Business Law Unit 4 Business Law Full Notes

Business Law Unit 4

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Business Law Unit 4

Presentation of Negotiable Instruments

Presentment of a negotiable instrument means presenting or showing a negotiable instrument to the drawee, maker or acceptor.

This presentment may be

(i) for acceptance,

(ii) for sight or,

(iii) for payment.

Presentment of acceptance:

Only certain types of bills of exchange require presentment for acceptance. The following bills must be presented for acceptance.

(i) A bill payable after sight or after presentment must be presented for acceptance so that date of maturity of the bill may be fixed.

(ii) A bill in which it has been expressly stipulated that it shall be presented for acceptance before payment.

However, a bill payable (a) on demand, or (b) on a fixed day, or (c) a certain number of days after date need not be presented for acceptance. Even in case where presentment for acceptance is optional, it is advisable to present the bill for acceptance so as to get (i) the benefit of additional security of drawee’s name on the bill, (ii) and immediate cause of action against the drawee for dishonour by non- acceptance.

Business Law Unit 3 Business Law Full Notes Presentation of Negotiable Instruments

Essential Rules of Valid Acceptance

1. Acceptance must be given on the bill:

No specific form is prescribed. However, the acceptance must be given on the bill and it should not be on any other paper. In case the bill is drawn in sets, only one of the copies should be accepted. If the acceptor signs on all the parts, he will be liable to holder in due course as if each part were a separate bill.

2. Acceptance must be signed by the drawee or by his agent, duly authorized in this respect:

Signing on the bill by the drawee, or his duly authorized agent is essential to charge him as a party to the bill. The world “accepted” may or may not be used but signature must be there. Merely writing the word “accepted” without drawee’s signature is not enough.

3. Acceptance must be completed by delivering the instrument to the holder:

Acceptance is complete only when the accepted bill is delivered to the holder.

4. Presentment must be made in time:

Presentment for acceptance must be made at a reasonable time on a business day and before maturity.

5. Not more than 48 hours should be given to accept the bill:

Not more than 48 hours should be allowed to the drawee to consider whether or not he will accept the bill.

To whom Presentment for Acceptance is made?

Obviously, to the drawee. However, presentment for acceptance may be made to the following:

(i) To the drawee himself or his duly authorized agent.

(ii) To his legal representative, if the drawee, before acceptance, has died.

(iii) To his Official Receiver or Assignee if the drawee, before acceptance, has been declared insolvent (Sec.75).

(iv) To drawee in case of need (Sec. 33).

(v) To acceptor for honour (Sec. 108).

(vi) To all the drawees, in case there are more drawees and they are not partners. In case they are partners, to any of the drawees (Sec. 34).

It should be noted that a partner or an agent can accept a bill on behalf of others only when he has express or implied authority to accept the bills.

Crossing of Cheques

A crossed cheque is a cheque that has been marked to specify an instruction about the way it is to be redeemed. A common instruction is to specify that it may only be deposited directly into an account with a bank and cannot be immediately cashed by a bank over the counter.

The format and wording varies between countries, but generally two parallel lines and/or the words ‘Account Payee’ or similar may be placed either vertically across the cheque or in the top left hand corner. By using crossed cheques, cheque writers can effectively protect the cheques they write from being stolen and cashed.

From the above discussion, it should be clear that a cheque can be made safe by crossing it. To cross a cheque, two transverse parallel lines are drawn on the left hand corner of the cheque. It is also usual to write the words “& Co”, in between these two lines. However, it is not necessary to write these words. A crossing is a direction to the paying banker not to pay the money to the holder at the counter.

Crossing of Cheques

Cheques can be of two types:-

1. Open or an uncrossed cheque

2. Crossed cheque

Open Cheque

An open cheque is a cheque which is not crossed on the left corner and payable at the counter of the drawee bank on presentation of the cheque.

Crossed Cheque

A crossed cheque is a cheque which is payable only through a collecting banker and not directly at the counter of the bank. Crossing ensures security to the holder of the cheque as only the collecting banker credits the proceeds to the account of the payee of the cheque.

