BANKING LAW- MODULE III

 Is E-banking the same as Internet banking?

E-banking is a blanket term that covers everything from internet banking to NEFT/RTGS
transfers.

Any kind of digital mode of fund transfer comes directly under Electronic Banking (E-banking).
For example, internet banking, mobile banking, and other modes of online fund transfers like
NEFT, RTGS, and IMPS all fall under Electronic Banking.

E-banking and its evolution have modified lives. Banking at the fingertips is a dream come true
and today, we face no more hassles of visiting banks for the tiniest of issues or services.

 Types of E-Banking

The integration of the internet and computers into finance and banking has created several
branches of e-banking.

1. Online Banking: Online banking is a type of e–banking that allows customers to access their
banking accounts, view account activity, make payments and transfer money via an online
platform.

2. Mobile Banking: Mobile banking is a type of e–banking that allows customers to access their
banking accounts, view account activity, make payments, and transfer money via a smartphone
or other mobile device.

3. ATM Banking: ATM banking is a type of e–banking that allows customers to access their
banking accounts, view account activity, make payments, and transfer money via an automated
teller machine (ATM).

 What are the services provided by e-banking?

Some of the services provided by e-banking are mobile banking, NEFT, RTGS, IMPS,
debit/credit cards, Electronic Data Interchange(EDI), and Electronic Clearing system(ECS).
What is a Negotiable Instrument?

 The term negotiable instrument literally means or written document, which creates a right
in favour of some person which is freely transferable.

 A negotiable instrument is a document that guarantees the payment of a specific amount

of money to a specified person and requires payment either on-demand or at a set date.

 Negotiable instruments are distinct from non-negotiable instruments in that they can be
transferred to different people, and, in that case, the new holder obtains full legal title to
them.

 Negotiable instruments contain key information such as principal amount, interest rate,
date, and, most importantly, the signature of the maker/ drawer.

 According to the Section 13 of the Negotiable Instruments Act of 1881, a negotiable

instrument means “a promissory note, bill of exchange or cheque, payable either to order
or to the bearer”.

Features

1. Easily transferable

o Any negotiable instrument should be easily and freely transferable.

o There are no formalities for much paperwork involved in any transformation under the
negotiable instrument.

o The ownership of an instrument can transfer simply by the delivery or by a valid

indorsement.

2. Must be in writing

o This is one of the most important features of the negotiable instrument that it must be in
writing.
o Underwriting includes handwritten notes, printed engraved type, etc.

3. Time of payment must be certain

o An order is not considered to be a negotiable instrument if it is not delivered in a certain

period of time.
o If not in a certain period of time it needs to be on a specific date.

4. Promise or order to pay must be unconditional.

5. The instrument must be payable to the bearer or to the order of name payee.
6. It is presumed that the instrument was drawn for consideration and it was excepted or
negotiated for consideration.
7. A negotiable instrument can be transferred in definite until the maturity period expire.
8. It must call for payment in money and money only and it should contain the sum of money to
be paid through it.
9. They must be a promise or order to pay in negotiable instrument.
10. It must be signed by the maker or the drawer.

Advantages

1. These are quick and instant instant way of transferring money.

2. not involve a lot of paperwork or formalities and therefore transferring money is simple and
hustle free.

3. no restriction on the number of transfers of promissory note, bill of exchange.

Case laws

Kundan Lal Rallaram v. The Custodian, Evacuee Property Bombay AIR 1961

It was held that NI or the indorsement was made or indorse for consideration, the burden of proof
of failure of consideration on the maker of the note or the indorser at the case maybe.

CT Joseph v IV Phillip AIR 2001

It was held that the presumption under section 118 of the NI act arises only if the execution of
the document is proved as true.

In Kedar Singh Chauhan v Bhagwan Singh AIR 2001

It was held that there is a presumption under section 118 of the act that NI is supported by a
consideration unless the contrary is proved.

