Instruments Act, but Sec. 13 of the Act gives its
meaning. According to Sec. 13, a negotiable instrument means a
promissory note, a bill of exchange or a cheque payable either to
order or bearer.
Presented by Advocate N.P.Noronha

Characteristics of a Negotiable
Instrument
1.
2.

3.

4.

Negotiable instruments must be in writing


Freely Transferable The property in a negotiable instrument
passes from one person to another by delivery, if the instrument is
payable to the bearer and by indorsement and delivery if it is
payable to order.
Title of holder free from all defects A person, taking an
instrument bona fide and for value, known as a holder in due
course, gets the instrument free from all defects in the title of the
transferor.
Recovery The holder in due course can sue upon a negotiable
instrument in his own name for the recovery of the amount. It is not
necessary for him to give any notice of transfer to the party liable
for payment on the instrument

Presented by Advocate N.P.Noronha

Characteristics of a Negotiable
Instrument
5.

a.

b.

c.

d.

Presumptions - Certain presumptions apply to all negotiable instruments,


unless contrary is proved. These presumptions are dealt with in Sec. 118
and 119 which are as follows
Consideration Every negotiable instrument is presumed to have been
made,
drawn, accepted, indorsed, negotiated or transferred for
consideration.
Date Every negotiable instrument bearing a date is presumed to have
been drawn on such date.
Time of acceptance When a bill of exchange is accepted, it is presumed
that it was accepted within a reasonable time of its date and before its
maturity.
Time of transfer Every transfer of a negotiable instrument is presumed to
have been made before its maturity.

Presented by Advocate N.P.Noronha

Characteristics of a Negotiable
Instrument
Order of indorsement The indorsement appearing upon a
negotiable instrument are presumed to have been made in the order
in which they appear thereon.
f.
Stamp When an instrument has been lost, it is presumed that it
was duly stamped.
g.
Holder presumed to be a holder in due course Every holder of a
negotiable instrument is presumed to be a holder in due course.
h.
Proof of protest In a suit upon an instrument which has been
dishonoured, the Court, on proof of the protest, presumes the fact of
dishonour, until such fact is disproved.
The presumptions are rebuttable by evidence. If anyone challenges any
of these presumptions, he has to prove his allegations. The
presumptions would not be applicable to a case where an instrument has
been obtained by an offense, fraud or unlawful consideration.
e.

Section 4. Promissory Note

A Promissory Note is an instrument in writing (not


being a bank-note or a currency-note) containing an
unconditional undertaking, signed by the maker, to
pay a certain sum of money only to, or to the order
of, a certain person, or to the bearer of the
instrument.

The person who makes the promissory note and promises


to pay is called the maker.
The person to whom the payment is to be made is called
the payee
7

Section 4. Promissory Note


Illustrations
(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 to deliver to
him my black horse on 1st January next.
The instruments marked (a) and (b) are promissory
notes. The instruments marked (c) and (d) are not
promissory notes.

Section 4. Promissory Note

Usual form of Promissory note


Rs. 500/-

Pune, 1st August 2012

Three months after date, I promise to pay Mr. Rahul


or Order, the sum of rupees five hundred for value received

Mr. Arjun

Essential features
An instrument is a promissory note if there are present the following
elements:1. Writing : The first essential is that all negotiable instruments must be in
writing. An oral engagement to pay a sum of money is not an instrument,
much less negotiable.
2. Promise to pay : Secondly, it must contain a promise to pay. A mere
acknowledgement of debt is not a promissory note. I.O.U., E.A. Gay, the
sum of seventeen dollars for value received. Has been held not to be a
promissory note. A mere receipt for money does not amount to a
promissory note, even though it might contain the terms of repayment. In
Mange Lal Vs. Lal Chand, AIR 1995, Rajasthan High Court has held
that a document which was in the form of a letter acknowledging receipt of
certain sums and affixed with 20 paise revenue stamp was held to be a
receipt and not a promissory note. In the case of Muthu Sastrigal Vs.
Visvanatha AIR 1914 Madras High Court , it has been held that a
document containing the following words Amount of cash borrowed of you
by me is Rs.350. I shall in two weeks time returning this sum with interest,
get back this letter. Has been held to be a promissory note because there
is an unconditional undertaking to repay the borrowed money.

