Negotiable Instruments 2

• Negotiable instruments include cheque, bill of exchange etc.

• These are dealt with, as per Negotiable Instruments Act 1881.
• NIAc t was last amended in the year 2015. (Total no. of Sections - 147)
• NIAc t applicable throughout India (including J
B:K) 2 basic elements of negotiabil1ty:
• No restriction on further transfer. Freely transferable any no.
of times, if not restricted.
• Assumption that r'1t of the transferee (receiver ) in the
instrument is defect free if he got the instrument for
consideration and without notice of any deficiency.

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Negotiation 8: its ef fect 3
===-

• Negotiation means transfer of right (ownership) in the instrument

by one person in favour of another, for consideration.
• Transferee party becomes new owner
• X is payee of a cheque. He negotiated the cheque in favour of Z
for consideration.Z is new owner.
Methods of Negotiation:
• Bea rheque or DD : by delivery only (Sec 47)
• Order heque/ DD I BOE I PN :by endorsement and delivery by
same person (Sec 48).
• If endorser dies before delivery :
1. legal heirs to make fresh endorsement and
2. then deliver the instrument to transferee.

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 4

--- -- --·
···--
Negotiable Instrument Transfer of Property Act What is not negotiabl
Act {Sec 137)
1881
Docu ment of title Lif e insu rance policy
Prom;ssory Note (Sec to goods, such as: Bank FDRs
4) BHl of Exchange Railway receipt Bank notes and
(Sec 5) Cheque (Sec 6)
Bi ll of lading currency notes
Demand draft (Sec SSA)
Goods receipt NSC I KVP
Wa rehouse receipt Letter o·f credit
Others Airway bil l

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Collection of Cheques --------
2
]
-----------------------
• Relationship = Agent I principal
• If a bank collects a cheque for a customer, which does not
belong to the customer, it is called conversion.
• Z intercepted cheque in name of another Z and got
collected through his account.
• Conversion m. eans an unauthorised ict that deprives an
owner of personal property by another perso without his
consent.

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Protection against Conversio n 3

• Subject to certain conditions, protection against conversion

is available to bank under:
• Sec 131 of NI Act (for cheque)
• 131-A of NIAct (for demand draft)
Condjt ion for pr otection agai nst conversion:
• Collection is for a customer,whose account is opened by following
KYC requirement
• Collection is of a cheque, crossed generally or specially, in favour
of the bank.
• Collection is in good fait(bank believes thft. cheque belongs to
customer) and without negligence.

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 4
Alterations in the Cheque

Al terati ons are of two categor ies:

• Non-material
• Material alteration
As per Sec 62 of Indian Contract Ac t (comments ), a material
alteration is one which varies the rights, liabilities or legal position of
parties, from original.
In case of cheques, the material alteration:
• Dilutes basic instructions of the drawer.
• Brings change in the basic character of the cheque.

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 5
Non-material alterations in the Cheque

• Completion of incomplete cheque by holder I payee.

• Crossing of i.Jncrossed cheque or conversion of general crossing
to special crossing
• Conversion of bearer cheque into order cheque
• Cuttings I alterations confirmed by
drawer. A cheque with such alterations,can
be paid. Alteration by drawer:
As per RBI guidelines, CTS cheq should not be altered even by dra\A/er
, except revalidation of date. If ttlere is need for alteration,
a new cheque should be issued.

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 6
Material alterations in the Cheque
• Conversion of order into bearer
• Cancellation of crossing or conversion of special crossing into
general crossing.
• Change in amount, name of payee or date.
• Mutilation of cheque
These are material alterations u/s 87 of NI
Act. If such cheque is paid, bank is liable.
Protect ion for payment of mater ially al tered cheque uls 89 :
• Alteration is not visible, even when cheque is examined, with
due care.
Use of ultra-violet lamp
• As per fraud prevention guidelines of RBI, cheques of Rs.2 lac
and above should be examined under UV amp.

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Definition of Cheque 2

As per Section 6, NI Act 1881, a Cheque is:

• A demand bill of exchange
• Drawn on a specific bank (drawee of a cheque can be bank only)
• Payable to order or bearer (restriction to draw bearer, u/s 31 RBI
Act does not apply)
• If order a bearer o lli.. written in a cheque, cheque is to be
treated payable to bearer. ·"t"
• If order or bearer not written,cheque is to be treated 'order'.

