Business Laws · The Negotiable Instruments Act, 1881

Parties to a Negotiable Instrument and Capacity (CA Foundation Business Laws)

Updated 4 October 2026

Parties to a negotiable instrument are the people whose names or signatures appear on it, such as the maker, drawer, drawee, acceptor, payee and indorser. A holder in due course is a holder who took it for consideration, before maturity, without sufficient cause to believe the transferor's title was defective. Identify each role, test section 9, then state rights and capacity.

Understand Parties to a Negotiable Instrument and Capacity

A negotiable instrument has people attached to it. Each has a role. Exam questions ask you to name the role, or to decide who is liable to whom. Learn the roles first.

In a promissory note, the person who makes it is the maker, and the person to be paid is the payee. In a bill of exchange or cheque, the maker is called the drawer. The person directed to pay is the drawee. The person named to receive the money, or whose order it is payable to, is the payee. Under section 7, once the drawee signs assent on a bill and delivers it (or gives notice of the signing to the holder), the drawee becomes the acceptor.

Section 7 also defines two special parties. A drawee in case of need is a person named in the bill or in an indorsement, in addition to the drawee, to be approached if needed. Under section 115, the bill is not dishonoured until this person has also dishonoured it. An acceptor for honour accepts a noted or protested bill to save the credit of the drawer or an indorser. Section 33 says only the drawee (or one of several drawees), a drawee in case of need, or an acceptor for honour can bind himself by acceptance. A stranger cannot accept.

The holder is the person entitled in his own name to possess the instrument and recover the amount. A holder in due course (HDC) is more. Under section 9, he must (1) have become possessor for consideration, (2) be the bearer, or the payee or indorsee if payable to order, (3) have received it before the amount became payable, and (4) have had no sufficient cause to believe that any defect existed in the title of the person he got it from. Every HDC is a holder, but not every holder is an HDC. A donee (one who receives it as a gift) gave no consideration, so he is not an HDC. A thief is not even a holder, because he has no entitlement to possess the instrument or recover on it in his own name.

Capacity comes from section 26. Every person capable of contracting under the law applicable to him can bind himself and be bound by making, drawing, accepting, indorsing, delivering and negotiating an instrument. A minor may draw, indorse, deliver and negotiate so as to bind all parties except himself. A corporation can make, indorse or accept only where the law in force empowers it.

Key rules to remember

Section 9: holder in due course: HDC = consideration + possession as bearer/payee/indorsee + before maturity + no sufficient cause to believe title defective; Write all four conditions. Examiners give a mark for each. Do not add extra tests that are not in the section.
Section 7: roles: Drawer = maker of bill/cheque; Drawee = person directed to pay; Payee = person to be paid; Acceptor = drawee who signed assent and delivered or gave notice; For a promissory note the maker is the equivalent of the drawer.
Section 33: who can accept: Only drawee (or one of several drawees), drawee in case of need, or acceptor for honour; A stranger's acceptance does not bind him as an acceptor.
Section 115: drawee in case of need: Bill not dishonoured until dishonoured by the drawee in case of need also; Applies where such a person is named in the bill or in an indorsement.
Section 26: capacity: Any person capable of contracting may bind himself and be bound; minor binds all parties except himself; A minor's drawing, indorsement, delivery or negotiation binds all other parties but not the minor himself.
Section 53: derivative title: Holder deriving title from an HDC has the HDC's rights; Remember it as: the HDC's rights pass on to the person who derives title from him.
Section 36: liability to HDC: Every prior party is liable to an HDC until the instrument is duly satisfied; Contrast with an ordinary holder, who takes subject to defects in title.
Section 118(g): presumption: Until the contrary is proved, the holder is presumed to be an HDC; If the instrument was obtained by offence, fraud or unlawful consideration, the holder must prove he is an HDC.
Section 30: drawer's liability: Drawer must compensate the holder on dishonour by drawee or acceptor, if due notice of dishonour is given to or received by him; Liability is conditional on notice.
Sections 121 and 122: estoppel: Maker/acceptor cannot deny payee's capacity to indorse (s.121); indorser cannot deny signature or capacity of prior parties (s.122); Section 121 helps an HDC suing on a note or on an accepted bill payable to order.

How to solve Parties to a Negotiable Instrument and Capacity questions

Use this order for any question on parties, holder or HDC, or capacity. It keeps the answer in provision, facts, conclusion form.

1Draw a quick line diagram of the instrument. Mark who is drawer, drawee, payee, and each indorser in order.
2Name the type of instrument: promissory note, bill of exchange or cheque. This fixes the words maker or drawer.
3Identify the question: role of a person, whether someone is an HDC, or whether someone can be bound.
4For HDC questions, test the four section 9 conditions one by one against the facts. Write yes or no for each.
5For capacity questions, apply section 26. Check minor, corporation, or other persons incapable of contracting.
6Apply the consequence: for an HDC, sections 36, 53, 121 and 122 as relevant. For a mere holder, state that title defects can be raised against him.
7Write the conclusion in one clear line naming the person and who may be sued.

Quickest way: Four-test HDC check and role tag

When to use it: Use when a short case asks whether someone is an HDC or who is liable. Takes under a minute.

