The Negotiable Instruments Act, 1881: Notes (Part - 2) | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


 
 
2.36 CORPORATE AND OTHER LAWS 
 
 
 
 11. PARTIES TO NOTES, BILLS AND CHEQUES 
(1) WHO CAN MAKE, DRAW OR ACCEPT INSTRUMENTS
According to section 26 of the Act, 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. 
(2) LIABILITY OF THE PARTIES TO NEGOTIABLE INSTRUMENT 
Liability of a Minor 
A minor may draw, indorse, deliver and negotiate such instruments so as to bind 
all parties except himself. A minors agreement is void and cannot be ratified 
when he attains the age of maturity. A minor cannot bind himself under a 
negotiable instrument as his contract is absolutely void. 
Parties to the 
Instruments
Every person who is 
capable of contracting
Ever person through duly 
authorised agent 
Page 2


 
 
2.36 CORPORATE AND OTHER LAWS 
 
 
 
 11. PARTIES TO NOTES, BILLS AND CHEQUES 
(1) WHO CAN MAKE, DRAW OR ACCEPT INSTRUMENTS
According to section 26 of the Act, 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. 
(2) LIABILITY OF THE PARTIES TO NEGOTIABLE INSTRUMENT 
Liability of a Minor 
A minor may draw, indorse, deliver and negotiate such instruments so as to bind 
all parties except himself. A minors agreement is void and cannot be ratified 
when he attains the age of maturity. A minor cannot bind himself under a 
negotiable instrument as his contract is absolutely void. 
Parties to the 
Instruments
Every person who is 
capable of contracting
Ever person through duly 
authorised agent 
 
 
2.37 
 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
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. 
Example 32: A draws a cheque in favour of M, a minor. M indorses the same in 
favour of X. The cheque is dishonoured by the bank on grounds of inadequate funds. 
Here in this case, M being a minor may draw, indorse, deliver and negotiate the 
instrument so as to bind all parties except himself. Therefore, M is not liable. X can, 
thus, proceed against A. 
Liability of an agent:  [Sections 27] 
Every person, capable of incurring liability, may bind himself or be bound by a 
duly authorized agent acting in his name. 
Liability of a legal representative 
A legal representative of a deceased person, who signs his name on a promissory 
note, bill exchange or cheque is liable personally thereon unless he expressly 
limits his liability to the extent of the assets received by him (Section 29)  
Thus, in the absence of an express contract to the contrary, the liability of a legal 
representative is unlimited. However, a legal representative may, by an express 
agreement, limit his liability. Further, he may exclude his liability i.e. by adding the 
words “Sans recourse or without recourse.” 
Note: Indorsement by legal representative: The legal representative of a 
deceased person cannot negotiate by delivery only, a promissory note, bill of 
exchange or cheque payable to order and indorsed by the deceased but not 
delivered (Section 57) 
A legal representative is not an agent of the deceased. Therefore, a legal 
representative cannot complete the instrument if the instrument was executed by 
the deceased but could not be delivered because of his death. 
Example 33: A, the holder of a bill to B, before delivering the bill died, the legal 
representative of A subsequently delivered the bill to B. The Indorsement is 
invalid and B cannot sue on the bill.  
A general authority given to an agent to transact business and to receive and 
discharge debts does not empower him to accept or indorse bills of exchange so 
as to bind his principal. 
An agent may have authority to draw bills of exchange, but not indorse them. An 
authority to draw does not, necessarily, imply an authority to indorse. 
Page 3


 
 
2.36 CORPORATE AND OTHER LAWS 
 
 
 
 11. PARTIES TO NOTES, BILLS AND CHEQUES 
(1) WHO CAN MAKE, DRAW OR ACCEPT INSTRUMENTS
According to section 26 of the Act, 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. 
(2) LIABILITY OF THE PARTIES TO NEGOTIABLE INSTRUMENT 
Liability of a Minor 
A minor may draw, indorse, deliver and negotiate such instruments so as to bind 
all parties except himself. A minors agreement is void and cannot be ratified 
when he attains the age of maturity. A minor cannot bind himself under a 
negotiable instrument as his contract is absolutely void. 
Parties to the 
Instruments
Every person who is 
capable of contracting
Ever person through duly 
authorised agent 
 
