Negotiable Instruments Act, 1881 - Key Notes

1. Definition of Negotiable Instruments

• Written documents ensuring payment of a sum of money.

• Payable to bearer or order.
• Examples: Promissory Notes, Bills of Exchange, Cheques.

2. Types of Negotiable Instruments (Section 13)

• Promissory Note (Section 4) – Written promise to pay a certain amount.

• Bill of Exchange (Section 5) – Order from one party to another to pay.
• Cheque (Section 6) – A bill of exchange drawn on a bank, payable on demand.

3. Holder & Holder in Due Course

• Holder (Section 8) – Person entitled to possession of the instrument.

• Holder in Due Course (Section 9) – Acquires the instrument for value, in good faith.

4. Payment in Due Course (Section 10)

• Proper payment to the rightful holder.

• No knowledge of defects in title.

5. Inland & Foreign Instruments

• Inland Instruments (Section 11) – Payable in India.

• Foreign Instruments (Section 12) – Payable outside India.

6. Negotiation & Endorsement

• Negotiation (Section 14) – Transfer of instrument.

• Endorsement (Section 15) – Signature for transfer.

7. Ambiguous Instruments (Section 17)

• Unclear whether it’s a Bill of Exchange or Promissory Note.

8. Payment Terms

• Payable on Demand (Section 18) – No fixed time for payment.

• Payable at Future Time (Section 19) – Has a specified payment date.

Characteristics of Negotiable Instruments

A negotiable instrument has the following 9 essential characteristics:

 1. Property
o Whoever holds the instrument legally owns it.
o If it is payable to bearer, ownership transfers by mere delivery.
2. Defects in Title
o A holder in due course (one who acquires the instrument in good faith and for
value) gets it free from defects that a prior holder may have.
3. Remedy
o The holder can sue on the instrument in their own name.
o All prior parties are liable to the holder.
4. Right
o The holder in due course is protected from certain defenses that may apply to
previous holders (e.g., fraud, unless they were involved).
5. Payable to Order
o Instruments may be payable to a specific person.
o Transferability is implied even if "order" is not mentioned.
6. Payable to Bearer
o A negotiable instrument is payable to whoever holds it, unless restricted.
o If endorsed in blank, it becomes payable to bearer.
7. Payment
o The instrument can be made payable to multiple payees.
o It may also allow alternative payees, meaning either one may collect payment.
8. Consideration
o Negotiable instruments are presumed to be issued with valid consideration (a
benefit exchanged).
9. Presumptions
o There are legal assumptions about negotiability, transfer, and authenticity that
favor the holder.

Presumptions of Negotiable Instruments

The law assumes certain things about negotiable instruments unless proven otherwise. Key
presumptions include:

1. Consideration – Every negotiable instrument is presumed to have valid consideration (a

lawful exchange of value).
2. Date – The date written on the instrument is presumed to be correct.
3. Acceptance Before Maturity – Bills of exchange are assumed to be accepted before
their maturity.
4. Transfer Before Maturity – Negotiable instruments are presumed to be transferred
before their maturity.
5. Order of Endorsements – The endorsements on the instrument are presumed to be done
in the order they appear.
6. Stamping of Lost Instruments – If an instrument is lost, it is presumed to have been
properly stamped.
7. Holder in Due Course – The holder of the negotiable instrument is assumed to be a
Holder in Due Course (acquired the instrument lawfully).
 8. Proof of Dishonour – If a negotiable instrument is dishonoured, the protest serves as
proof unless disproved.

Types of Negotiable Instruments

A negotiable instrument can take various forms, including:

1. Promissory Notes – A written and signed promise to pay a certain amount to a specific
person or bearer.
2. Bills of Exchange – An unconditional order from one person to another to pay a sum of
money.
3. Cheques – A bill of exchange drawn on a bank and payable on demand.
4. Certificates of Deposit – Time-based deposits issued by banks with a fixed interest rate.
5. Commercial Papers – Short-term debt instruments issued by corporations for borrowing
funds.
6. Treasury Bills – Short-term debt securities issued by the government to meet financial
needs.

