BANKING LAW & PRACTICE Negotiable Instruments :

1. BANKING LAW & PRACTICE 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”. 0 Sec. 13 of Negotiable Instruments Act,1881 As per this law three main types of negotiable instruments are recognised : 0 Cheques 0 Bills of Exchange 0 Promissory Notes

2. With the passage of time certain new categories of negotiable instruments have emerged which is of great use for mercantile and custom. 0 Hundi 0 Bank Draft 0 Postal Order 0 Dividend Warrant 0 Interest Warrant 0 Railway Receipt Features of a Negotiable Instruments: 0 Free Transfer - It can be very easily transferred from one person to another either by mere delivery or by endorsement and delivery. 0 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.

3. 0 Right to Sue - The holder has the right to sue in his own name when needed. 0 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. 0 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. 0 Credit of the Party credit of the party instruments.

4. 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:

5. Specimen of aCrossed Cheque:

6. 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: 0 Drawee: Bank on whom cheque is drawn. 0 Payee: Person who will be receiving the payment of cheque. 0 Drawer: One who writes the cheque.

7. Essential elements orFeaturesof a Cheque 0 Acheque mustfulfilallthe essentialrequirementsof abillof exchange. 0 AnInstrumentinWriting:Achequemustbeinwriting.Itcanbewritteninink pen,ballpointpen, typedor evenprinted.Oralordersarenotconsideredascheques. 0 Cheque Must be Payable on Demand: Acheque when presented for payment must be paid on demand.If cheque is made payable after the expiryof certainperiodof time thenitwillnotbe acheque. 0 ChequeContainsanUnconditionalOrder: Everychequecontains anunconditionalorderissued by the customer to his bank. It does not contain a request for payment. A cheque containing conditional orders is dishonoured by the bank.

8. 0 ChequeisDrawnbyaCustomeronSpecifiedBank:Achequeisalwaysdrawnonaspecific 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. 0 ChequeMustbeSignedByCustomer:Achequemustbesignedbycustomer(Accountholder) 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. 0 ChequeMustMentionExactAmounttoBePaid:Cheque mustbe for moneyonly.The amount tobe paidbythebanker mustbe certain.It mustbe writteninwordsandfigures.

9. 0 PayeeMustbeCertaintoWhomPaymentisMade:Thepayeeofthechequeshouldbecertain 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. 0 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. 0 Deliveries: Physicaldeliveryof the cheque isessential. 0 Post-dated Cheque:Postdatedchequesi.e.chequesbearingafuturedate isvalid.

10. ChequeVsBillsof Exchange

12. Types of Cheque Open Cheque: A cheque is called ‘Open’ when it is possible to get cash over the counter at the bank. 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 0 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. 0

13. 0 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. 0 0

14. 0 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. 0 Dividend Warrants: A dividend warrant is a cheque drawn by a company upon its banker for payment of dividends to its shareholders. 0 Interest Warrants: Interest warrants are drafts for the payment of the interest due on Government securities, debentures etc. 0 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. 0 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. 0 The buyer of the draft generally furnishes the particulars of the person to whom the amount thereof should be paid. 0 Payable on demand. 0 It cannot be made payable to bearer. 0 It cannot be stopped or countermanded except by order of the court. Specimen of a Bank Draft

16. Benefits of Cheque System in Modern Age 0 Cheque is most safe and secure instrument for monetary transaction. 0 The account holder can draw cheque from his account. Individual by presenting a cheque at a bank counter can easily collect money. 0 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. 0 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.

17. Crossing of a Cheque 0 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. 0 Crossing is a popular device for protecting the drawer and payee of a cheque. 0 Both bearer and order cheques can be crossed. Crossing prevents fraud and wrong payments. 0 Crossing of a cheque means "Drawing Two Parallel Lines" across the face of the cheque. 0 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.

18. Typesof crossing Crossingof the cheque isof twotypes: 0 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.” 0 There are two transverse parallel lines, marked across its face or, 0 The cheque bears an abbreviation “& Co.” between the two parallel lines or, 0 The cheque bears the words "Not Negotiable" between the two parallel lines or, 0 The cheque bears the words "A/c Payee" between the two parallel lines.

19. Specimen of GeneralCrossing 0 Special Crossing:The definitionof specialcrossinghasbeengiveninSec.124of Negotiable InstrumentAct,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.”

20. •When a particular bank's name is written in between the parallel lines the cheque is said to be specially crossed. 0 In addition to the bank’s name, the words "A/c. Payee Only", "Not Negotiable" may also be written. 0 The payment of such cheque is not made unless the cheque is presented through the bank mentioned in parallel lines. 0 The effect of special crossing is that the bank makes payment only to the banker whose name is written in the crossing. 0 Specially crossed cheques are more safe than a generally crossed cheques. Specimen Of Special Crossing

21. 0 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. 0 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.” 0 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.

22. 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 : 0 Where a cheque is uncrossed, the holder may cross it generally or specially. 0 Where a cheque is crossed generally, the holder may cross it specially. 0 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.

23. 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).

24. (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 He can obtain a duplicate of the lost instrument (Section 45-A). 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. He can sue in his own name in relation to the instrument. He can complete an inchoate instrument.

25. 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. The negotiable instrument must be regular and complete in all respects. The instrument must have been obtained before the amount mentioned therein becomes payable. ii. iii.

26. 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. 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. vi. Privileges of a Holder in Due Course 0 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.

27. 0 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. 0 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)

28. 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. 0 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.

29. 0 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. 0 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.

30. 0 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) 0 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. o 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)

31. 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’.

32. 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, 0 The endorsement followed by delivery transfers to the endorsee the property therein with right of further negotiation. 0 The endorsement may: by express words, restrict or exclude such right, or may merely constitute the endorsee an agent to endorse the instrument, or to receive its content for the endorsee or for some other specified person.

33. 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: 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. It must be made by the maker or holder of the instrument. A stranger cannot endorse it. 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

34. Essentials of a valid endorsement The following are the essentials of a valid endorsement: 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. It must be made by the maker or holder of the instrument. A stranger cannot endorse it. 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.

35. 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. 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. 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 deliveryisconditional,endorsementisnotcompleteuntilthe conditionisfulfilled.

36. Types Of Endorsement: An endorsement may be: Blank or general. Special or full. Partial. Restrictive. 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.

37. 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).

38. 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.

39. 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. 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. 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.

40. 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.

41. 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. ‘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’. iability 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.

42. 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.

43. 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.