Types of Negotiable Instruments

1. Promissory Note (Section 4)

o 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.
 o These are legal instruments in which one party promises to pay in writing a specific sum
of money to the other party, either after a stipulated time period or on-demand under
specific terms.

Parties to a Promissory Note

o Maker or Drawer: The person who makes the note and promises to pay the amount
specified in it.

o Payee: The person to whom the amount is payable.

Features of Promissory Note

1. Written Agreement – A promissory should be in writing, and an oral promise to pay

money is not accepted.
2. Pay Defined Amount – It must contain a promise to pay a certain sum of money.
3. Signed Documents – The document is duly signed and drawn by the drawer and
stamped.
4. Unconditional Promise – The promise to pay a certain amount of money must be
absolute in all cases. In such notes, a conditional guarantee is not accepted.
5. It must be stamped according to the provision of the stamp act, 1940.
6. Parties must be certain.

2. Bill of Exchange (Section 5)

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.

Features of Bill of Exchange

3. It is important to have a bill of exchange in writing

4. It must contain a confirm order to make a payment and not just the request
5. The order should not have any condition
6. The bill of exchange amount should be definite
7. Fixed date for the amount to be paid
8. The bill must be signed by both the drawee and the drawer

9. It must be stamped according to the provision of the stamp act, 1940.

10. The amount stated on the bill should be paid on-demand or on the expiry of a fixed time
11. The amount is paid to the beneficiary of the bill, specific person, or against a definite order
3. Cheque (Section 6)

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.

Cheques are negotiable instruments used to make payments as part of the day to day business
transactions. It is the most popular one and is used by businesses and individuals to make and
receive payments on a daily basis. Three parties are involved in a cheque transaction.

Features of cheque

1. A cheque can only be issued against a current or savings bank account

2. A cheque without date shall be considered invalid
3. Only the payee, in whose name the cheque has been issued, can encash it
4. A cheque is only valid 3 months from the date it has been issued

Cheques v/s Bills of Exchange

1. Cheques and bills of exchange might appear to be similar but there are important
differences between them. The following are some such points of distinction:
2. A cheque is always drawn only on a banker, while a bill may be drawn on any person.
3. Cheques are payable only on demand, while bills may be payable on demand or upon a
specific date.
4. It is important to cross a cheque but a bill needs no such crossing.
5. Bills generally carry a grace period of three days for repayment of money. Cheques,
however, do not provide for any grace period.
6. Dishonour of a bill requires the production of a notice. No such notice is important for
cheques.
7. All cheques are bills of exchange but the vice versa is not true.
Aspect Cheque Bill of Exchange Promissory note

By a cheque one
It is an instrument given in
individual/party orders A negotiable instrument is in
writing with an unrestricted
the bank to transfer the writing and holds an
guarantee to pay a certain
money to the bank unconditional order by the
Meaning amount of money to a
account of another bill’s maker to pay a certain
certain individual or to the
individual/party in whose amount of money either to a
bearer of the instrument and
name the cheque has specific person or its bearer.
signed by the maker of it.
been issued.

The definition of a bill of

exchange is given in Section 5
of the Negotiable Instruments
A cheque is a negotiable Act, 1881. Bill of exchange is The definition of the
instrument under Section also defined in Section 2(2) of promissory note is given in
Legal
6 of the Negotiable the Indian Stamps Act, 1899 Section 4 of the Negotiable
Instruments Act, 1881. and the bill of exchange Instruments Act, 1881.
payable on demand has been
explained in Section 2(3) of the
Indian Stamps Act, 1899.

Drawer of
the Creditor Creditor Debtor
instrument

Three parties are Two parties involved are

Partied The three parties are a drawer,
involved as a drawn the drawer/maker and the
involved drawee and payee.
payee. payee.

The same person can be the

It is payable on-demand drawer and payee.It is payable The drawer and payee
Payability
only. on-demand or on the expiry of cannot be the same person.
a certain period.

