Negotiable Instruments: Under Negotiable Instrument Act, 1881

Negotiable instruments
Under negotiable instrument Act, 1881

Definition of Negotiable Instruments:
“Negotiable” means transferable by delivery
and “instrument” means a written document by which a right is created
in favour of some person.
Thus negotiable instrument is a document transferable by delivery by
which a sort of right is created in favour of some person.
In order to have a concrete idea about negotiable instrument, we may
quote the following definition from the Black’s Law Dictionary:

 “ Negotiable instrument is a written instrument that
 is signed by the maker or drawer,
 includes an unconditional promise or order to pay a specific sum of
money,
 is payable on demand or at a definite time, and
 is payable to order or to bearer.”

Introduction to negotiable instrument
Act ,1881
 The negotiable instrument Act came into
force on 1 March, 1881. it extends to the
whole of India, except the state of J&K.
 The act deals with the law relating to three
specific classes of Negotiable Instruments,…

 Promissory note.
 Bill of exchange.
 Cheque.
 This act does not apply to Indian currency
Act, 1871.
Meaning and definition of negotiable
instrument
 In general terms, negotiable instrument is a
piece of paper containing in writing a right
entitling the holder to claim something,
usually money, but sometimes goods.
 According to s.13(1) of negotiable instrument
Act,1881: “ negotiable instrument means a

promissory note, bill of exchange, or cheque,
payable either to order or to bearer.”
Important definitions…
 Drawer: the maker of a bill of exchange is
called the drawer.
 Drawee: the person to whom direction is
given to pay is called the drawee.

 Payee: the person named in the instrument,
to whom or to whose order the money is by

the instrument directed to be paid, is called
the payee.
Essentials of negotiable instruments
A negotiable instrument must possess two qualities:

1. The right of ownership contained in the instrument
can be transferred from one person to another by
mere delivery or sometimes by endorsement and
delivery.
2. The transferee who takes the negotiable instrument
in good faith and for consideration technically known
as holder in due course gets a good title to the same
even though the title of the transferor is defective.
NOTE: A currency note also possesses these two
qualities, but for obvious reason the negotiable
instrument Act expressly excludes a currency note
from the purview of the Act.
KINDS OF NEGOTIABLE INSTRUMENT
1.PROMISSORY NOTE.
2.CHEQUE.
3.BILL OF EXCHANGE.
PROMISSORY NOTE
 According to S.4 of negotiable instrument
Act, 1881: “a promissory note is an
instrument in writing (not being a bank note
or a currency note) containing an
unconditional undertaking signed by the
maker to pay a certain sum of money only to ,
or to the order of a certain person or bearer
of instrument.”
Promissory Note
Rs 1000 Delhi, 10 August, 2010
Sixty days after due date I promise to pay to

Mr ABC or order the sum of rupees one
thousand only with interest thereon at 12 per
cent for value received.
Sd Revenue Stamp
Requirements of a valid promissory
note
 A promissory note must be in writing and signed
by the maker.
 A promise or undertaking to pay.
 The promise to pay must be unconditional.
 The promissory note must be signed by the maker.
 The maker must be certain.
 The sum payable must be certain.
 The instrument must contain a promise to pay
money only.
 The payee must be certain.
Few illustrations…
 “A promise to pay B or order, Rs. 500.”(P.N)
 “ I acknowledge myself to be indebted to B in
Rs. 1000, to be paid on demand for value

received”.(P.N)
 “I promise to pay B Rs. 500 seven days after
my marriage with C” (Conditional, not a P.N)

