Parties to Negotiable Instruments — Maker, Drawer, Drawee, Payee, Holder

The Negotiable Instruments Act, 1881 deploys a small but precise vocabulary to identify the persons who may bind themselves by, or take the benefit of, a negotiable instrument. Section 7 defines ‘drawer’, ‘drawee’, ‘drawee in case of need’, ‘acceptor’, ‘acceptor for honour’, and ‘payee’. Section 8 defines ‘holder’. Section 9 defines ‘holder in due course’. The chapter that follows reads each definition against its statutory context and against the leading authorities, and then maps the liabilities that the Act attaches to each role under Sections 30, 31, 32, 35, 36 and 37.

The order of treatment matters. The maker of a promissory note and the drawer of a bill or cheque create the instrument; the drawee and the acceptor are the persons addressed; the payee is the person entitled at issue; the holder and the holder in due course are persons who acquire the instrument by operation of law or by negotiation. Each role has its own statutory consequences, and a question that asks about the “rights of a payee” cannot be answered without first identifying whether the payee is also a holder, or a holder in due course, on the facts.

Statutory anchor — Sections 7, 8 and 9

Section 7 is a definition section. It does not create any party; it identifies the legal vocabulary. The maker of a bill of exchange or cheque is called the drawer. The person directed to pay is the drawee. After the drawee has signed his assent on the bill, he is the acceptor. The person named as the recipient of the money is the payee. Where the drawer names some other person to whom the holder may resort if the original drawee dishonours the bill, that person is the drawee in case of need. A person who, after dishonour by non-acceptance or for better security, accepts the bill for the honour of any party already liable on it, is an acceptor for honour.

Section 8 defines the holder. Section 9 defines the holder in due course. Sections 8 and 9 together carry the central commercial logic of the Act — the rules that allow a negotiable instrument to circulate and acquire title-cleansing properties as it does so.

Maker of a promissory note

The maker of a promissory note is the person who signs the instrument and undertakes to pay. The promise is direct — from the maker to the payee — with no intermediate party. Under Section 32, in the absence of a contract to the contrary, the maker is bound to pay the amount at maturity according to the apparent tenor of the note; in default he is bound to compensate any party to the note for any loss or damage caused by his default.

The maker’s liability is primary, absolute and unconditional. The presumption of consideration under Section 118 attaches at issue, and the burden to displace it lies on the maker. A note made payable to the maker himself is a nullity, because the same person cannot be both promisor and promisee — though such a note becomes valid the moment the maker endorses it, because endorsement creates a new payee. The chapter on promissory notes — essentials and form sets out the form and content rules in full.

Drawer of a bill of exchange or cheque

The drawer of a bill of exchange is the person who signs and issues the order to pay. He is the principal debtor on the bill until acceptance. After acceptance, the acceptor takes over as the principal debtor and the drawer’s liability becomes that of a surety. Section 30 of the Act crystallises this: the drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or acceptor, to compensate the holder — provided due notice of dishonour has been given to or received by him.

The drawer of a cheque is in a slightly different position. Because a cheque is always payable on demand and there is no acceptance, the drawer remains the principal debtor throughout the life of the cheque. The holder cannot sue the bank — there is no privity — and must therefore look to the drawer alone. Notice of dishonour to the drawer of a cheque is dispensed with where the dishonour is for want of funds, because absence of funds is itself notice (Section 98).

The drawer’s liability may be excluded or limited by an express clause on the face of the bill, e.g. by writing ‘sans recourse’ or ‘without recourse’ against the drawer’s name — though this is rare in practice and would, if used, defeat the bill’s circulation.

Drawee and acceptor

The drawee is the person to whom the order is addressed. Until acceptance, the drawee is not a party to the bill — he is a stranger to whom the bill is offered. Once he accepts, he becomes the acceptor, and his liability under Section 32 becomes primary and unconditional, save for whatever qualification he has placed on his acceptance under Section 86 (qualified acceptance).

The drawee of a cheque must always be a banker. Section 31 of the Act imposes on the drawee bank a duty — running only to the drawer, not to the holder — to honour cheques drawn against funds. If the bank, having sufficient funds of the drawer in its hands properly applicable to the payment, dishonours the cheque, it must compensate the drawer for any loss or damage caused.

The leading authority on the bank’s liability for wrongful dishonour is Canara Bank Ltd. v. I.V. Rajagopal (1975) 1 MLJ 420. There, the bank dishonoured a Rs. 295 cheque drawn by a customer in favour of the telephone department; the resulting disconnection led to the customer’s dismissal from his employer. The Madras High Court held the bank liable, awarding Rs. 14,000 in damages, and articulated the rule that a trader-customer is entitled to substantial damages for wrongful dishonour without proof of actual loss, while a non-trader must prove special damage.

