Q1) Define Negotiable Instruments Act

A1)The word “Negotiable” means “Transferable by delivery”, and the word “Instrument” means “A written document by which a right is created in favor of some person”. Thus, the term “Negotiable instrument” literally means “a written document transferable by delivery”.

According to Section 13 of the Negotiable Instruments Act,

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

The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cheque and declares that to be negotiable they must be made payable in any of the following forms:

A) Payable to order:

A note, bill or cheque is payable to order which is expressed to be “payable to a particular person or his order”.

But it should not contain any words prohibiting the transfer, e.g., “Pay to A only” or “Pay to A and none else” is not treated as “payable to order” and therefore such a document shall not be treated as the negotiable instrument because its negotiability has been restricted.

There is, however, an exception in favor of a cheque. A cheque crossed “Account Payee only” can still be negotiated further; of course, the banker is to take extra care in that case.

B) Payable to bearer:

“Payable to bearer” means “payable to any person whom so ever bears it.” A note, bill or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank

The definition given in Section 13 of the Negotiable Instruments Act does not set out the essential characteristics of a negotiable instrument. Possibly the most expressive and all-encompassing definition of negotiable instrument had been suggested by Thomas who is as follows:

“A negotiable instrument is one which is, by a legally recognized custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bonfire transferee for value, notwithstanding any defect in the title of the transferor.”

Q2) Give the Characteristics of Negotiable Instruments

A2) Easy Transferability:

A negotiable instrument is freely transferable. Usually, when we transfer any property to somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But, such formalities are not required while transferring a negotiable instrument.

The ownership is changed by mere delivery (when payable to the bearer) or by valid endorsement and delivery (when payable to order). Further, while transferring it is also not required to give notice to the previous holder.

Title:

Negotiability confers an absolute and good title on the transferee. It means that a person who receives a negotiable instrument has a clear and indisputable title to the instrument.

SFA (Sales Force Automation) use in Marketing Management

However, the title of the receiver will be absolute, only if he has got the instrument in good faith and for consideration.

Also, the receiver should have no knowledge of the previous holder having any defect in his title. Such a person is known as the holder in due course.

Must be in writing:

A negotiable instrument must be in writing. This includes handwriting, typing, computer print out and engraving, etc.

Unconditional Order:

In every negotiable instrument, there must be an unconditional order or promise for payment.

Payment:

The instrument must involve the payment of a certain sum of money only and nothing else.

For example, one cannot make a promissory note on assets, securities, or goods.

The time of payment must be certain:

It means that the instrument must be payable at a time which is certain to arrive. If the time is mentioned as “when convenient” it is not a negotiable instrument.

However, if the time of payment is linked to the death of a person, it is nevertheless a negotiable instrument as death is certain, though the time thereof is not.

The payee must be a certain person:

It means that the person in whose favor the instrument is made must be named or described with reasonable certainty.

The term “person” includes individual, body corporate, trade unions, even secretary, director or chairman of an institution. The payee can also be more than one person.

Signature:

A negotiable instrument must bear the signature of its maker. Without the signature of the drawer or the maker, the instrument shall not be a valid one.

Delivery:

Delivery of the instrument is essential. Any negotiable instrument like a cheque or a promissory note is not complete until it is delivered to its payee.

For example, you may issue a cheque in your brother”s name but it is not a negotiable instrument until it is given to your brother.

Stamping:

Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per the Indian Stamp Act, 1899. The value of stamp depends upon the value of the pro-note or bill and the time of their payment.

Right to file suit:

The transferee of a negotiable instrument is entitled to file a suit in his own name for enforcing any right or claim on the basis of the instrument.

Notice of transfer:

It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay.

Presumptions:

Certain presumptions apply to all negotiable instruments, for example, consideration is presumed to have passed between the transferor and the transferee.

Procedure for suits:

In India, a special procedure is provided for suits on promissory notes and bills of exchange.

The number of transfer:

These instruments can be transferred indefinitely until they are at maturity.

Rule of evidence:

These instruments are in writing and signed by the parties, they are used as evidence of the fact of indebtedness because they have special rules of evidence.

Exchange:

These instruments relate to payment of certain money in legal tender, they are considered as substitutes for money and are accepted in exchange of goods because cash can be obtained at any moment by paying a small commission.      

Q3) Explain Promissory Note

A3)A promissory note is a written contract that requires a borrower to pay back a lender an amount of money on a future date. A promissory note, sometimes referred to as a note payable, is a legal instrument, in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms.

