Negotiable Instruments Act PART 2

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 a electronic form.

Parties in a Cheque: 3 parties {Section 7}

1. Drawer
2. Drawee
3. Payee

Eg: Adani Ji sold steel to Bambani Ji for Rs. 1 lakh. Bambani Ji has a savings account
with Bank of India (BOI). Bambani Ji issued a cheque of BOI of Rs. 1 lakh to Adani
Ji for payment against the purchase of steel.
So here,
Drawer is Bambani Ji, who has issued the cheque.
Drawee is BOI, who has been directed to make the payment.
Payee is Adani Ji, who is the beneficiary as he will be receiving the money.

In the above attached cheque, Rajarshi Pal is the drawer, Axis Bank is drawee and
Satya Sudheer Khanda is the Payee.

Drawee in case of need: When in the bill or any enforcement 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”. [Section 7]
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. [Section 7]

It is clear that cheque is a kind of bill of exchange and therefore it must be drawn in
accordance with the requirements of section 5 of NI Act. But a cheque has two
additional qualifications namely:

• It is always drawn on a bank; and

• It is always payable on demand

Accordingly, it can be said that all cheques are bills of exchange, but all bills of
exchange are not cheques.

Presumption: Section 139 of NI Act provides that holder of the cheque is presumed to
have received the cheque in discharge of whole or part of the debt or liability, unless
contrary is proved.

Section 6(a): Cheque in electronic form: means a cheque drawn in electronic form
by using any computer resource and signed in a secure system with digital signature.

Section 6(b): A Truncated cheque: a cheque which is truncated during the course of
a clearing cycle, 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.

Cross Cheque Meaning

The general crossing of a cheque is a banking practice that enhances the

security of a cheque by indicating that it must be deposited directly into a bank
account and cannot be cashed at a bank counter. A cheque is considered crossed
when two parallel lines are drawn across its face, usually with the words
"Account Payee" or "Not Negotiable" written between the lines or alongside
them.

WHO IS AUTHORIZED TO CROSS A CHEQUE?

In accordance with Section 125 of NI Act, following persons are authorised to

cross a cheque:

1. The Holder
• The holder of a cheque is authorised to cross a cheque , either in general or in
particular if the cheque is not crossed.

• He is also entitled to cross a cheque , especially if the same is generally

crossed.

• He can also add the words “non-negotiable” to crossed cheques in general

and in particular.

2. The Banker

• The banker in whose favour a cheque is crossed in particular can also cross it
in favour of another banker or his agent for collection purpose. Such a
crossing is called special double crossing.

Purpose

• Security: The primary purpose of crossing a cheque is to prevent

unauthorized cashing. It ensures that the cheque can only be deposited
into the account of the payee, reducing the risk of theft or fraud.
• Controlled Payment: It directs the payment to a specific bank account,
adding an extra layer of control over the transaction.

Types of Crossing

1. General Crossing (sec 123): This is when the cheque is crossed with two
parallel lines without any specific bank name mentioned. It indicates that
the cheque can be deposited into any bank account.
 2. Special Crossing (Sec 124): This includes the name of a specific bank
between the lines. It means the cheque can only be deposited at that
particular bank.

Types of cheques

1. Bearer Cheque
A bearer cheque is the one in which the payment is made to the person bearing or
carrying the cheque. These cheques are transferable by delivery, that is, if you are
carrying the cheque to the bank, you can be issued the payment to. The banks need no
other authorisation from the issuer to be allowed to make the payment.

How can you identify a bearer cheque? You know it is a bearer cheque when you see
the words ‘or bearer’ printed on them.

2. Order Cheque
In these cheques, the words ‘or bearer’ is cancelled. Such cheques can only be issued
to the person whose name is mentioned on the cheque, and the bank will do its
background check to authenticate the cheque bearer’s identity before releasing the
payment.