Promissory Note – Definition & Features

A promissory note is a written instrument containing an unconditional promise by the maker

to pay a certain amount of money to the payee.

Features of a Promissory Note

1. Must be in Writing – A verbal promise is not valid.

2. Contains an Unconditional Promise – No conditions attached.
3. Signed by the Maker – The promise becomes legally enforceable only with a signature.
4. Must Pay a Definite Sum of Money – The amount must be clear and calculable.
5. Parties Must Be Certain – Both the maker and the payee must be specified.
6. Must Be Payable on Demand or at a Future Date – The note must mention when the
payment is due.
7. Payable in Legal Currency – Payment must be in money (not goods/services).
8. Proper Stamping Required – Must comply with Stamp Act provisions.

Essentials of a Valid Promissory Note

To be legally recognized, a promissory note must:

• Be clearly written and signed.

• Contain an unconditional commitment to pay.
• Mention a specific sum.
• Have valid stamping under the law.

� A banknote or currency note is NOT a promissory note under this Act.

Bills of Exchange – Definition & Parties Involved

A bill of exchange is an instrument in writing that contains an order from one person (drawer)
to another (drawee) to pay a certain amount of money.

Key Parties in a Bill of Exchange

1. Drawer – The person who creates the bill.

2. Drawee – The person on whom the bill is drawn.
3. Acceptor – The person who accepts the bill for payment.
4. Payee – The person who receives the payment.
5. Endorser – Someone who transfers the bill.
6. Endorsee – The person to whom the bill is transferred.
7. Holder – The person legally entitled to receive payment.

� A cheque is a special type of bill of exchange that is always drawn on a bank.

Explanation

• A promissory note is a personal promise to pay.

• A bill of exchange is an order instructing another person to pay.
• Both serve as important financial instruments ensuring legal payment.

Advantages of a Bill of Exchange

1. Legal Proof of Debt – A signed acknowledgment that strengthens the claim for
repayment.
2. Fixes Payment Timeline – The debtor knows exactly when to pay, avoiding disputes.
3. Negotiability – Can be transferred easily, making it useful for trade and banking
transactions.
4. Helps Credit Transactions – Facilitates credit by serving as formal evidence of money
owed.
5. Enables Discounting – Bills can be sold at a discount for early cash realization.
6. Financial Discipline – Ensures timely payments and structured financial agreements.

Characteristics of a Bill of Exchange

1. Must Be in Writing – Cannot be oral.

2. Order to Pay – The drawer directs the drawee to pay.
3. Unconditional Order – No attached conditions for payment.
4. Signed by the Drawer – Legally enforceable only if signed.
5. Parties Involved – Drawer, drawee, payee.
6. Certainty of Amount – Payment amount must be precise.
7. Payment Must Be in Money – No goods or services can substitute payment.
8. Stamped – Must comply with Stamp Act provisions.
 9. Not Payable to Bearer on Demand – Unlike a cheque, it cannot be directly cashed by a
bearer without endorsement.

Explanation

A bill of exchange is a valuable instrument in finance and trade because it:

• Provides formal proof of money owed.

• Sets clear payment terms to avoid confusion.
• Can be transferred or discounted for liquidity.

Difference Between Promissory Note and Bill of Exchange

Promissory Note Bill of Exchange

Contains a promise to pay Contains an order to pay
Prepared by the debtor Prepared by the creditor
Signed by the maker Signed by the drawer
Accepted by the debtor Accepted by the drawee
Payable to the payee Payable to the payee
Not negotiable Negotiable
Not drawn in sets Drawn in sets

� Key Difference – A Promissory Note is a commitment to pay, while a Bill of Exchange is a

direction to pay.

Meaning of Cheque

A cheque is a negotiable instrument that:

• Contains an unconditional order to pay.

• Is drawn on a specified bank.
• Is signed by the drawer (person issuing the cheque).
• Instructs the bank to pay a certain sum on demand.

� Cheques are widely used for safe and convenient transactions.