Promissory notes usually refer to the borrower as the maker of the note. The borrower generally is said to have made the written agreement because he or she is initiating the transaction. The lender is referred to as the payee because it is the party that first pays the money to the borrower and then receives the payments at a future date. I know this is confusing. Just remember the maker is the borrower and the payee is the lender.

Promissory Note, in the law of negotiable instruments, the written instrument containing an unconditional promise by a party, called the maker, who signs the instrument, to pay to another, called the payee, a definite sum of money either on demand or at a specified or ascertainable future date. The note may be made payable to the bearer, to a party named in the note, or to the order of the party named in the note.

A promissory note is a written agreement to pay a specific amount to specific party at a future date or on demand. In other words, it’s a written loan agreement between two parties that requires the borrower to pay the lender on a day in the future. This could be a set date or a date chosen by the lender.

According to section 4 of the Negotiable Instruments Act, 1881, a promissory note means “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.”

A promissory note is a written and signed contract in which one party promises to pay a specified amount of money to the other party. The terms of a promissory can be tailored to the parties’ needs, as far as the amount borrowed, whether interest will be charged, the schedule or date by which the money must be repaid, and any other neeneeded particulars.

There is no requirement that a promissory note is made on a certain type of paper or document, or that it contains complex language, though it is important to be as specific as possible. In fact, a promissory written and signed on a scrap piece of paper, back of a napkin, or even in an email or text message, is just as valid as a note drawn up by a lawyer.

Q4) Give the types of Promissory Note

A4)Types of Promissory Note:

Though every good promissory note contains certain elements, there are several types of promissory note. These notes are largely classified by the type of loan issued or purpose for the loan. All of the following types of the promissory note are legally binding contracts.

Personal Promissory Note: This type is used to record a personal loan made between two parties. While not all lenders use legal writings when dealing with friends and family, it helps avoid confusion and hurt feelings later. A personal promissory note shows good faith on behalf of the borrower, and provides the lender with recourse should the borrower fail to pay back the loan.

Commercial Promissory Note: A commercial promissory note is typically required with commercial lenders. Commercial promissory notes are often more strict than personal notes. If the borrower defaults on its loan, the commercial lender is entitled to immediate payment of the full balance, not just the past due amount. In most cases, the lender on a commercial promissory note can place a lien on the borrower’s property until payment in full is received.

Real Estate Promissory Note: A real estate promissory note is similar to a commercial note, as it often stipulates that a lien can be placed on the borrower’s home or other property if he defaults. If the borrower does default on a real estate loan, the information can become public record.

Investment Promissory Note: An investment promissory note is often used in a business transaction. Investment promissory notes are exchanged to raise capital for the business, and they often contain clauses that deal with returns on investments for specific periods of time.

Q5)  What are the features of a Promissory Note?

A5) Features of a Promissory Note:

The promissory note must be in writing- Mere verbal promises or oral undertaking does not constitute a promissory note. The intention of the maker of the note should be signified by writing in clear words on the instrument itself that he undertakes to pay a particular sum of money to the payee or order or to the bearer

It must contain an express promise or clear undertaking to pay- The promise to pay must be expressed. It cannot be implied or inferred. A mere acknowledgment of indebtedness is not enough.

The promise to pay must be definite and unconditional- The promise to pay contained in the note must be unconditional. If the promise to pay is coupled with a condition, it is not a promissory note.

The maker of the pro-note must be certain- The instrument should show on the fact of it as to who exactly is liable to pay. The name of the maker should be written clearly and ascertainable on seeing the document.

It should be signed by the maker- Unless the maker signs the instrument, it is incomplete and of no legal effect. Therefore, the person who promises to pay must sign the instrument even though it might have been written by the promisor himself.

The amount must be certain- The amount undertaken to be paid must be definite or certain or not vague. That is, it must not be capable of contingent additions or subtractions.

The promise should be to pay money- The promissory note should contain a promise to pay money and money only, i.e., legal tender money. The promise cannot be extended to payments in the form of goods, shares, bonds, foreign exchange, etc.

The payee must be certain- The money must be payable to a definite person or according to his order. The payee must be ascertained by name or by designation. But it cannot be made payable either to bearer or to the maker himself.

It should bear the required stamping- The promissory note should, necessarily, bear sufficient stamp as required by the Indian Stamp Act, 1889.

It should be dated- The date of a promissory note is not material unless the amount is made payable at the particular time after date. Even then, the absence of date does not invalidate the pro-note and the date of execution can be independently proved. However to calculate the interest or fixing the date of maturity or lm\imitation period the date is essential. It may be ante-dated or post-dated. If post-dated, it cannot be sued upon till ostensible date.

