Negotiable Instruments ActFrequently Asked Questions on Negotiable Instruments Act
(a) the property in the negotiable instruments passes to the holder by mere delivery. It is the ownership, i.e., the right of retaining it as against the previous owner that passes and not mere possession. In the case of chattels nobody can claim ownership over a thing as against its rightful owner.
(b) The holder in due course is not affected by any defects of title on the part of transferor. This is not so in the case of chattels.
(c) The holder can sue upon them in his own name.Section 13 of Act defines it as under :-
"Negotiable instrument". - [(1) A "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer.Explanation (i). - A promissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular person, and does not contain words, prohibiting transfer or indicating an intention that it shall not be transferable. Explanation (ii). - A promissory note, bill of exchange 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. Explanation (iii). - Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.] [(2) A negotiable instrument may be payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees].
(i) It should contain an agreement for payment of money and money only.
(ii) The agreement must amount to an undertaking of promise and such an undertaking must be unconditional.
(iii) The sum payable must be certain.
(iv) The instrument must be signed by the maker of the instrument.
(v) The money must be payable to or the order of certain person or to the bearer of the instrument.
(vi) It should not be a blank-note or a currency note.In Bachan Singh v. Ram Avadh, AIR 1949 All. 431, it was observed that there must be an express undertaking upon the face of instrument to pay money before it can be held to be a promissory note. A mere implied undertaking will not do. In Bal Mukund v. Munna Lal Ranji Lal, AIR 1970 P&H 516, it was observed that before a document be treated as promissory note it should be promissory note both in form and in intent. If indebtedness is acknowledged in a document for a defined sum of money, payable "on demand" that is enough to make the document a promissory note and the document need not necessarily say that debtor promises to repay the amount.
(i) its negotiability or quality of assignment which is inherent in all bills made payable to C.D. or `bearer' or to order of the payee, in the former of which cases it will pass like a bank note by delivery, whilst in the latter it requires the endorsement of the payee to make it negotiable;
(ii) that a consideration of the bill will be presumed until the contrary appears;
(iii) that it must be for payment of money;
(iv) that the payment must be unconditional or absolute;
(v) certainty as to the person, order to pay.Distinction between bill of exchange and promissory note - (i) In a bill of exchange there are three parties to be specified, i.e., drawer, drawee, and payee; though any two out of these three capacities may be filled by one and the same person. In a promissory note, there are only two parties, the maker and the payee. (ii) A promissory note cannot be made payable to the maker himself, but in a bill of exchange, the drawer and payee may be the same person. (iii) In a promissory note there is an unconditional promise by the drawer to pay a certain sum to the payee; in a bill of exchange, there is an unconditional order to a drawee, to comply with the drawer's direction as to payment.
(1) A cheque requires no acceptance by the drawee before the payment whereas a bill of exchange must be accepted by the drawee before he can be made liable upon it.
(2) A cheque is payable immediately on demand without any days of grace but a bill of exchange is entitled to three days grace.
(3) In case of a cheque the drawee is always a banker but in case of a bill the drawee may be any person including a banker.
(4) The drawer of a cheque is discharged by delay of the holder in presenting it for payment, unless, through the delay the position of the drawer has been insured by the failure of the bank. In the case of a bill of exchange it must be duly presented for payment or otherwise the drawer will be discharged.
(5) Notice of dishonour is not necessary in the case of a cheque when it is not met but when a bill of exchange dishonoured by non-payment, notice of dishonour is necessary.A cheque is a peculiar sort of instrument in many ways resembling a bill of exchange, but in some entirely different way. In the ordinary course, it is never accepted. It is not intended for circulation, it is given for immediate payment, it is not entitled to days of grace. In addition, a cheque is presented for payment, whereas a bill in the first instance is presented for acceptance unless it is a bill of demand. A bill is dishonoured by non- acceptance, this is not so in the case of a cheque, because the holder of a cheque, as between himself and the drawer has no right to require acceptance. A.I.R. 1944 P.C. 58 (60).
1. That on payment of a valuable consideration he became (i) the possessor of the negotiable instrument if payable to bearer, or (ii) the payee or the indorsee thereof, if payable to order.