10

Essential features

3. Unconditional : Thirdly, the promise to pay the money should be


unconditional, or subject only to a condition which according to the
ordinary experience of mankind is bound to happen. Thus in Beardsley
Vs. Baldwin (1741), a written undertaking to pay a sum of money within
so may days after the defendants marriage, was not recognised as a
promissory note because possibly the defendant may never marry and
the sum may never become payable. Similarly in Roberts Vs Peake
(1757), an action was bought upon a promissory note made in the
following form.
We promise to pay AB 116.11s value received, on the death of
George Hindshaw, provided he leaves either of us sufficient money to
pay the said sum or if we shall be otherwise able to pay.
The court pointed out that if the note had merely been made payable on
the death of G.H., it would have been a good promissory note, because
death is an event so certain and necessary that it is bound to happen
and therefore the note must have become payable at one time or the
other. But the other condition that it would be payable provided there
would be sufficient funds left behind made the instrument bad, because
that was an uncertain event, and a note payable on an uncertain
contingency can never be a negotiable instrument.
11

Essential features

4. Money only and a certain sum of money:


Fourthly, the instrument must be payable in money and money
only. If the instrument contains a promise to pay something other
than money or something in addition to money, it will not be a
promissory note. The sum of money payable must also be
certain. In Smith Vs Nightingale (1818) a promissory note
made in the following form was held bad.
I promise to pay to JE the sum of 65 with lawful interest for
the same, 3 months after date, and also all other the sums which
may be due to him.
It was held that the instrument was too indefinite to be
considered a promissory note. It contained a promise to pay
interest for a sum not specified and not otherwise ascertained
than by reference to the defendants book.

12

Essential features

5. Certainties of parties:
Fifthly, the parties to the instrument must be designated with
reasonable certainity. There are two parties to a promissory note, viz ,
the person who make the note and is known as the maker and the
payee to whom the promise is made. Both the maker and the payee
must be indicated with certainity on the face of the instrument. In Brij
Raj Sharan Vs. Saha Raghunandan Sharan AIR 1955, Rajasthan HC,
a letter was addressed to A continuing the following statement.
In your account Rs. 4668 15 0 are due from my son Mahesh
Chandra, I shall pay the amount by December 1948. You rest
assured.
It was contended that it should not be treated as a promissory note
because the person to whom the amount was to be paid was not
indicated therein. However, C J Wanchoo, holding it be a good note,
said By looking to illustration b of Section 4 it I cleared that if the
person to whom the payment is to be made is certain from the words
used in the document, the fact that the name is not mentioned after
the words I shall pay would not mean that the payee is uncertain.
Since the letter was addressed to A it was clear that A was intended to
be the payee
13

Essential features

6 Signed by the maker:


Lastly, the promissory note should be signed by the maker. Signature
may be on any part of the document. Where an instrument is in the
hand writing of a person and it is addressed by him to another, that is
sufficient evidence of his signature.
To consider whether a document is a promissory note or not the
following tests are helpful :
(i)
(ii)

(iii)
(iv)

(v)

Is the sum to be paid a sum of money and is that sum certain ?


Is the payment to be made to or to order of a person who is certain or to
the bearer of the instrument ?
Has the maker signed the document ?
Is the promise to pay made in the instrument the substance of the
instrument ? and
Did the parties intend that the document should be a promissory note ?

14

Section 5 : Bill of Exchange

A bill of exchange is an instrument in


writing containing an unconditional order,
signed by the maker, directing a certain
person to pay a certain sum of money only to,
or to the order of, a certain person or to the
bearer of the instrument.

Presented by Advocate N.P.Noronha

15

Section 5 : Bill of Exchange


A bill of exchange requires three parties
1.
The person who makes the bill of exchange, called the
Drawer
2.
The person to whom it is addressed, called the Drawee
3.
The Payee
Sometimes the drawer and the payee are the same person
as where is bill is drawn Pay to me or my order. Therefore
can be only two parties to a bill of exchange however not
less than that.
It was held in the case of Clutton V/s. Attenborough, 1897
that where the payee name in a bill is of a fictitious or non
existing person, the bill is treated as payable to the bearer.
16

Section 5 : Bill of Exchange

Form of Bill of Exchange


Ram of Pune buys goods on credit from Shyam from Mumbai for
Rs. 500/- to be paid 3 months after date. Shyam buys goods from Krishna
of Nasik for Rs. 500 on similar terms . Now Shyam may order Ram to pay
the sum of Rs. 500/- to Krishna. The order will be a bill of exchange
Mumbai 1st August