History of Cheques

• Abbasid Caliphate (750-1258) – Traders used an early cheque system.

• 9th Century – The concept spread among merchants.
• 13th & 14th Century – Italy and Europe adopted cheques.
• 18th Century England – Cheques became a common banking tool.
• 1780-1800 – Usage expanded to the USA and other countries.
• 19th Century – Cheques became widely accepted worldwide.
� Cheques revolutionized global commerce by enabling secure transactions.

Parties to a Cheque

1. Drawer – The person who writes the cheque.

2. Drawee – The bank that processes the cheque.
3. Payee – The person or entity receiving payment.

� Each party plays a key role in ensuring smooth cheque transactions.

Explanation

• A Promissory Note binds the debtor directly, while a Bill of Exchange is issued by the
creditor to collect payment.
• Cheques have a long history and are now essential in banking.
• Every cheque involves three parties to complete the transaction.

Characteristics of a Cheque

A cheque is a negotiable instrument with the following features:

1. Written Order – Must be in writing.

2. Unconditional – Cannot be subject to any conditions.
3. Drawn on a Bank – Only payable by a bank.
4. Signed by the Drawer – Must bear the drawer’s signature.
5. Payable on Demand – The amount must be paid immediately when presented.
6. Transferability – Can be endorsed and transferred.

� Cheques allow secure payments and minimize risks in transactions.

Types of Cheques

Type Description
Bearer Cheque Payable to anyone presenting it.
Order Cheque Payable only to the specified person.
Crossed Cheque Can be deposited into a bank account, not encashed directly.
Account Payee Cheque Clearly states payment is made to a specific account holder.
Stale Cheque A cheque not presented for payment within 3 months.
Post-Dated Cheque Dated for future payment, not payable before that date.
Self-Cheque Issued by the account holder, payable to themselves.
Traveler’s Cheque Used internationally for secure travel payments.

� Different cheque types serve different financial needs!

Difference Between Cheque and Bill of Exchange

Cheque Bill of Exchange

Drawn on a bank Can be drawn on anyone
Payable on demand Can be payable at a future date
No acceptance required Must be accepted by the drawee
Used for immediate transactions Often used in trade & credit deals

� A cheque is a simpler, more widely used instrument than a bill of exchange.

Explanation

• Cheques provide safe & convenient banking transactions.

• They are transferable, allowing flexibility in payments.
• Different cheque types ensure controlled and secure fund handling.
• Cheques vs. Bills of Exchange – Cheques are always bank-related, bills can involve
business dealings.

Essentials of a Valid Cheque

A cheque must meet the following legal requirements:

1. Must Have Essentials of a Bill of Exchange

o Since a cheque is a specific type of bill of exchange, it must follow its
fundamental principles.
2. Drawn on a Specified Banker
o The cheque must be issued through a bank; any cheque drawn on a non-
banking entity is invalid.

� Key Point: A cheque is valid only if issued by a bank and follows the bill of exchange rules.

Liability of Parties in a Cheque Transaction

1. Drawer
o The individual issuing the cheque is responsible until the cheque is presented for
payment.
o If the cheque bounces, the drawer may face legal consequences.
2. Endorser
o The person endorsing the cheque is liable unless they add "Sans Recourse",
meaning no liability for them.
3. Other Possessors of the Cheque
o Holder: The person who legally owns the cheque and can claim payment.
o Holder for Value: Someone who has acquired the cheque after giving actual
consideration (monetary value).
� Key Point: The liability depends on whether the person issuing, endorsing, or possessing the
cheque has accepted responsibility or has transferred value.

When Does a Banker Become a Holder for Value?

A banker is considered a Holder for Value in these cases:

1. Lending Money Against a Cheque – Accepting a cheque in exchange for giving a loan.
2. Paying an Amount Before Clearance – Allowing funds to be used before the cheque is
officially cleared.
3. Allowing Overdraft Based on the Cheque – Permitting withdrawals before the cheque
is processed.

� Key Point: A Holder for Value banker gains full rights over the cheque and enjoys the same
legal privileges as a normal holder.

