Cheque, Features,Types,MICR Cheque and advantages of printed Cheque

1. F.Y. B.Com (Sem-II)
Banking & Insurance

2. Negotiable Instruments :
Bank instruments or negotiable instruments are those documents which
are freely used in commercial transactions. Simply by endorsement and
delivery the legal title of these can be transferred. That is why these
negotiable instruments are transferable and not assignable.
“Negotiable Instruments means promissory note bill of exchange or
cheques payable either to order or to bearer”.
- Sec. 13 of Negotiable Instruments Act,1881
As per this law three main types of negotiable instruments are
recognised :
• Cheques
• Bills of Exchange
• Promissory Notes

3. With the passage of time certain new categories of negotiable
instruments have emerged which is of great use for mercantile and
custom.
• Hundi
• Bank Draft
• Postal Order
• Dividend Warrant
• Interest Warrant
• Railway Receipt
Features of a Negotiable Instruments:
• Free Transfer - It can be very easily transferred from one person to
another either by mere delivery or by endorsement and delivery.
• Transfer Free from Defects - If the transferor has a bad title to the
instrument he can still pass on a good title to any holder who takes it in
a good faith and without negligence and for valuable considerations.
Thus it cuts off prior defects in instruments.

4. • Right to Sue - The holder has the right to sue in his own name when
needed.
• No notice to Transfer - The transferor of negotiable instrument can
simply transfer the document without serving any notice of transfer to
the party who is liable on the instrument to pay.
• Presumptions as to Negotiable Instruments - Sec.118 & 119 of
Negotiable Instruments Act deals with certain presumptions which are
applicable only to negotiable instrument. Ex- It is presumed that the
instrument has been always obtained for consideration.
• Credit of the Party - These instruments will never be dishonoured as
credit of the party who signs the instruments is pledged to the
instruments.

5. Definition of a Cheque
“ A Cheque is a bill of exchange drawn on specified banker and not
expressed to be payable otherwise than on demand.”
-Sec. 6 of Negotiable Instrument Act
Specimen of an Open Cheque:

6. Specimen of a Crossed Cheque:

7. Definition of Bills of Exchange
“ A Bill of Exchange is an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person or
the bearer of the instrument.”
-Sec. 5 of Negotiable Instrument Act
Even though a cheque is considered to be very similar to a bill of
exchange, it is different from a bill in many respects. It is rightly said by
Chalmer that :
“All cheques are bills of exchange but all bills of exchange are not
cheques.”
There are three parties to a cheque:
• Drawee: Bank on whom cheque is drawn.
• Payee: Person who will be receiving the payment of cheque.
• Drawer: One who writes the cheque.

8. Essential elements or Features of a Cheque
 A cheque must fulfil all the essential requirements of a bill of
exchange.
 An Instrument in Writing: A cheque must be in writing. It can be
written in ink pen, ball point pen, typed or even printed. Oral orders are
not considered as cheques.
 Cheque Must be Payable on Demand: A cheque when presented for
payment must be paid on demand. If cheque is made payable after the
expiry of certain period of time then it will not be a cheque.
 Cheque Contains an Unconditional Order: Every cheque contains
an unconditional order issued by the customer to his bank. It does not
contain a request for payment. A cheque containing conditional orders is
dishonoured by the bank.

9.  Cheque is Drawn by a Customer on Specified Bank: A cheque is
always drawn on a specific bank mentioned therein. Cheque drawn by
stranger is of no meaning. Cheque book facility is made available only
to account holder who are supposed to maintain certain minimum
balance in the account.
 Cheque Must be Signed By Customer: A cheque must be signed
by customer (Account holder) Unsigned cheques or signed by persons
other than customers are not regarded as cheque. The drawer’s
signature to a cheque must tally with the specimen signature lying with
the bank.
 Cheque Must Mention Exact Amount to Be Paid: Cheque must
be for money only. The amount to be paid by the banker must be
certain. It must be written in words and figures.

10.  Payee Must be Certain to Whom Payment is Made: The payee of
the cheque should be certain whom the payment of a cheque is to be
made i.e. either real person or artificial person like joint stock company.
The name of the payee must be written on the cheque or it can be made
payable to bearer.
 Cheque Must be Duly Dated By Customer of Bank: A cheque
must be duly dated by the customer of bank. The cheque must indicate
clearly the date, month and the year. A cheque is valid for a period of
three months from the date of issue.
 Deliveries: Physical delivery of the cheque is essential.
 Post-dated Cheque: Post dated cheques i.e. cheques bearing a future
date is valid.