Demand- The promissory note may be payable on demand or after a certain definite period of time.

The rate of interest- It is unusual to mention in it the rated interest per annum. When the instrument itself specifies the rate of interest payable on the amount mentioned it, interest must be paid at the rate from the date of the instrument.

Q6) Explain Bill of Exchange

A6) Bill of Exchange, can be understood as a written negotiable instrument, that carries an unconditional order to pay a specified sum of money to a designated person or the holder of the instrument, as directed in the instrument by the maker. The bill of exchange is either payable on demand, or after a specified term.

In a business transaction, when the goods are sold on credit to the buyer, the seller can make the bill and send it to the buyer for acceptance, which contains the details such as name and address of the seller and buyer, amount of bill, maturity date, signature, and so forth.

Q7) What are the Features of Bill of Exchange?

A7)Features of Bill of Exchange:

An instrument which a creditor draws upon his debtor.

It carries an absolute order to pay a specified sum.

The sum is payable to the person whose name is mentioned in the bill or to any other person, or the order of the drawer, or to the bearer of the instrument.

It requires to be stamped, duly signed by the maker and accepted by the drawee.

It contains the date by which the sum should be paid to the creditor.

For Example:

Sam gives a loan of Rs.1,00,000 to Alex, which Alex has to return after three months. Further, Joseph has bought certain goods from Peter, on credit for Rs. 1,00,000. Now, Joseph can create a document directing Alex, to pay Rs. 1,00,000 to Peter, after three months. The instrument will be called as Bill of Exchange, which is transferred to Peter, on whom the payment is due, for the goods purchased from him.

Q8) What are the Parties to a Bill of Exchange?

A8)Parties to a Bill of Exchange:

There are three parties viz. ‘Drawer’, ‘Drawee’ and ‘Payee’ to a bill of exchange.

Drawer: A bill of exchange is drawn upon the buyer/debtor by the seller/creditor and the drawer is the person who makes and draws the bill. The drawer is entitled to receive money from the debtor.

Drawee: The person upon whom the bill of exchange is drawn is known as drawee. Bill of exchange is drawn on the drawee who is the purchaser of goods. The Drawee of a bill is called the acceptor when he writes the words “accepted” and puts his signatures on it. This process is known as acceptance. After acceptance, the bill of exchange becomes a legal document. This document now binds the drawee to honor the bill on the due date. This acceptance may be general or qualified. In the case of general acceptance, without stating any conditions, the only sign of the acceptor is required. However, in the case of qualified acceptance, the name of the bank or specified place for payment is mentioned.

Payee: The person to whom the payment is made is known as payee. In some cases, the drawer of the bill also becomes the payee when he himself keeps the bill till the date of maturity. Drawer and Payee is usually the same person.

However, in the following cases drawer and payee are two different persons:

(i) When the bill is discounted by the drawer, the person who discounted the bill becomes the payee.

(ii) When the bill is endorsed to a creditor, the endorsee will become the payee.

The content of Bills of Exchange:

The contents of bills of exchange are as under:

Date: The date of the bill on which it is drawn should be written on the top right comer of the bill. This aspect is very important to determine the maturity date of the bill.

Term: This is the tenure of the bill and runs from the date of the bill. This should be specified in the body of the bill. The grace period of three days should be given after the expiry of the term from the date of the bill.

Amount: Amount of the bill should be given both in figures and words. The amount in figures should be mentioned on the top left corner of the bill and amount in words should be mentioned in the body of the bill.

Stamp: Stamp of proper value which depends on the amount of bill shall be affixed on the bills of exchange.

Parties: There may be three parties to the bills of exchange, drawer, drawee, and payee. However, in some cases, drawer and payee may be the same person. All the names of the parties and their addresses should also be invariably mentioned in the bills of exchange.

For Value Received: This aspect is most important in the sense that law does not consider those agreements which have been made without consideration. Consideration means in lieu of and in the context of bills of exchange, it means that the bill has been issued in exchange of some consideration i.e., benefit has already been received.

Q9) Give the Advantages of Bills of Exchange?

A9)Advantages of Bills of Exchange:

The bills of exchange are used frequently in business as an instrument of credit due to the following reasons:

Legal Relationship: Issuing bills of exchange provides a framework which converts and establishes a legal relationship between seller and buyer, from creditor and debtor to drawer and drawee. In the case of any dispute between the parties, this relationship provides a conclusive proof in the court of law.

Terms and Conditions: Bill of exchange contains all terms and conditions of payments viz., amount of the bill, date of payment, place of payment, interest to be paid if any. The maturity date of the bill is also known to the parties to the bill so they can make necessary arrangement for funds.