Explanation

• A cheque must follow bill of exchange principles to be legally valid.

• Liability depends on whether the drawer, endorser, or holder assumes responsibility.
• Bankers become holders when they give money in exchange for a cheque.

Holder in Due Course (HDC)

A Holder in Due Course is someone who acquires a negotiable instrument for value, in good
faith, and without any knowledge of defects. They enjoy special legal protections and stronger
rights than ordinary holders.

Key Points

1. HDC holds the instrument free from defects – They are protected from claims or
defenses raised by prior holders.
2. Requirements for HDC status:
o Acquired a complete and regular negotiable instrument.
o Taken for value (not a gift or free transfer).
o Obtained in good faith, with no suspicion of fraud.
o Received the instrument before it was overdue.
3. Legal Advantage:
o An HDC is not responsible for the original creditor’s misdeeds.
o They can demand payment from the instrument’s issuer.

� Example – A bank buying a promissory note from a car dealer is considered an HDC and isn't
liable for the car's defects.

Collecting Banker as an Agent of the Customer

A Collecting Banker acts as an agent for customers to collect cheque payments from banks.

Key Points

1. Collecting Process:
o The banker credits the customer's account only after collecting the cheque’s
amount.
o The customer can withdraw money after clearance.
2. Legal Responsibilities:
o The banker does not own the cheque—only acts as a collection agent.
o If the cheque is defective, the banker may be liable for damages.
3. Risk of Conversion:
o If a banker collects a cheque that does not belong to the customer, they may face
liability for unauthorized handling of funds.

� Bankers must exercise caution to avoid liability when collecting cheques.

Explanation

• Holder in Due Course enjoys strong legal protection because they obtain instruments
without fraud or defects.
• A Collecting Banker serves as an agent, ensuring safe transaction processing but must
verify legitimacy of cheques.

Privileges of a Holder in Due Course (HDC)

A Holder in Due Course (HDC) enjoys special legal protections under the Negotiable
Instruments Act. These privileges ensure that an HDC can claim payment and enforce rights
even if there were defects in previous ownership.

1. Gets a Better Title Than the Transferor

• Even if the previous holder had issues (fraud, forgery, etc.), the HDC gets full ownership
without those defects.

2. Privilege in Case of Incomplete Instruments (Sec. 20)

• If an instrument is partially filled but signed, an HDC can enforce payment for the full
amount.

3. Liability of Prior Parties

• All previous endorsers, drawers, and acceptors remain liable to an HDC until the
instrument is fully paid.

4. Privilege in Case of Fictitious Bills (Sec. 42)

 • If a bill has fake names, an HDC can still claim payment as long as they acquired it in
good faith.

5. Privilege When Conditionally Delivered Instrument Is Negotiated

• If an instrument was given with a condition, but later transferred to an HDC, the
condition does not apply to the HDC.

6. Estoppel Against Denying Original Validity (Sec. 120)

• No party can deny the validity of an instrument once an HDC holds it.

7. Estoppel Against Denying Payee’s Right to Endorse

• If a payee has endorsed the instrument to an HDC, no one can claim the payee didn’t
have the right to do so.

Explanation

• A Holder in Due Course enjoys strong protections even if the instrument had prior
defects.
• They can enforce payment, override conditions, and hold previous parties liable.
• The law ensures the negotiability of instruments by trusting HDCs more than prior
holders.

Crossing of Cheques – Meaning & Purpose

Crossing a cheque means adding special instructions to ensure it is paid only through a bank
account, making it safer and less likely to be misused.

Why is Crossing Important?

• Prevents direct encashment; must be deposited in a bank.

• Adds security by ensuring money reaches the right account.
• Helps in traceability—banks record transactions.

Types of Cheque Crossing

Cheques can be crossed in three main ways:

1. General Crossing (Sec. 123)

o Two parallel lines across the cheque.
o May include words like "& Co." or "Not Negotiable".
o Payment is only allowed through a bank.
2. Special Crossing (Sec. 124)
o Includes the name of a specific bank.
 o Must be paid through that bank only.
o More secure than general crossing.
3. Double Crossing (Sec. 125)
o When a cheque is crossed twice by different banks.
o Used when the original bank assigns another bank for collection.
o Ensures extra security in complex transactions.

