The act of a person who is a holder of a negotiable instrument in signing his or her name on

the back of that instrument, thereby transferring title or ownership is an endorsement. An

endorsement may be in favour of another individual or legal entity. An endorsement provides
a transfer of the property to that other individual or legal entity. The person to whom the
instrument is endorsed is called the endorsee. The person making the endorsement is the
endorser.

1. Blank or general endorsement:

If the endorser signs his name only and does not specify the name of the endorsee, the
endorsement is said to be in blank Sec. 16(1). The effect of a blank endorsement is to convert
the order instrument into bearer instrument (Sec. 54), which may be transferred merely by
delivery.

2. Endorsement in full or special endorsement:

If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned
in the instrument to, or to the order of, a specified person the endorsement is said to be in full
[Sec. 16(1)].

If, for example, A, the holder of a bill of exchange, wants to make an endorsement in full to
B, he would write thus: “Pay to B or order, SdA4.” After such an endorsement it is only the
endorsee, i.e., B, who is entitled to receive the payment of the instrument and to further
negotiate the instrument by his endorsement.

A blank endorsement can easily be converted into an endorsement in full, According to

Section 49, the holder of a negotiable instrument endorsed in blank may, without signing his
own name, by writing above the endorser’s signature a direction to pay to any other person as
endorsee, convert the endorsement in blank into an endorsement in full; and since such holder
does not sign himself on the instrument he does not thereby incur the responsibility of an
endorser.

3. Partial Endorsement:

Section 56 provides that a negotiable instrument cannot be endorsed for a part of the amount
appearing to be due on the instrument. In other words, a partial endorsement which transfers
the rights to receive only a part payment of the amount due on the instrument is invalid.

Such an endorsement has been declared invalid because it would subject the prior parties to
plurality of actions (one action by holder for part value and another action by endorsee for
part value) “and will thus cause inconvenience to them.

Moreover, it would also interfere with the free circulation of negotiable instruments. It may
be noted that an endorsement which purports to transfer the instrument to two or more
endorses separately, and not jointly is also treated as partial endorsement and hence would be
invalid.

Thus, where A holds a bill for Rs 2,000 and endorses it in favour of B for Rs 1,000 and in
favour of C for the remaining Rs 1,000, the endorsement is partial and invalid.

Section 56, however, further provides that where an instrument has been paid in part, a note
to that effect ma; be endorsed on the instrument and it may then be negotiated for the balance.

Thus, if in the above illustration the acceptor has already paid Rs 1,000 to A, the holder of the
bill, A can then make an endorsement saying “Pay B or order” Rs 1,000 being the unpaid
residue of the bill.” Such an endorsement would be valid.

4. Restrictive endorsement:

Stating the effect of endorsement, Section 50 provides that “the endorsement of negotiable
instrument followed by delivery transfers to the endorsee the property herein with the right of
further negotiation.” However, Section 50 permits restrictive endorsement.

An endorsement which, by express words, prohibits the endorsee from further negotiating the
instrument or restricts the endorsee to deal with his instrument as directed by the endorser is
called ‘restrictive’ endorsement.

The endorsee under a restrictive endorsement gets all the rights of an endorser except the
right of further negotiation. In other words, such an endorsement entitles the endorsee to
receive the payment on due date and sue the parties for it but he cannot further negotiate the
instrument.

Illustrations:

(a) B, the holder of the bill, makes an endorsement on the bill saying “Pay C only.” It is a
restrictive endorsement as C cannot negotiate the bill further.2

(b) B, the holder of the bill, makes an indorsement on the bill, saying “Pay C for my use or
“Pay C or order for the account of B.” In either case there is a restrictive endorsement as the
right of further negotiation by C has been excluded thereby.

The person liable on the hill must pay by drawing a cheque in the name of the holder (or the
endorser) B. If he makes the payment to C on C’s own account, he will still be liable to B, the
endorser; Hence C cannot endorse the bill further in his own name.

5. Conditional endorsement:
If the endorser of a negotiable instrument, by express words in the endorsement, makes his
liability, dependent on the happening of a specified event, although such event may never
happen, such endorsement is called a ‘conditional’ endorsement (Sec. 52).