Rs. 500/2012

Three months after date pay to Krishna or order the sum of rupees five
hundred, for value received
To
Ram
Pune

Accepted
Krishna

Stamp

Sd/-

Shyam

17

Characteristics and Requirements


An essential character of a bill of exchange is that it contains an
order to accept or to pay and that the acceptor should accept it, in
the absence of such a direction to pay, the document will not be a
bill of exchange or a hundi.
1) It must be in writing
2) The bill of exchange must contain an order to pay. The order to
pay may be in the form of a request, but it must be imperative. In
Ruff Vs Webb(1974), the plaintiff Ruff was a servant of defendant
Webb. The defendant dismissed him from service and for his
wages gave him a draft in the following words: Mr Nelson will
much oblige Mr Webb by paying to J. Ruff or order, twenty
guineas on his account.
Lord Kenyon was of the opinion that paper was a bill of
exchange , that it was an order by one person to another to pay
money to the plaintiff or his order. It is quite apparent that the
language of the draft was very polite, but it has been said that the
introduction of the terms of gratitude does not destroy the promise
(or order) to pay.

Presented by Advocate N.P.Noronha

18

Characteristics and Requirements

But if the language of the draft does not show any order to pay, the
draft will not be a bill of exchange. In Little Vs Slackford, the
defendant issued a paper addressed to the plaintiff in the following
words:
Mr Little, please to let the bearer have 7 , and to place them to my
account, and you will oblige. Yours humble servant, R. Slackford.
It was held that the paper does not purport to be a demand made by
a party having a right to call on the other party to pay. The fair
meaning is you will oblige by doing it.
The order must be such as to require the other to pay the money at
all events. Merely to give him the authority to pay is not sufficient.

Presented by Advocate N.P.Noronha

19

Difference between Promissory Note


and a Bill of Exchange
Promissory note

Bill of Exchange

In a promissory note there are two In a bill of exchange there are three parties
parties i.e. the maker and payee
the drawer, drawee and payee

A promissory
note
contains
unconditional promise to pay

an A bill of exchange contains an unconditional


order to pay.

The maker of a promissory note is the The drawer of a bill of exchange is the
debtor himself and he undertakes to pay. creditor who directs the drawee i.e. his
debtor to pay.

A promissory note cannot be made In a bill the drawer and the payee may be
payable to the maker himself.
one and the same person
The liability of the maker of a promissory The liability of the drawer of a bill is
note is primary and absolute
secondary and conditional as the bill needs
acceptance.
A note needs no acceptance as it is A bill payable after a certain period must be
signed by the person who is liable to pay accepted by the drawee before it is
presented for payment.
20

Section 6 : Cheque

A cheque is 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.

Presented by Advocate N.P.Noronha

21

Section 6 : Cheque
Explanation I For the purpose of this section, the
expression
(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 is truncated
during the course of a clearing cycle (truncation means
make short), 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.
Presented by Advocate N.P.Noronha

22

What are Biometric signatures

Biometric signatures are based upon


recording various characteristics of ones
signing style to carry out the process of
identification in the future. Amount of
pressure employed, angle of writing,
formation of letters and other traits, which are
categorized as behavioural biometrics, form
the basis of biometric signature recognition
technology.
23

Section 6 : Cheque

Explanation II -- For the purpose of this section, the


expression 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.

Presented by Advocate N.P.Noronha

24

Post dated cheque

A post dated cheque remains a bill of


exchange till the date written on the face of it.
On that date it becomes a cheque. One of the
effects is that liability for criminal prosecution
under Section 138 would not be attracted and
6 months period would be reckoned from the
date appearing on the cheque.

Presented by Advocate N.P.Noronha

25

Distinguish between bill of


exchange and cheque
Bill of Exchange

Cheque

A bill of exchange may be drawn A cheque is always drawn on a


on any person, including a banker banker
A bill of exchange must be A cheque
accepted before the drawee can acceptance
be called upon to make payment
upon it.

does

not

require

Every bill of exchange which is not A cheque is not entitled to any


expressed to be payable on days of grace.
demand is entitled to 3 days of
grace.
A bill is never crossed

A cheque may be crossed

A bill of exchange requires stamp A cheque does not require stamp


duty
duty
26

Crossing of cheques
There are two types of cheques
Open cheque
Crossed cheques
Open cheque A cheque which is payable in cash across the counter
of a bank is called an open cheque. When an open cheque is in
circulation it has a great risk, as if the holder loses it, its finder can go to
the bank and encash it.
Crossed cheque a crossed cheque is one on which two parallel lines
are drawn. The payment of such a cheque can be obtained only
through a banker. Thus crossing is a direction to the drawee bank to
pay the amount of money on a crossed cheque generally to a banker or
a particular banker so that the party who obtains the payment of the
cheque can be easily traced.
27

Types of Crossing

(4)Not negotiable

(3) & Co.