� Example: A business issues a cheque with a special crossing to ensure payment goes only to
its chosen bank.

Who Can Cross a Cheque?

1. Drawer – The person issuing the cheque can cross it.

2. Holder – The receiver of the cheque can cross it.
3. Banker – A bank can cross it while handling funds.

� Banks often add crossing marks for security when handling cheques.

Explanation

• Crossing a cheque makes it safer by restricting direct withdrawal.

• Different crossing types add layers of security, ensuring payment reaches the right
account.
• Banks, businesses, and individuals use crossing to prevent fraud in cheque
transactions.

Special Crossing (Section 124)

• A cheque is specially crossed when the name of a specific bank is mentioned across the
cheque.
• It must be presented through the mentioned bank for payment.
• Ensures higher security since payment is restricted to a particular banker.

� Example: If a cheque says “State Bank of India” under crossing marks, it can only be
processed by SBI.

General Crossing (Section 123)

• Two parallel lines are drawn on the cheque (with or without the words "& Co." or "Not
Negotiable").
• Means the cheque must be deposited into a bank account—cannot be encashed
directly.

� Key Benefit: Prevents fraud since payment must go through the banking system.

Double Crossing (Section 125)

 • Occurs when a specially crossed cheque is further crossed by another bank.
• Used when the first bank doesn’t have a branch at the cheque's payable location.
• The second bank processes the cheque only for collection and must mention "Agent for
Collection".

� Important Rule: Double crossing is allowed only for collection purposes—not for direct
encashment.

Effect of “Not Negotiable” Marking (Section 130)

• Normally, negotiable instruments allow transfer without affecting legal rights.

• If a cheque says "Not Negotiable", the new holder cannot get a better title than the
previous holder.
• Reduces risk by ensuring that any fraud or defect in ownership carries forward.

� Key Impact: Makes the cheque more secure but doesn’t prevent transfer—just ensures that
defects in ownership remain.

Explanation

• Special crossing restricts payment to a specific bank, making it safer.

• General crossing ensures the cheque goes through a bank account, preventing
misuse.
• Double crossing is used when banking locations don’t match.
• Marking "Not Negotiable" keeps title defects but does not stop transfer.

Banker's Liability on Crossed Cheques

• If a crossed cheque is paid correctly, the bank is protected—even if the money doesn't
reach the rightful owner (Sec. 128).
• If a crossed cheque is wrongly paid, the bank may be liable for loss (Sec. 126 & 129).

� Key Point: Banks must follow proper procedures when processing crossed cheques.

Protection for Bankers (Uncrossed Cheques - Sec. 85(2))

• If a bank correctly pays an uncrossed cheque, it can debit the customer’s account.
• Even if an endorsement is forged, the bank is not responsible if payment is done in good
faith.

� Example: If a stolen cheque has a forged signature, the bank can still debit the drawer's
account if payment follows the rules.

Protection for Bankers (Crossed Cheques - Sec. 126)

 • If a bank follows Sec. 126, it can debit the customer’s account even if the money
doesn’t reach the correct owner.

� Key Rule: Banks are protected if they follow the legal guidelines for cheque processing.

Prerequisites for Claiming Protection

A bank must ensure:

1. Payment matches the cheque’s conditions.

2. Payment is made in good faith—no fraud or negligence.
3. Cheque is presented by the rightful possessor.
4. There’s no suspicious reason to reject payment.

� Important Rule: If the bank suspects fraud, it must not process the cheque.

Dishonour of Cheques – Reasons

A banker must refuse payment in these cases:

1. Insufficient Funds – If the account doesn’t have enough money.

2. Customer’s Death – Payments stop after the customer’s death.
3. Customer’s Insolvency – If declared bankrupt, the banker must stop payments.
4. Garnishee Order – If a legal order freezes the account, the bank must refuse payment.

