Endorsement in Promissory Notes under Indian Law: Statutory Framework, Judicial Elaboration, and Practical Implications

Endorsement in Promissory Notes under Indian Law: Statutory Framework, Judicial Elaboration, and Practical Implications

Introduction

Endorsement is the juridical act by which a holder of a negotiable instrument signs the instrument—ordinarily on its reverse side—with the intention of transferring title to another person. In the context of promissory notes, endorsement serves as the principal mode of negotiation, enabling fluidity of credit and commercial certainty. While apparently straightforward, the law governing endorsement in India involves a complex interplay of statutory provisions, presumptions of consideration, and divergent judicial opinions addressing whether a particular endorsement effects negotiation, a mere assignment, or a restricted agency for collection. This article analyses these dimensions with specific reference to case law, including the Supreme Court’s seminal decision in Kundan Lal Rallaram v. Custodian, Evacuee Property[1].

Statutory Framework

  • Section 15, Negotiable Instruments Act, 1881 (“NIA”): defines “endorsement.”
  • Section 16: differentiates endorsements “in blank” and “in full.”
  • Section 50: prescribes the effect of endorsement followed by delivery, viz., transfer of property with a right of further negotiation unless expressly restricted.
  • Section 52: recognises restrictive endorsements (e.g., “for collection”).
  • Section 118(a): raises a presumption that every endorsement is for consideration until the contrary is proved.
  • Section 20: governs inchoate stamped instruments that may subsequently be completed by a holder.
  • Sections 78 and 82(c): stipulate that payment must be made to the “holder,” which includes an endorsee, to discharge the maker.

Conceptual Distinctions

Endorsement versus Assignment

An endorsement operates ex lege mercatoria, conferring upon the endorsee the rights of a “holder in due course,” including insulation from prior defects (NIA, s. 9). Conversely, an assignment outside the Act transmits merely the assignor’s right, title, and interest under the Transfer of Property Act, 1882, s. 130. The Madras High Court in Muhammad Khumarali v. Ranga Rao[2] emphasised that even where an endorsement is defective for want of necessary parties, it may nonetheless serve as evidence of an equitable assignment, but without the privileges of a negotiable-title holder.

Blank, Full, and Restrictive Endorsements

A “blank” endorsement (s. 16) converts the instrument into bearer form; a “full” endorsement specifies the endorsee. A “restrictive” endorsement under s. 52 may either restrict further negotiation or merely constitute the indorsee an agent. In Bommareddi Mothireddi v. Bhimavarapu Pothireddi[3] the Andhra Pradesh High Court held that an endorsement “for collection” vests the endorsee with legal title sufficient to sue, albeit subject to accounting to the endorser.

Presumption of Consideration and Burden of Proof

Section 118(a) presumes that every endorsement is for consideration. The Supreme Court in Kundan Lal Rallaram clarified that this presumption shifts the evidentiary burden; it may be rebutted through direct or circumstantial evidence, including failure to produce account books, invocation of s. 114, Evidence Act, or proof of surrounding circumstances that negate consideration[1].

Judicial Elaboration of Key Issues

(A) Rebutting the Presumption of Consideration

In Kundan Lal Rallaram, the endorsee (the Custodian) failed to produce contemporaneous books despite being called upon. Drawing an adverse inference, the Court held the endorsement unsupported by consideration, thereby rebutting s. 118(a). The decision underscores that the statutory presumption is potent but not irrefutable; strategic nondisclosure may prove fatal.

(B) Scope of Agency in Restrictive Endorsement

The effect of a restrictive endorsement was examined in Bommareddi Mothireddi, where the Court held that an endorsee “for collection” may continue proceedings even after the death of the endorser because legal (though not beneficial) title passes upon endorsement. This position dovetails with s. 78 (payment to holder) and s. 82(c) (discharge when endorsed in blank).

(C) Endorsement Coupled with Debt Transfer

In Anthonyswamy v. M.R. Chinnaswamy[4], the Supreme Court read an endorsement containing express words transferring “principal and interest” as tantamount to assignment of the underlying debt, enlarging the endorsee’s rights beyond mere holder status. The ruling illustrates that language employed in the endorsement may convert a simple negotiation into a composite assignment.