11. Cheque Vs Bills of Exchange
Aspect Bills of Exchange Cheque
Drawee May be any person. Only a Banker.
Acceptance Must be accepted by the
drawee.
Required no acceptance.
Days of grace Entitled to 3 days of grace. Not entitled of grace days.
Payment Payable on demand or after
expiry of certain period
after date on sight.
Always payable on demand.
Crossing Bills can not be crossed. Can be crossed for safety.
Stamp Requires stamp. Does not require stamping.
Countermanding Cannot be countermanded Can be countermanded
Noting & Protect May be noted or protected
for dishonour.
Not required.
Nature Not necessarily a printed
form.
Always drawn on a printed
form.
Statutory protection Statutory protection is not
available.
Statutory protection is given
under Sec. 85 and Sec. 131 of
the Negotiable Instrument Act.

12. Types of Cheque
1. Open Cheque: A cheque is called ‘Open’ when it is possible to get
cash over the counter at the bank.
2. Crossed Cheque: The payment of such cheque is not made over the
counter at the bank. It is only credited to the bank account of the
payee. A cheque can be crossed by drawing two transverse parallel
lines across the cheque, with or without the writing ‘Account payee’
or ‘Not Negotiable’.
Other types of Cheque
 Bearer Cheque: A cheque which is payable to any person who
presents it for payment at the bank counter is called ‘Bearer
cheque’. A bearer cheque can be transferred by mere delivery and
requires no endorsement.
 Order Cheque: An order cheque is one which is payable to a
particular person. In such a cheque the word ‘bearer’ may be cut out
or cancelled and the word ‘order’ may be written. The payee can
transfer an order cheque to someone else by signing his or her name
on the back of it.

13.  Anti-dated Cheque: Cheque in which the drawer mentions the date
earlier to the date of issue is called ‘Anti-dated cheque’. Example, a
cheque issued on 24th March, 2017 may bear a date 4th March, 2017.
 Post-dated Cheque: Cheque on which drawer mentions a date
which is subsequent to the date on which it is issued, is called ‘Post-
dated cheque’. Example, if a cheque issued on 8th May, 2017 bears
a date of 27th June, 2017, it is a post-dated cheque. The bank will
make payment only on or after 27th June, 2017.
 Mutilated Cheque: In case a cheque is torn into two or more pieces
and presented for payment, such a cheque is called a ‘Mutilated
cheque’. The bank will not make payment against such a cheque
without getting confirmation of the drawer. But if a cheque is torn at
the corners and no material fact is erased or cancelled, the bank may
make payment against such a cheque.

14.  Stale Cheque: A cheque which is issued must be presented before at
bank for payment within a stipulated period. After expiry of that
period, no payment will be made and it is then called stale cheque.
In India, this period is usually taken to be 3 months.
 Dividend Warrants: A dividend warrant is a cheque drawn by a
company upon its banker for payment of dividends to its
shareholders.
 Interest Warrants: Interest warrants are drafts for the payment of
the interest due on Government securities, debentures etc.
 Demand Draft (DD): A bank draft is an order drawn by an office of
a bank upon another branch of the same bank.
It is a method used by individuals to make transfer payments from
one bank account to another. It is similar to a cheque in appearance
and usage with the difference that a cheque may or may not get
cashed but a DD is guaranteed payment.

15. • A draft is drawn either against cash deposited at the time of its
purchase or against debit to the buyer’s current or savings account.
• The buyer of the draft generally furnishes the particulars of the person
to whom the amount thereof should be paid.
• Payable on demand.
• It cannot be made payable to bearer.
• It cannot be stopped or countermanded except by order of the court.
Specimen of a Bank Draft

16.  Travellers Cheque
• Travellers cheques are most often used by those who travel because
they are widely accepted as payment in many parts of the world, yet can
be replaced if lost or stolen by the issuing bank.
•A travellers cheque can be purchased by any one. He need not to be
customer of the bank or to have an account in the same bank.
• Travellers cheque are issued in different denominations printed thereon,
e.g. Rs. 50, Rs. 100 or Rs. 500.
• The purchaser has to deposit money with the issuing bank equivalent to
the amount of travellers’ cheques he intends to buy.
• At the time of purchase, the purchaser shall have to sign at the place
marked when countersigned below with his signature.
• At the time of encashment, the purchaser is required to sign on travellers
cheque at the specified place and to fill in the date and the place of
encashment.