Tag every person with D (drawer), E (drawee), P (payee), I (indorser) beside the facts.
Run the checks: Consideration given? Received before due date? Properly payee or indorsee (or bearer)? Any sufficient cause to believe the transferor's title was defective?
If any check fails, write 'not an HDC, only a holder' and say title defects can be raised against him.
If all pass, write 'HDC' and add that prior parties are liable under section 36.
Finish with the section number and the one-line conclusion.

Common mistakes in Parties to a Negotiable Instrument and Capacity

Saying every holder is a holder in due course.
The words sound alike and both mean someone possessing the instrument.
Fix: State that an HDC must satisfy all four section 9 conditions. A gift recipient or someone with sufficient cause to believe the title was defective is only a holder.
Calling the maker of a cheque or bill the 'maker' and writing the wrong party.
Students mix promissory note terms with bill terms.
Fix: Remember that section 7 calls the maker of a bill or cheque the drawer. Use maker only for a promissory note.
Saying a minor cannot be a party to a negotiable instrument at all.
Students recall that minors' contracts are void and apply it fully.
Fix: Under section 26 a minor may draw, indorse, deliver and negotiate so as to bind all parties except himself. He is not personally liable.
Treating a bill as dishonoured the moment the drawee refuses when a drawee in case of need is named.
Students forget the extra party.
Fix: Under section 115, the bill is not dishonoured until the drawee in case of need has also dishonoured it.
Forgetting that the drawee is not liable until acceptance.
Students confuse the drawee with the acceptor.
Fix: The drawee is merely directed to pay. He becomes the acceptor after signing assent and delivering it or giving notice of the signing.
Omitting 'before maturity' and 'no sufficient cause to believe' from the HDC definition.
Students remember only 'for consideration'.
Fix: Write all four conditions in a list, then apply each to the facts.

Worked examples

Example 1

Ravi draws a bill on Sunil for ₹50,000 payable to Meena or order. Sunil signs his assent on the bill and hands it to Meena. Name the drawer, drawee, payee and acceptor. Can Kiran, a stranger, bind himself by accepting the bill?

Show the solution

Under section 7, Ravi made the bill, so he is the drawer.
Sunil is directed to pay, so he is the drawee.
Meena is named as the person to be paid, so she is the payee.
Sunil signed assent and delivered the bill, so under section 7 he is now the acceptor.
Section 33 allows only the drawee, a drawee in case of need, or an acceptor for honour to bind himself by acceptance. Kiran is none of these, as nothing says he is named in the bill.

Answer: Drawer: Ravi. Drawee and acceptor: Sunil. Payee: Meena. Kiran cannot bind himself by acceptance under section 33, as he is a stranger to the bill.

Example 2

Anil, a minor, indorses a bill payable to order to Bhavna for ₹20,000 for value. Bhavna indorses it for value to Chetan before the due date. Chetan does not know of any defect. On maturity the acceptor refuses to pay. Can Chetan sue Bhavna and Anil? Is Chetan an HDC?

Show the solution

Check capacity under section 26. A minor may indorse and negotiate the instrument so as to bind all parties except himself.
So Anil's indorsement is valid to pass title. He is not personally liable on it.
Test Chetan under section 9: he gave consideration, he is the indorsee of an order instrument, he took it before maturity, and he had no cause to believe any defect existed.
All four conditions are met, so Chetan is an HDC.
Under section 36, every prior party is liable to an HDC. Bhavna, as a prior party who indorsed, is liable to Chetan.
Anil, being a minor, is not bound by his own indorsement under section 26.

Answer: Chetan is an HDC. He can sue Bhavna as a prior party. He cannot hold Anil personally liable because a minor does not bind himself under section 26.

Exam tips

In case-study questions, state the section first, then apply facts, then conclude. Stay in this order.
Always list the four conditions of section 9 before deciding whether someone is an HDC.
Draw a mini diagram showing drawer, drawee and payee. It helps you avoid role mix-ups and shows presentation.
For minors, write the exact phrase: binds all parties except himself.
Quote section numbers only for the provisions you know well: 7, 9, 26, 33, 36, 53, 115, 118, 121 and 122.

Practice questions from The Negotiable Instruments Act, 1881

Parties to a Negotiable Instrument and Capacity: frequently asked questions

What is the difference between a holder and a holder in due course?

A holder is entitled in his own name to possess the instrument and recover the amount. A holder in due course must also have given consideration, taken the instrument before maturity, and had no sufficient cause to believe the transferor's title was defective. An HDC gets a better title that is free of many defences.

What are the privileges of a holder in due course?

Under section 36, every prior party is liable to him until the instrument is duly satisfied. Under section 53, anyone who derives title from him has his rights. Sections 121 and 122 stop certain parties from denying the payee's capacity to indorse or a prior party's signature and capacity.

Can a minor be a party to a negotiable instrument?

Yes, in part. Section 26 lets a minor draw, indorse, deliver and negotiate an instrument so as to bind all parties except himself. He cannot be made personally liable on it.

Who is a drawee in case of need?

It is a person named in the bill or in an indorsement, in addition to the drawee, to be approached if needed. Under section 115 the bill is not dishonoured until that person has also dishonoured it.