Bill of Exchange

Section-6 of N.I.T Act,1881A cheque is defined as 'a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand’.
Thus, a cheque is a bill of exchange with two added features:(i) It is always drawn on a specified banker; and
(ii) it is always payable on demand and not otherwise
Features of a Cheque
A Cheque is a bill of exchange with following features, viz.,
must be in writing
contain an unconditional order to pay
(iii) drawn on a specified banker
(iv) for a certain sum of money
the payee must be a definite person
(vi) amount must be written both in figures and words
(vii) it must be dated
(viii) it is always drawn on a specified banker
(ix) it is always payable on demand and not otherwise
Types of Cheque
Two Types:
1. Open Cheques: An open cheque is one which is payable in cash across the counter of the bank
2. Crossed Cheques: A crossed cheque is one which has two short parallel lines marked across its
face. It can be paid only to another banker.
 The advantage of crossing is that it reduces the danger of unathorised persons getting
possession of a cheque and cashing it.
 A crossed cheque can only be cashed through a bank of which the payee of the cheque is a
Crossing of cheques
Crossing on a cheque is a direction to the paying banker by the drawer that payment should not be
made across the counter. It is a peculiar method of modifying the instrument to the banker for
payment of the cheque. The payment on a crossed cheque can be collected only through a banker.
It is effected by drawing two parallel transverse lines with or without the words 'and company' or
any abbreviation thereof. A cheque that is not crossed is called an `open cheque`.
Why crossing
As payment cannot be claimed across the counter on a crossed cheque, crossing of cheques serves
as a measure of safety against theft or loss of cheques in transit.
Types of crossing
Crossing may be either General or Special
General – It mean as where a cheque bears across its face an addition of the words 'and company'
or any abbreviation thereof, between two parallel transverse lines or of two parallel transverse
lines simply, either with or without the words 'not negotiable', that addition shall be deemed a
crossing and the cheque shall be deemed to be crossed generally.
Special –It implies the specification of the name of the banker on the face of the cheque.The
object of special crossing is to direct the drawee banker to pay the cheque only if it is presented
through the particular bank mentioned therein. Thus, it makes the cheque system still safer.
Who can cross a cheque
A cheque may be crossed by any of the following:
1. The drawer of a cheque.
2. The holder of a cheque.
3. The Banker, in whose favour the cheque has been crossed specially.
Bill of Exchange
A 'bill of exchange' is defined by as 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.
Characteristic Features of a Bill of Exchange
It must be in writing.
It must contain an order to pay and not a promise or request.
The order must be unconditional.
There must be three parties, viz., drawer, drawee and payee.
The parties must be certain.
It must be signed by the drawer.
The sum payable must be certain or capable of being made certain.
The order must be to pay money and money alone.
It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.
Parties to a Bill of Exchange
The Drawer - the person who draws or makes the bill.
The Drawee - the person on whom the bill is drawn.
The Payee - the person to whom the amount of the bill is payable.
The Holder - is the original payee but where the bill has been endorsed, the endorsee.
The endorser - is the person who endorses a bill.
The endorsee - is the person to whom the bill is negotiated by endorsement.
Promissory Notes
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 to, or to the order
of, a certain person or to the bearer of the instrument
Examples of Promissory Notes
“A” signs instruments in the following terms:
"I acknowledge myself to be indebted to 'B' in Rs. 1000, to be paid on demand, for value received."
Essentials or Characteristics of a Promissory Note
From the definition, it is clear that a promissory note must have the following essential elements:(1)
In writing - A promissory note must be in writing. Writing includes print and typewriting.
Promise to pay - It must contain an undertaking or promise to pay. Thus, a mere
acknowledgement of indebtedness is not sufficient.
Notice that the use of the word `promise' is not essential to constitute an instrument as
promissory note.
(3) Unconditional - The promise to pay must not be conditional. Thus, instruments payable on
performance or non-performance of a particular act or on the happening or non-happening of
an event are not promissory notes.
(4) Signed by the Maker – The promissory note must be signed by the maker, otherwise it is of
no effect.
(5) Certain Parties - The instrument must point out with certainty the maker and the payee of the
promissory note.
Certain sum of money - The sum payable must be certain or capable of being made certain.
(7) Promise to pay money only - If the instrument contains a promise to pay something in addition
money, it cannot be a promissory note.
