Know more about Cheque – A bill of exchange

THE NEGOTIABLE INSTRUMENTS ACT, 1881
ACT NO. 26 OF 1881
[9th December, 1881.]

An Act to define and amend the law relating to Promissory Notes, Bills of Exchange and Cheque’s.

Preamble.

WHEREAS it is expedient to define and amend the law relating to, promissory notes, bills of exchange and cheque’s; It is hereby enacted as follows

CHAPTER I
PRELIMINARY

Section 1. Short title.
This Act may be called the Negotiable Instruments Act, 1881.
Local extent. Saving of usages relating to hundis, etc. It extends to the whole of India but nothing herein contained affects the ‘Indian Paper Currency Act, 1871, (3 of 1871). section 21, or .affects any local usage relating to any instrument in an oriental language: Provided that such usages may be excluded by any words in the body of the instrument which indicate an intention that the legal relations of the parties thereto shall be governed by this Act and it shall come into force on the first day of March, 1882.

2. Commencement.
[Repeal of enactments.] Rep. by the Amending Act, 1891 (12 of 1891), s. 2 and Sch. 1.

3. Interpretation-clause.
In this Act-
3* * * * * *
4[“banker” includes any person acting as a banker and any post office savings bank;]
5* * * * * *
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1 he words “except the State of Jammu and Kashmir”, which were subs. by Act 3 of 1951 for “except Part B States”, omitted by Act 62 of 1956, s. 2 and Sch.
2 Rep. by the Indian Paper Currency Act, 1923 (10 of 1923). See now the Reserve Bank of India Act, 1934 (2 of 1934), s. 31.
3 Definition of the word “India”, which was subs. by Act 3 of 1951 for the definition of the word ” State “, omitted by Act 62 of 1956, s. 2 and Sch.
4 Subs. by Act 37 of 1955, s. 2, for the definition of the word “banker”.
5 Omitted by Act 53 of 1952, s. 16 (w.e.f. 14-2-1956).
Extended to Laccadive Minicoy and Amindivi Islands (w.e.f. 1-10-1967): vide Reg. 8 of 1965, s. 3 & Sch.
Extended to Goa, Daman and Diu with modifications, by Reg. 12 of 1962 s. 3 & Sch.
Extended to and brought into force in Dadra and Nagar Haveli (w.e.f. 1-7-65) by Reg. 6 of 1963, s. 2 and Such. I.
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CHAPTER II
OF NOTES, BILLS AND CHEQUES

4. “Promissory note”.
A “promissory note” is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
Illustrations
A signs instrument in the following terms
(a) “I promise to pay B or order Rs. 500.
(b) ” I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received.”
(c) Mr. B, O U Rs. 1,000.”
(d) I promise to pay B Rs. 500 and all other sums which shall be due to him.”
(e) I promise to pay B Rs. 500, first deducting thereout any money which he may owe me.”
(f) “I promise to pay B Rs. 500 seven days after my marriage with C.”
(g) “I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum.”
(h) “I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.”
The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes.

5. “Bill of exchange”.
A “bill of exchange” is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
The sum payable may be “certain”, within the meaning of this section and section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be a “certain I person”, within the meaning of this section and section 4, although he is miss-named or designated by description only.

6. “Cheque”.
A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.

7. Drawer, Drawee.
The maker of a bill of exchange or cheque is called the œdrawer”; the person thereby directed to pay is called the “drawee”. Drawee in case of need. When in the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a “drawee in case of need”.
Acceptor – After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the “acceptor”.
Acceptor for honour. 1[When a bill of exchange has been noted or protested for non acceptance or for better security,] and any person accepts it supra protest for honour of the drawer or of any one of the endorsers, such person is called an “acceptor for honour”.
Payee – The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the “payee”.

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

9. Holder in due course.
“Holder in due course” means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee thereof, if 2[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.
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1 Subs. by Act 2 of 1885, s. 2, for “When acceptance is refused and the bill is protested for non-acceptance”.

2 Subs. by Act 8 of 1919, s. 2, for “payable to, or to the order of, a payee”.
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10. “Payment in due course”.
“Payment in due course” means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

11. Inland instrument.
A promissory note, bill of exchange or cheque drawn or made in 1 [India], and made payable in, or drawn upon any person resident in, 1 [India] shall be deemed to be an inland instrument.

12. Foreign instrument.
Any such instrument not so drawn, made or made payable shall be deemed to be a foreign instrument.

13. 2[(1)Negotiable instrument.
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.]
3[(2) A negotiable instrument may be made 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.]

14. Negotiation.
When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.

15. Indorsement.
When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, -and is called the “Indorser”.
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1 Subs. by Act 36 of 1957, s. 3 and Sch. II, for “a State”.
2 Subs. by Act 8 of 1919, s. 3, for the original sub-section.
3 Ins. by Act 5 of 1914, s. 2.
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16. 1(1) Indorsement in “blank” and “in full”.
If the indorser signs his name only, the indorsement is said to be ” in blank,” and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be “in full”; and the person so specified is called the “indorsee” of the instrument.

1(2) Indorsee.
The provisions of this Act relating to a payee shall apply with the necessary modifications to an indorsee.

17. Ambiguous instruments.
Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be thenceforward treated accordingly.

18. Where amount is stated differently in figures and words.
If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid.

19. Instruments payable on demand.
A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on demand.

20. Inchoate stamped instruments.
Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in 2[India], and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount: provided that no person other than a holder in due course shall recover from the person delivering the instrument any thing in excess of the amount intended by him to be paid there under.