 
2.37 
 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
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. 
Example 32: A draws a cheque in favour of M, a minor. M indorses the same in 
favour of X. The cheque is dishonoured by the bank on grounds of inadequate funds. 
Here in this case, M being a minor may draw, indorse, deliver and negotiate the 
instrument so as to bind all parties except himself. Therefore, M is not liable. X can, 
thus, proceed against A. 
Liability of an agent:  [Sections 27] 
Every person, capable of incurring liability, may bind himself or be bound by a 
duly authorized agent acting in his name. 
Liability of a legal representative 
A legal representative of a deceased person, who signs his name on a promissory 
note, bill exchange or cheque is liable personally thereon unless he expressly 
limits his liability to the extent of the assets received by him (Section 29)  
Thus, in the absence of an express contract to the contrary, the liability of a legal 
representative is unlimited. However, a legal representative may, by an express 
agreement, limit his liability. Further, he may exclude his liability i.e. by adding the 
words “Sans recourse or without recourse.” 
Note: Indorsement by legal representative: The legal representative of a 
deceased person cannot negotiate by delivery only, a promissory note, bill of 
exchange or cheque payable to order and indorsed by the deceased but not 
delivered (Section 57) 
A legal representative is not an agent of the deceased. Therefore, a legal 
representative cannot complete the instrument if the instrument was executed by 
the deceased but could not be delivered because of his death. 
Example 33: A, the holder of a bill to B, before delivering the bill died, the legal 
representative of A subsequently delivered the bill to B. The Indorsement is 
invalid and B cannot sue on the bill.  
A general authority given to an agent to transact business and to receive and 
discharge debts does not empower him to accept or indorse bills of exchange so 
as to bind his principal. 
An agent may have authority to draw bills of exchange, but not indorse them. An 
authority to draw does not, necessarily, imply an authority to indorse. 
 
 
2.38 
 
CORPORATE AND OTHER LAWS 
Liability of agent signing [Section 28] 
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. 
An agent can be sued by the holder in an action for falsely representing that he 
had authority. 
Liability of legal representative signing [Section 29] 
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. 
Liability of drawer of a bill of exchange/ cheque [Section 30] 
The drawer of a bill of exchange or cheque is bound in case of dishonour by the 
drawee or acceptor thereof, to compensate the holder, provided due notice of 
dishonor has been given to, or received by, the drawer as hereinafter provided. 
The liability of the maker of promissory note is primary, while the liability of the 
drawer of a bill arises on dishonour by acceptance or non-acceptance by the 
drawee or acceptor respectively. The drawer of a bill, however, can exclude or 
limit his liability upon the bill. 
The liability of the drawer of a cheque is primary as in case of dishonour the 
holder of the cheque has no remedy against the banker. He can only sue the 
drawer. 
Liability of drawee of cheque [Section 31] 
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. 
The drawee of cheque must always be a banker. The drawee bank is bound to 
honour the customer’s cheque if he has sufficient funds of the drawer applicable 
to the payment of such cheque. If the drawee bank wrongfully dishonours the 
cheque it can be made liable for such default. The liability for such default is not 
towards the payee or the holder but towards the drawer. A bank is liable for 
dishonour of the cheque, to the drawer (his customer) only and not to the payee 
Page 4


 
 
2.36 CORPORATE AND OTHER LAWS 
 
 
 
 11. PARTIES TO NOTES, BILLS AND CHEQUES 
(1) WHO CAN MAKE, DRAW OR ACCEPT INSTRUMENTS
According to section 26 of the Act, 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. 
(2) LIABILITY OF THE PARTIES TO NEGOTIABLE INSTRUMENT 
Liability of a Minor 
A minor may draw, indorse, deliver and negotiate such instruments so as to bind 
all parties except himself. A minors agreement is void and cannot be ratified 
when he attains the age of maturity. A minor cannot bind himself under a 
negotiable instrument as his contract is absolutely void. 
Parties to the 
Instruments
Every person who is 
capable of contracting
Ever person through duly 
authorised agent 
 