Mode of Credit: Bill of exchange has been defined as a negotiable instrument under the Negotiable Instruments Act, 1881. The buyer can buy the goods on credit and pay after the period of credit with the help of bill of exchange. In case of urgency, the drawer can also get the payment by discounting the bill from the bank and without waiting for the maturity period.

Easy Transferability: Bill of exchange can be used for settling the debt of the creditors. Mere delivery and endorsement of the bill give a valid title to the endorsee.

Wider Acceptance: In case of the foreign bill, wider acceptance is given to the parties through which payments can be received and made easily.

Mutual Accommodation: Sometimes, the bill can be issued for mutually accommodating the parties so that financial help can be given to each other.

Q10) Explain Cheque.

A10)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 the electronic form. Explanation I. —For the purposes of this section, the expressions—

(a) “a cheque in the electronic form” means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system;

(b) “a truncated cheque” means 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.

Q11) Define Holder and Holder in Due Course

A11)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.

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 endorsee thereof, if 1[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.

Section 9 of N.I. Act, define holder in due course as under.

“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 endorsee 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.”

Holder in due course is a person who takes a negotiable instrument for the value receivable by him in good faith and taken due care and caution while taking such instrument and he had no suspicion or reason to believe any defect existed in the title of the person, from whom he derived title possession of the instrument. Thus, a person claim to be a ‘holder in due course’ should satisfy the following conditions.

Q12) Differentiate between Holder and Holder in due course

A12)Various differences between holder and holder-in-due-course can be explained on the basis of the following

Q13) What are the Privileges granted to a ‘holder in due course’ under the Negotiable Instruments ?

A13) The Privileges granted to a ‘holder in due course’ under the Negotiable Instruments are given below:

1. He gets a better title than that of the transferor:

One who is a ‘holder’ only gets no better title than that of his transferor but a holder in due course is in a privileged position in that he gets a better title than that of the transferor and the defenses on the part of a person liable that the instrument has been lost, or has been obtained by means of an offence or fraud or for an unlawful consideration cannot be pleaded against a holder in due course (Sec. 58).

For example, if P obtains an instrument payable to bearer by theft or fraud, or for an unlawful consideration, he cannot sue on it. But if P transfers the instrument (being a bearer one) to R under circumstances (for value in good faith) which make R a holder in due course, R can sue on the instrument.

The party liable to pay can take, as against P, the defence of theft or fraud, but as against R he will not be allowed to take such a defence.

Further, not only the holder in due course himself gets a good title free from all defects but also serves as a channel to protect all subsequent holders. Once an instrument passes through the hands of a holder in due course it is purged of all defects. Section 53 states that “a holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course.”

Thus, anybody who takes a negotiable instrument from a holder in due course can recover the amount from all prior parties, although he had knowledge of the prior defects e.g., no consideration was paid by some of the prior parties or some one of them was a thief.

It is important to note that a forged instrument, even if it passes through the hands of a holder in due course, cannot be cured of its defect because there is no defect of title but there is complete absence of title.

2. Privilege in case of inchoate stamped instruments (Sec. 20):

In the case of inchoate stamped instrument, if the holder or original payee fills more amount than that was authorised, he cannot enforce the instrument for the whole amount (only actual authorised amount can be recovered).

If such an instrument is transferred to a holder in due course, he can claim the whole of the amount so entered provided that the amount is covered by the stamp affixed thereon. Thus, the defence that the amount filled by the holder was in excess of the authority given cannot be taken against a holder is due course.

3. Liability of prior parties:

All prior parties to a negotiable instrument (i.e., its maker or drawer, acceptor and intervening endorsers) continue to remain liable to a holder in due course both jointly and severally (i.e., he can hold any or all prior parties liable) until the instrument is duly satisfied (Sec. 36). Whereas, only preceding party is liable to a succeeding party, if the succeeding party is only a holder.

4. Privilege in case of Fictitious bills (Sec. 42):

When a bill of exchange is drawn in a fictitious name and is made payable to the drawer’s order (i.e., where both drawer and payee of a bill are fictitious persons), the bill is said to be a fictitious bill. Such a bill is not a good bill and cannot be enforced at law.

But the acceptor of such a bill is liable to a holder in due course provided the latter can show that the first indorsement on the bill and the signature of the supposed drawer are in the same handwriting.