An acceptor of a bill already endorsed is not relieved from liability merely because the endorsement is forged, if he knew or had reason to believe the endorsement to be forged when he accepted (Section 41). An acceptor of a bill drawn in a fictitious name and made payable to the drawer’s order is not relieved from liability to a holder in due course claiming under an endorsement by the same hand as the drawer’s signature (Section 42).

Payee

The payee is the person to whom or to whose order the amount is payable. The payee must be designated with reasonable certainty — whether by name or by description (Section 5, paragraph 4). Where the payee is misnamed but is identifiable, the instrument is still valid: Ponnuswami Chettiar v. P. Vellaimuthu Chettiar AIR 1957 Mad 355 held that the absence of the name of a payee, where the lender was known with certainty as ‘son of Palaniandi Chettiar’, did not invalidate the note.

An instrument may be made payable jointly to two or more payees, or in the alternative to one of two or more payees (Section 13). It cannot be addressed to two or more drawees in the alternative on a bill of exchange — the drawee must be certain — but it may be made payable in the alternative to two or more payees.

Where the payee is a fictitious or non-existing person, the instrument is treated as ambiguous and the holder may treat it as either a note or a bill at his option (Section 17). A fictitious-payee bill that has been accepted creates liability to a holder in due course under Section 42.

Holder — Section 8

Section 8 defines the holder of a promissory note, bill of exchange or cheque as “any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto”. Where the instrument is lost or destroyed, the holder is the person so entitled at the time of loss or destruction.

Two requirements emerge. First, the person must be entitled in his own name to the possession of the instrument. Mere physical possession is not enough — a thief, a finder, or a person taking under a forged endorsement is not the holder. Second, he must have the right to receive or recover the amount due from the parties to the instrument. The holder is therefore a de jure holder, not merely a de facto one.

The English Bills of Exchange Act, 1882, by contrast, requires actual possession. The Indian Act dispenses with possession in favour of entitlement. Where a bill payable to order is, without endorsement, entrusted by the payee to his agent, the agent does not become the holder — the payee remains the holder.

The categories of holder under the Act are three:

1. The payee — the person originally named.
2. The bearer — the person to whom a bearer instrument is delivered.
3. The indorsee — the person to whom an order instrument is transferred by endorsement and delivery.

A legal representative of a deceased holder may by operation of law become the holder, but a beneficial owner who is not the named payee, bearer or indorsee cannot ordinarily sue: Lachmi Chand v. Madan Lal Khemka AIR 1947 All 52. The 11th Law Commission Report (1958) recommended a tighter definition (“the payee or indorsee in possession, or the bearer”), but the existing definition has not been amended.

Where a payee dies leaving heirs, the holder of a succession certificate may sue on the instrument; but a single heir without endorsement and without succession certificate cannot maintain the suit on her own — Singheswar Mandal v. Gita Devi AIR 1975 Pat 81.

Holder in due course — Section 9

Section 9 defines the holder in due course as 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 indorsee thereof (if payable to order), before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived the title.

The full doctrinal treatment is in the chapter on holder and holder in due course and on privileges of holder in due course. For present purposes the four ingredients are:

1. He must be a holder — payee, bearer or indorsee.
2. He must have given consideration that is legal and valuable.
3. He must have acquired the instrument before maturity.
4. He must have acted in good faith and without notice of any defect in the title of his transferor.

In India, the payee can be a holder in due course (unlike English law, where the holder must take by negotiation, not by issue). The Indian standard of good faith is stricter than the English — under Indian law, negligence in taking the instrument is incompatible with good faith; under English law, good faith is preserved unless the holder is dishonest. The Supreme Court in U. Ponnappa Moothan Sons v. Catholic Syrian Bank Ltd. (1991) 1 SCC 113 held that while constructive notice does not apply, gross negligence in disregarding a ‘red flag’ will defeat the holder’s claim.

Indorser and indorsee

The act of endorsement — signing on the back or on an allonge of the instrument for the purpose of transfer — converts the holder of an order instrument into an indorser, and the transferee into an indorsee. The indorsee, on delivery, becomes the new holder.

The indorser’s liability is set out in Section 35: in the absence of a contract to the contrary, an indorser who endorses and delivers a negotiable instrument before maturity, without expressly excluding or making conditional his own liability, is bound to every subsequent holder, in case of dishonour, to compensate that holder for loss or damage caused — provided due notice of dishonour has been given to or received by the indorser. The indorser’s liability is therefore secondary and conditional — it depends on dishonour by the prior parties and on notice.

An indorser who, without consent, finds his prior endorsements struck out by the holder is discharged to the same extent as if the instrument had been paid at maturity (Section 40). The full treatment is in the chapter on indorsement — kinds, effect, forged indorsement.