When two parallel transverse lines, with or without any words, are drawn generally, on the left hand top corner of the cheque. A crossed cheque does not affect the negotiability of the instrument.

Types of Crossing

Crossings are of the following types:

(1) General crossing;

(2) Special crossing;

(3) However, there is yet another type of crossing which is recognized by usage and custom, called restrictive crossing:

(4) Not negotiable crossing.

1. General Crossing:
In a general crossing, simply two parallel transverse lines, with or without the words ‘not negotiable’ in between, maybe drawn. Such a cheque is crossed generally.

The effect of general crossing is that the payment of the cheque will not be made at the counter; it can be collected only through a banker.

2. Special Crossing:
In a special crossing, the name of a banker with or without the words ‘not negotiable’ is written on the cheque. Such a cheque is crossed specially to that banker.

It should be noted that two transverse parallel lines are necessary for a general crossing, whereas for a special crossing, no such lines are necessary.

The effect to special crossing is that the paying banker will be the amount of the cheque only through the bank named in the cheque.

3. Restrictive crossing:
Besides the two statutory types of crossing discussed above, there is one more type of crossing namely; restrictive crossing. This type of crossing has been recognised by usage and custom of the trade.

In a restrictive crossing the words ‘Account Payee’ or Account Payee Only’ are added to the general or special crossing.

The effect of restrictive crossing is that the payment of the cheque will be made by the bank to the collecting banker only for the account payee named. If the collecting banker collects the amount for any other person, he will be liable for wrongful conversion of funds.

It should be noted that the duty of the paying banker is only to ensure that the payment is made through the named bank, if there is any. He is not liable, in case the collecting banker collects the cheque for any other person than the account payee. In that case collecting banker will be liable to the true owner.

4. Not negotiable Crossing (Sec. 130):
A person taking is cheque crossed generally or specially, bearing in either case the words ‘not negotiable’ shall not be able to give a better title to the holder than that of the transferor.

The effect of a not negotiable crossing is that the cheque can be transferred but the transferee will not acquire a better title to the cheque. Thus a cheque is deprived of its essential feature of negotiability.

The object of “not negotiable” crossing is to protect the drawer against loss or theft in the course of transit.


A cheque was drawn in favour of a firm B & Co. The cheque was crossed ‘not negotiable’; one of the partners, A in fraud of his Co-partner B, endorsed the cheque to P who in cashed it. Held that B, who under the terms of the partnership agreement was entitled to the cheque could recover the amount from P as A could not transfer better title than he himself had.
Who may cross a cheque? As a rule, it is the drawer who can cross a cheque. However, Sec. 125 provides that even a holder can cross the cheque. It further provides that a banker can cross the cheque specially for collecting to another banker as his agent for collection.

Business Law Unit 4 Business Law Full Notes Crossing of Cheque

Discharge From Liability

Discharge From Liability

The maker, acceptor or endorser respectively of a negotiable instrument is discharged from liability thereon-

  • By cancellation-to a holder thereof who cancels such acceptor’s or endorser’s name with intent to discharge him, and to all parties claiming under such holder.
  • By release- to a holder thereof who otherwise discharges such maker, acceptor or endorser, and to all parties deriving title under such holder after notice of such discharge;
  • By payment-to all parties thereto, if the instrument is payable to bearer, or has been endorsed in blank, and such maker, acceptor or endorser makes payment in due course of the amount due thereon.

The term ‘discharge’ in relation to negotiable instruments is used in two senses: 

(1) Discharge of an instrument, and  (2) Discharge of one or more parties.

  1. Discharge of an instrument:

An instrument is discharged when all the rights under it are extinguished so that the instrument ceases to be negotiable. For example, when the party primarily liable on the instrument, i.e. the maker or the acceptor is discharged, the instrument is also discharged. After an instrument is discharged all the parties are also 

discharged from their liabilities even holder in due course cannot claim the amount of the instrument from any party to the instrument.

  1. Discharge of one or more parties:

When one or more parties are discharged, the instrument continues to be liable and the undercharged parties remain liable on the instrument.

 For example when the name of the indorser is cancelled, the drawer and acceptor continue to be liable.