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Types of Cheque 3

U/ s 6, 3 types of cheques, namely:

• Paper cheque
• The electronic image of a Truncated cheque
• Electronic cheque
Payment on the basis of any of these,will be payment in due
course, if otherwise in order

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Truncated Cheque 4

• It is a paper cheque, retained

by the collecting bank or
clearing house (i.e. physical Drawee Bank
Drawer
movement stopped in the
process of collection of
payment).
Paper Cheque
t
ScannedImage

t
• The collecting bank collects the

payment by generating
scanned 1mage of the paper
cheque + its own digital
signatures.
' .. Collecting Bank

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Electronic Cheque 5

• It is exact mirror image of a paper cheque, generated, written

and signed by drawer, in a secure payment system, with an
electronic signature and asymmetric crypto system.
Electronic signature has two keys
• (1) private key (used for signing) .
• (2) publ key used for verification of signatures)

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Format of Cheque 6

• Form of cheque, is
not prescribed in any
Act.
• It is a practice.
• Generally, cheque forms
of different banks are
similar.
• Design of CTS cheques is -o
approved by RBI under its CTS •I
2010 Regulations. f) • 00'1'1'° 00
• W.e.f. 1.1.2014 only O Bank·s 1010 printed withinvisible Ink (ultra·viol t Ink)
CTS cheques to be
used. €) VOID panlo& ph (), - symbol

{), CheQu printer deta1Js/CTS·2010 0, Signature sp ce Ind

cator

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Ante-dated and Post-dated Cheque 7

Ante -dated cheque

• A cheque with a past date.
• Example: Cheque written on Jan 26, 2016 is dated as Jan 1O, 2016.
• It is a valid mandate of the customer.
• It is paid within its validity period, when presented.
• If date is earlier to date of opening of account, it will be paid.
(Cheque wri tten on Jan 26, is dated as Jan 10. A le opened on Jan
20. It will be pai d)
Post-dated cheque
• A cheque with a future date. Itis a valid mandate.
• Mandate becomes operative from the date written on cheque.
• Example : Cheque actually written on Jan 1O, 2016 is dated
as Jan 26, 2016. It is presented on Jan 24.. It will not be
paid.
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Stale Cheque 8

• It is a cheque, the validity period of which has expired.

• Validity period is maximum 3 months (w.e.f. 1.4.2012) as per
RBI directions u/s 3 5 A Banking Regulation Act.
• If validity period is stated to be more than 3 months, it will be
restricted to 3 months only.
• Examole : Cheque dated Jun 1O, 2016 becomes stale on Sept
1O, 2016.
Revalidation of stale cheques:
• A stale cheque can be re-validated any no. of times, tillit is paid
(practice may differ with different banks)
• New validity date begins from the date it is revalidated.
• Above cheque revalidated on Sep 2'-..is valid till Dec 21 irrespective
of the fact, as to when it had become stale cheque.

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Cheque with im possible date 9
=
• Where date written on a cheque is a non-existent date, cheque
treated dated as last date of that month. It can be paid on that
last date.
• Cheque dated Feb 31 , 2017 is treated as dated Feb 28, 2017.
• It can be paid on Feb 28, 2017 or after, during its validity
period Cheque with incomplete date (inchoate cheque)
• Where cheque is signed but some other particulars such as date,
name of payee or amount is not stated, it is called inchoate cheque.
• It cannot be paid in this form (Sec 20) .
• It can be completed by its holder (payee or endorsee). If the
holder or drawer completes it:,it can be paid.
• Cheque dated Jun 2017,presented on 30th Jun 2017. Cannot
be paid.

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Different amount in words and figures

• As per Section 18, if amount differs in words and figures, the

amount written in words to be paid. (in figures to be ignored).
• Amount is Rs. 5 lac in words and Rs.5000.00 in figures. Cheque to
be paid for Rs.5lac.
• Legal ft courtesy amount: As per CTS 201O guidelines of RBI:
• amount written in words is 'legal amount' and
• amount in figures is 'courtelamou nt '.

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Signatures on a Cheque 12

Forged Signatures
• It is not the mandate of the customer.
• Bank cannot debit customer's account.
• If debited, no protection is available to bank, in any
circumstances. Different signa ures of the customer
• It is a valid mandate of the customer
• Bank has no obligation to pay such cheque.
• If bank makes payment, customer cannot se refund.

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Crossing of Cheque 2

Crossing is direction of drawer

to paying bank or collecting
bank : MY ai.c,.Mlte ••• • • •••• • ••••• • • • • •••• • •• •• • ••• • •••• • "'

One and F •••••••••••••

• Not to make payment to
payee across the counter
(i.e. cash payment)
• To make payment to
payee's bank only.
• Payment to payee's bank
can be in cash OR in
clearing OR as transfer.
• Crossing is done by way 2
parallel lines on face of a ..
Cheque or a Demand draft.
• These lines can be in any
manner under: .. cm __- • _

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