2. That he became the possessor before the amount due under the instrument became actually payable.
3. That he became the possessor without having sufficient cause to believe that any defect existed in the title of the transferee from whom he delivered his title.In Sukhanraj Khimraja v. N. Rajagopalan (1989) ILW 401 it was observed that plaintiff was fully aware that the cheque had been dishonoured and the endorsement in his favour was only after it was returned by the bank therefore it had lost its negotiability. Hence he cannot be a holder in due course. In order that a person can be called a holder in due course, he must show :-
(i) that he is the holder of the negotiable instrument,
(ii) he has obtained it for consideration,
(iii) he has obtained it before the maturity of the negotiable instrument, and
(iv) that he has obtained the negotiable instrument in good faith.(i) He must receive the Negotiable Instruments as a holder - According to Section 9, a person taking the negotiable instrument may be either the payee or he became the possessor when the negotiable instrument was payable to bearer, i.e., the negotiable instrument must have been voluntarily delivered to him, or he may be the indorsee thereof, if the negotiable instrument was payable to order. (ii) He must obtain it for consideration - A holder in due course must have obtained the instrument for consideration. The consideration must also be lawful. If a person takes a negotiable instrument without consideration or where the consideration is unlawful he cannot be called a holder in due course. (iii) He must receive the negotiable instrument before its maturity - Section 9 requires that to be a holder in due course a person must take the negotiable instrument "before the amount due thereon became payable." For example, if the date of maturity of a negotiable instrument is 1st March, and a person takes the instrument on 1st March or thereafter, he cannot be said to be a holder in due course as he did not receive the negotiable instrument before its maturity. Section 59 of the Negotiable Instruments Act also provides that a person taking a negotiable instrument after its maturity has the rights thereon of a transferor. It means that a person taking an instrument after maturity will not be a holder in due course and will not be capable of having a better title than that of the transferor. (iv) He must take the negotiable instrument in good faith - Our Act does not use the term `good faith' but instead says that to be holder in due course, a person must take the negotiable instrument "without having sufficient cause to believe that any defect existed in the title of the person from whom he derives his title." The condition requires that he should act in good faith and with reasonable caution. (V. Ponappa v. C.S. Bank, AIR 1991 SC 441). It means that a person must take the negotiable instrument with an honest belief that the title of the transferor is a good one and, moreover, there should be nothing which could arouse a suspicion in his mind that the title of the transferor is defective. Rights and powers `of holder in due course' - (1) A holder in due course has all the rights and powers of a holder and in addition holds the bill free from any personal defect of title of prior parties, as well as from more personal defences available to prior parties among themselves and may enforce payment against all parties liable on the bill. (24 Bom. 65). (2) The holder in due course of a promissory note can recover the amount of promissory note from the maker and the payee, irrespective of the their respective liability as between themselves. (3) A party to a suit cannot in a suit on it by a holder in due course set-up a defence that there was consideration for the execution of the note. (4) Where the payee of the pronote executed by two persons jointly, agrees to relinquish his claim against one of the executants, the assignee of the note who takes with the knowledge of this arrangement acquires no better title than the payee, that is, his assignor, had. He is not a holder in due course and can therefore enforce the instrument only against the executant and the claim which was not relinquished by the assignor.
(i) According to Section 82(c) the maker, acceptor or indorser respectively of a negotiable instrument are discharged from liability thereon to all parties thereto by making the payment in due course of the amount due thereon.
(ii) Section 85(1) grants protection to the drawee bank when it makes payment in due course of a cheque where the payee's indorsement is forged. According to this provision where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course.
(iii) Section 85(2) also grants protection to the drawee bank by declaring that a bank is discharged by making payment in due course to the bearer thereof, of a cheque which is originally payable to bearer, notwithstanding the fact that there is any indorsement thereon, and also notwithstanding the fact that such indorsement purports to restrict, or exclude further negotiation.
(iv) Section 89 grants protection to the person making the payment in due course of an instrument which has been materially altered, but the alteration made thereon is not apparent. Although by any material alteration, the instrument is rendered void, but if the alteration cannot be apparently discovered, the person making the payment of such instrument is discharged from liability, and such payment cannot be questioned on the ground that the instrument was an altered one.
(v) Section 128 grants protection to the drawee bank, which makes the payment in due course of a crossed cheque. Even if there is something wrong with the title of the person receiving the payment through a collecting bank, the drawee or the paying bank cannot be made liable, if the payment is in due course.
"A Promissory note, Bill of exchange or a cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument."Where a promissory note reciting that both parties belong to India and are temporarily in Singapore, it being an instrument drawn on person resident in India is an inland instrument as defined under Section 11 (AIR 1976 Mad. 254). Section 12 of the Act provides that "Any such instrument not so drawn, made or made payable, shall be deemed to be a foreign instrument."
Provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder." In H. Maregowda v. Thippamma, AIR 2000 Kant. 169, it was observed that a reading of Section 20 reveals that the words used are `either wholly blank or having written thereon an incomplete negotiable instrument'. Thus even if a blank promissory note is given, it cannot be taken as a defence to avoid a decree based on such instrument once it is found that the document produced before the court satisfies the requirements of a promissory note within the meaning of the Act. The instrument may be wholly blank or incomplete in particulars in either case the holder has authority to make or complete the instrument as negotiable one.
(1) Darshani Hundis (i.e. payable at sight); and
(2) Muddati or miadi hundis (i.e. payable after a time).The following chart shows clearly the classification of hundis :
(1) Due to minority,
(2) due to lucency, and
(3) due to personal law.
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.Maker's liability - When the maker of a promissory note signs the same there is an unconditional undertaking made by him to pay the amount of the note according to its tenor. His engagement to pay is unconditional and his liability to pay is absolute. His liability arises when he signs the promissory note and delivers the same to the person in whose favour it has been made, i.e., the payee. Acceptor's liability - The drawee of a bill of exchange becomes liable on the bill when he accepts the same. An acceptance by him means his undertaking to pay the amount according to the tenor of the bill. The liability of the acceptor of a bill of exchange is similar to that of the maker of the promissory note. A bill of exchange contains an unconditional order and when the drawee accepts to pay the amount, there is obviously an unconditional undertaking by him to pay in accordance with the tenor of the bill. The acceptor of a bill of exchange is liable thereunder as principal debtor and as such, the suit filed merely against the acceptor of a Bill of Exchange is maintainable in law even though a separate suit has been filed by the plaintiffs against the drawers of that Bill of Exchange on the basis of the suit Bill of Exchange along with other reliefs claimed therein. (Union Bank of India v. Ankur Corp. AIR 993 Bom 297).
(i) The drawee of a bill.
(ii) All or some of several drawees, where the bill is addressed to more than one drawee.
(iii) A drawee in case of need who is mentioned in the bill.
(iv) An acceptor for honour.As a general rule, no one can accept the bill except the person to whom it is addressed but section 33 recognises the exception to this rule and provides that an acceptor for honour can bind himself by such acceptance. In a case reported in AIR 1961 Cal. 653 acceptance of bill of exchange through agent was held proper in view of provisions of Section 33 of Act. Liabilities of an Endorser - Section 35 of Negotiable Instruments Act says - "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." So Endorser is responsible to every subsequent holder in case of dishonour by drawee if he had notice of dishonour, except where (a) there is contract to contrary or (b) he expressly limits his liability in endorsement.
First indorsement, "B".
Second indorsement, "Peter Williams".
Third indorsement, "Wright and Co."
Fourth indorsement, "John Rozario".This bill A puts in suit against John Rozario and strikes out, without John Rozario's consent, the indorsements by Peter Williams and Wright and Co. A is not entitled to recover anything from John Rozario. So Section 40 of Act comes into operation only when the holder of a negotiable instrument destroys the endorser's remedy without consent of the endorser.
"An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such indorsement is forged, if he knew or had reason to believe the indorsement to be forged when he accepted the bill."This rule of law is based upon equitable principle that no person can be permitted to take advantage of his fraud or wrong.
"Where a bill is drawn in the name of a fictitious person payable to the order of the drawer the acceptor is considered as undertaking to pay to the order of the person who signed as the drawer; and therefore an indorsee may bring evidence to show that the signature of the supposed drawer, to the bill and to the first indorsement, are in the same handwriting." [Cooper v. Meyer, (1823) 10 B and C 468].In such a case the drawer is fictitious and the bill is drawn to his own order and the drawer and the payee are one and the same person and fictitious. Therefore, before such a bill can be negotiated, the supposed drawer must indorse in his own handwriting. The acceptor is liable only to the holder in due course and not to a holder who knew or had reason to believe that the drawer or the payee was a fictitious person.
"Where a part of the consideration for which a person signed a promissory note, bill or exchange or cheque, though not consisting of money, is ascertainable in money without collateral enquiry, and there has been a failure of that part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionately reduced."So when the partial failure of consideration is other than money, the liability of the signer of the negotiable instrument standing in immediate relationship with the holder is proportionally reduced, provided that the consideration which has failed can be ascertained in terms of money without collateral enquiry.
(a) "Pay the contents to C only."
(b) "Pay C for my use."