The law permits a conditional endorsement and therefore it does not in any way affect the
negotiability of the instrument. Thus, endorsements can validly be made in the following
terms:

(i) “Pay B or order on his marriage;”

(ii) “Pay B on the arrival of Pearless ship at Bombay.”

In the case of a conditional endorsement the liability of the endorser would arise only upon
the happening of the event specified. But the endorsee can sue other prior parties, e.g., the
maker, acceptor, etc., if the instrument is not duly met at maturity, even though the specified
event did not happen.

6. Sans recourse endorsement (Sec. 52):

When the endorser expressly excludes his own liability on the negotiable instrument to the
endorsee or any subsequent holder in case of dishonour of the instrument, the endorsement is
known as ‘sans recourse’ endorsement.

Such an endorsement is generally made by adding the words ‘sans recourse’ or ‘without
recourse.’ Thus, “Pay X or order sans recourse” or “Pay X without recourse to me” or “Pay X
or order at his own risk” is examples of this type of endorsement.

7. Facultative endorsement:

When the endorser expressly gives up some of his rights under the negotiable instrument, the
endorsement is called a ‘facultative’ endorsement. Thus, “Pay X or order, notice of dishonour
waived” is a facultative endorsement.

As a result of such an endorsement the endorsee is relieved of his duty to give notice of
dishonour to the endorser and the latter remains liable to the endorsee for the non-payment of
the instrument, even though no notice of dishonour has been given him.

8. Forged Endorsement: When a negotiable instrument is endorsed with the forged

signature of the endorser, the endorsement is called a forged endorsement.

In such a case, the endorsee does not acquire any title to the instrument even if he is the
bonafide purchaser. It is because such an endorsement is a nullity and has no existence in the
eyes of law.
Essentials of Endorsement

It must be on the back or on the face of the instrument or on a slip of paper attached to it.

ii. It must be made by the maker or holder or drawer of the instrument or by his duly
authorized agent.

iii. It must be signed by the maker or the holder and if by the maker, he must sign it again
then as a maker.

iv. It can be either “in blank” or “in full”.

v. It must be made with the intention of transferring the instrument to a third person so as to
entitle the transferee must clearly be expressed thereon.

vi. It must be completed by delivery of the instrument with the intention of passing the
property mentioned in the instrument to a third person

Holder’s Rights and Powers:

• In Special Endorsement, the holder of a cheque endorsed in blank may
convert the blank endorsement, by writing above the endorser’s signature
which gives direction to pay the cheque to or to the order of himself or any
other person.

• In Crossings, a cheque may be crossed generally or specifically; when it’s

uncrossed whilst when it’s crossed generally, the holder may cross it
specifically.

• In Duplicate of Cheque, in case of misplacing of the cheque, the holder can

ask to the drawer to give him another cheque of the same tenor, but holder
must give security to the drawer to indemnify him for all the loses if the lost
cheque has been found again.

• In Negotiation, a holder of a cheque has a right to negotiate to another

person. Moreover, in some cases, a holder has a power of negotiation even
though cheque has no title or faulty title.

• In Presentation, if a cheque is an open cheque then the person can take it

to the drawee bank and request payment in cash; but in case of crossed
cheques one cannot anticipate drawee bank to pay in cash, and he should,
therefore, present it to the drawee bank for payment.

• In Notice of Dishonour, a cheque holder presents the cheque for payment

and it does not get paid then he may give notice of dishonour outright to
prior parties in order to hold back their liability to him.
• In Right of Action, a holder can sue on it in his own name. whether his
action on the cheque succeeds or not is depended on whether he is a holder
or holder in due course.

Holder in due course-

In Banking or Commercial law, a holder in due course is a person who
accepts a negotiable instrument in a value-for-value exchange without
doubting its legitimacy so ultimately in a good faith. Now the person who
took it for value in good faith now becomes a real owner of the instrument
and is known as “holder in due consideration”. According to Section 9,
“Holder in due course means any person who for consideration became the
possessor of a promissory note, bill of exchange or cheque is payable to
bearer, or the payee or endorsee 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 his title”.

