Section 40 NI Act: Discharge of indorser's liability

Negotiable Instruments Act, 1881

Section 40 NI Act at a Glance

Section 40 NI Act discharges an indorser from liability to the holder when the holder, without the indorser's consent, destroys or impairs the indorser's remedy against a prior party. The indorser is discharged as if the instrument had been paid at maturity.

Section 40 NI Act Bare Act Text

40. Discharge of indorser's liability.

Where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser's remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

Illustration

A is the holder of a bill of exchange made payable to the order of B, which contains the following indorsements in blank:—

First indorsement, “B”.

Second indorsement, “Peter Williams”.

Third indorsement, “Wright & Co.”

Fourth indorsement. “John Rozario”.

This bill A puts in suit against John Rozario and strikes out, without John Rozario's consent, the indorsements by Peter Williams and Wright & Co. A is not entitled to recover anything from John Rozario.

Section 40 NI Act in Simple Words

Section 40 NI Act states when an indorser of a negotiable instrument is discharged from liability to the holder. Where the holder, without the consent of the indorser, destroys or impairs the indorser's remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

The Illustration to Section 40 NI Act gives the case of A, who is the holder of a bill of exchange made payable to the order of B. The bill contains four indorsements in blank in order: first "B", second "Peter Williams", third "Wright & Co." and fourth "John Rozario". A puts the bill in suit against John Rozario and, without John Rozario's consent, strikes out the indorsements by Peter Williams and Wright & Co. A is not entitled to recover anything from John Rozario.

When Section 40 NI Act Applies

  • A person is the holder of a negotiable instrument that bears an indorsement.
  • The holder destroys or impairs the indorser's remedy against a prior party.
  • The holder does so without the consent of the indorser.
  • The indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

Example of Section 40 NI Act

Arvind in Prayagraj holds a bill of exchange payable to the order of Naveen and indorsed in blank in order by Naveen, Farida, Tenzin, and Swati. Arvind files a suit on the bill against Swati and strikes out the prior indorsements of Farida and Tenzin without Swati's consent. By striking out those prior indorsements without Swati's consent, Arvind destroys or impairs Swati's remedy against those prior parties. Under Section 40 NI Act, Swati is discharged from liability to Arvind to the same extent as if the bill had been paid at maturity, and Arvind cannot recover anything from Swati.

FAQs on Section 40 NI Act

What is Section 40 NI Act?▼

Section 40 NI Act deals with the discharge of an indorser's liability on a negotiable instrument. If the holder destroys or impairs the indorser's remedy against a prior party without the indorser's consent, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

To what extent is an indorser discharged under Section 40 NI Act?▼

To the same extent as if the negotiable instrument had been paid at maturity. In the Illustration to Section 40 NI Act, the holder who strikes out earlier indorsements without the fourth indorser's consent is not entitled to recover anything from that indorser.

Does Section 40 NI Act discharge the indorser if the indorser consented to the holder's act?▼

No. Section 40 NI Act applies only where the holder destroys or impairs the indorser's remedy against a prior party without the consent of the indorser.

What happens if a holder strikes out prior indorsements on a bill of exchange without a later indorser's consent?▼

The holder cannot recover from that later indorser. As shown in the Illustration to Section 40 NI Act, when holder A strikes out the second and third indorsements without the fourth indorser John Rozario's consent, A is not entitled to recover anything from John Rozario.

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Disclaimer: This is for informational purposes only. Always consult a qualified advocate for legal advice.

Sources: Bare Act Text, Negotiable Instruments Act, 1881 (India Code) ·