It may be pointed out that the term ‘discharge of instrument’ is wider than the term ‘discharge of party (ies).’ When an instrument is discharged, all the parties to the instrument are also discharged automatically. However, discharge of one or more parties does not necessarily discharge the instrument.


An instrument is discharged in the following ways:

  1. By payment in due course [Sec. 10 and 82(c)]:

Perhaps this is the most natural and usual mode of discharge of an instrument. All parties to an instrument are discharged by payment made in due course.

Essential Rules Regarding Payment:

  1. The payment should be made by the party primarily liable, i.e. the maker of a note or the acceptor of a bill and the drawee of a cheque. If the payment is made by any indorser, the instrument will not be discharged; only that indorser and subsequent parties will be discharged.
  2. The payment of the instrument should be made at or after maturity. If the payment is made before maturity, it will not discharge the instrument unless the instrument is cancelled. If it is not cancelled, it is likely to reach again in the hands of a holder in due course who can enforce payment.


  1. Payment should be made to the holder; otherwise it will not discharge the party liable to pay (Sec. 78). In case the instrument is payable to bearer, the payment may be made to any person in possession of the instrument unless there is a suspicion to show that he is not entitled to payment.

In that case, payment even to a thief or finder will discharge the instrument. In case the instrument is payable to order, the payment should be made to the payee named. This condition is very strict. Even if the payment is made to another person of the same name, it will not discharge the party liable to pay it.


A bill was drawn payable to Ram Lai. Another Ram Lai picked up the bill and got the payment. The acceptor is not discharged. The true Ram Lai can still recover the amount from the acceptor.

However, in case of a cheque, special protection has been granted by Sec. 85(1):

“Where a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee is discharged by payment in due course”.

Thus, in the above example, if it were a cheque and not a bill, then the true Ram Lai would have no remedy against the drawee, i.e. the bank.

  1. Discharge by cancellation [Sec. 82 (a)]:

Where the holder of an instrument with the intention of discharging the instrument, cancels the name of the party primarily liable (i.e. the maker of a note or the acceptor of a bill), the instrument is discharged. An instrument is also discharged if the holder cancels the instrument itself with an intention of discharging all the parties to the instrument. He may cancel the instrument by scoring it out or tearing it off.


A drew a bill for Rs. 500 on B. A indorsed the bill to C, C to D and D to E.

E, the holder of the bill, cancels the name of the drawer A. Now B, C and D are also discharged as their liability is dependent upon the liability of the drawer A.

It should be noted that cancellation should be intentional.

An accidental cancellation will not discharge the instrument. To discharge the instrument, the name of the party primarily liable should be cancelled. If the name of a party who is secondarily liable is cancelled, the instrument will not be discharged; only the subsequent parties will be discharged in that case. The instrument should be destroyed physically so that it may not be used again.

  1. By acceptor of a bill becoming its holder [Sec. 90]:

Where the acceptor of a bill of exchange (which has been negotiated) becomes its holder at or after maturity, the bill is discharged. This is based on the principle of ‘Negotiation Back’ discussed earlier. The party primarily liable becomes the holder of the instrument; it will not be allowed to enforce its claim against other parties. Hence the instrument is discharged.

  1. By release [Sec. 82 (b)]:

Where the holder of the instrument releases the party primarily liable on the instrument or otherwise discharges him, the instrument is also discharged. The reason is very simple. Discharge of principal debtor discharges the surety. In a negotiable instrument, an indorser and subsequent parties are in the position of sureties.

Discharge of One or more Parties to an Instrument:

  1. Discharge by cancellation [Sec. 82 (a)]:

This point has already been discussed as point No. 2 on the last page while discussing discharge of an instrument.

  1. Discharge by release [Sec. 82 (b)]:

Where the holder of the instrument releases any indorser or otherwise discharges him, then that indorser and subsequent parties are discharged from the liabilities.

  1. Discharge by payment [Sec. 82 (c)]:

Where the party primarily liable on the instrument makes the payment, the instruments as well as all the parties to the instrument are discharged. For essential rules regarding payment, please refer to discharge of instrument discussed earlier.