3. Crossed Cheque

You may have observed cheques with two sloping parallel lines with the words ‘a/c
payee’ written on the top left. That is a crossed cheque. The lines ensure that
irrespective of who presents the cheque, the payment will only be made to the
individual whose name is written on the cheque, in other words, the a/c payee along
with his/her account number. These cheques are relatively safe because they can be
encashed only at the drawee’s bank.

4. Post-Dated Cheque

These types of cheques bear a later date of being encashed. Even if the bearer
presents this cheque to the bank immediately after getting it, the bank will only
process the payment on the date mentioned in the cheque. This cheque stands valid
past the mentioned date, but not before.

5. Stale Cheque
A cheque past its validity, three months after the date of being issued, is called a stale
cheque.

6. Traveller’s Cheque

Foreigners on vacations carry traveller’s cheques instead of carrying hard cash, which
can be cumbersome. These cheques are issued to them by one bank and can be
encashed in the form of currency at a bank located in another location or country.
Traveller’s cheques do not expire and can be used for future trips.

7. Self Cheque
You can identify self cheques by the word ‘self’ written in the drawee column. Self
cheques can only be drawn at the issuer’s bank.

8. Banker’s Cheque

A bank is the issuer of these types of cheques. The bank issues these cheques on
behalf of an account holder to make a remittance to another person in the same city.
Here the specified amount is debited from the bank account of the customer, and
then, the cheque is issued by the bank. This is the reason banker’s cheques are called
non-negotiable instruments as there is no room for banks to dishonour these cheques.
They are valid for three months. They can be revalidated provided specific conditions
are met.
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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 too receive or recover the
amount due thereon from the parties thereto.

Section 9: Holder in due course

It 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.

Thus, a holder in due course may be either (a) possessor of a promissory note, bills of
exchange or cheque payable to bearer, or (b) the payee or endorsee thereof in other
cases. In each case, however, the following three conditions must be satisfied for a
holder in due course:
1. he must be a holder for valuable and lawful consideration
2. he must become the holder before the amount become payable i.e. before
maturity; and
3. he must become the holder without having sufficient cause to believe that any
defect existed in the title of the person from whom he derived the title.

Privileges of a Holder in Due Course

1. He gets a Better Title than that of the Transferor: The Holder only gets the
same title as his transferor, but a holder in due course gets a better title than that of
his transferor, and he is in a privileged position. The liable parties can't make any
defense by making a plea that the instrument was lost, obtained through fraud, or that
the instrument is for an unlawful consideration against a holder in due course.
2. Privilege in case of Inchoate Stamped Instruments (Section 20): In the case of
an inchoate instrument, if the holder fills in more than the amount for which he was
actually authorized, the holder cannot enforce the negotiable instrument for the whole
of the amount. If an inchoate instrument is transferred to a person who possesses the
title of the holder in due course, he can claim the whole of the amount as mentioned
on the instrument and the amount as covered by the stamp.
3. Liability of Prior Parties (Section 36): All the prior parties liable to a negotiable
instrument, including the maker or drawer, acceptor, and intervening endorsers of the
negotiable instrument, continue to be liable to a person who has derived the title of a
holder in due course, both jointly and severally, until the negotiable instrument is
duly satisfied. Whereas, in the case of a holder, only the preceding party is liable to a
succeeding party.
4. Privilege in the Case of Fictitious Bills (Section 42): In the case of a fictitious
bill, both the drawer and payee are fictitious persons. When a negotiable instrument is
drawn in a fictitious name and such an instrument is made payable to the drawer’s
order, the bill is said to be a fictitious bill, such a bill is not considered good and
cannot be held valid. But the acceptor of such a bill is liable to a person who has the
title of the holder in due course, provided the latter can show that the first
endorsement and the signature on the instrument of the supposed drawer are in the
same handwriting.
5. Privilege when an Instrument Delivered Conditionally is Negotiated (Section
46 and Section 47): When any negotiable instrument is endorsed or delivered
conditionally or for a special purpose only and not with the idea of transferring
absolute property, the property in the instrument does not pass to the endorsee, and he
is merely considered a bailee with limited title and limited power of negotiating the
instrument. This, however, does not affect the rights of a person who gains the title of
the holder in due course; i.e., if such an instrument is negotiated with a person with
the title of the holder in due course, the parties liable for the instrument cannot escape
their liability.
6. Estoppel against Denying Original Validity of Instrument (Section 120): In a
case where no consideration actually passed between the maker and the payee of a
negotiable instrument, it cannot be put forth against the holder in due course by the
drawer of a negotiable instrument for the honor of the drawer. However, the above
parties are not excluded from challenging the validity of the instrument on the
grounds that, at the time of making the instrument, the party was a minor, the
signature of the party had been forged, or the instrument is otherwise a void-ab-initio
transaction.
7. Estoppel against Denying Capacity of Payee to Endorse (Section 121): A
person having the title of the holder in due course can claim payment in his own
name despite the fact of the payee’s incapacity to endorse the instrument. As
established by Section 51, only the holder or a person in lawful custody of the
instrument is competent to endorse it. In this case, any person who receives the
negotiable instrument for any gambling debt or for an unlawful consideration cannot
negotiate the negotiable instrument. Furthermore, the holder, in due course, enjoys a
privilege in this case, and he gets a good title without any defect, even if he holds a
negotiable instrument endorsed by a person who received the instrument for an
unlawful consideration. As mentioned in Section 121, no maker of a note or acceptor
of a bill payable to order shall be permitted to deny the payee’s capacity to endorse
the same.
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Negotiable Instruments Act PART 3

