Summary of Unit 5

Negotiable instruments are legal documents that can be transferred from one person
to another, and which are commonly used as a means of payment. They are called
negotiable because they can be transferred by delivery or endorsement, and they are
instruments because they represent a legal obligation to pay.

The nature of negotiable instruments is that they are written promises to pay a
certain amount of money to a person or entity. They are typically used in commercial
transactions, and the most common types are promissory notes, bills of exchange,
and cheques.

The characteristics of negotiable instruments include being in writing, signed by the

maker or drawer, containing an unconditional promise to pay a specific amount of
money, and being transferable by endorsement or delivery.

The parties to a negotiable instrument include the maker or drawer, who creates the
instrument and promises to pay; the payee, who is the recipient of the payment; and
the endorser, who transfers the instrument to another person.

The rights and obligations of parties to a negotiable instrument include the right to
enforce payment of the instrument, the obligation to pay when the instrument is
presented for payment, and the right to receive notice of dishonour if the instrument
is not paid.

The rules of honour and dishonour on presentment apply to negotiable instruments

that are presented for payment. If the instrument is honoured, payment is made
according to the terms of the instrument. If the instrument is dishonoured, the holder
of the instrument may have certain remedies available, such as suing for payment.

Endorsements on negotiable instruments are used to transfer ownership of the

instrument. An accommodation party is a person who signs a negotiable instrument
to lend their credit to another party. Notices of dishonour are used to inform parties
of non-payment of an instrument.

Criminal liability for non-payment of cheques can occur if a person issues a cheque
knowing that there are insufficient funds in their account to cover the payment. This
is known as cheque fraud or bouncing a cheque, and it is a criminal offense in many
jurisdictions. The penalty for bouncing a cheque can include fines and even
imprisonment in some cases.
Negotiable Instruments are governed by various sections of the law depending on
the jurisdiction. In India, negotiable instruments are regulated by the Negotiable
Instruments Act, 1881. Some of the important sections related to negotiable
instruments in India are:

Sections

Section 4: This section defines two types of negotiable instruments: promissory

notes and bills of exchange. A promissory note is an instrument in writing, containing
an unconditional undertaking signed by the maker, to pay a certain sum of money to
the payee or to the order of the payee. A bill of exchange, on the other hand, 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.

Section 5: This section defines a cheque as a bill of exchange drawn on a specified

banker and payable on demand. It also specifies the essential elements of a cheque,
which include the date, the name of the payee, the amount in figures and words, and
the signature of the drawer.

Section 6: This section defines the parties involved in a bill of exchange, which
include the drawer (the person who draws the bill), the drawee (the person directed
to pay), and the payee (the person entitled to receive payment).

Section 7: This section defines the parties involved in a promissory note, which
include the maker (the person who makes the promise to pay) and the payee (the
person entitled to receive payment).

Section 8: This section specifies the requirements for an instrument to be negotiable.

These include being in writing, signed by the maker or drawer, containing an
unconditional promise or order to pay a certain sum of money, payable on demand or
at a fixed or determinable future time, and payable to a specific person or to the
bearer of the instrument.
Sections 9-11: These sections specify the rules for endorsement, which is the act of
transferring the ownership of a negotiable instrument from one person to another.
Section 9 specifies the conditions for making an endorsement, while Section 10
specifies the rules for transferring a negotiable instrument by endorsement. Section
11 specifies the effect of an endorsement on a negotiable instrument.

Section 12: This section specifies the rights of the holder of a negotiable instrument,
which include the right to receive payment, to sue for non-payment, and to transfer
ownership.

Section 13: This section specifies the liabilities of the parties to a negotiable
instrument, which include the liability of the maker or drawer to pay the instrument
and the liability of the endorser to pay the instrument if the maker or drawer defaults.

Sections 14-16: These sections specify the rules for presentment and dishonour of a
negotiable instrument. Section 14 specifies the rules for presenting a negotiable
instrument for payment, while Section 15 specifies the liability of the drawer or
endorser in case of dishonour of a negotiable instrument. Section 16 specifies the
rules for giving notice of dishonour.

Section 17: This section specifies the liability of the parties in case of non-payment
of a negotiable instrument, which includes the right of the holder to sue for the
amount due.