17. •It is encashable only at the branches of issuing bank or at the
branches of the other banks with which the issuing bank may have
arrangement. Now-a-days, with the banks entering into arrangement
with establishments, these cheques are also accepted directly at hotels,
restaurants, and shops, etc.
•There is no expiry period for travellers cheques.
•Unused cheques can be returned back to the issuing bank and the
payment can be obtained for them.
• The travellers cheques are issued in the single name only i.e. not in
joint names, clubs, societies and companies.

18. Uses of a Printed Cheque
• The payment of large sum of money is risky and time consuming.
The payment by using a cheque is easy and also it is safe.
• Serves as an acknowledgement of payment & hence, separate receipt
is not required.
• In case of dispute regarding the payment between two parties, it acts
as an evidence of payment.
• It is considered as the payment near by cash or money and hence it is
endorsable by different persons.
• Bankers and customers also get relief from the handling of currency.
• It is easy to stop payment of a certain cheque by instructing the bank
and giving them the cheque number.
• Alteration can more easily be detected on a printed cheque form than
on an ordinary piece of paper.
• It saves the customer trouble of drafting cheques in accordance with
the requirement of law.

19. Benefits of Cheque System in Modern Age
• Cheque is most safe and secure instrument for monetary transaction.
• The account holder can draw cheque from his account. Individual by
presenting a cheque at a bank counter can easily collect money.
• The transaction is recorded in the bank’s account book as well as its
also found in the counterfoil of a cheque. It is also recorded in a pass-
book issued through bank.
• Payment of money through cheque is considered to be an authentic
evidence for the legal suits.
•When any payment is made by mistake, an individual can immediately
inform the banker to stop payment of a cheque with an immediate effect.
•Security of the cheque can be increased by crossing it.
•The distinguished feature of a cheque is that a cheque is considered to
be negotiable instrument, hence its transaction can be done freely.

20. Crossing of a Cheque
• During the process of circulation, a cheque may be lost, stolen or the
signature of payee may be done by some other person for endorsing it.
Under these circumstances the cheque may go into wrong hands.
• Crossing is a popular device for protecting the drawer and payee of a
cheque.
• Both bearer and order cheques can be crossed. Crossing prevents fraud
and wrong payments.
• Crossing of a cheque means "Drawing Two Parallel Lines" across
the face of the cheque.
• Crossing is an instruction given to the paying banker to pay the
amount of the cheque through a banker only and not directly to the
person presenting at the counter. A cheque bearing such an instruction is
called a “Crossed Cheque”.
•Thus, crossing is necessary in order to have safety.

21. Types of crossing
Crossing of the cheque is of two types :
 General Crossing: The definition of general crossing is given in
Sec. 123 of Negotiable Instrument Act , 1881.
“ Where a cheque bears across its face two transverse parallel
lines and addition of the words “and company” or any
abbreviation thereof between two parallel lines or two parallel
lines only, either with or without the words “not negotiable” that
cheque shall be deemed to be crossed generally.”
• There are two transverse parallel lines, marked across its face or,
• The cheque bears an abbreviation “& Co.” between the two parallel
lines or,
• The cheque bears the words "Not Negotiable" between the two
parallel lines or,
• The cheque bears the words "A/c Payee" between the two parallel
lines.

22. Specimen of General Crossing
 Special Crossing: The definition of special crossing has been
given in Sec. 124 of Negotiable Instrument Act, 1881.
“Where a cheque bears across its face an addition of the name of
a Banker with or without the words “not negotiable”, that addition
shall be deemed a crossing and the cheque shall be deemed to be
crossed specially.”

23. •When a particular bank's name is written in between the parallel lines the
cheque is said to be specially crossed.
• In addition to the bank’s name, the words "A/c. Payee Only", "Not
Negotiable" may also be written.
• The payment of such cheque is not made unless the cheque is presented
through the bank mentioned in parallel lines.
• The effect of special crossing is that the bank makes payment only to
the banker whose name is written in the crossing.
• Specially crossed cheques are more safe than a generally crossed
cheques.
Specimen Of Special Crossing

24.  Account Payee Crossing
Account Payee crossing is a direction to the collecting bank that
the Negotiable instrument should be collected only for the named payee.
In case the collecting bank fails to take precaution, it loses the statutory
protection.
 Not negotiable Crossing
As per Section 130, “a person taking a cheque crossed generally or
specially bearing in either case the words' not negotiable' shall not
have and shall not be capable of giving a better title to the cheque than
that which the person from whom he took it, had.”
• The effect of the inclusion of words not negotiable in the crossing on
the cheque, is that the transferee of the cheque cannot have a better title
than that of a transferor.