For a bill of exchange, a notice

of dishonour is mandatory and No notice is served to the
For a cheque, a notice of
Notice of it should be served to all the drawer in case of
dishonour is not
Dishonour concerned parties involved in dishonouring the
compulsory.
the transaction on dishonouring promissory note.
the bill of exchange.

Copies The cheque allows no Bill of exchange can have The promissory note allows
 copies. copies. no copies.

A cheque does not have a

Third day after the day on
Grace grace period once it is A bill of exchange, however,
which it is expressed to be
period presented for its has a three days grace period.
payable.
payment.

As regards a bill of exchange,

The parties remain liable the parties who don’t get notice
to pay even though no of dishonour are free from the The liability of the drawer
Liability
notice of dishonour is liability of paying and the is primary and absolute.
given. liability of the drawer is
secondary and conditional.

A cheque is generally
valid for six months; A promissory note is valid
some cheques issued by only for a period of 3 years
Validity the central government There is no validity to a bill. from the date of its
may be valid only for 3 execution after which it
months from the date of becomes invalid.
issue.

A cheque does not

A bill of exchange must be
require acceptance and No acceptance is required
Acceptance accepted first before payment
its object is for from the drawee.
can be demanded on it.
immediate payment.

A cheque does not

A bill of exchange must be A promissory note has to
Stamp require any stamp except
stamped. besufficiently stamped.
in certain cases.

Section 7 ''Drawer''

The maker of a bill of exchange or cheque is called the drawer; the person thereby directed to
pay is called the drawee.

"Drawee in case of need" - When in the Bill or in any indorsement 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".
"Acceptor" - After the drawee of a bill has signed his assent upon the bill, or, if there are more
parts thereof than one, upon one of such parts, and delivered the same, or given notice of such
signing to the holder or to some person on his behalf, he is called the "acceptor".

"Acceptor for honour" - When a bill of exchange has been noted or protested for non-
acceptance or for better security, and any person accepts it supra protest for honour of the
drawer or of any one of the indorsers, such person is called an "acceptor for honour".

"Payee" - The person named in the instrument, to whom or to whose order the money is by the
instrument directed to be paid, is called the "payee".

Simplified Act
When someone creates a bill of exchange or a cheque, that person is known as the "drawer." The
"drawee" is the person who is supposed to pay the amount written on that document.

"Drawee in case of need" - Sometimes, a bill may have another person's name on it (or on a
related endorsement) who can be asked to pay if the main drawee cannot. This person is known
as the "drawee in case of need".

"Acceptor" - The drawee becomes known as the "acceptor" once they agree to pay the bill by
signing it and either delivering it back, or letting the person who holds the bill (or their
representative) know that they've signed it.

"Acceptor for honour" - If a bill of exchange is at risk of not being paid or needs extra
backing, and someone steps in to accept the bill to protect the reputation of the person who wrote
it or one of the endorsers, this person is called an "acceptor for honour".

"Payee" - The "payee" is the person or entity that the bill or cheque says should receive the
payment.

Section 8 ''Holder''

The "holder" of a promissory note, bill of exchange or cheque means any person entitled in his
own name to the possession thereof and to receive or recover the amount due thereon from the
parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so
entitled at the time of such loss or destruction.

Simplified Act
A "holder" is someone who has the right to keep a promissory note, bill of exchange, or cheque
in their own name and also has the right to collect the money that is owed by the people who
signed it. If the document gets lost or destroyed, the "holder" is the person who had the right to
the document and the money when it was lost or destroyed.

What are the conditions for a person to become a Holder?

Consideration

1. NI must acquired in exchange of good and services

2. NI should not be a gift
3. It should be legally binding and lawful
4. It should not be forbidden by law fraudulently acquired or immoral acquired
5. It should not be opposed any public policy or public interest

Before maturity

1. A person must take the NI before the amount due thereon become payable

The person is said to be the holder of a negotiable instrument if he satisfies two conditions:

 The person is entitled to possess the instrument in his own name; i.e., he can have legal
custody of the instrument.