21. “At sight”.
“On presentment”. In a promissory note or bill of exchange the expressions “at sight” and “on presentment” mean on demand. The expression “after sight” means, in a promissory note, after presentment for sight, and, in a bill of exchange, after acceptance, or noting for non-acceptance, or protest for non-acceptance.
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1 Ins. by Act 5 of 1914, s. 3.
2 Subs. by Act 3 of 1951, s. 3 and Sch., for “the States”.
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22. “Maturity”.
The maturity of a promissory note or bill of exchange is the date at which it falls due. Days of grace. Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable.

23. Calculating maturity of bill or note payable so many months after date or sight.
In calculating the date at which a promissory note or bill of exchange, made payable a stated number of months after date or after sight, or after a certain event, is at maturity, the period stated shall be held to terminate on the day of the month which corresponds with the day on which the instrument is dated, or presented for acceptance or sight, or noted for non-acceptance, or protested for non-acceptance, or the event happens, or, where the instrument is a bill of exchange made payable a stated number of months after sight and has been accepted for honour, with the day on which it was so accepted. If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month.

Illustrations
(a) A negotiable instrument, dated 29th January 1878, is made payable at one month after date. The instrument is at maturity on the third day after the 28th February 1878.
(b) A negotiable instrument, dated 30th August 1878, is made payable three months after date. The instrument is at maturity on the 3rd December 1878.
(c) A promissory note or bill of exchange, dated 31st August 1878, is made payable three months after date. The instrument is at maturity on the 3rd December, 1878.

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

25. When day of maturity is a holiday.
When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day.
Explanation – The expression “public holiday” includes Sundays: 1*** and any other day declared by the 2[Central Government], by notification in the Official Gazette, to be a public holiday.

CHAPTER III
Inchoate stamped instruments
PARTIES TO NOTES, BILLS AND CHEQUES

26. Capacity to make, etc., promissory notes, etc.
Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.
Minor. A minor may draw, indorse, deliver and negotiate such instrument so as to bind all parties except himself.
Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered.

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

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

29. Liability of legal representative signing.
A legal representative of a deceased person who signs his name to a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such.
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1 The words “New Year’s day, Christmas day: if either of such days falls on a Sunday, the next following Monday ; Good-Friday;” omitted by Act 37 of 1955, s. 3 (w.e.f. 1-4-1956).
2 Subs. by the A.O. 1937, for “L.G.”.
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30. Liability of drawer.
The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor thereof, to compensate tile holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided.

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

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

33. Only drawee can be acceptor except in need or for honour.
No person except the drawee of a bill of exchange, or all or some of several drawees, or a person named therein as a drawee in case of need, or an acceptor for honour, can bind himself by an acceptance.
Acceptance by several drawees not partners

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

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

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

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

38. Prior party a principal in respect of each subsequent party.
As between the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of each subsequent party.
Illustration
A draws a bill payable to his own order on B, who accepts. A afterwards indorses the bill to C, C to D, and D to E. As between E and B, B is the principal debtor, and A, C and D are his sureties. As between E and A, A is the principal debtor, and C and D are his sureties. As between E and C, C is the principal debtor and D is his surety.

39. Surety ship.
When the holder of an accepted bill of exchange enters into any contract with the acceptor which, under section 134 or 135 of the Indian Contract Act, 1872,(9 of 1872) would discharge the other parties, the holder may expressly reserve his right to charge the other parties, and in such case they are not discharged.

40. Discharge of indorser’s liability.
Where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser’s remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.
Illustration
A is the holder of a bill of exchange made payable to the order of B, which contains the following indorsements in blank “
First indorsement, “B”
Second indorsement, “Peter Williams”
Third indorsement, “Wright & 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 & Co. A is not entitled to recover anything from John Rozario.

41. Acceptor bound, although, indorsement forged.
An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such indorsement is forged, if lie knew or had reason to believe the indorsement to be forged when he accepted the bill.

42. Acceptance of bill drawn in fictitious name.
An acceptor of a bill of exchange drawn in a fictitious name and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from liability to any holder in due course claiming under an indorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.

43. Negotiable instrument made, etc., without consideration.
A negotiable instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without indorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
Exception I. – No party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed can, if he have paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.
Exception II. – No party to the instrument who has induced any other party to make, draw, accept, indorse or transfer the same to him for a consideration which he has failed to pay or perform in full shall recover thereon an amount exceeding the value of the consideration (if any) which he has actually paid or performed.

44. Partial absence or failure of money consideration.
When the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is proportionally reduced.
Explanation. -The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the indorser with his indorsee. Other signers may by agreement stand in immediate relation with a holder.
Illustration
A draws a bill on B for Rs. 500 payable to the order of A. B accepts the bill, but subsequently dishonours it by non-payment. A sues B on the bill; B proves that it was accepted for value as to Rs. 400, and as an accommodation to the plaintiff as to the residue. A can only recover Rs. 400.

45. Partial failure of consideration not consisting of money.
Where a part of the consideration for which a person signed a promissory note, bill of 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 proportionally reduced.
1[45A.Holder’s right to duplicate of lost bill. Where a bill of exchange has been lost before it is over-due, the person who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again. If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do so.]

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