The holder of a negotiable instrument may sign his or her name on the back of that
instrument, which replicates the transfer of title or ownership of that negotiable
instrument, this process is termed as an endorsement. An endorsement can be done by
keeping another individual or an entity in a favorable position. Thus, we can say that
an endorsement helps in the transfer of the property to another individual or a legal
entity.

Section 15: 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.

An Endorser and an Endorsee

In an act of endorsement, there are mainly two persons - Endorser and Endorsee who
initiates the act overall.

The person to whom the instrument is being endorsed is known as the endorsee.
While the person who is making the endorsement is known as the endorser.

Types of Endorsement
1. The Endorsement in Blank or General Endorsement
2. The Endorsement in full or Special Endorsement
3. Conditional Endorsement.
4. Restrictive Endorsement.
5. Partial Endorsement.
6. Facultative Endorsement.

Section 16: Endorsement “in blank” and “in full”

Blank Endorsements- If the endorser signs his name only, the endorsement is said to
be in blank and it becomes payable to bearer.

Endorsements in full: Blank endorsement can be converted to full endorsement by

writing name of the endorsee. This can be done by holder without his signatures by
writing name above the endorser’s signatures.
Eg: “Pay to Mr. Santa or order”.

Conditional Endorsement: The endorser puts some condition along with

endorsement. Eg: Pay to Ms. Ziva or order on her attaining the age of 21 years.
So, there is a condition that Ziva will received the payment only after attaining the
age of 21 years.

Restrictive Endorsement: When the endorser restricts further negotiation of

instrument.
Eg: If it is written that ‘Pay to Ms. Ziva only”
So, Ms. Ziva loses the right to further endorse the negotiable instrument as she is
being restricted.

Partial Endorsement: In case, part payment of bill has been made and a note to that
effect has been given in the instrument, it can be endorsed only for the balance unpaid
amount. Otherwise, a negotiable instrument can be endorsed for full amount and not
for partial amount.
Eg: Tina sold her necklace to Anjali for Rs. 2 lakhs. At present, Anjali is not having
funds to make the full payment. So, Anjali made a part payment of Rs. 1 lakh to Tina
and for remaining Rs. 1 lakh, Anjali issued a negotiable instrument in favour of Tina
to make the payment after a certain period of time.

Section 30: Liability of drawer of bill

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.

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.