� Example: If a customer writes a cheque after becoming insolvent, the bank must reject it.

Explanation

• Banks have legal protection if they follow cheque processing rules.

• Crossed cheques offer more security, ensuring payments go through banking channels.
• Dishonoured cheques protect the bank and prevent illegal transactions.

Dishonour of Cheques – Meaning & Consequences

A cheque is dishonoured when the bank refuses payment due to reasons like insufficient funds,
incorrect details, or legal restrictions.

Reasons for Dishonour

1. Insufficient Funds – Account balance is too low.

2. Signature Mismatch – Wrong or incomplete signature.
3. Post-Dated Cheque Presented Early – Cannot be cleared before the date.
4. Frozen Account – Legal action has blocked transactions.
5. Altered Cheque Details – Any changes without confirmation.
� Key Point: A dishonoured cheque means the payment fails, and the drawer may face legal
consequences.

Notice of Dishonour – Importance & Rules

• When a cheque is dishonoured, the holder must notify the previous parties (drawer,
endorser).
• The notice must be given in time—delay can invalidate the claim.
• Banks often send dishonour messages or formal return memos.

� Example: If a cheque bounces due to insufficient funds, the bank will notify the account
holder, and further action may be taken.

Legal Consequences of Dishonour

• Under the Negotiable Instruments Act (Sec. 138), dishonouring a cheque due to
insufficient funds can lead to:
o Penalty or fine.
o Legal proceedings if the amount is significant.
o Loss of credibility for the drawer.

� Important Rule: If a cheque bounces, the payee can file a legal complaint for recovery.

Explanation

• Dishonoured cheques mean the payment fails, and the drawer can face penalties.
• Notice of dishonour ensures that previous parties are informed and legal claims can be
made.
• The law protects cheque holders from financial loss due to dishonour.

Notice of Dishonour – Importance & Rules

When a cheque or negotiable instrument is dishonoured, the holder must notify the previous
parties (drawer, endorser) to claim repayment.

Key Points

1. Who Can Receive Notice?

o The party liable to pay (drawer or endorser).
o Their legal agent or representative.
2. Who Can Give Notice?
o The holder or any previous party entitled to claim payment.
3. How Can Notice Be Given?
o In writing or verbally.
o By post, personal delivery, or leaving it at the recipient’s place.
4. Time Limit to Give Notice (Sec. 107 & 108)
 o Must be sent within a reasonable time after dishonour.
o Post notice must be timely, considering postal delays.

� Example: If a cheque bounces due to insufficient funds, the bank sends a formal dishonour
memo.

When Notice of Dishonour Is Excused (Sec. 113-114)

Sometimes, notice is not required due to special conditions.

Cases Where Notice Is Excused

1. When the party already knows about dishonour

o No need for notice if the drawer is aware their cheque bounced.
2. When notice is impossible to deliver
o If the liable party cannot be traced, notice may be excused.
3. When the drawer waives the need for notice
o If the cheque contains a note like "No notice required", it is legally valid.
4. In case of insolvency or death
o No notice is required if the drawer dies or is declared bankrupt.

� Key Rule: If dishonour is obvious or unavoidable, notice may not be needed.

Explanation

• Notice ensures repayment claims after dishonour.

• It must be given to the right parties within a reasonable time.
• In special cases, like insolvency or awareness of dishonour, notice may not be
necessary.

Noting of a Dishonoured Instrument (Sec. 99)

Noting is a formal step to record dishonour of a negotiable instrument. It helps establish proof
for legal claims.

Key Points

1. Made by a Notary Public

o A qualified notary records dishonour by marking details on the instrument.
2. Details Recorded in Noting
o Date of dishonour.
o Reasons (insufficient funds, incorrect details).
o Notary’s signature to confirm authenticity.
3. Purpose of Noting
o Provides evidence in legal disputes.
o Ensures proof of dishonour for further action.
� Example: If a cheque bounces due to insufficient funds, it can be officially "noted" by a
notary to make legal enforcement easier.