5. Privilege when an instrument delivered conditionally is negotiated:

When a negotiable instrument is endorsed or delivered conditionally or for a special purpose only, e.g., as collateral security or for safe custody, and not with the idea of transferring absolutely property therein, the property in the instrument does not pass to the indorsee, and he is merely a bailee with limited title and power of negotiating it.

This, however, does not affect the rights of a holder in due course, i.e., if such an instrument is negotiated to a holder in due course, the parties liable on the instrument cannot escape liability (Sections 46 and 47).

For example, if I give a cheque to a shopkeeper with the condition that he should not encash the cheque till he supplies me the goods, anybody encashing the cheque prior to fulfilling the condition is liable to return the money except the holder in due course.

6. Estoppel against denying original validity of instrument (Sec. 120):

The plea of original invalidity of the instrument; e.g., that no consideration actually passed between the maker and the payee of a promissory note; cannot be put forth against the holder in due course by the drawer of a bill of exchange or cheque or by the maker of a promissory note or by an acceptor of a bill for the honour of the drawer.

However, the aforestated parties are not precluded from challenging the validity of the instrument on the ground that at the time of making the instrument he was a minor or his signature had been forged or the instrument is otherwise void ab-initio, e.g., where a promissory note is made ‘payable to bearer’ it is void and illegal as per the Reserve Bank of India Act.

7. Estoppel against denying capacity of payee to indorse:

“No maker of a note and no acceptor of a bill payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee’s capacity, at the date of the note or the bill to indorse the same” (Sec. 121).

Thus, a holder in due course can claim payment in his own name despite the payee’s incapacity to indorse the instrument. As per Section 51, only a ‘holder’ or a person in lawful possession of the instrument is competent to indorse. Accordingly, a person who got the instrument for a gambling debt or for unlawful consideration cannot negotiate the same.

However, the holder in due course enjoys a privilege in this regard and he gets a good title even if he holds a negotiable instrument endorsed by a person who got the instrument for unlawful consideration because Section 121 provides that as against a holder in due course, no maker of a note and no acceptor of a bill payable to order shall be permitted to deny the payee’s capacity to indorse the same.

Q14) Explain  Endorsement.

A14)Section 15 defines endorsement as follows: “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 negotiable instrument, he is said to endorse the same, and is called the endorser.”

Thus, an endorsement consists of the signature of the holder usually made on the back of the negotiable instrument with the object of transferring the instrument. If no space is left on the back of the instrument for the purpose of endorsement, further endorsements are signed on a slip of paper attached to the instrument. Such a slip is called “along” and becomes part of the instrument. The person making the endorsement is called an “endorser” and the person to whom the instrument is endorsed is called an “endorse.”

Q15) What are the Kinds of Endorsements?

A15)Endorsements may be of the following kinds:

Blank or general endorsement: If the endorser signs his name only and does not specify the name of the indorse, the endorsement is said to be in blank. The effect of a blank endorsement is to convert the order instrument into a bearer instrument which may be transferred merely by delivery.

Endorsement in full or special endorsement: If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be in full.

Partial endorsement: Section 56 provides that a negotiable instrument cannot be endorsed for a part of the amount appearing to be due on the instrument. In other words, a partial endorsement which transfers the right to receive only a partial payment of the amount due on the instrument is invalid.

Restrictive endorsement: An endorsement which, by express words, prohibits the indorse from further negotiating the instrument or restricts the indorse to deal with the instrument as directed by the endorser is called “restrictive” endorsement. The indorse under a restrictive endorsement gets all the rights of an endorser except the right of further negotiation.

Conditional endorsement: If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability, dependent on the happening of a specified event, although such event may never happen, such endorsement is called a “conditional” endorsement.

In the case of a conditional endorsement, the liability of the endorser would arise only upon the happening of the event specified. But they endorse can sue other prior parties, e.g., the maker, acceptor etc. if the instrument is not duly met at maturity, even though the specified event did not happen.

Q16 )Define Crossing of cheque                                                                              

A16)Crossing a cheque means drawing two parallel transverse lines between the lines on the cheque with or without additional words such as “& CO.” or “Account Payee” or “Not Negotiable.”

Q16) Why cheque is crossed?

A17)Minimizing the risk: The crossing of the cheque gives the paying banker instructions to pay the amount only through the banker and not directly to the payee or holder presenting the amount at the counter. It is an effective way to minimize the risk of loss or falsification.

Paying instructions: Crossing is a way for the paying banker to generally pay the money to a bank or to a particular bank, as applicable.

Payment through the bank: Only a banker can secure the payment of a crossed cheque, which makes it easy for the holder to present it with a quarter of the respectability and credit that is known. By using a crossed cheque, you can ensure that the specified amount cannot be cashed but can only be credited to the bank account of the payee.

