In this tough time of demonetization where everyone is facing lack of liquidity and fear of having actual turnover shown in bank accounts as compared to past trends, one may use age old provision provided during the time of British colonial rule, which is still in force in India- provisions of Negotiable Instrument Act enacted on 9th December 1881- ENDORSEMENT. In this 2nd decade of 21st century, it is possible many would be unaware of such an existing provision in our law which may prove to be beneficial to anyone. Let me take you to the details‑
1. Endorsement- The word ‘endorsement’ under the Negotiable Instruments Act means, the writing of one’s name on the back of the instrument (cheque) or any paper attached to it with the intention of transferring the rights therein. 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’.
2. Essentials of a valid endorsement- The following are the essentials of a valid endorsement:
i. The endorsement may be on the back or face of the instrument (cheque) and if no space is left it may be made on a separate paper attached to it called allonage
ii. It must be made by the maker or holder of the instrument. A stranger cannot
iii. It must be signed by the endorser. Full name is not essential. Initials may suffice.
iv. 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.
v. 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.
NOTE– Where a cheque is originally expressed to be payable to bearer, by drawer to drawee and thereafter endorsed to endorsee, it is essential to present the cheque in base branch of original drawer to be encashed in cash, otherwise it would be payable in account of the endorsee.
For example- a bearer cheque (of State Bank of India- Parliament Street New Delhi Branch) is drawn by Mr. A in favour of Mr. B. And Mr. B endorses the same to Mr.C. Now in case, Mr.C wants to liquidate the amount of CHEQUE IN CASH, he has to present the cheque in State Bank of India-Parliament Street New Delhi Branch only. If Mr.C presents this in some other branch, amount would be paid in his account and not in cash.
3. 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).
The maker or drawer cannot endorse or negotiate an instrument unless he is in lawful possession of instrument or is the holder there of. A payee or indorsee cannot endorse or negotiate unless he is the holder there of.
4. Classes of endorsement – An endorsement may be:
i. Blank or general.
ii. Speical or full.
iii. Partial.Online GST Certification Course by TaxGuru & MSME- Click here to Join
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.
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.
There is no difference between a bill or note indorsed in blank and one payable to bearer. They can both be negotiated by delivery.
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).
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.
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 endoser 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. 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 indorsee cannot look to the indorser 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.
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.
Conclusion- Taking Payment in cheque from the customer and endorsing thereby in favour of supplier would by-pass the turnover reflected in bank account. You may take multiple cheques from customer instead of single of full bill amount (i.e instead of taking 1 cheque of Rs.1,00,000, its better to take 4 cheques of Rs.25,000 each). You may then endorse 3 of them to your supplier and deposit 4th in your own account. This would result in amount to be reflected in your bank account to be Rs. 25,000 instead of Rs. 1,00,000.