Intro for NI
Sec 13- ni means any PN, BOE, cheque payable either to order or to bearer
Conditions for good title
- Good faith
- For consideration
- Before maturity
What do you understand by a
promissory note? Discuss
sec 4 of NI act 1884
Written Document – Oral promises don’t count.
Unconditional Promise to Pay – No “if” or “subject to” conditions.
Signed by Maker – Without signature, no liability.
Certain Sum of Money – Fixed and ascertainable.
Payable to a Certain Person / Order / Bearer – Beneficiary must be identifiable.
Excludes Bank Note or Currency Note – Cannot be treated as PN under NI Act.
I promise to pay Ram or order ₹10,000.” ✅
“I promise to pay Shyam ₹5,000 after my marriage.” ❌
Difference between promissory note and boe
Pn sec 4
Boe sec 5
- Maker and payee
Drawer, drawee, payee - Promise vs order
- Maker is the debtor
Drawer is the creditor, drawee is debtor - Liability of maker - primary plus absolute
Liablity of drawer - secondary plus conditional
Drawee- primary and unconditional - Not payable to maker himself
Drawer and payee and can be same
Cheque vs bill of exchange . All cheques are bill of exchange but not vice versa
- c- drawee is bank
Boe- drawee could be any person - C- payable on demand
Boe- grace period of 8 days allowed if BOE is not payable on demand - System of crossing cheques
- In case of cheques drawer may revoke the authority by informing the bank. Bank can stop if it comes to know about customers death or insolvency
In BOE authority cannot be removed in any of these ways
- No system of noting and protesting dishonour of cheques
holder
To be a holder, a person must:
entitled to Possess the instrument lawfully in his name
Be entitled to the amount (right to receive/recover).
Conditions to become HDC
- Must have received the NI as a holder- payee ( order instrument), bearer (bearer instrument), endorsee
- Obtain it for consideration - if no or unlawful not HDC
- Received before maturity - if after maturity then he will have the same title as transferor
- He must act in good faith - honest belief in the title of the transferor, reasonable diligence
why the concept of HDC
Negotiable instruments (like cheques, BoE, PN) are designed to circulate as substitutes for money.
To make circulation safe and speedy, law confers special protection on bona fide holders → Holder in Due Course
Without HDC, free transferability and commercial confidence would collapse.
Without HDC, investigation of title for each transfer would slow down commerce.
Balances Risk Between Innocent Parties and Defaulters
Example: If A issues a cheque to B for goods not delivered, and B negotiates it to C (HDC) →
C can recover, and A bears the risk, as he chose to trust B.
Rights and privileges of HDC
- Prima facie, every holder is deemed to be HDC until proved otherwise.
Effect: Burden of proof is on the party alleging bad faith or knowledge of defect. - Privilege against incohate stamped instrument , wherein the holder exceeds his authority in filling in the blanks, provided that the amount filled is covered by stamp fixed there on
- If an instrument is delivered conditionally or for a special purpose but reaches an HDC,
→ HDC can enforce payment as if delivered absolutely. (ex: servant to whom given for safe custody gives it to HDC - Prior defect - sec53, 58- even if transferred by a person with defect title ( for ex via theft, fraud, unlawful consideration) the HDC will get get good title
- Estoppel against prior parties- the maker or drawer of NI are not entitled to allege against a HDC that NI as originally drawn was not valid
- Acceptor of BOE, cannot as against Hdc say that other parties to the bill are fictitious ( sec 42)
Finder of a lost negotiable instrument
Sec 58 - finder of a lost NI has no rt to receive the amount of NI
Difference between Holder and HDC
May or may not be for consideration vs Must acquire for consideration Before maturity Good faith Privileges Right to sue - a holder cannot sue all the prior parties and a HDC can sue all the prior parties Doesn’t get a better title from the previous holder vs title gets cured when HDC posession
Milind shripad vs KALIM khan- suite for recovery of amount which is liable through negotiable instrument can only be filed by a person who is a HDC
Jurisprudence- humanely impossible to have full knowledge of history of HDC beyond due deligence
Who can make negotiable
instrument? Whether a
promissory note duly executed in
favour of minor is void? Give
reasons
Any person competent to contract under Section 11 of the Indian Contract Act, 1872 can make a negotiable instrument, i.e.,
Major (18 years or above)
Of sound mind
Not disqualified by law
Since making a negotiable instrument involves creating liability, the maker/drawer must be contractually competent.
As per NI Act, 1881
A minor can be a payee or endorsee (receive payment). ✅
A minor can draw or endorse an instrument, but he is not personally liable. ❌
A promissory note in favour of a minor makes the minor the payee, which confers a benefit without imposing liability.
- Unsound mind - liable if lucid interval
- Trading company - in course of business
Non trading and trading - cheques - Insolvents- cannot be
- Principle and agent - no general right with agent
Negotiation vs Endorsement sec 15.. types of endorsement
Negotiation
* It is the transfer of a negotiable instrument to another person so as to make that person the holder of the instrument.
