Law relating to Negotiable Instruments: formula sheet

Key formulas

Definition of negotiable instrument (Section 13(1))

Negotiable instrument = promissory note, bill of exchange or cheque, payable to order or to bearer

Quote this first in every answer. The test is the three named instruments plus the order or bearer feature.

Payable to order (Section 13, Explanation (i))

Expressed to be payable to order, or payable to a particular person, with no words prohibiting transfer

Words like 'not transferable' or 'pay A only' defeat negotiability if they prohibit transfer.

Payable to bearer (Section 13, Explanation (ii))

Expressed to be payable to bearer, or the only or last indorsement is in blank

An instrument can change from order to bearer through a blank indorsement.

Holder (Section 8)

Holder = person entitled in his own name to possession and to receive or recover the amount from the parties

A mere possessor or an agent is not a holder.

Holder in due course (Section 9)

HDC = consideration + payee/indorsee (if order) or possessor (if bearer) + before maturity + no sufficient cause to believe title defective

All four conditions must be met.

Rights of a holder deriving title from an HDC (Section 53)

Holder deriving title from HDC has the rights of that HDC

Applies even if the later holder is not an HDC himself.

Liability to an HDC (Section 36)

Every prior party is liable to an HDC until the instrument is duly satisfied

This is what gives the instrument its credit value.

Presumptions (Section 118)

Until the contrary is proved: consideration, date, time of acceptance, time of transfer, order of indorsements, stamp (lost instrument), holder is HDC

They are rebuttable. The proviso shifts the burden to the holder where the instrument was obtained by offence, fraud or for unlawful consideration.

Promissory note (Section 4)

Writing + unconditional undertaking + signed by maker + certain sum only + certain person or bearer

Not a bank-note or currency-note. Two parties: maker and payee.

Bill of exchange (Section 5)

Writing + unconditional order + signed by drawer + directs a certain person + certain sum only + to a certain person or bearer

Three parties: drawer, drawee, payee. One person can hold more than one role.

Cheque (Section 6)

Cheque = bill of exchange + drawn on a specified banker + payable on demand only

Includes electronic image of a truncated cheque and a cheque in electronic form.

Negotiable instrument (Section 13)

Promissory note, bill of exchange or cheque, payable to order or to bearer

Payable to order if expressed so, or payable to a particular person without words prohibiting transfer.

Payable on demand (Section 19)

No time specified (note or bill) or a cheque = payable on demand

A cheque is always on demand.

General crossing (Section 123)

Two parallel transverse lines, or "and company" between lines, with or without "not negotiable"

Any such addition is deemed a general crossing.

Negotiation by delivery (Section 46)

Bearer instrument: delivery. Order instrument: indorsement and delivery

Making, acceptance or indorsement is complete on delivery.

Holder (Section 8)

Holder = person entitled in his own name to possess the instrument and to receive or recover the amount from the parties

Covers payee, indorsee or bearer. A finder or thief is not a holder. If the instrument is lost or destroyed, the holder is the person so entitled at that time.

Holder in due course (Section 9)

HDC = holder + consideration + bearer, or payee/indorsee if payable to order + before maturity + no sufficient cause to believe title defective

All conditions must be met together. Failing any one means he is only an ordinary holder.

Derivative title (Section 53)

A holder who derives title from a holder in due course has that holder's rights

This holds even if the later holder is not himself an HDC. It keeps the instrument freely transferable.

Liability of prior parties (Section 36)

Every prior party is liable to a holder in due course until the instrument is duly satisfied

The HDC can sue any prior party.

Principal and sureties (Section 37)

Maker of note or cheque, drawer of bill until acceptance, and acceptor are principal debtors; the other parties are sureties

Applies in the absence of a contract to the contrary.

Presumption of HDC (Section 118(g))

Until the contrary is proved, the holder is presumed to be a holder in due course

Proviso: if the instrument was obtained by an offence, fraud or for unlawful consideration, the holder must prove HDC status.

Estoppel (Section 121)

Maker of a note or acceptor of a bill payable to order cannot deny the payee's capacity to indorse in a suit by an HDC

The capacity is tested at the date of the note or bill.