Section 18: This section specifies the rules of compensation for the holder in case of
dishonour of a negotiable instrument, which includes the right to recover damages
from the party liable for the dishonour.
These sections of the Negotiable Instruments Act provide a comprehensive
framework for the regulation of negotiable instruments in India.

There are several important sections of the Negotiable Instruments Act, 1881 that
are relevant to negotiable instruments. Some of the key sections include:

● Section 4: This section defines various terms used in the act, including
"holder," "holder in due course," and "promissory note."
● Section 13: This section sets out the requirements that a document must
meet in order to be considered a negotiable instrument. These include being
in writing, signed by the drawer or maker, and containing an unconditional
promise or order to pay a specified amount of money.
● Section 18: This section deals with bills of exchange and sets out the
requirements for creating a valid bill of exchange, including the order to pay,
the name of the payee, and the date of payment.
● Section 138: This section deals with dishonour of a cheque and provides for
criminal prosecution of the drawer of the cheque in case of a bounced
cheque.

There are also several important case laws that have helped to shape the legal
framework around negotiable instruments in India. For example, in Bhausaheb v. Baij
Nath (AIR 1953 SC 351), the Supreme Court held that in order for a document to be
considered a negotiable instrument, it must meet the requirements set out in Section
13 of the Negotiable Instruments Act.

Overall, understanding the legal nature of negotiable instruments and the relevant
sections and case laws is important for anyone involved in commercial transactions
or managing financial instruments in an organisation.
Negotiable instruments have several key characteristics that make them useful for
transferring ownership rights and facilitating financial transactions. Some of the
main characteristics of negotiable instruments are:

1. Transferability: One of the key features of negotiable instruments is their

transferability. These instruments can be transferred from one person to
another by endorsement or delivery. This allows for the efficient transfer of
ownership rights and the settlement of financial obligations.
 2. Negotiability: Negotiable instruments are freely negotiable, meaning that they
can be bought and sold on the open market. They can also be used as
collateral for loans and other financial transactions.
3. Unconditional Promise or Order to Pay: Negotiable instruments must contain
an unconditional promise or order to pay a specific amount of money. This
means that the payment is not subject to any conditions or contingencies, and
must be paid when the instrument is presented for payment.
4. Written Document: Negotiable instruments must be in writing, either on paper
or in an electronic form. The instrument must be signed by the maker or
drawer and contain all the essential elements required by law.
5. Payment on Demand: Negotiable instruments are payable on demand,
meaning that they must be paid immediately or within a certain period of time
when presented for payment.
6. Presumption of Consideration: A negotiable instrument is presumed to have
been issued for consideration, meaning that the person who issues the
instrument has received something of value in exchange for it.

The parties to a negotiable instrument are the individuals or entities that are involved
in the creation, transfer, and payment of the instrument. The key parties to a
negotiable instrument are:

1. Maker: The maker is the person who creates and signs the instrument, and
promises to pay a certain amount of money to the payee. In the case of a
promissory note, the maker is the debtor who promises to pay the creditor.
2. Drawer: The drawer is the person who creates and signs a bill of exchange or
a check, and orders the drawee to pay a certain amount of money to the
payee.
3. Payee: The payee is the person or entity to whom the payment is to be made.
The payee can be a creditor, supplier, or any other person who is entitled to
receive payment under the instrument.
4. Drawee: The drawee is the person or entity who is ordered to pay the amount
of money stated in the bill of exchange or check. The drawee can be a bank or
any other financial institution.
5. Endorser: An endorser is a person who transfers his ownership rights to the
instrument to another person by signing on the back of the instrument.
6. Endorsee: The endorsee is the person to whom the ownership rights to the
instrument are transferred by the endorser.
7. Holder: The holder is the person who is in possession of the instrument and is
entitled to receive payment under the instrument.
The Negotiable Instruments Act, 1881 defines the rights and liabilities of these
parties, and lays down the legal framework for the use of negotiable instruments.
Some of the key sections of the act that are relevant to the parties to a negotiable
instrument include:

● Section 8: This section defines the liability of the maker of a promissory note.
● Section 9: This section defines the liability of the drawer of a bill of exchange.
● Section 10: This section defines the liability of the drawee of a bill of
exchange.
● Section 31: This section defines the rights and liabilities of the holder of a
negotiable instrument.
● Section 56: This section provides for the discharge of a negotiable instrument
when payment is made or when the instrument is cancelled.