* It can occur by delivery (for bearer instruments) or by endorsement + delivery (for order instruments).
endorsement:It is the act of signing a negotiable instrument (usually on the back or a slip attached) for the purpose of negotiation.
It is one of the steps that may be required to negotiate order instruments.
Essentials
1. On or allonge
2. Signed
3. Completed by delivery
Types
- Blank: endorser signs only his name, without specifying an endorsee
Cheque payable to “Ram or order”
Ram signs at back “(Signed) Ram” → Anyone holding it can claim payment. - Full- now only endorsee can negotiate
“Pay to Shyam or order” (Signed) Ram. - Restrictive - stops further negotiate
- Sans Recourse: Endorser denies liability → “Pay to Shyam without recourse to me.”
- Facultative -Endorser waives some rights (like requirement of notice of dishonour).
Effect: Increases liability of endorser.
ex: pay A or order, notice of dishonour waived - Sans frias- Endorser directs that no expenses (like protest charges) be incurred on his account.
- Contingency - Pay to Shyam if he marries before Dec 2025
S 138 of ni act
- Intro- new dimension, cheques with no intention to honour, untill 1988 civil offence. Amendment of 1988- promptitute and remedy and credibility- criminal offence for dishonour.
1.a - strict liability no mens rea - 5 ingredients
A. Drawing of check
B. Presentment
C. Return unpaid by drawee
D. Holder giving notice within 30 days
E. Failure of drawer to make payment within 15 days
The cause of action starts from 16th day. CONCATENATION OF ALL THE 5 - Mohd Shafi vs Noor mohd (2022) - court reiterated that sec138 should be interpreted in a liberal manner to achieve the objectives of cases of cheque dishonour. Cheques dishonoured due to stop payment, account closed, signature mismatch ,,all fall within the ambit of sec 138.
- Suni Todi vs state - sec 138 to cheque dishonour case when there was no debt at the time of drawing the cheque , but incurred after that but before the presentment
- Jurisdiction
- a - K BHASKARAN CASE- at any of the 5 places where any of 5 ingredients. This led to stalled proceedings- dishonest drawers challenging jurisdiction
- b- Dasrath rupsingh Rathode case - 2 principled
* Where cheque delivered for collection of acc- where the payee maintains his account
* Where checque delivered for OTC- Court where the drawer maintains his account
Both these principles were inserted by the way of sec 142 (2) in the 2015 amendment
- 2018 amendment
143A- can direct drawer to pay interim amount compensation
148 A- appellate court can order the drawer of cheque to deposit an amount
Re: expeditious trial
2 cases to write in intro part of 138 NI act
- Mohd shafi vs Noor mohd
- Suni Todi vs state
Which case led to the latest development of jurisdiction of 138
Dasrath rupsingh rathode case
Case for a cheque marked not negotiable is nevertheless negotiable
Wilson and meeson vs Pickering
Fraudulently completed by an agent and transferred to a person to whom the agent was indebted. Held that tranfaree was affected by the fraud
2 articles for a checque marked non negotiable
- A 123- NI act permits crossing as nn
- 130 - such crossing materially diminishes the negotiable value of the cheque. Transferee will get the same title as transferor. He cannot become holder in due course
What is material alteration . Define
An alteration if it alters
- The character or legal effect of NI
- The rights and liablities of any of the party
examples
Alterations that affect:
* Date – e.g., changing the date of a cheque to extend its validity.
* Sum payable / Amount in words or figures – increasing or decreasing payment.
* Time of payment – e.g., “30 days after sight” changed to “60 days after sight.”
* Place of payment – changing branch or city where payable.
* Rate of interest – altering interest rate in PN or BoE
Burden of proof: custodian of NI to explain alteration
What is the effect of material alteration
S 87- renders the same void and discharges the non consenting party of any obligation to perform according to the terms of the NI
S88- person who become parties to the instrument post alteration are liable
Kinds of alteration allowed under NI act
- Filling blanks of incohate
- Conversion of blank endorsement into full
- Crossing of cheques
- Conversion of bearer into order by deleting the word bearer
- Correcting a clerical error
- Alteration made with consent of the parties liable
Define bearer instrument
Ownership can be transferred by mere delivery of the instrument
Restrictive endorsement case and what was done to remove that difficulty
Forbes Campbell vs official assignee- sec 50 applicable to even those instruments which were originally payable to the bearer.
Remove difficulty- sec 85 (2) added in 1934.
Bearer cheque will not loose bearer character even if any further restrictive endorsement occurs.
Bank and forgery
- Sec 85
- Babulal Aggarwal vs sbi- sec 85(2) protection ceases
- Escape liability if
- ratification, estoppel ( Babulal Aggarwal case)
- knowledge of customer regarding forgery ( Cana ram bank vs Canara sales corp case)