(2) and company

General Crossing A cheque is said to be


generally crossed when it bears across its
face an addition of the words and company
between two parallel lines with or without the
words not negotiable.

(1)

1.

28

Types of Crossing

(3) Bank of India


Not negotiable

(2) Canara Bank

Special Crossing When a cheque bears


across its face an addition of the name of a
specific banker, either with or without the words
not negotiable. The cheque is crossed
specially.
(1) Bank of India

2.

29

Types of Crossing

Restrictive Crossing Another type of


crossing has been adopted by commercial
and banking usage is crossing by using
words A/c. Payee.
The words A/c. payee on a cheque are a
direction to the collecting bank that the
amount collected on the cheque is to be
credited to the account of the payee.

30

Not negotiable

The meaning of the words not negotiable


is that, anyone who takes the cheque
marked not negotiable takes it at his own
risk.

31

Who are the parties to a


negotiable instrument

Parties to a bill of exchange Drawer,


Drawee, Acceptor, Payee, Holder, Indorser,
Indorsee, Drawee in case of need and
Acceptor for honour.
Parties to a promissory note Maker, Payee,
Holder, Indorser, Indorsee,
Parties to a cheque maker, drawee, Payee,
Holder, Indorser and Indorsee.
32

Who is a maker , drawer


The person who makes a promissory
note is called the maker.
The person who makes or draws a
bill of exchange or cheque is called
drawer.

33

Who is a Drawee, Acceptor

The person on whom the bill of exchange is


drawn and who is directed to pay is called the
drawee.
In case of cheque, a drawee is always the
banker. A cheque does not need acceptance.
In case of bill of exchange, the drawee
becomes the acceptor when he accepts the
bill i.e. he signs his assent upon the bill.

34

Who is a Payee

The person named in the bill, note or cheque,


to whom or to whose order the money is to
be paid is called the payee.
In a bill of exchange or cheque, the drawer
may himself be the payee. When the payee is
some fictitious person or non existing person,
the bill is treated as payable to bearer.

35

What is Indorsement

Indorsement in the literal sense means


writing on an instrument.
According to the Negotiable Instruments Act
indorsement means writing of a persons
name other than the maker on the face or
back of a negotiable instrument or on a slip of
paper annexed thereto, for the purpose of
negotiation.

36

Indorser & Indorsee

The person who indorses the bill, note or


cheque to another is called indorser.

The person to whom the bill, note or cheque


is indorsed is called indorsee.

37

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 a Drawee in case of need.
Mumbai 1st August 2012

Rs. 500/-

Three months after date pay to Krishna or order the sum of rupees five
hundred, for value received
To
Ram
Pune

Accepted
Krishna

Stamp
Sd/Shyam

In case of need
Punjab National Bank
38

Holder
1.

The holder of a promissory note, bill of


exchange or cheque means any person who is
entitled in his own name

To possession and
To receive or recover the amount due thereon
from the parties.
2. In order to be entitled to receive or recover the
amount due, the holder must be

named as payee or
named as the indorsee in case the instrument is payable
to order.
The bearer in case the instrument is payable to bearer.
39

Section 9 Holder In Due Course


Any person is a holder in due course if he
fulfils the following conditions
1.

2.
3.

By giving consideration he became the


a) Possessor when the instrument was payable
to bearer or
b) Payee or indorsee when the instrument was
payable to order
He obtained the instrument before maturity
He took the instrument in good faith and without
notice of any defect either in the instrument or
in the title of the person negotiating it to him.
Presented by Advocate N.P.Noronha

40

Negotiation
The transfer of an instrument by one party to
another so as to constitute the transferee a holder is
called negotiation.
One of essential characteristics of a negotiable
instrument is that it is freely transferable from one
person to another.
Transfer may take place by
1. Negotiation or
2. Assignment

Presented by Advocate N.P.Noronha

41

Transfer by Negotiation

1.
2.