 The person holds the right to receive or recover the amount as mentioned from the
parties liable to pay.

Section 9 ''Holder in due course''

"Holder in due course" means any person who for consideration became the possessor of a
promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee
thereof, if payable to order, before the amount mentioned in it became payable, and without
having sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title.

Simplified Act
A "Holder in due course" is someone who legally obtained a promissory note, bill of
exchange, or cheque in exchange for something of value. This person must have gotten the
document before it was time to pay the amount written on it. If the document is meant to be
given to whoever holds it (payable to bearer), they simply need to be holding it. If it's meant to
be given to a specific person (payable to order), they must be the person named on it or someone
who has been legally given the document (indorsed). Also, they must not have had any good
reason to suspect that there was a problem with the ownership of the document when they got it
from the previous owner.

Conditions to be called Holder in Due Course

1. He must be a Holder: The holder of a negotiable instrument must have the right to possess
the instrument in his own name and also the holder must have the right to recover or receive
payment from the parties liable to pay for the negotiable instrument.

2. He must be a Holder for a Valid Consideration: The holder of a negotiable instrument must
have given lawful consideration to acquire the negotiable instrument. If someone gets a cheque
as a gift, he cannot become a holder in due course of that cheque. Therefore, if a person gets an
instrument without consideration, he cannot enforce it as a holder in due course.

3. He must Acquire the Instrument before Maturity: The holder of a negotiable instrument
must have acquired the instrument either on or before the date of maturity.

4. Holder must take the Instrument in Good Faith: The holder of a negotiable instrument
must take the instrument in good faith which means, acting without any negligence and honesty.

Section 10 "Payment in due course"

"Payment in due course" means payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for believing that he is not entitled to
receive payment of the amount therein mentioned.

Simplified Act
"Payment in due course" refers to paying someone the amount written on a financial document
(like a check or promissory note) as it seems it should be paid based on the document itself. This
payment should be made honestly and carefully to someone who has the document and seems to
have the right to be paid. There shouldn't be any obvious reasons to doubt that the person should
get the money.
Section 13 ''Negotiable instrument''

What is a negotiable instrument?

 It's a document guaranteeing the payment of a specific amount of money, either on

demand or at a set time. The common types include promissory notes, bills of exchange,
or cheques.

 These can be paid to someone specific if the document says so, and as long as it doesn't
say it can't be transferred to someone else.

 If the document doesn't name a specific person, or if it has a signature on the back (an
indorsement) without any specific name, it can be paid to whoever holds it (the bearer).

 Even if the document says it's payable to a specific person but not specifically "to the
order of" that person, that person can still choose to have it paid to themselves or
someone else they designate.

Who can it be paid to?

 A negotiable instrument can be made out to be paid to more than one person working
together.

 It can also be set up so that it's payable to one person or another (in the alternative), or to
any one of several people.

Section 22 ''Maturity''

The maturity of a promissory note or bill of exchange is the date at which it falls due.

Days of grace - Every promissory note or bill of exchange which is not expressed to be payable
on demand, at sight or on presentment is at maturity on the third day after the day on which it is
expressed to be payable.

Section 23- Calculating maturity of bill or note payable so many months after date or sight

In calculating the date at which a promissory note or bill of exchange, made payable a stated
number of months after date or after sight, or after a certain event, is at maturity, the period
stated shall be held to terminate on the day of the month which corresponds with the day on
which the instrument is dated. If the month in which the period would terminate has no
corresponding day, the period shall be held to terminate on the last day of such month.

Illustrations

 (a) A negotiable instrument, dated 29th January, 1878, is made payable at one month
after date. The instrument is at maturity on the third day after the 28th February, 1878.

 (b) A negotiable instrument, dated 30th August, 1878, is made payable three months after
date. The instrument is at maturity on the 3rd December, 1878.

 (c) A promissory note or bill of exchange, dated 31st August, 1878, is made payable three
months after date. The instrument is at maturity on the 3rd December, 1878.