Capacity to be a party — Section 26

Section 26 of the Act provides that every person capable of contracting may bind himself and be bound by making, drawing, accepting, endorsing, delivering and negotiating a promissory note, bill of exchange or cheque. The capacity to incur liability on a negotiable instrument is therefore co-extensive with the capacity to contract under Section 11 of the Indian Contract Act, 1872.

The proviso under Section 26 protects the holder. A minor may draw, endorse, deliver and negotiate — so as to bind other parties — but the minor is not himself bound. The incapacity of one party does not diminish the liability of the other competent parties. So where X (a major) and Y (a minor) execute a promissory note in favour of Z, the note is valid; Y escapes liability, X does not.

A person of unsound mind, or a drunkard at the time of execution, is in the same position as a minor. A lucid interval cures the incapacity, and a note made during a lucid interval binds the maker.

An insolvent cannot, after adjudication, become a party to a negotiable instrument; his rights vest in the official assignee. A trading company has implied authority to draw, accept and endorse bills in the ordinary course of business; a non-trading company has no such implied power and must be expressly authorised by its memorandum or articles. Both kinds of company can issue cheques.

An agent may bind his principal if duly authorised. A general authority to transact business does not, however, by itself extend to the drawing, accepting or endorsing of bills. Mere authority to draw is not authority to accept; mere authority to accept is not authority to endorse (Section 27). Where an agent signs in his own name without indicating his agency, or exceeds his authority, he is personally liable. The full treatment is in the chapter on capacity and liability of parties.

Liability of prior parties to a holder in due course — Section 36

Section 36 lays down the rule that gives the holder in due course his commercial value: every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. The liability is not conditional on personal dealings between the prior party and the holder; it runs with the instrument.

This is the proposition that makes the negotiable instrument transferable as money. A holder in due course takes the instrument free of personal defences that prior parties might have had against intermediate transferors — with the narrow exceptions of forgery of the maker’s or drawer’s signature, of incapacity, and of fundamental fraud or material alteration that vitiates the instrument itself.

Maker, drawer and acceptor as principal debtors — Section 37

Section 37 sets out the order of priority among the parties. In the absence of a contract to the contrary, the maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance, and the acceptor are liable as principal debtors. Other parties to the instrument are liable as sureties for the maker, drawer or acceptor, as the case may be.

Section 38 supplements this with the rule that, as between the parties so liable as sureties, each prior party is liable as a principal debtor in respect of each subsequent party. The classical illustration: A draws a bill payable to his own order on B, who accepts. A endorses to C, C to D, D to E. As between E and B, B is principal debtor, and A, C and D are his sureties. As between E and A, A is principal debtor and C, D are his sureties. As between E and C, C is the principal debtor and D his surety.

The cascade matters because of Section 39 (suretyship): when the holder enters into a contract with the acceptor that, under Sections 134 or 135 of the Indian Contract Act, would discharge the sureties, the holder may expressly reserve his right to charge the other parties, and in that case they are not discharged.

Drawee in case of need and acceptor for honour

The Section 7 vocabulary contains two specialised parties that survive in international trade. A drawee in case of need is a person named on the bill, in addition to the original drawee, to whom the holder may resort if the principal drawee dishonours. The drawee in case of need is not himself a drawee — he becomes liable only if and when he accepts.

An acceptor for honour is a person who, after a bill has been protested for non-acceptance or for better security, accepts the bill (under Sections 108 to 116) for the honour of any party already liable on the bill. The acceptor for honour pays only after the bill has been duly presented to the drawee and the drawee has refused payment, and his liability runs to the holder and to all parties subsequent to the party for whose honour he accepted.

Liability of the legal representative

A legal representative of a deceased person who signs his name on a promissory note, bill of exchange or cheque is personally liable thereon, unless he expressly limits his liability to the extent of the assets received by him (Section 29). In the absence of an express limitation, the legal representative’s liability on the instrument is unlimited — even if the assets received are inadequate.

A legal representative cannot complete an instrument that the deceased had executed but not delivered. Section 57 makes this explicit: a legal representative of a deceased person cannot negotiate, by delivery only, a promissory note, bill of exchange or cheque payable to order which has been endorsed by the deceased but not delivered.

Distinguishing roles — common confusions

Three confusions appear with regularity in judicial-services questions.

Maker versus drawer. A maker promises; a drawer orders. A note has only a maker; a bill or cheque has a drawer (who issues the order), a drawee (to whom it is addressed) and a payee. The maker of a note is the principal debtor from the moment of issue; the drawer of a bill is the principal debtor only until acceptance, after which the acceptor takes that role.

Holder versus holder in due course. A holder is a person entitled in his own name to possession; the holder need not have given consideration, need not have acquired before maturity, and need not have acted in good faith. A holder in due course is a holder who satisfies the four additional ingredients of Section 9. A donee can be a holder, but cannot be a holder in due course because he has given no consideration.