(c) "Pay C or order for the account of B."
(d) "The within must be credited to C."
These indorsements exclude the right of further negotiation by C.
(e) "Pay C value in account with the Oriental Bank."
(g) "Pay the contents to C, being part of the consideration in a certain deed of assignment executed by C to the indorser and others."These indorsements are executed by C to the indorser and others. These indorsements do not exclude the right of further negotiation by C.
(a) Presentment of bill of exchange for acceptance (Section 61).
(b) Presentment of a promissory note for sight (Section 62).
(c) Presentment of a promissory note, bill of exchange or cheque for payment (Section 64).Acceptance is required only in case of bill of exchange, therefore, only in case of bill of exchange, it is presented for acceptance. Presentment for acceptance means exhibiting the bill of exchange to drawee to procure the acceptance thereof. Every negotiable instrument, promissory note, bill of exchange or cheque is ultimately meant for payment, for which it is always required to be presented to the maker, drawee or acceptor as the case may be.
1. To present the bill of exchange for acceptance within the time specified in the bill for that purpose, and if no time is specified, within a reasonable time after it has been drawn.
2. To present the bill at the place, if any, mentioned in the bill, and if no place is mentioned, at the usual place of business of the drawee or his residence.
3. To allow the drawee only 48 hours and not more, to consider whether he will accept the bill or not.
4. To obtain an unqualified acceptance of the bill.Effect of non-presentment When the presentment of a bill of exchange for acceptance is compulsory i.e., when a bill of exchange is payable after sight, holder's duty is to duly present the bill to the drawee thereof as required by Section 61. In default of such presentment, no party thereto is liable thereon to the person making such default. When presentment for acceptance is excused
1. When the drawee, even after a reasonable search, cannot be found, the presentment for acceptance is excused and the bill of exchange is deemed to be dishonoured. Where the drawee is dead, the presentment is to be made to his legal representative, and in case of his insolvency to his assignee.
2. Where the drawee is a fictitious person, or he is incompetent to contract, the bill can be treated as dishonoured even without presentment for acceptance.
(a) a person in possession of the instrument;
(b) in accordance with the apparent tenor of the instrument;
(c) that it was paid in good faith, without suspecting that the person in possession is not entitled to payment;
(d) the payment is made without negligence;
(e) whenever a cheque supposedly issued by a customer is presented before a bank, it carries a mandate to the bank to pay, but if a cheque is a forged one, there is no such mandate and the bank can escape the liability only if it can establish that the customer had knowledge of that forgery,
(f) a payment made on a forged cheque cannot be regarded as payment in due course,
(g) in case of payment made by the Bank on a forged cheque it cannot escape liability only by proving that it made payment in due course according to the apparent tenor of the cheque or by comparing the signature on the cheque with the specimen signature and finding no apparent discrepancy. (Babulal Aggarwal v. SBI (1988) 64 Comp. Cases 467).
(a) If an inchoate instrument is filled up under Section 20, or
(b) Convert a blank indorsement into full without signing oneself (Section 49), or
(c) Qualify the acceptance (Section 86), or
(d) Crossing a cheque which was not crossed before (Section 125)If a material alteration is made by an indorsee it discharges the indorser from all liability to him in respect of the consideration of it. A plaintiff, who has been guilty of a material alteration of a promissory note in his favour cannot enforce the same and nor can he fall back on the original consideration nor can he invoke the provisions of Section 65 of the Contract Act (9 of 1872) to sustain his claim (Naryan Prasad v. Ghanshyam Lal, AIR 1961 M.P. 62). The holder cannot sue for consideration of a bill which is materially altered unless he shows (1) that the bill was negotiated to him after the alteration was made, and he was ignorant of the alteration; or (2) if the bill was altered whilst in his possession and under his control and there was no intent to commit fraud by the alteration, and the defendant would not have had any remedy over the bill if there been no alteration. Payment of altered instrument - It sometimes happens that though the bill is materially altered, it does not appear to be so altered. In such a case if a person liable to pay, pays it according to the apparent tenor of it, in due course, the person paying is discharged from all liability on the instrument. This payment cannot be questioned by reason of the instrument having been altered. Three things are necessary for this payment to be good -
(1) That the payment was made in due course;
(2) The alteration or crossing was not apparent; and
(3) The payment was made by the person liable to pay, and in the case of the cheque, by the banker;
(4) Such payment will not only discharge the person paying from any liability under the bill, but he can also debit the person on whose account the payment was made;