(D) Quantum of Consideration Irrelevant to Maker’s Liability

Thambusami Reddiar v. Chidambaram Pillai[5] held that a maker’s liability is determined by the face value of the note, not the (possibly discounted) amount paid by an endorsee to acquire it. Sections 43 and 30, NIA, thereby safeguard circulation of credit even when notes are traded below par.

(E) Self-Endorsement and Joint Payees

Early authority in Khumarali recognised the conceptual legitimacy of self-endorsement by a payee or by one joint payee in favour of the other, analogising it to a drawer making a bill payable to himself. Modern commercial practice, now supported by s. 15 and s. 50, renders such endorsements legally efficacious.

(F) Holder versus Holder in Due Course: Jurisdictional Consequences

In Duraisamy v. Velmurugan[6] the Madras High Court distinguished a mere “holder” from a “holder in due course” for purposes of territorial jurisdiction. The decision illustrates that failure to prove consideration may limit procedural advantages, reaffirming the practical stakes of s. 118(a).

Interaction with Ancillary Doctrines

Inchoate Instruments under Section 20

Where a promissory note is signed on blank paper and authority is conferred to complete it, s. 20 validates completion up to the stamped amount. The Madras High Court in Kuppayammal v. A. Sitheswaran[7] held that the maker remains liable to a holder in due course notwithstanding allegations of unauthorised completion, unless the initial burden to prove fraud is discharged.

Negotiability Constraints: “Not Negotiable” and “A/c Payee”

Although the present discussion focuses on promissory notes (for which crossing is inapplicable), comparative reference to cheque endorsements illuminates how words restricting negotiability impact rights. In Adigear International v. State[8], the Delhi High Court observed that an “A/c Payee” crossing does not negate transferability, implying by analogy that restrictive words in endorsements of promissory notes must be expressly framed under s. 52 to be effective.

Practical Implications for Commercial Actors

  • Endorsers: Should maintain contemporaneous records of consideration to avoid successful rebuttal under s. 118(a).
  • Endorsees: Must scrutinise wording; inclusion of phrases such as “for collection” or “without recourse” materially alters rights.
  • Financial Institutions: May rely on blank or full endorsements coupled with delivery; however, internal risk controls should verify chain of title to pre-empt competing claims.
  • Counsels and Litigants: Should leverage evidentiary presumptions strategically, mindful that nondisclosure of documents can invite adverse inferences (Kundan Lal Rallaram).

Conclusion

The jurisprudence on endorsement of promissory notes in India demonstrates a calibrated balance between commercial expediency and evidentiary safeguards. Statutory presumptions under s. 118(a) facilitate negotiability yet remain susceptible to rebuttal through diligent evidentiary challenge. Judicial decisions—from early twentieth-century pronouncements permitting self-endorsement to contemporary rulings on restrictive endorsements—collectively underscore that the legal effect of an endorsement turns on its form, wording, and surrounding circumstances. For practitioners, mastery of these nuances is indispensable to structuring transactions and litigating disputes involving negotiable instruments.

Footnotes

  1. Kundan Lal Rallaram v. Custodian, Evacuee Property, Bombay, AIR 1961 SC 1316.
  2. Muhammad Khumarali v. Ranga Rao, (1901) Madras High Court.
  3. Bommareddi Mothireddi v. Bhimavarapu Pothireddi, 1962 SCC OnLine AP 37.
  4. Anthonyswamy v. M.R. Chinnaswamy Koundan, (1969) 2 SCC 303.
  5. Thambusami Reddiar v. Chidambaram Pillai, 1954 SCC OnLine Mad 82.
  6. K. Duraisamy v. S. Velmurugan, 2009 SCC OnLine Mad 857.
  7. Kuppayammal v. A. Sitheswaran, 2011 SCC OnLine Mad 1303.
  8. Adigear International & Ors. v. State & Anr., 2013 SCC OnLine Del 1534.