Section 24 Calculating maturity of bill or note payable so many days after date or sight

In calculating the date at which a promissory note or bill of exchange made payable a certain
number of days after date or after sight or after a certain event is at maturity, the day of the date,
or of presentment for acceptance or sight, or of protest for non-acceptance, or on which the event
happens, shall be excluded.

Explanation using Example

Imagine John issues a promissory note to Sarah on March 1st, which states that the amount is to
be paid 30 days after the date of the note. According to Section 24 of The Negotiable Instruments
Act, 1881, when calculating the maturity date of this promissory note, March 1st—the day the
note was issued—would not be counted. Therefore, the 30-day period starts on March 2nd,
making the maturity date of the note March 31st, which is when Sarah can expect payment from
John.

Section 25 When day of maturity is a holiday

When the day on which a promissory note or bill of exchange is at maturity is a public holiday,
the instrument shall be deemed to be due on the next preceding business day.

Explanation - The expression "public holiday" includes Sundays and any other day declared by
the Central Government, by notification in the Official Gazette, to be a public holiday.
Section 14 Negotiation

Negotiation of instrument. 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.

Section 46 Delivery

When someone makes, agrees to, or signs a promissory note, bill of exchange, or cheque, it's not
considered complete until it's actually given to someone else. This can be a physical handover or
something that is understood to be equivalent. If the person directly involved in the transaction is
handing it over, they must do it themselves or have someone they've authorized do it for them to
make it official.

If there's a dispute involving the original parties or someone who got the instrument but isn't the
ultimate intended recipient, it might be argued that the instrument was handed over with specific
conditions or just for a limited purpose, not to fully transfer ownership.

If a promissory note, bill of exchange, or cheque doesn't specify a person and can be given to
anyone, simply handing it over to someone else makes it theirs to use.

If a promissory note, bill of exchange, or cheque does specify a person, the current holder can
make it theirs to use by signing the back and then handing it over.

Section 47 Negotiation by delivery

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to
bearer is negotiable by delivery thereof. Exception - A promissory note, bill of exchange or
cheque delivered on condition that it is not to take effect except in a certain event is not
negotiable (except in the hands of a holder for value without notice of the condition) unless such
event happens.

Illustrations
  (a) A, the holder of a negotiable instrument payable to bearer, delivers it to B's agent to
keep for B. The instrument has been negotiated.

 (b) A, the holder of a negotiable instrument payable to bearer, which is in the hands of
A's banker, who is at the time the banker of B, directs the banker to transfer the
instrument to B's credit in the banker's account with B. The banker does so, and
accordingly now possesses the instrument as B's agent. The instrument has been
negotiated, and B has become the holder of it.

Section 48 Negotiation by indorsement

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable
to order, is negotiable by the holder by indorsement and delivery thereof.

Simplified Act
A promissory note, bill of exchange, or cheque that is meant to be paid to a specific person can
be transferred to someone else by the current holder. This is done by signing the back
(endorsing) and then giving it to the new person (delivery). However, this is all under the
condition that it follows the rules set out in section 58 of the same law.

Section 50 Effect of indorsement

When someone signs the back of a negotiable instrument (like a check) and hands it over, they
pass on the ownership of the instrument to the person they give it to (the indorsee). This person
can then either use it or sign it over to someone else (further negotiation).

However, the person signing it over (the indorser) can use specific words to limit what the
receiver can do with it. They might say the receiver can only cash it, or that they are only acting
as a middleman to cash it for someone else, or for the person who signed it over.

Examples

If B writes on different negotiable instruments:

 (a) "Pay the contents to C only".

C cannot sign it over to anyone else.
 (b) "Pay C for my use."
C cannot sign it over to anyone else.
Section 51 Who may negotiate

Every sole maker, drawer, payee or indorsee, or all of several joint makers, drawers, payees or
indorsees, of a negotiable instrument may, if the negotiability of such instrument has not been
restricted or excluded as mentioned in section 50, indorse and negotiate the same.