(8) Number, place, date etc - These are usually found in a promissory note but are not essential
in law. If a promissory note does not bear a date, it is deemed to have been made when it was
(9) It may be payable in installments
(10) It may be payable on demand or after a definite period - Payable 'on demand' means payable
immediately or any time till it becomes time-barred. A demand promissory note becomes time
barred on expiry of 3 years from the date it bears.
(11) It cannot be made payable to bearer on demand or even payable to bearer after a certain
(12) It must be duly stamped under the Indian Stamp Act - It means that the stamps of the
requisite amount must have been affixed on the instrument and duly cancelled either before or
at the time of its execution. A promissory note, which is not so stamped, is a nullity.
Parties to A Promissory Note
1. The Maker - the person who makes the note promising 'to pay the amount stated therein.
2. The Payee - the person to whom the amount of the note is payable.
3. The Holder - is either the original payee or any other person in whose favour the note been
4. The Endorser - the person who indorses the note in favour of another person.
5. The Endorsee - the person in whose favour the note is negotiated by indorsement.
Bill of Exchange and Cheque distinguished
1) It must be drawn only on a banker.
2) The amount is always payable on demand.
The cheque is not entitled to days of grace.
Acceptance is not needed.
A cheque can be crossed
Notice of dishonour is not necessary. The
Bill of Exchange
1) It can be drawn on any person including a
2) The amount may be payable on demand or after a. specified time.
A usance (time) bill is entitled to three days of
3) grace.
4) A bill payable after sight must be accepted.
5) Crossing of a bill of exchange is not possible.
parties thereon remain liable, even if no notice
of dishonour is given.
7) A cheque is not to be noted or protested in case
of dishonour.
6) Notice of dishonour is necessary to hold the
parties liable thereon. A party who does not
receive a notice of dishonour can generally
escape its liability thereon.
7) A bill is noted or protested to establish dishonour.
8)The protection given to the paying banker in
respect of crossed cheques is peculiar to this
8) No such protection is available in the case of
Promissory Note and Bill of Exchange distinguished
Promissory Note
Bill of Exchange
1) There are only two parties – the maker (debtor)
and the payee (creditor).
1) There are three parties – the drawer, the
drawee and the payee- although any two of
these capacities may be filled by one and the
same person.
2) It contains an unconditional order to the drawee
to pay according to the drawer`s directors.
2) A note contains an unconditional promise by the
maker to pay the payee.
3) No prior acceptance is needed.
3) A bill payable `after sight` must be accepted by
the drawee or his agent before it is presented
for payment.
4) The liability of the maker or drawer is primary
and absolute.
5) No notice of dishonour need be given.
6) The maker of the note stands in immediate
relation with the payee.
4) The liability of the drawer is secondary and
conditional upon non-payment by the drawee
5) Notice of dishonour must be given by the holder
to the drawer and the intermediate endorsers to
hold them liable thereon.
6) The maker or drawer does not stand in
immediate relation with the acceptor drawee.
The acceptance of a bill is the indication by the drawee of his assent to the order of the drawer.
It has been defined as the signature of the drawee of a bill who has signed his assent upon bill and
delivered it or given notice of such signing to the holder to some person on his behalf.
An acceptance to be valid must be
(a) in writing,
(b) signed by the drawee or his agent,
(c) on bill of exchange, and
(d) completed by delivery to the holder or by notice of acceptance to him or some person on his
behalf [Jagjivan Mauji Vithlani v. M/s Ranchahodas Meghaji, 1945]
An acceptance of a bill may be general or qualified.
(a) General Acceptance
(b) Qualified Acceptance
Who may Accept
A bill of exchange may be accepted by the following persons:(1) The drawee of the bill
(1) Where there are more than one drawees, by all or some of them.
(2) A drawee in case of need.
(4) An agent of any of the person mentioned above.
(5) An acceptor for honour.
(6) An agent of the acceptor for honour.
(7) In case no drawee is mentioned in the bill and a person accepts it, he becomes an acceptor
by estoppel.
Acceptance for Honour
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 anyone of the
endorsers, such person is called an acceptor for honour.
After acceptance of the bill by the acceptor for honour, the payee, at the due date, has to
present the bill first to the drawee for payment and if it is also dishonoured for payment by
the drawee and noted or protested as the case may be it should then be presented to the
acceptor for honour for payment.
Presentment of a negotiable instrument is made for two purposes.