Inchoate instrument (Section 20)

Signer of a stamped blank or incomplete paper is liable to an HDC for the amount filled in, up to the stamp value

A person who is not an HDC cannot recover more than the amount the signer intended.

Negotiation of bearer instrument

Bearer instrument → negotiable by delivery (Sections 46, 47, subject to Section 58)

No endorsement needed. Exception: delivery on condition that it takes effect only on an event; not negotiable (except in the hands of a holder for value without notice) until the event happens.

Negotiation of order instrument

Order instrument → endorsement + delivery by the holder (Sections 46, 48)

Both steps are needed. Endorsement alone, without delivery, is incomplete.

Definition of endorsement

Signature of maker or holder, otherwise than as maker, for the purpose of negotiation (Section 15)

May be on back, on face or on an annexed slip. A signed stamped paper meant to be completed as an instrument also counts.

Effect of endorsement

Endorsement + delivery = transfer of property with right of further negotiation (Section 50)

Right may be restricted or excluded by express words, or the endorsee may be made a mere agent.

Bearer by endorsement in blank

Only or last endorsement in blank → payable to bearer (Section 13, Explanation (ii))

A blank endorsee can negotiate by mere delivery.

Inchoate instrument limit

Authority to complete = any amount specified, up to the amount covered by the stamp (Section 20)

Holder in due course can recover up to the stamp amount. Others cannot recover more than the amount intended.

Capacity

A minor may draw, endorse, deliver and negotiate so as to bind all parties except himself (Section 26)

Useful when a minor is in the chain of endorsements.

Legal representative

The legal representative of a deceased person cannot negotiate by delivery only an order instrument endorsed by the deceased but not delivered (Section 57)

The bar is on negotiation by delivery only. The deceased endorsed the instrument but never delivered it, so the endorsement was incomplete (Section 46).

Presentment for acceptance (Section 61)

Bill payable after sight → present to drawee within a reasonable time after drawing, in business hours on a business day

Default means no party is liable on the bill to the person who defaulted. If the drawee cannot be found after reasonable search, the bill is dishonoured.

Place of presentment (Section 61)

Bill directed to drawee at a particular place → present at that place

If he cannot be found there after reasonable search at the due date for presentment, the bill is dishonoured. Registered post presentment is valid only if authorised by agreement or usage.

Reasonable time (Section 105)

Reasonable time = by nature of instrument + usual course of dealing; public holidays excluded

It applies to presentment for acceptance or payment, notice of dishonour and noting.

Excuse for delay (Section 75A)

Delay excused if cause is beyond holder's control and not due to his default, misconduct or negligence; then present within a reasonable time after the cause ceases

Both conditions must be met. The excuse is not permanent.

Payment in due course (Section 10)

Payment per apparent tenor + good faith + no negligence + to a person in possession who appears entitled

All four elements must be present. Lack of any one defeats the protection.

Discharge of maker, acceptor or indorser (Section 82)

Discharge by (a) cancellation, (b) release, (c) payment in due course

Under (c), discharge is against all parties only if the instrument is payable to bearer or indorsed in blank.

Liability of prior parties (Section 36)

Every prior party is liable to a holder in due course until the instrument is duly satisfied

Liability ends only on due satisfaction.

Presumptions (Section 118)

Until the contrary is proved: consideration, date, time of acceptance, time of transfer, order of indorsements, stamp on lost instrument, holder is a holder in due course

For the last, the burden shifts to the holder if the instrument was obtained by offence, fraud or for unlawful consideration.

Dishonour by non-acceptance (Section 91)

Drawee (or one of several drawees not being partners) defaults in acceptance on being duly required, or presentment is excused and the bill is not accepted

Applies to bills of exchange. A bill may also be treated as dishonoured if the drawee is incompetent to contract or the acceptance is qualified.

Dishonour by non-payment (Section 92)

Maker of note / acceptor of bill / drawee of cheque defaults in payment on being duly required to pay

Applies to promissory notes, bills and cheques.

Notice of dishonour (Section 93)

Holder or a party remaining liable gives notice to all parties to be made severally liable, and to one of several parties to be made jointly liable

No notice is necessary to the maker of a note, or the drawee or acceptor of a bill or cheque.

