Page 116 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Unit 6: Law of Negotiable Instruments

4. When a negotiable instrument is made, drawn accepted or transferred without consideration Notes
and the negotiable instrument gets into the hands of a holder in due course, then the plea
of absence of consideration cannot be raised against him or against any subsequent holder
deriving title from him (Sec.43).
5. Where an instrument is negotiated to a holder in due course, the parties to the instrument
cannot escape liability on the ground that the delivery of the instrument was conditional or
for a special purpose only (Sec.46).
6. Right of an endorsee from a holder in due course. Not only that the title of the holder in
due course is not subject to the defect in previous holder’s title but once that instrument
passes through the hands of a holder in due course, it is purged of all defects. Any person
acquiring it takes it free of all defects, unless he was himself a party to the fraud (Sec.53).

6.6 Negotiation of a Negotiable Instrument

Meaning of Negotiation

The transfer of an instrument by one party to another so as to constitute the transferee a holder
thereof is called ‘negotiation’.

Negotiation and Assignment

Both the assignment and negotiation involve the transfer of the right to receive the payment of
debt. However, the rights, which the transferee of an instrument by negotiation acquires are
substantially superior to those of an assignee. When an instrument is negotiated, its transferee
gets good title irrespective of the defective title, if any, of the transferor.

Example: A, the holder of a negotiable instrument payable to bearer, delivers it to B’s
agent to keep for B. The instrument has been negotiated.

Endorsement

An endorsement is the mode of negotiating a negotiable instrument. A negotiable instrument
payable otherwise than to bearer can be negotiated only by indorsement and delivery. An
endorsement according to Sec.15, is “when the maker or holder of a negotiable instrument signs
the same otherwise than 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 intended
to be completed as a negotiable instrument, he is said to endorse the same and is called the
endorser”. The person to whom the instrument is endorsed is called the endorsee. Usually the
endorsement is on the back of the instrument; though it may be even on the face of it. Where no
space is left on the instrument, the endorsement may be made on a slip of paper attached to it.
This attached slip of paper is called ‘Allonge’.

Example: A cheque is payable to ‘X or order’, and ‘X’ merely signs on the back of it. This
will constitute endorsement in blank. Where an endorsement in blank is subsequently followed
by an endorsement in full, the endorser in full will be liable to his immediate endorsee and
parties deriving title from him, but not to others (s.55).

LOVELY PROFESSIONAL UNIVERSITY 111