 
2.37 
 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
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. 
Example 32: A draws a cheque in favour of M, a minor. M indorses the same in 
favour of X. The cheque is dishonoured by the bank on grounds of inadequate funds. 
Here in this case, M being a minor may draw, indorse, deliver and negotiate the 
instrument so as to bind all parties except himself. Therefore, M is not liable. X can, 
thus, proceed against A. 
Liability of an agent:  [Sections 27] 
Every person, capable of incurring liability, may bind himself or be bound by a 
duly authorized agent acting in his name. 
Liability of a legal representative 
A legal representative of a deceased person, who signs his name on a promissory 
note, bill exchange or cheque is liable personally thereon unless he expressly 
limits his liability to the extent of the assets received by him (Section 29)  
Thus, in the absence of an express contract to the contrary, the liability of a legal 
representative is unlimited. However, a legal representative may, by an express 
agreement, limit his liability. Further, he may exclude his liability i.e. by adding the 
words “Sans recourse or without recourse.” 
Note: Indorsement by legal representative: The legal representative of a 
deceased person cannot negotiate by delivery only, a promissory note, bill of 
exchange or cheque payable to order and indorsed by the deceased but not 
delivered (Section 57) 
A legal representative is not an agent of the deceased. Therefore, a legal 
representative cannot complete the instrument if the instrument was executed by 
the deceased but could not be delivered because of his death. 
Example 33: A, the holder of a bill to B, before delivering the bill died, the legal 
representative of A subsequently delivered the bill to B. The Indorsement is 
invalid and B cannot sue on the bill.  
A general authority given to an agent to transact business and to receive and 
discharge debts does not empower him to accept or indorse bills of exchange so 
as to bind his principal. 
An agent may have authority to draw bills of exchange, but not indorse them. An 
authority to draw does not, necessarily, imply an authority to indorse. 
 
 
2.38 
 
CORPORATE AND OTHER LAWS 
Liability of agent signing [Section 28] 
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. 
An agent can be sued by the holder in an action for falsely representing that he 
had authority. 
Liability of legal representative signing [Section 29] 
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. 
Liability of drawer of a bill of exchange/ cheque [Section 30] 
The drawer of a bill of exchange or cheque is bound in case of dishonour by the 
drawee or acceptor thereof, to compensate the holder, provided due notice of 
dishonor has been given to, or received by, the drawer as hereinafter provided. 
The liability of the maker of promissory note is primary, while the liability of the 
drawer of a bill arises on dishonour by acceptance or non-acceptance by the 
drawee or acceptor respectively. The drawer of a bill, however, can exclude or 
limit his liability upon the bill. 
The liability of the drawer of a cheque is primary as in case of dishonour the 
holder of the cheque has no remedy against the banker. He can only sue the 
drawer. 
Liability of drawee of cheque [Section 31] 
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. 
The drawee of cheque must always be a banker. The drawee bank is bound to 
honour the customer’s cheque if he has sufficient funds of the drawer applicable 
to the payment of such cheque. If the drawee bank wrongfully dishonours the 
cheque it can be made liable for such default. The liability for such default is not 
towards the payee or the holder but towards the drawer. A bank is liable for 
dishonour of the cheque, to the drawer (his customer) only and not to the payee 
 
 
2.39 
 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
or the holder of the cheque as there is no privity of contract between the bank 
and the payee or the holder. 
Liability of maker of note and acceptor of bill [Section 32] 
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. 
Liability of indorser [Section 35] 
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. 
Liability of prior parties to holder in due course [Section 36] 
Every prior party to a negotiable instrument is liable thereon to a holder in due 
course until the instrument is duly satisfied. 
Prior party a principal in respect of each subsequent party [Section 38] 
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. 
Example 34: 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. 
Page 5


 
 
2.36 CORPORATE AND OTHER LAWS 
 
 
 
 11. PARTIES TO NOTES, BILLS AND CHEQUES 
(1) WHO CAN MAKE, DRAW OR ACCEPT INSTRUMENTS
According to section 26 of the Act, 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. 
(2) LIABILITY OF THE PARTIES TO NEGOTIABLE INSTRUMENT 
Liability of a Minor 
A minor may draw, indorse, deliver and negotiate such instruments so as to bind 
all parties except himself. A minors agreement is void and cannot be ratified 
when he attains the age of maturity. A minor cannot bind himself under a 
negotiable instrument as his contract is absolutely void. 
Parties to the 
Instruments
Every person who is 
capable of contracting
Ever person through duly 
authorised agent 
 