Section 14 which defines negotiations reads as


follows:
Negotiation - When a promissory note, bill of
exchange or cheque is transferred to any
person, so as to constitute that person the
holder thereof, the instrument is said to be
negotiated.
There are two methods of transfer by
negotiation
Negotiation by delivery
Negotiation by indorsement and delivery
42

Negotiation by delivery

Negotiation by delivery - An instrument which


is payable to bearer is negotiated merely by
delivery.
Example - A is the holder of a negotiable
instrument payable to bearer. He delivers it to
Bs agent against the price of goods purchased
from B. The instrument has been negotiated.
Negotiation by indorsement and delivery - An
instrument payable to order can be negotiated
by indorsement and delivery
43

Assignment

Transfer by Assignment - When a person


transfers his right to receive the payment of a
debt assignment of debt takes place.
Therefore when the holder of an instrument
transfers it to another so as to confer a right
on the transferee to receive the payment of
the instrument, transfer by assignment takes
place.

44

Section 15 Indorsement

Indorsement in the literal sense means writing on an


instrument.
According to the Negotiable Instruments Act
indorsement means writing of a persons name other
than the maker on the face or back of a negotiable
instrument or on a slip of paper annexed thereto, for the
purpose of negotiation.
The person who signs the instrument is called the
indorser
The person to whom the instrument is indorsed is called
the indorsee.

Presented by Advocate N.P.Noronha

45

Who can indorse

The first indorsement can be made by the payee.


Subsequent indorsements can be made by any
person who becomes the holder of the instrument.
If the bill of exchange is drawn, payable to the
drawers order, the first signature of the drawer as
a drawer is not an indorsement. If he signs the bill
second time for the purpose of negotiating it, the
second signature would be indorsement.
A drawer, payee, indorsee may indorse and
negotiate a negotiable instrument.
46

Essentials of a valid Indorsement


1.

2.

3.

It must be on the instrument itself. If there is no


space on the instrument then it must be made on
a separate slip or paper attached to the
instrument.
It must be signed by the indorsement for the
purpose of negotiation.
It must be completed by the delivery of the
instrument. The delivery of the instrument with
the intention of passing the property in it to the
indorsee is important. The delivery must be made
by the indorser himself or someone on his behalf.
Presented by Adv. N. P. Noronha

47

Types of Indorsements
1.
2.
3.
4.
5.

Blank or general indorsement


Full or special indorsement
Restrictive indorsement
Conditional indorsement
Partial indorsement

48

Blank or general Endorsements


An indorsement is said to be blank or general if the
indorser signs his name only on the face or back of
the instrument.
A blank indorsement specifies no indorsee and the
instrument in consequence becomes payable to
bearer even though it was originally payable to
order.
Example A bill is payable to the order of Ram.
Ram signs on the back of the bill. This is an
indorsement in blank by Ram. In this case the
property in the bill may pass by mere delivery as if
the bill is payable to bearer.
Presented by Advocate N.P.Noronha

49

Full or special endorsement

If an indorser signs his name and adds a direction


to pay the amount mentioned in the instrument to
or to the order of, a specific person, the
indorsement is said to be in full.
Thus Pay to Ram or order or Pay to Ram
followed by the signature of the indorser is an
indorsement in full.
An indorsement in blank may be converted into an
indorsement in full.
Eg. A is the holder of a bill which is indorsed by B
in blank. So A is the indorsee and B is the
indorser. If A writes over Bs signature Pay to C or
order. There is an endorsement in full from B to C.
Presented by Advocate N.P.Noronha

50

Restrictive Indorsement
An indorsement is said to be restrictive
when it prohibits or restricts the further
negotiability of a negotiable instrument.
The indorser may, by express words, restrict
or exclude the right of future negotiation or
merely constitute the indorsee an agent to
indorse the instrument, or receive its
contents for the indorser or some other
specified person.
Presented by Advocate N.P.Noronha

51

Restrictive Indorsement

a)
b)
c)
d)

e)
f)

Illustrations
B signs the following endorsements on different negotiable
instruments payable to bearer:
Pay the contents to C only
Pay C for my use.
I pay C or order for the account of B
The within must be credited to C
These endorsements exclude the rights of further
negotiation by C
Pay C.
Pay C value in account with the Oriental Bank.
These endorsements do not exclude the rights of further
negotiation by C.
Presented by Advocate N.P.Noronha