The receiver of the amount: As only a banker secures the payment of a crossed cheque, the money received can easily be traced for whose use.

Negotiability: Merely a cheque crossing does not affect it negotiability.

Q17)Who is authorized to Cross a Cheque?

A18)In accordance with the Sec. 125 of the Negotiable Instruments Act, the following persons are authorized to cross the cheque, apart from the drawer:

The Holder

The holder of a cheque is authorized 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.

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 purposes. Such a crossing is called Special Double-crossing.

Q18) What are the Different Types Of Crossing of Cheque?

A19) A crossing of cheques is basically of 2 types:

General Crossing

Special Crossing of cheques.

General Crossing

Section 123 of the Negotiable Instruments Act deals with the general crossing of cheque, In the following cases, a cheque is generally considered to be crossed:

If two parallel transverse lines are marked across the cheque face.

If the cheque has an abbreviation “& C” between the two parallel transverse lines.

If the cheque is written between the two parallel lines, the words “Not Negotiable”.

When the cheque comes with the words “A / C. Payee” between the two parallel transverse lines.

Implications of General Crossing

The effect of the general crossing is that any other banker must submit such a cheque to the paying banker.

Payment can only be made by bank account and should not be made at the bank’s payment counter.

The banker then credits the cheque amount to either the owner of the cheque or the payee ‘s account.

Special Crossing

According to section 124 of the Negotiable instruments Act,

For a cheque to be deemed to have been crossed, the banker’s name had to be added across the face of the cheque.

In case of a special crossing, a cheque must not be crossed by drawing two parallel lines.

Section 124 of The Negotiable Instruments Act, 1881 defines Special Crossing as: “Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable”, that in addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially and to be crossed to that banker.”

Also known as Restricted Crossing.

Two transverse lines must not necessarily be drawn.

The banker’s name is added across the face of the cheque.

The banker’s name may or may not carry the abbreviated word’ & Co.’

Payment can only be made through the bank of the crossing. The banker mentioned at the crossing can appoint another banker to collect such cheques as his agent. Therefore, it is safer than ‘generally’ crossed cheques.

Specially Crossed Cheques are not convertible into General Crossing.

Implications of Special Crossing – The bank pays the banker with his name between the crossing lines.

General Crossing vs Special Crossing

There are also substantial differences between the special and general crossing of cheques. Whereas the inclusion of the banker’s name is a must in the case of a special crossing, the need for a general crossing is to draw two parallel lines. The special crossing of a cheque indicates that the paying banker must only honour the cheque if it is presented to him by the bank mentioned at the crossing. No other person can receive the cheque.

Double Crossing

Section 127 of The Negotiable Instruments Act, 1881

“Where a cheque is crossed specially to more than one banker except when crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof.”

A double-crossed cheque shall be paid by the banker if the second banker acts only as of the agent of the first collecting banker and this is clearly stated on the cheque. i.e., Crossing must specify that the banker to whom it was particularly crossed again acts as the first banker’s agent for the purpose of collecting the cheque..

In the case that the banker to whom a cheque is crossed, has no branch at the place of the paying banker,

Or if he feels the need otherwise, he can cross the cheque to another banker( specifying clearly).

Non-Negotiable Crossing

Although the non- negotiable crossing does not result in the cheque becoming non- transferable, it still loses much of the negotiability of the cheques.

This prevents anyone other than the cheque transferor from holding a better title than the one he has.

However, if such a cheque is transferred for consideration and if such a transfer does not lead to a defect in the transferor ‘s title, the validity of such a non- negotiable crossing is still not removed from the cheque.

Section 130 of the Negotiable Instrument Act which deals with Non-Negotiable crossing states that “a person taking a cheque crossed generally or especially, bearing in either case the words ‘not negotiable’ shall not have and shall not be capable of giving a better title to the cheque than that which person from whom he took it had.”

A/C Payee Crossing

In order to ensure that a cheque will not be able to be encashed by anyone but the rightful owner of the cheque, the words “account payee” are often added to the crossing ensuring that the bank receiving such a cheque is to collect the amount only for the purposes of the payee’s account.

The Advantages of A/C Payee Crossing

The same does not lead to a reduction in the cheque ‘s negotiability or transferability. The Court held that this was also the case in various matters like National Bank v. Lilke and also in the case of A.Z. Underwood Ltd. v. Bank of Liverpool & Martins Ltd. 

Checking with an account payee crossing does not affect the paying banker in any way since it only has to ensure that even if the cheque cannot be collected by the payee himself, the proceeds of the payee are credited to the account of the payee.