 
2.37 
 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
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. 
Example 32: A draws a cheque in favour of M, a minor. M indorses the same in 
favour of X. The cheque is dishonoured by the bank on grounds of inadequate funds. 
Here in this case, M being a minor may draw, indorse, deliver and negotiate the 
instrument so as to bind all parties except himself. Therefore, M is not liable. X can, 
thus, proceed against A. 
Liability of an agent:  [Sections 27] 
Every person, capable of incurring liability, may bind himself or be bound by a 
duly authorized agent acting in his name. 
Liability of a legal representative 
A legal representative of a deceased person, who signs his name on a promissory 
note, bill exchange or cheque is liable personally thereon unless he expressly 
limits his liability to the extent of the assets received by him (Section 29)  
Thus, in the absence of an express contract to the contrary, the liability of a legal 
representative is unlimited. However, a legal representative may, by an express 
agreement, limit his liability. Further, he may exclude his liability i.e. by adding the 
words “Sans recourse or without recourse.” 
Note: Indorsement by legal representative: The legal representative of a 
deceased person cannot negotiate by delivery only, a promissory note, bill of 
exchange or cheque payable to order and indorsed by the deceased but not 
delivered (Section 57) 
A legal representative is not an agent of the deceased. Therefore, a legal 
representative cannot complete the instrument if the instrument was executed by 
the deceased but could not be delivered because of his death. 
Example 33: A, the holder of a bill to B, before delivering the bill died, the legal 
representative of A subsequently delivered the bill to B. The Indorsement is 
invalid and B cannot sue on the bill.  
A general authority given to an agent to transact business and to receive and 
discharge debts does not empower him to accept or indorse bills of exchange so 
as to bind his principal. 
An agent may have authority to draw bills of exchange, but not indorse them. An 
authority to draw does not, necessarily, imply an authority to indorse. 
 
 
2.38 
 
CORPORATE AND OTHER LAWS 
Liability of agent signing [Section 28] 
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. 
An agent can be sued by the holder in an action for falsely representing that he 
had authority. 
Liability of legal representative signing [Section 29] 
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. 
Liability of drawer of a bill of exchange/ cheque [Section 30] 
The drawer of a bill of exchange or cheque is bound in case of dishonour by the 
drawee or acceptor thereof, to compensate the holder, provided due notice of 
dishonor has been given to, or received by, the drawer as hereinafter provided. 
The liability of the maker of promissory note is primary, while the liability of the 
drawer of a bill arises on dishonour by acceptance or non-acceptance by the 
drawee or acceptor respectively. The drawer of a bill, however, can exclude or 
limit his liability upon the bill. 
The liability of the drawer of a cheque is primary as in case of dishonour the 
holder of the cheque has no remedy against the banker. He can only sue the 
drawer. 
Liability of drawee of cheque [Section 31] 
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. 
The drawee of cheque must always be a banker. The drawee bank is bound to 
honour the customer’s cheque if he has sufficient funds of the drawer applicable 
to the payment of such cheque. If the drawee bank wrongfully dishonours the 
cheque it can be made liable for such default. The liability for such default is not 
towards the payee or the holder but towards the drawer. A bank is liable for 
dishonour of the cheque, to the drawer (his customer) only and not to the payee 
 
 
2.39 
 
THE NEGOTIABLE INSTRUMENTS ACT, 1881 
 
or the holder of the cheque as there is no privity of contract between the bank 
and the payee or the holder. 
Liability of maker of note and acceptor of bill [Section 32] 
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. 
Liability of indorser [Section 35] 
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. 
Liability of prior parties to holder in due course [Section 36] 
Every prior party to a negotiable instrument is liable thereon to a holder in due 
course until the instrument is duly satisfied. 
Prior party a principal in respect of each subsequent party [Section 38] 
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. 
Example 34: 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. 
 
 
2.40 
 
CORPORATE AND OTHER LAWS 
(3) OTHER RELATED CONCEPTS TO THE PARTIES ON THE NEGOTIATION 
OF THE INSTRUMENTS 
Discharge of indorser’s liability [Section 40] 
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. 
Example 35: 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. 
Acceptor bound, although indorsement forged [Section 41] 
An acceptor of a bill of exchange already indorsed is not relieved from liability by 
reason that such indorsement is forged, if he knows or had reason to believe the 
indorsement to be forged when he accepted the bill. 
Acceptance of bill drawn in fictitious name [Section 42] 
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. 
Example 36: X draws a bill on Y but signs it in the fictitious name of Z. The bill is 
payable to the order of Z. The bill is duly accepted by Y. M obtains the bill from X