Protest of a Dishonoured Instrument (Sec. 100)

Protest is a more detailed formal certification of dishonour, issued by a notary public.

Key Points

1. A Formal Document
o Contains full details of dishonour, including:
 Date and reason.
 Names of parties involved.
 Notary's official certification.
2. Needed for Legal Claims
o Used for foreign bills of exchange.
o Can be presented in court as proof.

� Key Difference: Noting is just a short record, while Protest is a full written statement.

Effect of Dishonour

• The holder can take legal action against prior endorsers.

• A dishonoured bill may be noted or protested to strengthen claims.

� Key Point: Noting and protest help in legal enforcement of unpaid negotiable instruments.

Explanation

• Noting and protest provide proof of dishonour, helping holders recover their money.
• Noting is a quick mark, while protest is a full statement.
• These steps are crucial for legal claims in negotiable instrument disputes.

Bouncing of Cheques – Meaning & Reasons

A cheque bounce happens when a bank refuses to process payment, returning the cheque to
the issuer with a reason memo.

Common Reasons for Cheque Bounce

1. Insufficient Funds – The account doesn’t have enough money.

2. Wrong Date on Cheque – If the cheque date is incorrect or post-dated.
3. Signature Mismatch – The signature doesn’t match the bank’s records.
4. Amount Difference – If numbers and words don’t match.
5. Damaged Cheque – If torn or unclear details.
6. Overwriting – If changes are made without proper authorization.
� Key Point: Banks return dishonoured cheques with a note explaining the reason for rejection.

Noting (Sec. 99) – Recording Dishonour

Noting is an official step to record dishonour of a cheque or bill.

Key Points

• Done by a Notary Public.

• Details recorded include:
o Date & Reason for dishonour.
o Notary’s signature & charges.

� Example: If a business cheque bounces due to insufficient funds, it can be officially “noted”
for further legal action.

Protest (Sec. 100) – Formal Legal Proof

A Protest is a detailed formal certificate issued by a notary public confirming dishonour.

Protest for Better Security (Sec. 100)

• Used when an acceptor becomes insolvent or loses financial credibility before maturity.
• The holder can demand additional security—if refused, the refusal gets recorded.

� Difference: Noting is a short record, while Protest is a full written certification.

Contents of a Protest (Sec. 101)

A protest document must include:

1. The dishonoured cheque or bill (or a full copy).

2. Names of all involved parties.
3. Demand for payment and the response.
4. Place & time of dishonour.
5. Signature of the Notary Public.
6. If someone offers payment for honour, details of the payment.

� Key Point: A protest makes legal enforcement stronger for recovery of money.

Explanation

• Cheque bounce stops payment, requiring action from the drawer.

• Noting & Protest provide formal proof of dishonour, helping the cheque holder take
legal steps.
• A protest strengthens claims in legal disputes.
Cheque Bounce – Key Reasons & Consequences

A cheque bounces when the bank refuses to process payment due to errors or lack of funds.

Common Reasons for Cheque Bounce

1. Insufficient Funds – The account doesn’t have enough balance.

2. Wrong Date – If the cheque is post-dated or expired (more than 3 months old).
3. Signature Mismatch – The signature doesn’t match the bank’s records.
4. Amount Difference – If the number and words don’t match.
5. Damaged Cheque – A torn or unclear cheque may be rejected.
6. Overwriting & Corrections – Any changes or scribbles can lead to dishonour.

� Key Rule: Banks return dishonoured cheques with a memo stating the reason.

What Happens When a Cheque Bounces?

• The bank charges a penalty to both the issuer and receiver.

• The issuer must issue a fresh cheque or resolve the issue.
• The receiver has the right to take legal action if the cheque is not honoured.

� Key Rule: A dishonoured cheque can lead to legal consequences under the Negotiable
Instruments Act (Sec. 138).

Explanation

• Cheque bounce occurs due to errors in funds, details, or overwriting.

• Legal consequences exist for dishonour—issuers must stay careful.
• Review questions help strengthen understanding of key cheque-related concepts.