  1. Discharge by allowing more than 48 hours to the drawee to accept the bill [Sec. 83]:

If the holder allows more than 48 hours to the drawee to consider whether or not he will accept the bill, all previous parties not consenting to such allowance, are discharged from their liability to such holder.

  1. Discharge by delay in presenting cheques [Sec. 48]:

A cheque must be presented for payment within a reasonable time. When a cheque is not presented for payment within a reasonable time of its issue and the drawer suffers actual damage through the delay, he is to that extent discharged from his liability. However, the holder shall become the creditor of the bank to that extent.


A issued a cheque for Rs. 500 to B. When the cheque should have been presented, there was enough balance in his account. But the cheque is delayed beyond reasonable time and the bank fails in the meantime. A is discharged from his liability. However, B can claim Rs. 500 from the liquidator of the bank, i.e. whatever dividend is paid to the other creditors.

If in the above example, before A could present the cheque in the ordinary course, the bank fails. A will not be discharged because A has not suffered any loss due to the presentment of the cheque which was in time.

  1. Discharge by qualified acceptance:

As a rule, acceptance must be absolute or unqualified. A holder is entitled to object to a qualified acceptance. However, if he does not object to such qualified acceptance, all other parties who do not consent to such qualified acceptance are discharged to such holder and those claiming under him, unless, on notice given by the holder, they agree to such acceptance.

  1. Discharge by material alteration [Sec. 87]:

Any material alteration of a negotiable instrument renders the same void as against anyone who is party thereto at the time of making such alteration. However, if the party consents to such alteration or it was made to carry out the common intention of the parties, the alteration does not discharge the party concerned.

Alteration by Indorsee:

Any alteration made by the indorsee, discharges his indorser from all liability to him. However, it should be noted that an acceptor or indorser of a negotiable instrument is bound by his acceptance or indorsement if the alteration was made before he accepted or indorsed the instrument. The reason is simple. In such a case, he has in a way consented to such alteration.

An alteration is void only if it is made subsequent to acceptance or indorsement.

  1. Discharge by payment of instrument on which alteration is not apparent:

When an instrument has been materially altered but does not look like that or where cheque has been crossed but does not appear to have been crossed, e.g. crossing clearly erased, the person paying or the banker is discharged from all liabilities thereon.

  1. Discharge by debtor becoming its holder, i.e. when the acceptor of a bill again becomes its holder [Sec. 90]:

We have already made reference to negotiation back which discharges all the parties to the bill. A debtor (acceptor) who again becomes the holder of a bill, discharges all other parties on the same principle.

  1. Discharge by operation of law:

Liability of party to a negotiable instrument is discharged by operation of law. It may be by:

  • An insolvent is discharged from his liability.
  • When merger takes place, the liability is discharged, i.e., merging of debt under the instrument into the judgement debt.
  • Law of limitation. Further, the liability may be discharged by the debt becoming time- barred by the law of limitation.

Material Alteration

An alteration which in any way alters the operational character of the instrument or rights and liabilities of the parties is called material alteration? It is immaterial whether the alteration is advantageous or disadvantageous. Alteration must be intentional. An accidental alteration is not bad. It need not be made by the holder.

It is sufficient if it was made when the instrument was in the possession of the holder. The holder must take every care to protect it from such alteration, otherwise he will be liable for the consequence of the alteration.

Material Alterations:

The following alterations are regarded as material: 

  1. The date,
  2. The sum payable,
  3. The place of payment,
  4. The time of payment,
  5. The rate of interest,
  6. The place where the instrument is drawn,
  7. Addition of a party’s name or place of payment.

Any of the above alterations made will discharge the parties liable on the instrument.

Alterations Which are not Material (Sec. 87)

The following alterations are not regarded as material alterations:

  1. Alteration made before acceptance or indorsement. An acceptor and indorser are bound by previous alterations (Sec. 88).
  2. Alteration made to carry out the common intention of the parties.
  3. Alteration consented to or agreed by the other parties.
  1. Filling an inchoate but stamped instrument (Sec. 20):

A holder has the authority to fill in the blanks in such an instrument. Even where the holder fills an amount larger than intended (but is covered by the stamp) the instrument is not void against a holder in due course.