There are also several important case laws that have helped to shape the legal
framework around the parties to a negotiable instrument. For example, in Ram
Kumar Ramchandra Prasad v. The State of Maharashtra (AIR 2009 SC 2447), the
Supreme Court held that a holder in due course of a negotiable instrument is entitled
to recover the amount due under the instrument, even if there are defects in the title
of the transferor.

The rights and obligations of parties to a negotiable instrument are defined under the
Negotiable Instruments Act, 1881. The act provides a legal framework for the
creation, transfer, and discharge of negotiable instruments, and defines the rights
and obligations of the parties involved. Some of the key sections of the act that
outline the rights and obligations of parties to a negotiable instrument include:

1. Section 8: Liability of maker of promissory note - The maker of a promissory

note is liable to pay the amount specified in the instrument to the payee or
holder when it becomes due.
2. Section 9: Liability of drawer of bill of exchange - The drawer of a bill of
exchange is liable to pay the amount specified in the instrument to the payee
or holder when it becomes due.
3. Section 10: Liability of drawee of bill of exchange - The drawee of a bill of
exchange becomes liable to pay the amount specified in the instrument when
he accepts the bill.
4. Section 31: Rights of holder - The holder of a negotiable instrument has the
right to sue the parties liable to pay the amount due under the instrument. A
holder in due course, who acquires the instrument for consideration and
without any knowledge of defects in title, has further rights and privileges.
 5. Section 38: Transfer of negotiable instruments - A negotiable instrument can
be transferred by endorsement or delivery. A transferor who endorses the
instrument, however, is liable to subsequent holders for any defects in title.
6. Section 59: Discharge of negotiable instruments - A negotiable instrument is
discharged when it is paid in full, when it is cancelled, or when it becomes due
and is not presented for payment.

There are also several case laws that help to clarify the rights and obligations of
parties to a negotiable instrument. For example:

1. K.M. Abdul Khadir v. Gopalakrishna Pillai (AIR 1971 SC 963) - The Supreme
Court held that the drawer of a bill of exchange is not discharged from liability
merely because the bill was not presented for payment on the due date, if the
delay in presentation did not cause any loss to the drawer.
2. Associated Cement Co. Ltd. v. Bank of America (AIR 1989 SC 1531) - The
Supreme Court held that the burden of proving forgery or fraud in a negotiable
instrument lies on the party who alleges it, and not on the holder in due
course.
3. Rangappa v. Sri Mohan (AIR 2003 SC 3018) - The Supreme Court held that
the holder of a dishonoured cheque can recover the amount due from the
drawer of the cheque, even if the cheque was issued as a gift or for a
non-commercial purpose.
The rules of honour and dishonour on presentment apply to negotiable instruments,
which are governed by the Negotiable Instruments Act, 1881. These rules are
designed to ensure that the parties to a negotiable instrument are aware of their
respective rights and obligations when the instrument is presented for payment.

Section 91 of the act defines dishonour of a negotiable instrument as the refusal to

accept or pay the instrument when it is duly presented for payment. The act provides
a set of rules for presentment and payment, and outlines the consequences of
dishonour.

Some of the key sections of the act that deal with honour and dishonour on
presentment include:

1. Section 64: Liability of maker of a note and drawer of a bill - The maker of a
promissory note and the drawer of a bill of exchange are liable to pay the
instrument when it is presented for payment, provided that it is duly
presented.
2. Section 68: Liability of acceptor of a bill of exchange - The acceptor of a bill of
exchange is liable to pay the instrument when it is presented for payment,
provided that it is duly presented.
 3. Section 70: Presentment of instrument for payment - A negotiable instrument
must be presented for payment to the party liable to pay it within a reasonable
time after its maturity.
4. Section 74: Dishonour by non-payment - When a negotiable instrument is duly
presented for payment and is not paid, it is said to be dishonoured by
non-payment.
5. Section 91: Dishonour of cheque - A cheque is said to be dishonoured when
the bank on which it is drawn refuses to honour it.