Presentment for acceptance - It is only bills of exchange that require presentment for
acceptance and that too not all but certain kind of bills only. Bill payable on demand or on a
fixed date need not be presented for acceptance.
Presentment for payment - A negotiable instrument must be presented for payment to the
maker, acceptor or drawee, thereof, as the case may be, by the holder or his agent.
Hundis are instruments written in an oriental language. The word 'hundi' appears to have been
derived, from the Sanskrit work 'hund' which means 'to collect'. These hundis were, therefore,
originally used for the collection of debts. Hundis have been in circulation in India from very early
times, long before the Negotiable Instrument Act, 1881.
It is to be noted that The Negotiable Instruments Act does not apply to hundis, but where, by any
words in the instrument itself, the usages regarding such instruments are excluded, or where it is
expressly indicated that the legal relations of the parties thereto shall be governed by the
Negotiable Instruments Act 1881, the Act becomes applicable. In the absence of any of the above
indications, hundis shall be governed by local usages applying to such documents [Kanhyalal v.
Ramkumar, 1956].
Kinds of hundis
Shah-Jog Hundi - A Shah-jog hundi is drawn by one merchant on another asking the latter to
pay the said hundi to a 'Shah'. 'Shah' is a respectable and responsible person, a man of worth
and known in the bazar.
Darshni Hundi - A darshni hundi must be presented for payment within a reasonable time after
its receipt by the holder.
Muddati Hundi or Miadi Hundi – Hundi payable agter a specified period of time.
Nam Jog Hundi - A hundi payable to the specified person is called Nam-jog hundi.
Nishan.Jog Hundi – This hundi is payable only to the persons who presents it.
Dhani.Jog Hundi- A dhani-jog hundi is payable to a dhani, owner.
Firman-Jog and Dekhanhar Hundis – There are payable to order.
According to sec-8 of N.I.T Act,1881A holder of a negotiable instrument is a person entitled in his own name to the possession of that
negotiable instrument and to receive or recover the amount due thereon from the parties thereto.
Holder in Due Course
A 'holder in-doe-course' is a person who for consideration became the possessor of a negotiable
instrument before the due date of payment of that instrument and without having sufficient cause
to believe that any defect existed in the title of the person from whom he derived his title. He
nust fulfil the following qualifications:1. He must be a holder
2. He must be a holder for valuable consideration.
3. He must have become the holder of the negotiable instrumentbefore its maturity.
4. He must have become the holder of the negotiable instrument before its maturity.
5. He must take the negotiable instrument complete and regular on the face of it.
6. He must have become holder in good faith without having sufficient cause to believe that
any defect existed in the title of the transferor.
1. Dishonour by Non-Acceptance (Section 91)
(I) When the drawee does, not accept it within 48 hours from the time of presentment for
(2) when presentment for acceptance is excused and it remains unaccepted;
(3) when the drawee is a person incompetent to contract;
(4) when the drawee could not be found after a reasonable search.
(5) where the acceptance is qualified;
(6) where one or more of the several drawees refuse to accept the bill.
2. Dishonour by Non-Payment
A promissory note, bill of exchange or cheque is said to be dishonoured by non-payment when the
maker of the note,acceptor of the bill or drawee of the cheque makes default in payment upon
being duly required to pay the same (sec.92).Also a promissory note or a bill of exchange is
dishonuured by non-payment when presentment for payment is excused expressly by the maker of
the note or acceptor of the bill and the note or bill remains unpaid at or after maturity.
Notice of Dishonour
When a negotiable instrument is dishonoured by non-acceptance or non-payment, the holder must
give notice of dishonour to the drawer and all other parties whom he seeks to make liable. Each
party receiving notice of dishonour must in order to render any prior party liable to himself give
notice of dishonour to such party within a reasonable time after he has received it. The notice may
be oral or in writing though for safety it is advisable to give a written notice.
Notice of dishonour unnecessary
(1) When it is dispensed with by the party entitled thereto.
(2) When the payment has been countermanded by the drawer or endorser.
(3) When the party charged could not suffer damages for want of notice.
(4) When the party entitled to notice cannot after reasonable search be found.
(5) Where the party liable to give notice is unable, without any fault of its own, to give it,
e.g. death or serious illness of the holder or his agent or any other accident.
(6) Where the promissory note is not negotiable.
(7) In case the drawer himself is acceptor, no notice is necessary to charge the drawer.
(8) When the party entitled to notice, knowing the facts, promises unconditionally to pay
the amount due on the instrument.