Drawee versus acceptor. The drawee is the person to whom the bill is addressed. Until he accepts, he is a stranger to the bill and incurs no liability under it. After acceptance, he is the acceptor, and his liability is primary. The same person before and after acceptance is named differently because the legal incidents are different.

Leading authorities to remember

Three lines of authority recur in examinations on the parties topic. Lachmi Chand v. Madan Lal Khemka AIR 1947 All 52 — the holder, not the beneficial owner, is the person entitled to sue on the instrument; the doctrine of benami cannot be imported. Singheswar Mandal v. Gita Devi AIR 1975 Pat 81 — an heir who is not named on the instrument and has no succession certificate is not the holder. Canara Bank Ltd. v. I.V. Rajagopal (1975) 1 MLJ 420 — the drawee bank’s liability under Section 31 to its customer for wrongful dishonour, and the trader/non-trader distinction in measure of damages. On the holder-in-due-course side, Nunna Gopalan v. Lakshmi Narasamma AIR 1940 Mad 631 establishes that for a demand note, dishonour is not apparent on the face and a transferee for value who is unaware of demand and dishonour can still be a holder in due course; U. Ponnappa Moothan Sons v. Catholic Syrian Bank (1991) 1 SCC 113 establishes the ‘red flag’ gloss on good faith.

Reading list within the Act

For the broader scheme, see the Negotiable Instruments Act notes hub. The role-specific chapters that follow are: holder and holder in due course (Sections 8 and 9); privileges of the holder in due course; capacity and liability of parties (Sections 26 to 32); negotiation by delivery and indorsement (Sections 46 to 60); and discharge of parties (Sections 78 to 90). For the cheque-specific consequences attaching to the drawer and the drawee bank, see the chapter on cheques (Section 6).

Frequently asked questions

What is the difference between a holder and a holder in due course?

A holder is any person entitled in his own name to the possession of a negotiable instrument and to receive the amount due on it (Section 8). A holder in due course is a holder who additionally satisfies four conditions under Section 9: he must have taken the instrument for consideration; before maturity; in good faith; and without sufficient cause to believe in any defect in the title of the transferor. The practical difference is that a holder takes subject to all defences and equities; a holder in due course takes free of personal defences and prior equities, with very limited exceptions for forgery, incapacity and material alteration.

Can a minor be a party to a negotiable instrument?

A minor can draw, endorse, deliver and negotiate a negotiable instrument so as to bind every other competent party — but the minor is not himself bound (Section 26). The instrument is valid; the minor's incapacity does not vitiate the obligations of the other parties. A minor can also be the payee or the indorsee and can enforce the instrument against the maker, drawer or acceptor. The same rule applies to persons of unsound mind and drunkards at the time of execution; their incapacity is to themselves only.

Is the drawee bank liable to the payee of a cheque if it wrongfully dishonours the cheque?

No. The drawee bank's liability under Section 31 of the Act runs only to the drawer, who is its customer. There is no privity of contract between the bank and the payee of the cheque, and the holder cannot sue the bank for refusing to pay. The holder's remedy lies against the drawer. The bank is liable to compensate the drawer for any loss or damage caused by wrongful dishonour, including loss of credit and reputation, with traders entitled to substantial damages without proof of actual loss (Canara Bank Ltd. v. I.V. Rajagopal (1975) 1 MLJ 420).

When does the drawee become an acceptor of a bill of exchange?

When he signifies on the bill, by his signature, his assent to the order of the drawer (Section 7). Until that moment, the drawee is a stranger to the bill — he has been merely directed to pay, but he is not bound. Once he has signed his acceptance, he becomes the acceptor and his liability under Section 32 is primary, absolute and unconditional, except to the extent he has placed conditions on the acceptance under Section 86. The drawer's liability, until acceptance, is principal; after acceptance, it is secondary, akin to that of a guarantor.

Who is a drawee in case of need?

A drawee in case of need is a person named on the face of a bill of exchange — in addition to the original drawee — to whom the holder may resort for acceptance or payment if the principal drawee dishonours. The drawee in case of need is not a party to the bill until he accepts; if he does, he is treated as an acceptor. The mechanism survives in international trade where the drawer wishes to provide the holder with a fallback party of standing in another market. A purely domestic cheque transaction would not use this device, since cheques have no acceptance and no fallback drawee.

Can a payee be a holder in due course?

Yes, in India a payee can be a holder in due course if he satisfies the four ingredients of Section 9 — consideration, before maturity, good faith, and absence of sufficient cause to believe in any defect of title. This is different from English law, where the Bills of Exchange Act, 1882, requires the holder in due course to take by negotiation, not by issue, and a payee — being one of the original parties — therefore cannot be a holder in due course. In practice, a payee will rarely qualify because he is usually privy to the original transaction; but the door is not closed by definition.