In addition to the above sections, there are several case laws that provide further
guidance on the rules of honour and dishonour on presentment. For example:

1. Kotak Mahindra Bank Ltd. v. Sivakama Sundari (2016) - The Supreme Court
held that a cheque must be presented for payment within a reasonable time
after its date, and that the bank has no obligation to honour a stale-dated
cheque.
2. Bank of Baroda v. Gurbux Singh (AIR 1988 SC 1425) - The Supreme Court
held that a cheque can be dishonoured only if it is presented for payment in
the manner specified by the bank, and that the bank has the right to prescribe
the mode and manner of presentation.
3. State Bank of India v. Renuka Kumar (AIR 1994 SC 2283) - The Supreme
Court held that the holder of a dishonoured cheque can sue the drawer of the
cheque for recovery of the amount due, and that the burden of proving that the
cheque was not dishonoured lies on the drawer.
Endorsements on negotiable instruments are a means of transferring ownership of
the instrument from one party to another. An endorsement is a signature, usually on
the back of the instrument, that indicates the transfer of the instrument and the
intent to transfer ownership.

Section 15 of the Negotiable Instruments Act, 1881 defines an endorsement as

follows: "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
thereof or on a slip of 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."

The following are some of the key types of endorsements:

1. Blank endorsement: An endorsement in which the endorser simply signs their

name on the back of the instrument, without specifying a particular person as
the new holder. This type of endorsement makes the instrument payable to
 the bearer, meaning that anyone who holds the instrument can collect the
payment.
2. Special endorsement: An endorsement in which the endorser specifies the
name of the person to whom the instrument is being transferred. This type of
endorsement makes the instrument payable only to the specified person.
3. Restrictive endorsement: An endorsement in which the endorser places a
restriction on the use of the instrument, such as "for deposit only." This type of
endorsement limits the ability of the new holder to transfer the instrument to
someone else.

There are several case laws that provide guidance on endorsements on negotiable
instruments, such as:

1. Ram Chand and Sons Sugar Mills v. J.K. Industries Ltd. (1996) - The Supreme
Court held that a blank endorsement on a negotiable instrument makes it
payable to the bearer and can be negotiated by anyone who possesses it.
2. Madanlal Fakirchand Dudhediya v. Ramesh and Co. (2007) - The Bombay
High Court held that a special endorsement on a negotiable instrument
restricts its negotiability and makes it payable only to the specified person.
3. HSBC Bank v. Jogendra K. Mohanty (2007) - The Supreme Court held that a
restrictive endorsement on a negotiable instrument restricts its transferability
and limits the use of the instrument to the purpose specified in the
endorsement.

Criminal liability for non-payment of cheques is a serious matter and can occur if a
person issues a cheque knowing that there are insufficient funds in their account to
cover the payment. This is known as 'cheque bouncing' or 'dishonour of cheque'. It is
a criminal offence under section 138 of the Negotiable Instruments Act, 1881.

Section 138 of the Act states that if a cheque is returned unpaid due to insufficient
funds, the person who issued the cheque can be held liable for a criminal offence
punishable by imprisonment for up to two years, or a fine that can be twice the
amount of the cheque, or both.

The following are the key elements that must be proved to establish criminal liability
under section 138 of the Act:

1. The cheque must have been issued for a debt or liability that was due at the
time of issue.
2. The cheque must have been presented within three months from the date of
issue or within the validity period of the cheque, whichever is earlier.
 3. The cheque must have been returned unpaid by the bank due to insufficient
funds.
4. The payee must have given a notice in writing to the drawer within 30 days of
the cheque being returned unpaid, demanding payment of the amount due.
5. The drawer must have failed to make payment within 15 days of receiving the
notice.

There have been several landmark case laws that provide guidance on the criminal
liability for non-payment of cheques, such as:

1. Modi Cements Ltd. v. Kuchil Kumar Nandi (1998) - The Supreme Court held
that the liability of the drawer of the cheque under section 138 of the Act is
strict and there is no requirement to prove mens rea or a guilty mind.
2. Dashrath Rupsingh Rathod v. State of Maharashtra (2014) - The Supreme
Court held that a notice of demand sent by the payee to the drawer of the
cheque must be in writing and must specifically demand payment of the
amount due.
3. R. Vijayan v. Baby and Company (2018) - The Supreme Court held that the
time limit for filing a complaint under section 138 of the Act is one month
from the date on which the cause of action arises.