(5) If a bill of exchange which has been negotiated, is, at or after maturity, held by the acceptor in his own right, all right of action on it are extinguished : (1) The bill must come to the acceptor, (2) after payment, (3) at or after maturity and (4) in his own right, and not as an executor or a trustee.The same principles would apply to the maker of a promissory note. In Anirudhan v. Thomco's Bank, AIR 1963 SC 746, it was observed that if the alteration is made by stranger without knowledge of the promisee, other party is discharged if instrument is altered by a stranger when instrument was not in the custody of promisee, the promisor is not discharged. 5. By non-presentment for acceptance of a Bill of Exchange. - Section 61 of Act requires that when a bill of exchange is payable after sight, its holder must present it for acceptance to drawee within a reasonable time after it is drawn. If he makes a default in making such presentment, the drawer and all indorsers who were liable towards such a holder are discharged from their liability towards him. 6. By the holder allowing the drawee of a bill more than 48 hours to accept. - When the holder presents the bill of exchange to the drawee for acceptance, the drawee is entitled to be allowed a period of 48 hours (exclusive of public holidays) to consider whether he will accept the bill or not. After the expiry of the period of 48 hours the holder is bound to demand back the delivery of the bill, whether the same has been accepted or not. If the drawee does not return the bill duly accepted within 48 hours of the presentment the holder should deem the bill to have been dishonoured. If the holder of the bill allows the drawee more than 48 hours, exclusive of public holidays, to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby discharged from liability to such holder. (Section 83). 7. By the holder agreeing to a qualified or limited acceptance of bill of exchange. - If the holder of a bill of exchange, who presents the same for acceptance, acquiesces in a qualified acceptance of the bill, all previous parties whose consent is not obtained to such an acceptance are discharged as against the holder and those claiming under him, unless on notice given by the holder they assent to such acceptance (Section 86). Acceptance of a bill is deemed to be qualified in the following cases :
(a) When the acceptance is conditional, declaring the payment to be dependent on the happening of an event.
(b) Where the acceptor undertakes the payment of part only of the sum ordered to be paid.
(c) When the acceptor accepts to pay at a specified place only and not elsewhere.
(d) Where the acceptor undertakes the payment at a time other than that at which under the order it would be legally due.
(e) When acceptance is made by some of the drawees only and not by all of them, unless the drawees of the bill are partners.
1. Dishonour of a bill of exchange by non-acceptance (Section 91).
2. Dishonour of a promissory note, bill of exchange or cheque by non-payment (Section 92).1. Dishonour by non-acceptance. - Since presentment for acceptance is required only of a bill of exchange, it is only the bill of exchange which could be dishonoured by non-acceptance. Section 91 provides that the dishonour of a bill of exchange, by non-acceptance, may take place in any of the following ways :-
(1) When a bill of exchange is presented for acceptance and the drawee or the drawees makes default in acceptance. When there are several drawees even if one of them makes a default in acceptance the bill is deemed to be dishonoured, unless these several drawees are partners.
(2) Where presentment for acceptance is excused and the bill is not accepted, for example, if the drawee cannot, after a reasonable search, be found, the bill is dishonoured.
(3) Where the drawee is incompetent to contract, the bill is treated to be dishonoured.
(4) When the drawee makes a qualified acceptance, the holder may treat the bill of exchange having been dishonoured.2. Dishonour by non-payment. - A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same. When presentment for payment is made and the maker, acceptor or drawee, as the case may be, makes default in making the payment, there is dishonour of the instrument. Apart from that there are certain circumstances when presentment for payment is excused and the instrument is deemed to be dishonoured even without presentment.
(1) The fact of dishonour;
(2) The date of dishonour;
(3) The instrument has not been expressly dishonoured;
(4) If the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonour; and
(5) The Notary's charges.Noting is not compulsory in the case of an inland bill or note. This depends upon the option of the holder, and omission to do so does not, in any way, affect his rights thereon. Noting should be made by the notary within a reasonable time after dishonour. Noting by itself has no legal effect. It is not evidence of presentment or dishonour of the bill. But the following are some advantages :-
(1) Under Section 204-A noting may provisionally serve the purpose of protest which may be drawn up later.
(2) Under Section 108 noting even without protest is sufficient to allow a bill to be accepted for honour.
(3) Similarly, under Section 113 a bill may be paid for honour even after noting though no protest has yet been drawn up.