Noting (Section 99)

Notary public notes dishonour on the instrument or an attached paper, within a reasonable time

The note must state the date of dishonour, the reason (or why the holder treats it as dishonoured) and the notary's charges.

Protest (Section 100)

Noting + certificate by a notary public = protest

Applies to promissory notes and bills. Protest for better security arises when the acceptor becomes insolvent or his credit is publicly impeached before maturity.

Noting equivalent to protest (Section 104A)

Where protest is required within a time, noting before that time is enough; formal protest can be extended later as of the date of noting

Protects the holder who is short of time.

Notice of protest (Section 102)

Where protest is required by law, notice of protest replaces notice of dishonour

The notary public who makes the protest may give the notice.

Reasonable time (Section 105)

Depends on the nature of the instrument and usual course of dealing; public holidays excluded

Applies to presentment, notice of dishonour and noting.

Compensation (Section 117)

Holder: amount due + expenses properly incurred in presenting, noting and protesting. Indorser who paid: amount paid + interest at 18% per annum from payment until tender or realisation + all expenses caused by dishonour and payment

Where the parties live at different places, the sum is at the current rate of exchange between the two places.

Offence and punishment (s.138)

Imprisonment up to 2 years, or fine up to 2 × cheque amount, or both

Applies when a cheque for a legally enforceable debt is returned unpaid for insufficient funds or because it exceeds the arrangement with the bank.

Presentment (s.138 proviso (a))

Present within 6 months from date of drawing or within validity period, whichever is earlier

Cheques can be presented many times within this period. The period is counted from the date on the cheque.

Demand notice (s.138 proviso (b))

Written notice to drawer within 30 days of receiving bank information of return

The 30 days run from when the payee receives information of the return, not from the date of bounce.

Drawer's time to pay (s.138 proviso (c))

Drawer must pay within 15 days of receiving the notice

The offence arises only if the drawer fails to pay within this time.

Complaint (s.142(1))

Written complaint by payee or holder in due course within 1 month from the date cause of action arises under proviso (c)

Court may take cognizance later if the complainant shows sufficient cause for the delay. Trial lies before a Metropolitan Magistrate or Judicial Magistrate of the first class.

Interim compensation (s.143A)

Up to 20% of the cheque amount; payable within 60 days, extendable by up to 30 days on sufficient cause

Ordered in a summary trial or summons case when the drawer pleads not guilty, and in other cases upon framing of charge. If the drawer is acquitted, the complainant must repay it with interest at the bank rate.

Jurisdiction (s.142(2))

Cheque through an account: court where the payee's collecting branch is. Cheque presented otherwise: court where the drawer's branch is

Section 142A protects transferred cases and sends later complaints against the same drawer to the same court.

Presumptions (s.118)

Until the contrary is proved: consideration is presumed, and holder is presumed to be a holder in due course

Burden shifts to the holder where the instrument was obtained by offence, fraud or for unlawful consideration (proviso to s.118(g)).

Inland instrument (Section 11)

Drawn or made in India AND (payable in India OR drawn on a person resident in India)

Both parts must be met. Failing either makes it foreign.

Foreign instrument (Section 12)

Any instrument not an inland instrument

It is a residual definition.

Liability of maker or drawer (Section 134)

Law of the place where he made the instrument

Applies in all essential matters, in the absence of a contract to the contrary.

Liability of acceptor and indorser (Section 134)

Law of the place where the instrument is made payable

Same condition: absence of a contrary contract.

Dishonour and notice (Section 135)

Law of the place of payment decides dishonour and sufficiency of notice

Applies where the place of payment differs from the place where it was made or indorsed.

Instrument made abroad under Indian law (Section 136)

Invalidity under foreign law does not invalidate later acceptance or indorsement within India

Protects subsequent Indian parties.

Presumption as to foreign law (Section 137)

Foreign law is presumed same as Indian law until the contrary is proved

The party who says it differs must prove it.

Protest of foreign bills (Section 104)

Protest is required when the law of the place where the bill is drawn requires it

Applies to foreign bills of exchange.