The phrase “in good faith and for value” has split into 4 rudiments under sec
9-

• The instrument taken by the holder is should be for value.

• It’s necessary to obtain the instrument before its maturity.

• The instrument should be complete and regular on its face.

• The instrument should have been received in a good faith without noticing
any defect or error neither in the instrument, title nor in the person
negotiating it to him.

Case- SukhanRajkhim Raja a Firm of Merchants, Bombay V. N. Raja

Gopalan-

The Hon’ble court held that the plaintiff was cognizant that the cheque had
been dishonoured and endorsement in his favour was only after it was
returned by the bank. Furthermore, it has lost its negotiability. Hence, the
plaintiff cannot beholder in due course.

The difference between Holder and Holder in due course-

Holder refers to a person, the payee of the negotiable instrument, who is in
possession of it. A person, who is entitled to receive or recover the amount
due on the instrument from the parties to that, whilst the holder in due
course connotes a person who incurs the instrument for value and in good
faith without having any knowledge of the defect in the title of the person
transferring the instrument. In holder, consider is not necessary but in the
holder in due course, it is of course necessary. A holder cannot sue all the
prior parties but a holder in due course can sue all the prior parties. The
instrument is obtained regardless of good faith but holder in due course the
instrument is only accepted in good faith. A person can become a holder
before or after the maturity of negotiable instrument, on the other hand, a
person can become holder in due course, only before the maturity of the
negotiable instrument. If the title of any of the prior parties was imperfect or
defective the holder does not acquire good title but a holder due course
acquires a good title even there was an error in the title of any prior parties.

Conclusion
The holder of a negotiable instrument is any person who is for the time being
entitled in his own name and right to the possession of the instrument and to
receive and recover the amount due on the instrument. a holder in due
course is a person who accepts a negotiable instrument in a value-for-value
exchange without doubting its legitimacy so ultimately in a good faith. Now
the person who took it for value in good faith now becomes a real owner of
the instrument and is known as “holder in due consideration”. To sum it up
every holder in due course is a holder but every holder in due course is not a
holder.

“The views of the authors are personal“

Frequently asked questions

What is the holder?

Sec 8 of Negotiable Instrument act defines the term, “Holder”-The holder of
a negotiable instrument is any person who is for the time being entitled in his
own name and right to the possession of the instrument and to receive and
recover the amount due on the instrument.

What is the holder in due course?

Holder in due course means any person who for consideration became the
possessor of a promissory note, bill of exchange or cheque is payable to
bearer, or the payee or endorsee 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 his title.

How holder and holder in due course distinct in terms of entitlement?

A holder is entitled in his own name to the possession of the instrument,
whilst a holder in due course acquires the possession of the instrument for
consideration.

DISCHARGE OF A PARTY   {Sec. 82 to 90}

Payment:-

Payment by a party who is secondarily liable on a negotiable instrument discharges

the holder and all parties subsequent to the party making payment of the negotiable
instrument.

Cancellation:-

Where the holder cancels the name of any party liable on the negotiable instrument
(other than the party primarily liable on the negotiable instrument), such a party and
all parties subsequent to him are discharged.

Release:-

Where the holder releases any party liable negotiable instrument (other than the
party primarily liable on the negotiable instrument), such a party and all parties
subsequent to him are discharged.

Allowing drawee more than 48 hours to accept:-

All prior parties not consenting to the same are discharged from liability to such
holder.

Qualified acceptance:-

Where a holder of the bill consents to qualified acceptance, all the prior parties who
did not consent to qualified acceptance are discharge.

Material alteration:-

Every party not consenting to a material alteration negotiable instrument is

discharged.

Negotiation back:-

Where a party already liable on the negotiable instrument becomes the holder of
negotiable instrument, such a party and all intermediate parties to whom such a
party was previously liable shall be discharge.
Operation of law:-

*A party is discharged if the negotiable instrument becomes time barred.

*A party is discharged if he is declared as an insolvent by the court.