  1. Converting blank indorsement into full (Sec. 49):

A holder has the authority to convert an indorsement in blank into an indorsement in full.

  1. Conditional or qualified acceptance (Sec. 86):

A holder may take a qualified acceptance.

  1. Crossing of cheques (Sec. 125):

A holder and a banker are empowered to cross the cheques.

Effect of Material Alteration (Sec. 87)

When a material alteration has been made a negotiable instrument, as well as all the parties to the instrument are discharged. If the alteration is made by an indorsee, then his indorser is discharged from all liabilities to him.

It should be noted that even if a material alteration is agreed to by all the parties, it becomes a new instrument which requires a new stamp.

Business Law Unit 4 Business Law Full Notes Discharge From Liability

Noting and Protest

Negotiable instruments, such as bills of exchange, promissory notes or cheques are pieces of paper representing the ownership of debts and obligations and are used to settle the debt by an exchange or transfer of credit without the need for cash.

Negotiable instruments may be inland or foreign. A bill of exchange is an inland bill because it is both drawn and payable within the British Isles or drawn within the British Isles on a person resident in the British Isles.

When a negotiable instrument is dishonoured, it should be noted for nonacceptance or nonpayment (as the case may be). This is where the notary presents the dishonoured instrument to the defaulting party for acceptance or payment and recording on the instrument the reason for dishonour. Noting must take place at a reasonable time of day on the date due date or the next succeeding business day.

A foreign negotiable instrument as opposed to an inland negotiable instrument which is dishonoured, i.e. not accepted or paid by the due date, must be protested in order for action to be taken on it. However there is generally no need to protest an inland negotiable instrument.

Please contact us for further information and in the case of the need for noting and protesting on or before the due date.

The term ‘noting’ may be defined as the recording of the fact of dishonor by a Notary Public upon the negotiable instrument- Where a promissory note or bill of exchange is dishonoured, the holder can, after giving due notice of dishonor, sue the liable parties for the recovery of amount due on the instrument. But before he files such a suit, he needs some authenticated proof of the fact, to be put up before the court, that the bill or note is actually dishonoured,

For this the holder takes the bill or note to the Notary Public who makes a demand for acceptance or payment upon the drawee or acceptor or maker formally and on his refusal to do so notes the same on the bill or note. Thus ‘noting’ means recording the fact of dishonor on the dishonoured instrument or on a paper attached thereto for the purpose. Noting should be done within a reasonable time after dishonor.

Noting Should Specify the Following on the Instrument:
(a) The fact of the instrument being dishonoured;

(b) The date of dishonor;

(c) The reason, if any assigned to the dishonor;

(d) If the instrument has not been expressly dishonoured, the reason, why it is being treated as dishonoured

(e) The Notary’s charges for such noting; (f) A reference to the Notary’s register.

Noting is not compulsory under law. If the dishonoured instrument is not ‘noted’, it does not affect the rights of the holder of the instrument in any way. However, it has certain advantages. For instance, it provides an authentic evidence of dishonor. ‘Noting’ is authentic and official proof of presentment and dishonor of a negotiable instrument.

The question of noting does not arise in the case of a dishonor of a cheque because in such a case the bank, while refusing payment returns back the cheque giving reasons in writing for the dishonor of the same and that itself acts as an authentic evidence of the fact of dishonor.

Protesting (Sec. 100)

According to Sec. 100, “when the promissory note or bill of exchange has been dishonoured by non- acceptance or non-payment, the holder may, within a reasonable time, cause such dishonor to be noted and certified by a notary public. Such certificate is called a protest.”

Protest or better security: (Sec- 100, Para 2)

“When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may, within a reasonable time, cause a notary public to demand better security of the acceptor and on its being refused may, within a reasonable time, cause such facts to be noted and certified as aforesaid. Such certificate is called a protest for better security.

Contents of Protest (Sec. 101)

A protest under Section 100 must contain:

1) The instrument itself or a literal transcript of the instrument and of everything written or printed thereupon.