52

Conditional Indorsement

An indorsement is conditional or qualified if it limits the liability


of the indorser.
An indorsement may be conditional in one of the following
ways
Sans recours indorsement
Liability dependant upon a contingency
Facultative indorsement Where the indorser by express
words abandons some right or increases his liability under
the instrument, the indorsment is called facultative
indorsement.
Sans frais indorsement - When the holder does not want
the indorsee or subsequent holders to incur any expenses
the indorsement is callled as sans frails.
53

Sans Recours Indorsement


The holder of a bill may indorse a bill in such a way that he does
not incur liability of an indorser to the indorsee.
The holder can limit his liability by adding the words Sans
recours i.e. without recourse.
Eg. Pay A or order without recourse to me or
Pay A or order Sans recours.
If in case the instrument is dishonoured, the subsequent holder
or the indorsee cannot look to the indorser for payment of the
same.
However if an endorser excludes his liability and afterwards
becomes the holder of the instrument, all intermediate endorsers
are liable to him.
Eg. A the holder of a bill. Indorses it sans recours to B. B
indorses it to C, C to D, D to E and E to A. A can recover the
amount of the bill from B,C,D or any of them.
Presented by Advocate N.P.Noronha

u54

Partial Indorsement

When an indorsement purports to transfer to the


indorsee only a part of the amount of instrument , the
instrument is said to be partial. However a partial
indorsement does not operate as a negotiation of the
instrument.
An instrument cannot be indorsed for a part of its
amount.
Example:
A is the holder of a bill for Rs. 1000/-. He indorses it
Pay B or order Rs. 500/-.
This is a partial indorsement and is invalid for the
purpose of negotiation.
Presented by Advocate N.P.Noronha

55

Noting And Protest

Sec. 99 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 dishonour and must specify the date of
dishonour, the reason, if any, assign for such
dishonour or if the instrument has not been
expressly dishonoured the reason why the holder
treats it as dishonoured, and the notarys charges.
Presented by Advocate N.P.Noronha

56

Noting And Protest

When a promissory note or a bill of exchange has been dishonoured


by non acceptance of non payment, in order to create a proof of this
fact the holder may approach a notary public and have the fact of
dishonour noted either on the instrument itself or on a separate
piece of paper or partly upon each.
Noting must be made within a reasonable time after dishonour.
Upon such request being received the notary inquires from the
party liable to pay and if he still dishonours, the notary makes a note
of the fact of dishonour. The note should contain the following
particulars: (1) The fact that the instrument has been dishonoured;
(2) That date on which it was dishonoured; (3) The reason, if any
assigned for the dishonour; 4) If the instrument has not been
expressly dishonoured the reason why the holder treats it as
dishonoured, and (5) Notary charges.
The advantage of noting is that it creates evidence of the fact of
dishonour.

Presented by Advocate N.P.Noronha

57

Protest

Sec: 100 When a promissory note or a bill or


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.
Protest for better security 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 accepter, and on
it 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.
Presented by Advocate N.P.Noronha

58

Protest

Protest for better security is a measure of protection


against the consequences of the accepters
insolvency. When the accepter of a bill of exchange
becomes insolvent all his credit has been publicly
impeached, and this has happened before the
maturity of the bill, the holder may approach
a
notary public and ask him to demand from the
acceptor a better security than the mere bill. This
should be done within a reasonable time. If the
acceptor refuses to oblige with any security, the
holder should have the fact of refusal noted and
certified by the notary. Such a certificate is called a
protest for better security. This should be done
within a reasonable time after the acceptors refusal
to provide security
Presented by Advocate N.P.Noronha

59

Contents of Protest
Section 101 requires a protest to contain certain particulars
for its validity. The particulars are as follows:
1. It should contain the instrument itself or a literal transcript
of it and of everything written or printed on the instrument.
2. The name of the person for whom and against whom the
instrument has been protested, that is, the name of the
party making the protest and against whom the protest is
made.
3. It should contain a statement that acceptance, or payment
or better security has been demanded from such person by
the notary public, the terms of his answer, or a statement
that he gave no answer or that he could not be found.

Presented by Advocate N.P.Noronha

60

Contents of Protest
4.

5.