(1) It affords authentic and satisfaction evidence of dishonour to a drawer or indorsers living abroad, who would find it difficult to make inquiries of such dishonour, and would be compelled to rely on the representations of the holder.
(2) Under Section 119, in a suit upon a dishonoured instrument, the Court shall on proof of protest, presume the fact of dishonour unless and until such fact is disapproved.Protest is not compulsory in the case of inland bills, and omission to have an instrument protested does not, in any way, affect the right of the holder thereon. Contents of Protest. - In order that a protest may be valid, it must contain the following particulars :-
(1) Instrument or transcript of instrument.
(2) The name of the parties. The protest must mention the name of the party for whom and against whom the instrument has been protested.
(3) The fact and the reasons for dishonour.
(4) Place and time for dishonour.
(5) The signature of the notary.
(6) In the event of an acceptance for honour or of a payment for honour, the name of the person by whom, of the person for whom, and the manner in which, such acceptance or payment was offered and effected must be stated on the protest.
(1) Before there can be acceptance for honour it is essential that the bill of exchange must have been noted or protested for non-acceptance or for better security.
(2) Acceptance for honour can be made by any person who is not a party already liable on the bill. Such an acceptance can be made only by a stranger.
(3) Acceptance for honour should be made in writing on the bill.
(4) Acceptance for honour should be made with the consent of the holder. If the holder does not want, such an acceptance cannot be made.
(5) The acceptance for honour may be made for the honour of any party already liable on the bill. A person desiring to accept for honour must, by writing on the bill under his hand, declare that he accepts under protest the protested bill for the honour of the drawer or of a particular indorser whom he names, or generally for honour (Section 109). Where the acceptance does not mention for whose honour it is made it shall be deemed to be made for the honour of the drawer. (Section 10).Rights and liabilities of acceptor for honour - The liability of the acceptor for honour is conditional and arises if the original drawee, after being approached again on the date of the maturity, does not pay. An acceptor for honour cannot be charged unless the bill has, at its maturity, been presented for such dishonour. (Section 112). As regards rights and liabilities, an acceptor for honour takes the place of the person for whose honour he has accepted the bill. On such acceptance the acceptor for honour binds himself to all parties subsequent to the party for whose honour he accepts to pay the amount of the bill if the drawee does not. (Section 111). On paying the bill, an acceptor for honour is entitled to recover the amount from the person for whose honour he accepted the bill and all prior parties to such a person. But an acceptor is not liable to the holder of the bill unless it is presented or (in case the address given by such acceptor on the bill is a place other than the place where the bill is made payable) forwarded for presentment not later than the day next after the day of its maturity. (Section 111).
(1) The bill of exchange must have been dishonoured by non- payment and then noted and protested for the same.
(2) Such payment must have been made for the honour of any party liable to pay the same.
(3) The person making the payment or his agent must declare before the notary public the party for whose honour he pays, and that such declaration must have been noted by such notary public.Any person so paying is entitled to all the rights, in respect of the bill, of the holder at the time of such payment, and may recover from the party for whose honour he pays all sums so paid, with interest thereon and with all expenses properly incurred in making such payment (Section 114).
(i) Where a cheque is uncrossed, the holder may cross it generally or specially.
(ii) Where a cheque is crossed generally the holder may cross it specially.
(iii) Where a cheque is crossed generally or specially the holder may add the words "not negotiable".The Banker also is entitled to cross a cheque in the name of another bank who may collect the cheque as an agent for collection. Therefore, where a cheque is crossed specially, the banker to whom it is crossed may cross it specially to another banker, his agent for collection. (Section 127). Protection to the collecting bank - Section 131 of the Act grants a protection to the collecting bank. If the collecting bank has collected a cheque satisfying the conditions which are mentioned in Section 131, then it cannot be held liable even if the amount is collected on behalf of a person who is not the true owner. In order to avail of such a protection the banker has to prove the following :-
(i) That the banker had received the payment of a crossed cheque. It means that the cheque which is to collect must have been given to the banker as crossed i.e., which was crossed either generally or specially to that banker before it reached the hands of the collecting bank.
(ii) That the collection was made by the bank on behalf of a customer.
(iii) The collecting bank must have acted in good faith and without negligence in collecting the amount due on the cheque.In Syndicate Bank v. Jayshree Industries, AIR 1994 Kant 315, a draft in the name of `Ms. Rama' was collected and credited to the account of `Mr. Rama', the bank was held to be negligent and thus not entitled to protection given under Section 131, N.I. Act. It is no defence that the bank acted in good faith.