25. Alterations or Additions to a Crossing
It is not lawful for any person to obliterate or to add or to alter the
crossing except as provided under Sec. 125 of the Act which is stated as
under :
• Where a cheque is uncrossed, the holder may cross it generally or
specially.
• Where a cheque is crossed generally, the holder may cross it specially.
• Where a cheque is crossed generally or specially, the holder may add
the words “ Not Negotiable”.
•Where a cheque is crossed specially the banker to whom it is crossed
may again cross it specially to another banker, his agent, for collection.

26. Holder
Sec. 8 of the Act defines the term Holder as
“The holder of a bills of exchange, promissory note or cheque means
any person who is entitled in his own name to the possession thereof
and to receive or recover the amount, due therein to the parties
thereto.”
A person is called the holder of a negotiable instrument if the following
conditions are satisfied :
i. holder must be entitled to the possession of the negotiable
instrument in his own name. Mere legal right to possess the
instrument is enough and actual possession is not essential. (say
legal heirs of payee of a cheque who are entitled to possess the
cheque).

27. (ii) holder must be entitled to receive or recover the amount
of negotiable instrument from the parties. Hence, he should
be a bearer or payee or endorsee.
A thief cannot be holder as he is not entitled to receive the
amount. A person who was entitled to receive payment of
an instrument and the instrument has been lost, he will
continue to be treated as holder. Person who finds the
instrument lying somewhere will not become its holder by
mere possession.
Rights of a holder
a. He can obtain a duplicate of the lost instrument (Section 45-A).
b. He can cross the cheque if not already crossed, convert general
crossing to a special crossing and endorse and can negotiate, if the
negotiation is not restricted.
c. He can sue in his own name in relation to the instrument.
d. He can complete an inchoate instrument.

28. Holder in Due Course
Sec. 9 defines Holder in Due Course as :
“A holder in due course is any person, who for consideration, became
the possessor of a promissory note, bill of exchange or cheque, if
payable to bearer, or the payee or endorsee thereof, if payable to order,
before the amount mentioned in it becomes payable, and without
having sufficient cause to believe that defect existed in the title of the
person from whom he derived his title.”
A person becomes holder in due course if the following conditions are
satisfied :
i. Person who claims to be holder in due course must have the
negotiable instrument in his possession. He must be payee or
endorsee and a bearer.
ii. The negotiable instrument must be regular and complete in all
respects.
iii. The instrument must have been obtained before the
amount mentioned therein becomes payable.

29. v. He must obtain possession of it for real, valuable and lawful
consideration (and not as a gift) before its maturity (in case of
bill), as after maturity of a bill, subsequent holders cannot be the
holders in due course, even though they acquire in good faith
and for due consideration.
vi. He must obtain it in good faith without any sufficient reason to
believe that any defect existed in the title of the person from
whom he obtained it.
Privileges of a Holder in Due Course
• Instrument purged of all defects: A holder in due course who gets
the instrument in good faith in the course of its currency is not only
himself protected against all defects of title of the person from whom
he has received it, but also serves, as a channel to protect all
subsequent holders. (Sec. 53)
For example: A bill of exchange payable to bearer is stolen. The thief
delivers it to B, a holder in due course. B can recover the money of
the bill.

30. • Rights not affected in case of an inchoate instrument: Right of a
holder in due course to recover money is not at all affected even though
the instrument was originally an inchoate stamped instrument and the
transferor completed the instrument for a sum greater than what was
intended by the maker. (Sec. 20)
For example: Sudhir purchased some goods from Ramesh. As the
exact amount of money payable by him was not known to Sudhir, he
gave Ramesh a blank cheque duly signed by him. Ramesh filled in the
figure of Rs. 5000, whereas the amount payable to him was Rs. 4250.
Ramesh endorsed the cheque to Kamlesh, who took it for valuable
consideration and in good faith. Kamlesh, the holder in due course, is
entitled to recover from the bank the amount of Rs. 5000, though he
was entitled to recover Rs.4250 only.
• All prior parties liable: All prior parties to the instrument (the maker
or drawer, acceptor and intervening endorsers) continue to remain
liable to the holder in due course until the instrument is duty satisfied.
The holder in due course can file a suit against the parties liable to pay,
in his own name .(Sec. 36)

31. For example : A draws a bill of exchange on B payable to C. It is duly
accepted by B. C endorses it to F, who is its holder in due course. Now
F, the holder in due course, can realise the amount of bill from B, its
acceptor. If B fails to do so, F can recover the amount from A and C.
All of them shall remain liable to F in respect of the bill till its payment
is made.
• Can enforce payment of a fictitious bill: Where both drawer and
payee of a bill are fictitious persons, the acceptor is liable on the bill to
a holder in due course. (Sec. 42)
For example : X draws the bill on Y but signs in the fictitious name of
Z. It is payable to the order of Z and is duly accepted by Y. X endorses
it to A who becomes its holder in due course. Y, the acceptor of the bill,
cannot deny his liability on the bill to the holder in due course on the
ground that it was drawn on behalf of the fictitious person Z as a
drawer, and as endorser, must be in the same handwriting.

