Drawer Liability When Drawee Endorses & Delivers Cheque

In the world of negotiable instruments like cheques and bills of exchange, understanding party liabilities is crucial for businesses, individuals, and legal professionals. A common query arises: What is the Liability of Drawer when the Drawee Endorses it and Delivers it to Another? This scenario typically involves a bill of exchange or cheque where the drawee, after acceptance, endorses and transfers it, raising questions about the drawer's ongoing responsibility.

This blog post breaks down the legal framework under the Negotiable Instruments Act, 1881 (NI Act), key provisions, implications of endorsement, exceptions, and practical insights. While this provides general information, consult a legal expert for advice tailored to your situation.

Overview of Drawer and Drawee Roles

The drawer is the person who creates the negotiable instrument, directing the drawee (usually a bank or another party) to pay the specified amount to the payee or holder. Under normal circumstances, the drawer promises payment if the drawee dishonours it. But what happens if the drawee endorses and delivers the instrument to a third party?

The NI Act governs this through Sections 30 and 35, ensuring a chain of liability among parties. The maker of a bill of exchange or cheque is called the drawer; the person thereby directed to pay is called the drawee.

Lyka Labs Limited VS State of Maharashtra - Crimes (2023)

Key Legal Provisions on Drawer's Liability

Section 30: Core Liability of the Drawer

Section 30 of the NI Act is pivotal: The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof, to compensate the holder, provided due notice of dishonour has been given.

Lyka Labs Limited VS State of Maharashtra - Crimes (2023)

This liability activates upon dishonour, requiring the holder to provide timely notice to the drawer. Without it, the drawer may escape responsibility. 1027

Section 35: Endorser's Liability

When the drawee endorses the instrument before maturity without limiting liability (e.g., without recourse), they become liable to subsequent holders upon dishonour. An endorser who delivers a negotiable instrument before maturity, without excluding or making conditional his own liability, is bound to every subsequent holder in case of dishonour, provided due notice of dishonour has been given.259

Here, the drawee-as-endorser assumes primary recourse for the immediate holder, but the drawer remains secondarily liable down the chain.

Implications of Drawee's Endorsement and Delivery

Endorsement by the drawee transforms their role from mere payor to an active party in the negotiation chain. When the drawee endorses a cheque and delivers it to another party, the drawee assumes certain obligations. If the cheque is dishonoured, the endorser (drawee) is liable to compensate the holder, and the drawer remains liable as well, provided the necessary notice of dishonour is given. 214

Effect on Drawer's Position

The drawer does not shed liability simply because the drawee endorses and delivers. Delivery itself reinforces the drawer's commitment: The drawing and delivery of a cheque create a legally enforceable liability. Thus, we are of the opinion that when a person writes, signs and delivers a cheque to another it is an acknowledgment of a legally enforceable liability.2025 0 Supreme(Ker) 96 This extends to scenarios where the instrument circulates further.

In practice, the holder can pursue the drawer for compensation, especially under Section 138 for criminal liability if the cheque bounces due to insufficient funds. A cheque is issued as security to provide the drawee of the cheque with a leverage of using the cheque in case the drawer fails to pay the debt in the future.2022 8 Supreme 240

Exceptions and Limitations to Liability

While the drawer's liability is robust, certain defenses apply:

• Conditional Endorsement: If the drawee endorses without recourse, it may limit recourse to them, potentially shielding the drawer—but only if explicitly stated. Absent this, full liability remains. 227

• Lack of Notice: No due notice of dishonour absolves the drawer. The drawer’s liability is also contingent upon receiving due notice of dishonour. If the drawer does not receive such notice, their liability may not arise.1027

• Prior Payment or Security Cheques: Drawers may claim cash payment before presentation. However, by giving the reply to the said notice the drawer of the cheque... denied his liability... on the plea that though he issued a cheque, but he made the payment by cash before presentation of cheque.2023 0 Supreme(Cal) 1372 Security cheques don't automatically exempt, but context matters. These are only the defences that would be available to the drawer of the cheque in a proceedings initiated under S.138 of the N.I. Act.2023 0 Supreme(Ker) 895

• Improper Presentation: For Section 138 criminal liability, present within six months to the drawee bank. The payee of the cheque has the option to present the cheque in any bank... but to attract the criminal liability of the drawer of the cheque such collecting bank is obliged to present the cheque in the drawee or payee bank.2024 0 Supreme(Ker) 1041

Presentation, Dishonour, and Legal Consequences

Upon endorsement and delivery, the new holder must present promptly. Dishonour triggers:

• Civil Liability: Drawer compensates for loss.
• Criminal Liability (Section 138): If conditions met (drawn on maintained account, for debt discharge, dishonour for insufficient funds). Section 138 of the Act provides that a drawer of a cheque is deemed to have committed the offence if the following ingredients are fulfilled...2022 8 Supreme 240

Liability of drawee of cheque—The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do...

Pandurang VS Akola District Central Co-Operative Bank Ltd. - Dishonour Of Cheque

Practical Recommendations

To mitigate risks:- Clear Endorsements: Avoid ambiguity; specify conditions if needed.- Documentation: Retain proof of payments, notices, and transactions. Maintain proper documentation of all transactions and notices of dishonour to protect the rights of both the drawer and the holder.- Sufficient Funds: Ensure accounts are funded to prevent dishonour.- Timely Action: Holders, send notice within 30 days of dishonour.

Conclusion and Key Takeaways

Generally, the drawer remains liable to compensate holders upon dishonour, even after drawee endorsement and delivery, subject to notice requirements under Sections 30 and 35 of the NI Act. The drawee-endorser shares liability, creating a layered protection for holders. Exceptions like prior payment or improper presentation offer defenses, but proactive management is key.

Key Takeaways:- Drawer's liability is secondary but enduring.- Due notice is mandatory.- Endorsement adds drawee obligation without erasing drawer's.- Section 138 applies for criminal aspects with strict timelines.

This is general information based on the NI Act and case insights—not legal advice. For specific cases, seek professional counsel.

References:- Sections 30, 35 NI Act 1025279214- Additional sources: 2023 0 Supreme(Cal) 1372 2025 0 Supreme(Ker) 96

Lyka Labs Limited VS State of Maharashtra - Crimes (2023)

Pandurang VS Akola District Central Co-Operative Bank Ltd. - Dishonour Of Cheque