Although the words ‘ account payee’ is not mentioned in the Negotiable Instrument Act, they are still considered to be part of the law because of their widespread practice and use.

Non-Negotiable A/C Payee Crossing

It has often been observed that both non- negotiable crossing and crossing of accounts payee help to ensure that cheques are extremely secure. Sometimes, a type of crossing is referred to as a’ non- negotiable account payee crossing.’

Advantages of Non-Negotiable Account Payee Crossing for the Payee:

The non- negotiable element of the crossing makes the cheque non- negotiable and therefore removes the more insecure element of the cheque’s negotiability;

The crossing of the’ account payee’ element serves as a direction for the payee banker to collect the cheque from the payee only, serving as a warning of the banker’s responsibility if he does not do the same.

The Implication of Non-Negotiable Account Payee Crossing– Payment will be credited to the payee account named in the cheque.

Q19) Explain Paying Banker Accountability

A20)Paying banker is also accountable to:

The true owner of the cheque;

The drawer of such a cheque.

Reasons for such Accountability

If the paying banker pays for a cross-cheque that does not comply with the wishes of the drawer that is transmitted through the cheque, Then the banker in question shall be held liable for any loss suffered by him as a result of such payment to the true owner of the crossed cheque.

Similarly, if the paying banker fails to make the payment in accordance with the provisions of Sec. 126 of the Negotiable Instrument Act, the law considers it to be a payment not made in accordance with the instructions of the drawer. This law prevents such a banker from debiting the check amount on his customer’s account, as such payment is considered to have been made to the wrong person.

Q20) What are the Duties of a paying banker as to crossed cheques?

A21)For general Crossing- Sec. 126 of the Negotiable Instruments Act states that crossed cheques are usually only paid to a banker.

For Special Crossing- A cheque crossed in particular should only be paid to the banker to whom it is crossed or who is a collection agent.

For Second Special Crossing- Sec. 127 of the Negotiable Instruments Act, 1881, allows the banker who would act as the agent of the first banker to collect a second special crossing. In the second special crossing, it is, therefore, necessary to specify that the banker in whose favour he is made is the collection agent on behalf of the first banker.

Care and Attention- A banker must not pay a cheque by ignoring the crossing since it is not legally justified to pay the payee in cash over the counter.

Q21)What are the Duties of a Collecting Banker?

A22)Drafts Collection: The collecting banker’s duty is to collect and place the proceeds of both cheques and drafts for his customer’s account, since 85-A of the Negotiable Instruments Act, 1881, defined drafts as “an order to pay money, drawn from one bank office to another bank office”.

Checking Account Holder bona-fides: Establish the Bona- fides of the Account Holder: the banker must ask to determine the Bona- fides of the person who wishes to become a customer. If the banker fails to do so or fails to make a proper introduction or a reliable reference from the proposed customer, he will commit a breach of duty in accordance with section 131 of the Negotiable Instruments Act, 1881.

Crossings Examination: The collecting banker must carefully examine all the crossings and cheques he receives for collection. If the customer gives him a cheque crossed to any banker, in particular, he should not accept it for collection. Likewise, a cheque crossed “Account Payee Only” should only be collected for the payee named in the cheque and nobody else.

Indorsements Examination: While paying, the paying banker usually relies on the discharge of the collecting banker. It is, therefore, a very important duty of the collecting banker to examine all approvals and other material parts of all cheques and drafts before submitting them for collection and discharge on the instruments.

Dishonour Notice: If a cheque is dishonoured upon presentation, the collecting banker is responsible for informing his client accordingly. In addition, the banker has the right to debit a dishonoured cheque to the account of his customer if he has already credited the cheque.

In accordance with Sec. 126 of the Negotiable Instrument Act, the paying banker is obliged to make the payment in accordance with the terms of the crossing on a crossed cheque. This was also laid down in Sec. 126 of the Negotiable Instrument Act, according to which:

“Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker and where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed or his agent for collection.”

Therefore, only a banker is allowed to receive a crossed cheque.

The paying banker is not authorized to send the proceeds of a crossed cheque to the payer or the cheque holder.

Any failure by the paying banker to pay a crossed cheque shall be punishable by liability as defined in Sec. 129 of the Negotiable Instrument Act.