When the protest is against the dishonour of a bill or note, the


protest should specify the time and place of dishonour. When
the protest is against refusal of better security, the place and
time of refusal should be noted.
The signature of the notary public making the protest.

Presented by Advocate N.P.Noronha

61

Dishonour Of Cheques

Penalties in case of dishonour of cheque for insufficiency ,


etc. of funds in the account:
Sec. 138 dishonour of cheque for insufficiency, etc. of funds in
the account where any cheque drawn by a person on an
account maintained by him with a banker for payment of any
amount of money to another person from out of that account for
the discharge, in whole or in part, of any debt or other liability, is
returned by the bank unpaid, either because of the amount of
money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be
paid from that account by an agreement made with that bank,
such person shall be deemed to have committed that offence
and shall, without prejudice to any other provision of this Act, be
punishable with imprisonment for a term which may extend to 2
years of with fine which may extend to twice the amount of the
cheque or with both:
Presented by Advocate N.P.Noronha

62

Dishonour Of Cheques
Provided that nothing contained in the section shall apply
unless
(a)
The cheque has been presented in the bank within a
period of 6 months from the date on which it was drawn
or within the period of its validity, which ever is earlier.
(b)
The payee or the holder in due course of the cheque,
as the case may be, makes a demand for the payment
of the said amount of money by giving a notice, in writing,
to the drawer of the cheque within 30 days of the receipt
of information by him from the bank regarding the return
of the cheque as unpaid; and
(c)
The drawer of such cheque fails to make the payment
of the said amount of money to the payee or , as the
case may be , to the holder in due course of the cheque ,
within 15 days of the receipt of the said notice.

Presented by Advocate N.P.Noronha

63

Dishonour Of Cheques

The Supreme Court in the case of Electronics Trade and


Technology Development Corporation Limited Vs Indian
Technologists and Engineers Electronics Private Limited (1996)
has observed that the object of Section 138 is to inculcate faith in the
efficacy of banking operations and credibility in transacting business on
negotiable instruments. Despite civil remedy, Section 138 intended to
prevent dishonesty on the part of the drawer of a negotiable instrument
in drawing a cheque without sufficient funds in his accounts and in
inducing the payee or holder in due course to act upon it. Section 138
is based upon the presumption that one commits the offence if he
issues the cheque dishonestly.
Once such a cheque against
insufficient funds has been drawn and issued to the payee and the
payee has presented the cheque and thereafter, if any instructions are
issued to the bank for non payment and the cheque is returned to the
payee with such an endorsement, it amounts to dishonour of the
cheque and it comes within the meaning of Section 138. If, after the
cheque is issued to the payee or to the holder in due course and
before it is presented for encashment and the drawer informs the
payee not to present the cheque and yet the payee or holder in due
course returns the cheque to the bank for payment and when it is
returned on instructions, Section 138 does no get attracted.
Presented by Advocate N.P.Noronha

64

Dishonour Of Cheques

In a subsequent ruling on the point, in the case of


Goa Plast (P. Limited) Vs Chico Ursula Dsouza ,
AIR 2004 the Supreme Court referred to this point
of the statement and sad that if this were accepted
as good law, the very object of introducing section
138 would be defeated.
In another Supreme court decision, the object have
been reinstated as follows: Chapter XVII containing
Ss 138 142 was introduced in the Act by the 1988
amendment with the object of inculcating faith in the
efficacy of banking operations and giving credibility
to negotiable instruments in business transactions.
The said provisions were intended to discourage
people from not honouring the commitments by way
of payment through cheques.
Presented by Advocate N.P.Noronha

65

Dishonour Of Cheques
Ingredients of Liability under Section 138
The ingredients of liability under the Section have been stated in terms of
the following points.
The cheque is drawn on the bank for the discharge of a legally
enforceable debt or other liability.
The cheque is returned by the bank unpaid.
The cheque is returned unpaid because the amount available in the
drawers account is insufficient for paying the cheque.
The payee has given a notice to the drawer claiming the amount within
30 days of the receipt of the information form the bank.
The drawer has failed to pay within 15 days from the date of the receipt
of the notice.
If the aforementioned ingredients are satisfied then the person who has
drawn the cheque shall be deemed to have committed an offence.
Punishment
Maximum 2 years imprisonment on the defaulting party with fine which
may extend to twice the amount of cheque or with both.

Presented by Advocate N.P.Noronha

66