32. • No effect of conditional delivery: Where negotiable instrument is
delivered conditionally or for a special purpose and is negotiated to a
holder in due course, a valid delivery of it is conclusively presumed and
he acquired good title to it. (Sec. 46).
For Example : A, the holder of a bill indorses it “B or order” for the
express purpose that B may get it discounted. B does not do so and
negotiates it to C, a holder in due course. D acquires a good title to the
bill and can sue all the parties on it.
• No effect of absence of consideration or presence of an unlawful
consideration: The plea of absence of or unlawful consideration is not
available against the holder in due course. The party responsible will
have to make payment (Sec. 58).
For Example: A draws a bill of exchange on B in respect of an amount
which the latter has lost in Gambling. B accepts the bill. A endorses the
bill to C who becomes its holder in due course. Now C has the right to
recover the amount of bill as it was drawn for unlawful consideration.
The same would be the position of B, if he is made to accept the bill
under undue influence, coercion or fraud.

33. • Estoppel against denying capacity of the payee to endorsee: No
maker of promissory note and no acceptor of a bill of exchange payable
to order shall, in a suit thereon by a holder in due course, be permitted
to resist the claim of the holder in due course on the plea that the payee
had not the capacity to endorse the instrument on the date of the note as
he was a minor or insane or that he had no legal existence. (Sec 121)
• Estoppel against endorser to deny capacity of parties: An endorser
of the bill by his endorsement guarantees that all previous endorsements
are genuine and that all prior parties had capacity to enter into valid
contracts. Therefore, he on a suit thereon by the subsequent holder,
cannot deny the signature or capacity to contract of any prior party to
the instrument.(Sec. 122)
For Example: X draws a bill of exchange on Y in favour of Z who
endorses the same to A, a minor. A endorses it to B and B to C, who
becomes its holder in due course. It is dishounered on the due date. C,
the holder in due course, has the right to file a suit against all or any of
the parties to the bill except A, the minor. Now B, the endorser, cannot
plead that A was minor and had no capacity to endorse the bill and
hence the bill is a void one. He will remain liable on the bill to C.

34. • Estoppel against denying original validity of instrument: The plea
of original invalidity of the instrument cannot be put forth, against the
holder in due course by the drawer of a bill of exchange or cheque or
by an acceptor for the honour of the drawer. But where the instrument
is void on the face of it e.g. promissory note made payable to “bearer”,
even the holder in due course cannot recover the money. Similarly, a
minor cannot be prevented from taking the defence of minority. Also,
there is no liability if the signatures are forged. (Sec. 120)

35. M.I.C.R. Cheque (Magnetic Ink Character Recognition)
With a view to speeding up the cheque clearing process, both local as
well as intercity, the Reserve Bank of India has introduced mechanised
cheque processing system using MICR (Magnetic Ink Character
Recognition) technology initially in the four metropolitan cities:
• Mumbai
•Kolkata
•Chennai
•New Delhi.
Using this technology, cheques are processed at high speed on
machines. Banks issue cheque, draft and other payment instrument in
MICR format using the special quality paper and printing specifications.

36. • On MICR instruments, there is a 15 digits code line
at the bottom containing information
printed in magnetic ink, which is required for
mechanical processing.
The code line contains the following
information:
• First six numbers indicate the cheque
number.
• Next three numbers indicate city code.
• Next three numbers indicate bank code.
• Next three numbers indicate branch code.
• The technology allows MICR readers to scan and read the
information directly into a data-collection device. Unlike bar codes and
similar technologies, MICR characters can be read easily by humans.
The MICR E-13B font has been adopted as the international standard
in ISO 1004:1995.

37. As in the above specimen:
Cheque number is 920580
City code is 110
Bank code is 024
Branch code is 049
Transaction code is 29
Transaction code indicates that whether the transaction is for a savings
or current account.
Besides this the specimen contains a IFSC code.