Explanation - Nothing in this section enables a maker or drawer to indorse or negotiate an

instrument, unless he is in lawful possession or is holder thereof; or enables a payee or indorsee
to indorse or negotiate an instrument, unless he is holder thereof.

Illustration - A bill is drawn payable to A or order. A indorses it to B, the indorsement not

containing the words "or order" or any equivalent words. B may negotiate the instrument.

Section 58 Instrument obtained by unlawful means or for unlawful consideration

When a negotiable instrument has been lost, or has been obtained from any maker, acceptor or
holder thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or
indorsee who claims through the person who found or so obtained the instrument is entitled to
receive the amount due thereon from such maker, acceptor or holder, or from any party prior to
such holder, unless such possessor or indorsee is, or some person through whom he claims was, a
holder thereof in due course.
Section 26 Capacity to make, etc, promissory notes, etc

Every person capable of contracting, according to the law to which he is subject, may bind
himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation
of a promissory note, bill of exchange or cheque.

Minor - A minor may draw, indorse, deliver and negotiate such instruments so as to bind all
parties except himself.

Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept
such instruments except in cases in which, under the law for the time being in force, they are so
empowered.

Section 27 Agency

Every person capable of binding himself or of being bound, as mentioned in section 26, may so
bind himself or be bound by a duly authorized agent acting in his name. A general authority to
transact business and to receive and discharge debts does not confer upon an agent the power of
accepting or indorsing bills of exchange so as to bind his principal. An authority to draw bills of
exchange does not of itself import an authority to indorse.

Explanation using Example

Imagine John is a business owner who frequently deals with negotiable instruments like cheques
and bills of exchange. John is planning to leave the country for a vacation, but he knows that
there will be transactions that need his attention while he's away. He decides to appoint his
trusted employee, Sarah, as his agent with the authority to handle certain financial transactions
on his behalf.

To ensure that Sarah can legally bind John in these transactions, John provides her with a
specific power of attorney that explicitly states she can endorse cheques and accept bills of
exchange in his name. This is necessary because under Section 27 of The Negotiable
Instruments Act, a general authority to manage business does not include the power to endorse or
accept negotiable instruments. By taking this step, John ensures that any actions Sarah takes with
respect to negotiable instruments are legally binding on him.
Section 28 Liability of agent signing

An agent who signs his name to a promissory note, bill of exchange or cheque without indicating
thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility,
is liable personally on the instrument, except to those who induced him to sign upon the belief
that the principal only would be held liable.

Section 29 Liability of legal representative signing

A legal representative of a deceased person who signs his name to a promissory note, bill of
exchange or cheque is liable personally thereon unless he expressly limits his liability to the
extent of the assets received by him as such.

Section 30 Liability of drawer

The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or
acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to,
or received by, the drawer as hereinafter provided.

Explanation using Example

Imagine John issues a cheque to Alice for Rs. 10,000 as payment for her services. Alice presents
the cheque at the bank, but it gets bounced due to insufficient funds in John's account. Alice then
sends a formal notice to John about the dishonoured cheque. Under Section 30 of The Negotiable
Instruments Act, 1881, since John, the drawer of the cheque, has been notified of the dishonour,
he is now legally obligated to compensate Alice, the holder of the cheque, for the amount that
was dishonoured.

Section 31 Liability of drawee of cheque

The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable
to the payment of such cheque must pay the cheque when duly required so to do, and, in default
of such payment, must compensate the drawer for any loss or damage caused by such default.

Explanation using Example

Let's say John has an account with ABC Bank and writes a cheque to Emma for $500, which is
well within the balance he has in his account. When Emma goes to ABC Bank to cash the
cheque, the bank must honor the cheque and pay Emma the $500 because John has sufficient
funds. If ABC Bank refuses to pay without a valid reason, they are in default, and John may be
able to claim compensation from the bank for any loss or damage he suffers as a result of the
bank's refusal to pay, such as a damaged business relationship or reputation.