Q22) Explain Bouncing Of Cheque

A23) Cheque bounce is a condition which arises due to the non-payment of the amount because of the lack of balance in the account. For the recovery of the amount, prompt action must be taken. Firstly a letter is sent to the drawer to make payment otherwise proceedings shall be initiated. Sometimes a prompt settlement is done on the letter. Cheque Bounce is a serious offense which is punishable by imprisonment and fine which is stated in the Negotiable Instrument Act. The drawer of the cheque should present the cheque within 30 days from the date of dishonoring of the cheque just to protect his rights as stated in the Negotiable Insttrument Act. In India, as per Section 138 of the Negotiable Instruments Act, cheque bounce or cheque non-payment is a serious offense punishable with fine or imprisonment.Before serving notice to the maker of the cheque regarding the bouncing of the cheque the following information is required mandatorily

Date when the cheque was drawn.

Date of presentation of the cheque.

Reason for non-realization of payment.

Q23) What are the Things Required to be considered for the Validity of Cheque Bounce Notice?

A24)It must be in reference to Section 138 of the Negotiable Instruments Act;

Information regarding the cheque presentation,

Reason for non-realization of payment and

Information regarrding the request made to the cheque issuer to make payment on an immediate

A notice must be presented within 30 days of return of cheque to the cheque issuer.

Q24) When can Cheque bounce notice be issued?

A25)The cheque must be presented within 6 months from the date of its issue.

The cheque must have been dis-honored due to non-sufficient fund.

The maker of the cheque has not paid the amount within 15 days from the date of serving the notice regarding the bouncing of the cheque.

The beneficiary has intimated the maker of the cheque within 30 days from the date of bouncing of the cheque.The cheque has been provided for settlement of any past liability.

Q25)How to Send Cheque Bounce Notice?

A26)A Cheque bounce notice can be drafted through our platform. Once the drafting is completed, it is required to take a print on a plain paper or on the letterhead of the business thereafter it is delivered to the cheque issuer. Cheque bounce notice must contain the following

Name of the cheque beneficiary,

Name and address of the check issuer,

The return date of the cheque,

Reasons for cheque return,

Request made to check issuer for immediate alternate payment and

That it is issued as per the Section 138 of the Negotiable Instrument Act.

A cheque bounce notice is sent through the registered post for the purpose of recording issuing date of notice formally. Cheque beneficiary can retain one copy of the letter with himself whereas the other copy is delivered to the cheque issuer through registered post.

Q26)Why and When Cheque Bounce Notice is Issued?

A27)The first condition is that cheque must be towards the liability.

Within a period of 6 months of validity of cheque, it should be presented by the beneficiary.

Due to insufficient funds the bank must have returned the cheque.

Within 30 days of the receipt of information from the bank regarding the insufficiency of funds, demand is raised by the payee by giving a written cheque bounce notice for the payment.

Within 15 days of the receipt of the written notice of cheque bounce, drawer fails to make payment of the said amount.

Within one month from the date cause-of-action arise, legal action is initiated.

Q27)How to Initiate Legal Action in case of Cheque Bounce?

A28) Cheque Beneficiary issues the Cheque bounce notice by the registered post to the defaulter within a period of 30 days of cheque dishonor. The cheque bounce notice must be in a proper format consisting information regarding the transactional nature, the amount involved, the date on which cheque deposited with a bank, cheque bounce date, the reason of cheque bounce, and beneficiary made the payment request within 15 days.

Within 30 days from the expiry of the notice period of 15 days, the payee can file a criminal case in a court in case of cheque issuer made default in payment.

Complaints regarding Cheque bounce must be filed in a court of such city where the cheque was presented.

Once the case is admitted in the court, a hearing will be done and summons will be issued under Section 138 of the Negotiable Instruments Act.

Cheque defaulter would have to appear before the Court for resolution of the matter.

Q28)What is the Procedure of Cheque Bouncing?

A29) Within the period of 30 days, demand notice is sent. On receiving demand notice, the drawer has to make payment within 15 days.

The cheque bounce notice is sent by the registered post as to create the proof of the notice sent.

In case of payment is not received within 15 days then payee can file a complaint before a magistrate within 30 days.

A complaint has to be filed in such a state where the bank is situated.

Punishment and Penalty

On receiving the complaint, along with an affidavit and relevant paper trail, the court will issue summons and hear the matter. If found guilty, the defaulter can be punished with monetary penalty which may be twice the amount of the cheque or imprisonment for a term which may be extended to two years or both. The bank also has the right to stop the cheque book facility and close the account for repeat offences of bounced cheques.

If the drawer makes payment of the cheque amount within 15 days from the date of receipt of the notice, then drawer does not commit any offence. Otherwise, the payee may proceed to file a complaint in the court of the jurisdictional magistrate within one month from the date of expiry of 15 days prescribed in the notice.