38. Indian Financial System Code
The Indian Financial System Code (IFSC Code) is an alphanumeric
code that uniquely identifies a bank-branch participating in the two main
Electronic Funds Settlement Systems in India: the Real Time Gross
Settlement (RTGS) and the National Electronic Funds Transfer (NEFT)
Systems.
This is an 11-character code with the first four alphabetic characters
representing the bank name and the last six characters (usually
numeric, but can be alphabetic) representing the branch identity. The
fifth character is 0 (zero) and reserved for future use.
IFSC Code is used by the NEFT & RTGS systems to route the messages
to the destination banks/branches.
Bank-wise lists of IFSCs are available with all the bank-branches
participating in inter bank electronic funds transfer. A list of
bankbranches participating in NEFT/RTGS and their IFSCs is available
on the website of Reserve Bank of India.

39. Benefits Of MICR Technology
Easily Readable:
The magnetic ink allows the computer to read the characters even if
they have been covered with signatures, cancellation marks or other
marks.
Standardization:
Since all checks within a country use the same standardised information
and same font, banks are able to easily read the checks.
Accuracy:
The error rate when using MICR checks is almost zero, which protects
consumers and banks from routing funds to the wrong bank or pulling
funds from the wrong account.
Speed:
MICR helps banks mechanize the process of cheque processing, which
allows them to process large volumes of cheques. The transfer of funds
between two banks is fastened and easy.
Fraud Prevention:
Because MICR uses a special magnetic ink that is not available to the
public, it is more difficult for criminals to create phony cheques.

40. Precautions To Be Observed In The Use Of MICR
Cheques
• Must not be folded:
Folding may break the MICR field of the cheque, resulting in the
cheque being rejected by the cheque processing system.
• Must not be stapled:
Cheques should not be stapled to prevent accidental tearing. Pins and
gum must not be used.
• Properly Signed:
Signature should be done in a proper manner, so that it may not enter
the band of MICR code.
• Proper Stamping:
Rubber stamp should not be affixed on the band line.

41. At Par Cheque
 At Par means without any charges i.e. the cheque which is recovered
at its face value is said to be an at par cheque.
 At par cheque is a cheque on which no charge is deducted by the
bank for crediting to your account, even if your account is in a
branch that is in a different city from where the cheque is issued.
 For example, if your account is in Mumbai, and a company with its
account in Delhi gives you a cheque, the Bank will charge certain
amount from the cheque, as the cheque will have to be sent to Delhi to
get cleared.
 However, with the networking of branches of most banks, it is
possible to get the cheque cleared without sending it to the issuing
branch. Thus, the bank does not deduct any charges from the value of
the cheque.
The receiver of the cheque will not have to pay any charge on the
credit of the cheque, meaning that he will be more willing to accept
cheque payments.

42. Endorsement
Meaning
The word ‘endorsement’ in its literal sense means, writing on the back
of an instrument.
But under the Negotiable Instruments Act it means, the writing of one’s
name on the back of the instrument or any paper attached to it with the
intention of transferring the rights therein.
Thus,
Endorsement is signing a negotiable instrument for the purpose of
negotiation. If with the intention of transferability of a negotiable
instrument, if one signs on the back side of a pronote, bills of exchange
or a cheque, it is called as Endorsement.
The person who effects an endorsement is called an ‘Endorser’ and the
person to whom negotiable instrument is transferred by endorsement is
called the ‘Endorsee’.

43. Definition
Acc. to Sec.15 of the Negotiable Instrument Act,
“ When the maker or holder of a negotiable instrument signs the same,
otherwise then as such maker, for the purpose of negotiation, on the
back or face thereof or on a slip of paper annexed thereto, or so signs
for the same purpose a stamped paper intending to be completed as a
negotiable instrument, he is said to endorse the same, and is called the
endorser”.
Important Points
As per Section 50,
• The endorsement followed by delivery transfers to the endorsee the
property therein with right of further negotiation.
• The endorsement may:
(a) by express words, restrict or exclude such right, or
(b) may merely constitute the endorsee an agent to endorse the
instrument, or
(c) to receive its content for the endorsee or for some other specified
person.