Section 32 Liability of maker of note and acceptor of bill

In the absence of a contract to the contrary, the maker of a promissory note and the acceptor
before maturity of a bill of exchange are bound to pay the amount thereof at maturity according
to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of
exchange at or after maturity is bound to pay the amount thereof to the holder on demand. In
default of such payment as aforesaid, such maker or acceptor is bound to compensate any party
to the note or bill for any loss or damage sustained by him and caused by such default.

Explanation using Example

Imagine Jane issues a promissory note to John for Rs. 10,000, promising to pay him on April 1st.
April 1st comes, and Jane does not pay. Under Section 32 of The Negotiable Instruments Act,
1881, unless they had a separate agreement stating otherwise, Jane is legally obligated to pay
John the Rs. 10,000 according to the terms of the promissory note. Because Jane failed to pay on
the due date, she would also be liable to compensate John for any loss or damage he suffered due
to her not paying on time, such as interest charges or financial penalties John might have faced.

Section 34 Acceptance by several drawees not partners

Where there are several drawees of a bill of exchange who are not partners, each of them can
accept it for himself, but none of them can accept it for another without his authority.

Section 35 Liability of indorser

In the absence of a contract to the contrary, whoever indorses and delivers a negotiable
instrument before maturity without, in such indorsement, expressly excluding or making
conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour
by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to
him by such dishonour, provided due notice of dishonour has been given to, or received by, such
indorser as hereinafter provided. Every indorser after dishonour is liable as upon an instrument
payable on demand.

Explanation using Example

Imagine Alice writes a check to Bob for $500. Bob then endorses the check by signing the back
and gives it to Carol in exchange for goods. When Carol presents the check at the bank, it's found
that Alice's account doesn't have enough funds, and the check is dishonored. Since Bob didn't
specify any conditions when he endorsed the check to Carol, under Section 35 of The Negotiable
Instruments Act, 1881, he is liable to compensate Carol for the $500, as long as Carol has given
Bob proper notice about the dishonor in a timely manner.

Section 36 Liability of prior parties to holder in due course

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

Explanation using Example

Imagine that Sarah issues a personal check to Bob for $500. Bob then endorses the check over to
Alice, a holder in due course, who is not aware of any problems with the check. However, when
Alice tries to cash the check, it bounces due to insufficient funds in Sarah's account. Under
Section 36 of The Negotiable Instruments Act, 1881, not only is Sarah (the issuer of the check)
liable to Alice for the amount, but Bob is also liable to Alice, as he is a prior party to the
instrument. This means Alice can seek payment from either Sarah or Bob to satisfy the amount
owed on the check.

Section 37 Maker, drawer and acceptor principals

The maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance,
and the acceptor are, in the absence of a contract to the contrary, respectively liable thereon as
principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer
or acceptor, as the case may be.

Explanation using Example

Imagine John issues a promissory note to Mike, promising to pay him Rs. 10,000 in three
months. According to Section 37 of The Negotiable Instruments Act, 1881, John is the maker of
the promissory note and is primarily responsible for paying Mike the amount. If John fails to
pay, and there is no other agreement stating otherwise, he is the principal debtor and is fully
liable to pay Mike the Rs. 10,000 when the note is due.
Indorsements

o Section 15 of the Negotiable Instruments Act 1881 defines an “Indorsement” as when the
maker or the 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 indorse the same and is called the
“indorser”.

o Indorsement means transferring of any document or instrument to another person by

signing on its back, face, or on a slip of paper attached to it.

o An indorsement is a mode of negotiating a negotiable instrument.

o A negotiable instrument payable otherwise than to a bearer can be negotiated only by

indorsement and delivery.

o The person to whom the instrument is indorsed is called the indorsee.

o Thus, usually, the indorsement is on the back of the instrument though it might also be on
the face of it.