2) The name of the person for whom and against whom the instrument has been protested.

3) The fact and the reasons for dishonor this is a statement that payment or acceptance, or better security, as the case may be, was demanded by the notary public from the person concerned and he refused to give it or did not answer, or that he could not be found.

4) The place and time of dishonor.

5) The signature of the Notary Public.

6) In the case of acceptance for honor or payment for honor, the names of the persons by whom and for whom it is accepted or paid.

Notice of Protest (Sec. 102)

“When a promissory note or bill of exchange is required by law to be protested, notice of such protest must be given instead of notice of dishonor, in the same manner and subject to the same conditions; but the notice may be given by the notary public who makes the protest.” Protest of Foreign Bill (Sec. 104)

“Foreign bills of exchange must be protested for dishonor when such protest is
required by the law of the place where they are drawn.”

The following are the points of distinction between Noting and Protesting:

1) Noting is merely a record of the fact of dishonor. When the notary public issues a certificate stating the particulars regarding the dishonor, it is called a protest.
2) Noting is the preliminary step to ‘Protesting’.
3) Noting is made on the negotiable instrument by the notary public by way of memorandum while a protest is a formal certificate drawn up later on the basis of noting.

Business Law Unit 4 Business Law Full Notes Noting and Protest

Dishonour of Negotiable Instruments


If negotiable instrument is presented for acceptance, sight or payment before the acceptor, maker, drawer or other party liable thereon by or on behalf of the holder but such persons refused to accept it or to make payment upon it.

Types of Discharge of Negotiable Instrument

A negotiable instrument may be dishonoured in two different way. (i) Non-acceptance (ii) Non-payment

I. Non-acceptance:

A bill of exchange is non accepted in the following cases.

I. When the drawer or one of several drawers fails to accept the bill within 42 hrs of its due presentment for acceptance.

II. When the presentment is exceeded and the bill remains unaccepted.

III. Where the drawee has not capacity to contract.

IV. Where the drawee gives the conditional acceptance.

V. Where a drawee in case of need is named in a bill of exchange, or any endorsement thereon, the bill not dischonoured until it has been dishonoured by such drawee.


II. Dishonour by non-payment:

A promissory note, bill of exchange or cheque is said to be dishnoured by nonpayment when the maker of the note, acceptor of the bill or drawee of the being duly required to pay the same.


III. Effect of dishonour:

The drawer and all the endorsers of the bill become liable to the holder if the bill is dishonoured either by non-payment provided that he gives them notice of such dishonour.


IV. Notice of dishonour:

The holder must give a notice of dishonour to all parties against whom he wants to file suit.

Persons Who Can Give Notice:

The following persons can give notice of dishonour.

(i) The holder of the instrument.

(ii) The authorized agent of the holder.

(iii) The party receiving the notice of dishonour to all prior parties to make them liable.

Persons to whom notice is given:

Notice can be given to the following persons.
(i) All the parties of negotiable instrument.

Maker of a note acceptor of a bill or drawee of a cheque.
(ii) In case of persons jointly liable, notice to any one of them is sufficient.
(iii) To the official assignee if the person has been declared insolvent.

Form of notice:
It may be (i) oral (ii) written.

Time of notice:
Notice must be given within reasonable time.

Effect of notice:
(i) When the party to whom notice of dishonour is dispatched is dead, the party dispatching the notice is ignorant of his death, the notice is sufficient.

(ii) If the notice is duly directed and sent by the post and miscarries, such miscarriage does not render the notice invalid.

Cases when notice of dishonour is unnecessary:

Notice of dishonour is unnecessary in the following cases.

(i) When it is dispensed with by the party entitled to notice.

(ii) In order to charge the drawer, when he has countermanded payment.

(iii) When the party charged could not suffer damage for want of notice.

(iv) When the party entitled to notice cannot after due search, be found.

(v) To charge the drawers, when the acceptors is also a drawer.

(vi) In case of promissory note.

(vii) When after knowing the facts, the party entitled to notice promises to pay unconditionally.

Business Law Unit 4 Business Law Full Dishonour of negotiable Instrument

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