44. Who may endorse?
The payee of an instrument is the rightful person to make the first
endorsement. Thereafter the instrument may be endorsed by any
person who has become the holder of the instrument.
The maker or the drawer cannot endorse the instrument but if any of
them has become the holder thereof he may endorse the instrument.
(Sec. 51)
Essentials of a valid endorsement
The following are the essentials of a valid endorsement:
1. The endorsement may be on the back or face of the instrument
and if no space is left on the instrument, it may be made on a
separate paper attached to it called Allonage. It should usually be
in ink.
2. It must be made by the maker or holder of the instrument. A
stranger cannot endorse it.
3. It must be signed by the endorser. Full name is not essential.
Initials may suffice. Thumb-impression should be attested.
Signature may be made on any part of the instrument. A rubber
stamp is not accepted but the designation of the holder can be

45. Essentials of a valid endorsement
The following are the essentials of a valid endorsement:
1. It must be on the instrument. The endorsement may be on the back
or face of the instrument and if no space is left on the instrument, it
may be made on a separate paper attached to it called allonage. It
should usually be in ink.
2. It must be made by the maker or holder of the instrument. A
stranger cannot endorse it.
3. It must be signed by the endorser. Full name is not essential.
Initials may suffice. Thumb-impression should be attested.
Signature may be made on any part of the instrument. A rubber
stamp is not accepted but the designation of the holder can be done
by a rubber stamp.

46. 4. It may be made either by the endorser merely signing his name on the
instrument (it is a blank endorsement) or by any words showing an
intention to endorse or transfer the instrument to a specified person (it
is an endorsement in full). No specific form of words is prescribed for
an endorsement. But intention to transfer must be present. When in a
bill or note payable to order the endorsee’s name is wrongly spelt, he
should when he endorses it, sign the name as spelt in the instrument
and write the correct spelling within brackets after his endorsement.
5. It must be completed by delivery of the instrument. The delivery must
be made by the endorser himself or by somebody on his behalf with the
intention of passing property therein. Thus, where a person endorses an
instrument to another and keeps it in his papers where it is found after
his death and then delivered to the endorsee, the latter gets no right on
the instrument.
6. It must be an endorsement of the entire bill. A partial endorsement i.e.
which purports to transfer to the endorse a part only of the amount
payable does not operate as a valid endorsement.
If delivery is conditional, endorsement is not complete until the
condition is fulfilled.

47. Types Of Endorsement:
An endorsement may be:
(1) Blank or general.
(2) Special or full.
(3) Partial.
(4) Restrictive.
(5) Conditional.
(a) Blank or general endorsement (Sections 16 and 54):
It is an endorsement when the endorser merely signs on the instrument
without mentioning the name of the person in whose favour the endorsement
is made. Endorsement in blank specifies no endorsee. It simply consists of
the signature of the endorser on the endorsement. A negotiable instrument
even though payable to order becomes a bearer instrument if endorsed in
blank. Then it is transferable by mere delivery. An endorsement in blank
may be followed by an endorsement in full.

48. Example: A bill is payable to X. X endorses the bill by simply affixing his
signature. This is an endorsement in blank by X. In this case the bill becomes
payable to bearer.
(b) Special or full endorsement (Section 16):
When the endorsement contains not only the signature of the endorser but also the
name of the person in whose favour the endorsement is made, then it is an
endorsement in full. Thus, when endorsement is made by writing the words “Pay
to A or A’s order”followed by the signature of the endorser, it is an endorsement
in full. In such an endorsement, it is only the endorsee who can transfer the
instrument.
Conversion of endorsement in blank into endorsement in full:
When a person receives a negotiable instrument in blank, he may without signing
his own name, convert the blank endorsement into an endorsement in full by
writing above the endorser’s signature a direction to pay to or to the order of
himself or some other person. In such a case the person is not liable as the
endorser on the bill. In other words, the person transferring such an instrument
does not incur all the liabilities of an endorser. (Section 49).

49. Example: A is the holder of a bill endorsed by B in blank. A writes over B’s
signature the words “Pay to C or order.” A is not liable as endorser but the
writing operates as an endorsement in full from B to C.
Where a bill is endorsed in blank, or is payable to bearer and is afterwards
endorsed by another in full, the bill remains transferable by delivery with regard
to all parties prior to such endorser in full. But such endorser in full cannot be
sued by any one except the person in whose favour the endorsement in
full is made. (Section 55).
Example: C the payee of a bill endorses it in blank and delivers it
to D, who specially endorses it to E or order. E without endorsement
transfers the bill to F. F as the bearer is entitled to receive payment or
to
sue the drawer, the acceptor, or C who endorsed the bill in blank but he
cannot sue D or E.
(c) Partial endorsement (Section 56):
A partial endorsement is one which purports to transfer to the endorsee a part
only of the amount payable on the instrument. Such an endorsement does not
operate as a negotiation of the instrument.