Presumptions (Section 118)

Consideration, date, time of acceptance, time of transfer, order of indorsements, stamp on lost instrument, holder in due course

All hold until the contrary is proved. For the holder in due course presumption, the proviso shifts the burden to the holder where the instrument was obtained by offence, fraud or unlawful consideration.

Quick revision

• A bill of exchange is a written, unconditional order signed by the maker, directing a certain person to pay a certain sum only to, or to the order of, a certain person or the bearer.
• A promise or order is not conditional merely because payment is due after an event that is certain to happen, even if its timing is uncertain.
• The sum can still be certain if it includes future interest or an indicated rate of exchange.
• A holder is entitled in his own name to possess the instrument and to receive or recover the amount from the parties.
• A holder in due course gave consideration, became holder before the amount became payable, and had no sufficient cause to believe the title was defective.
• A minor may draw, indorse, deliver and negotiate an instrument so as to bind all parties except himself.
• A corporation can make, indorse or accept instruments only where the law in force empowers it.
• On an inchoate stamped instrument, the holder has prima facie authority to complete it for any amount up to the amount covered by the stamp.
• Only a holder in due course can recover from the signer more than the amount the signer intended to be paid.
• A drawee paying a bearer cheque in due course is discharged despite any endorsement on it.
• An indorser who paid is entitled to the amount with interest at eighteen per cent per annum from payment until tender or realisation, plus expenses.
• For foreign instruments, the maker's or drawer's liability follows the law of the place of making, and the acceptor's and indorser's follows the law of the place of payment; foreign law is presumed the same as Indian law until the contrary is proved.

Common mistakes

• Saying a negotiable instrument is any document that promises payment, such as a share certificate or a bill of lading. Fix: Quote Section 13(1): only a promissory note, bill of exchange or cheque payable to order or to bearer is covered by the statutory definition.
• Treating an instrument as negotiable even though it says 'pay A only, not transferable'. Fix: Under Explanation (i), words prohibiting transfer take it outside payable to order. Read the wording carefully.
• Calling a document a promissory note because it uses the word 'promise', without checking whether it is unconditional. Fix: Check for a condition that may never happen. In the Act's illustration, a promise to pay on D's death only if D leaves enough is not a promissory note.
• Saying a bill of exchange has only two parties. Fix: Name drawer, drawee and payee. The note has maker and payee.
• Treating every holder as a holder in due course. Fix: Remember that a holder in due course is a holder who also meets the Section 9 conditions. Write the four conditions before concluding.
• Treating a person who got the instrument as a gift as an HDC. Fix: Check consideration first. A donee gave no consideration, so he is not an HDC.
• Saying an order instrument can be negotiated by delivery alone. Fix: Order instrument needs endorsement and delivery (Section 48). Only bearer instruments pass by delivery alone (Section 47).
• Treating every endorsement as restrictive if the endorsee is named. Fix: Section 50 illustration (e) shows that "Pay C" does not exclude further negotiation. Restriction needs express words like "only".
• Saying every instrument must be presented for acceptance. Fix: Acceptance applies to bills of exchange, since the drawee must agree to pay. Section 61 deals with a bill payable after sight. A note or cheque is presented for payment.
• Forgetting that failure to present for acceptance discharges parties. Fix: Write the consequence from Section 61: in default of presentment, no party is liable on the bill to the person who made the default.

Exam tips

• Begin every answer with the Section 13(1) definition. Examiners look for it.
• Remember the Explanations to Section 13. Questions on 'payable to order' and 'payable to bearer' are frequent.
• For features, write a short list and tie each feature to a section: Section 8, Section 9, Section 36, Section 53, Section 118.
• Keep the question on usage and custom answered through Section 1: local usage relating to hundis is saved but can be excluded by words in the instrument.
• Finish fact-based problems with a one-line conclusion, as ICSI answers expect.
• Begin every answer with the section number and the definition in your own words, then list the essentials.
• Memorise parties: note (maker, payee), bill (drawer, drawee, payee), cheque (drawer, drawee bank, payee).
• For a difference question, use at least five points in a two-column style written as lines, not a table.