50. Example: A is the holder of a bill for Rs.1000. He endorses it “pay to B or order Rs.500.”
This is a partial endorsement and invalid for the purpose of negotiation.
(d) Restrictive endorsement (Section 50):
The endorsement of an instrument may contain terms making it restrictive.
Restrictive endorsement is one which either by express words restricts or prohibits
the further negotiation of a bill or which expresses that it is not a complete and
unconditional transfer of the instrument but is a mere authority to the endorsee
to deal with bill as directed by such endorsement.
“Pay C,” “Pay C for my use,” “Pay C for the account of B” are instances of
restrictive endorsement. The endorsee under a restrictive endorsement acquires
all the rights of the endorser except the right of negotiation.
(e) Conditional or Qualified endorsement:
It is open to the endorser to annex some condition to his owner liability on the
endorsement. An endorsement where the endorsee limits or negatives his liability
by putting some condition in the instrument is called a conditional endorsement.
A condition imposed by the endorser may be a condition precedent or a condition
subsequent. An
endorsement which says that the amount will become payable if the endorsee
attains majority embodies a condition precedent. A conditional endorsement
unlike the restrictive endorsement does not affect the negotiability of the
instrument. It is also some times called qualified endorsement.

51. An endorsement may be made conditional or qualified in any of the following
forms:
(i) ‘Sans recourse’ endorsement:
An endorser may be express word exclude his own liability thereon to the endorser
or any subsequent holder in case of dishonour of the instrument. Such an
endorsement is called an endorsement sans recourse (without recourse). Thus ‘Pay
to A or order sans recourse, ‘pay to A or order without recourse to me,’ are
instances of this type of endorsement. Here if the instrument is dishonoured, the
subsequent holder or the endorsee cannot look to the endorser for payment of the
same. An agent signing a negotiable instrument may exclude his personal liability
by using words to indicate that he is signing as agent only. The same rule applies to
directors of a company signing instruments on behalf of a company. The
intention to exclude personal liability must be clear. Where an endorser so excludes
his liability and afterwards becomes the holder of the instrument, all intermediate
endorsers are liable to him.
Example: A is the holder of a negotiable instrument. Excluding personal liability
by an endorsement without recourse, he transfers the instrument to B, and B
endorses it to C, who endorses it to A. A can recover the amount of the bill from B
and C.

52. (ii) Facultative endorsement:
An endorsement where the endorser extends his liability or abandons some right
under a negotiable instrument, is called a facultative endorsement. “Pay A or
order, Notice of dishonour waived” is an example of facultative endorsement.
(iii) ‘Sans frais’ endorsement:
Where the endorser does not want the endorsee or any subsequent holder, to
incur any expense on his account on the instrument, the endorsement is ‘sans
frais’.
(iv) Liability dependent upon a contingency:
Where an endorser makes his liability depend upon the happening of a
contingent event, or makes the rights of the endorsee to receive the amount
depend upon any contingent event, in such a case the liability of the endorser will
arise only on the happening of that contingent event. Thus, an endorser may
write ‘Pay A or order on his marriage with B’. In such a case, the endorser will
not be liable until the marriage takes place and if the marriage becomes
impossible, the liability of the endorser comes to an end.

53. Negotiation back:
‘Negotiation back’ is a process under which an endorsee comes again into
possession of the instrument in his own right. Where a bill is re-endorsed to a
previous endorser, he has no remedy against the intermediate parties to whom he
was previously liable though he may further negotiate the bill.
Example: A bill is drawn payable A by order. A endorses it to B, B to C, C to D,
D to E and E again to A. The endorsement by E to A is ‘Negotiation back’. A
having been relegated to original position, cannot sue other parties, for that
would only lead to circuitary of action.
When an endorser excludes his liability and afterwards becomes the holder of
the instrument, all the intermediate endorses are liable to him, i.e. He regains the
position he occupied before he made the restrictive endorsement without
recourse (Sec.52, Para 2).
Example: In the above example, A at the time of the first endorsement excludes
his liability. He is not liable to B,C,D or E. If the bill is now negotiated back to
A then B,C,D and E are in turn still liable to him.

54. Cancellation of endorsement/ Discharge of Endorser’s Liability:
When the holder of a negotiable instrument, without the consent of the endorser
destroys or impairs the endorser’s remedy against prior party, the endorser is
discharged from liability to the holder to the same extent as if the instrument had
been paid at maturity (Section 40).
Example:
A is the holder of a bill of exchange payable to the order of B, which contains
the following endorsement in blank:
First endorsement, “B”
Second endorsement, “Peter Williams.”
Third endorsement, “Wright and Co.”
Fourth endorsement, “John Rozario.”
This bill A puts in suit against John Rozario and strikes out without John
Rozario’s consent the endorsement made by Peter Williams and Wright and Co.
A is not entitled to recover anything from John Rozario.