 I promise to pay B Rs. 500 and to deliver to
him my black car on 1 may, 2014”. (other than

money, not a P.N)
BILL OF EXCHANGE
 According to section 5 of Negotiable
instrument Act, 1881:
“A bill of exchange is an instrument in writing
containing an unconditional order, signed by
the maker, directing a certain person to pay
a certain sum of money only to, or to the
order of, a certain person, or to the bearer of
the instrument.”
Bill of Exchange
Rs 1000 Delhi, 04 August, 2009
Three months after due date pay to C or order the

sum of rupees one thousand only, for value
received.
To
A
Sadar Bazar Accepted sd
Delhi sd Revenue Stamp
Requisites of a bill of exchange
 A Bill of exchange require three parties:
1. The drawer: the person who is the maker of a bill & who gives the
order.
2. The drawee: the person who is directed to pay the bill & who on
affixing his signature becomes the acceptor.
3. The payee: the person to whom or to whose order the amount of
instrument is payable, unless the bill is payable to bearer.
 A B.O.E must be in writing.
 A B.O.E must contain an order to pay.
 The order contained in the bill should be unconditional.
 A B.O.E. must be signed by the drawer.
 Drawee must be certain.
 The sum payable must be certain.
 The payee must be certain.
 The instrument must contain an order to pay money and money only.
CHEQUE
 According to section 6 of negotiable
instrument Act, 1881:
 In general terms, a cheque is a bill of

exchange drawn on a specified banker and is
payable only on demand.
 The necessary parties to cheque are same as
B.O.E, save that the drawee must be a banker.

Requisites of a valid cheque
 A cheque is a species of Bill of exchange.
 As cheque, being payable on demand do not require
acceptance & is intended for immediate payment.

 A cheque does not required to be stamped under the
provisions of stamp Act.

 A cheque may bear a date of holiday or Sunday.
 A cheque is valid for payment within a period of 3
months from the date on which it is drawn. There

after, it becomes stale, & then the drawee bank may
refuse to pay the same.
 A drawer can also restrict the limit for validity of a
cheque upto a specified date.

Cheque & BOE
Cheque BOE
(i) Must be drawn only (i) Can be drawn on any
on a banker person including a
banker
(ii) The amount is (ii) The amount may be
always payable on
demand paid on demand or
after a specified time
Cheque & BOE
Cheque BOE
(iii) Cheque does not (iv) Requires stamp.
require stamp
(iv) Acceptance is not (iv) A bill payable after
needed sight must be
accepted.
(v) Can be crossed
(vi) Not possible
Promissory Note & Bill of Exchange
PN BOE
(i) There are two parties (i) Three parties
(ii) Contains an
unconditional (ii) Contains an
promise unconditional order
(iii) Liability of maker or (iii) Liability is secondary
drawer is primary and of the drawer and
absolute. conditional.
(iv) No notice of (iv) Notice must be
dishonour is required given.
CROSSING OF CHEQUE
 MEANING OF CROSING
 The crossing of cheque is an instance in alteration which is
authorized by the Act. A cheque is said to be crossed when it

bears across its face two parallel transverse lines which are
usually drawn on the left hand top corner of the cheque.
 PURPOSE OF CROSSING
 The purpose of crossing is to direct the drawee(banker) to
pay the amount of cheque only to a banker so that the party

who receives the payment of the cheque can be easily traced.
 TYPES OF CROSSING
 There are two types of crossing, viz, general crossing and
special crossing.
BOUNCING OR DISHONOUR OF CHEQUES
 A cheque is said to be bounced or

dishonoured by non-payment when the
drawee of the cheque makes default in
payment upon being duly required to pay the
same.
Liability of drawer on dishonour of
cheque (section 138)
 On dishonour of cheque, the drawer is punishable with
imprisonment for a term not exceeding one year or with fine not
exceeding twice the amount of a cheque or with both if the
following conditions are satisfied:
 If the cheque was drawn to discharge a legally enforceable debt or
other liability,
 If the cheque is returned by the bank unpaid due to insufficiency of
funds,
 If the cheque has been presented to the bank within a period of
three months from the date on which it is drawn or within the
period of its validity, whichever is earlier.
 If the drawee of such cheque has failed to make the payment of the
said amount of money to the payee or to the holder in due course
of the cheque, within fifteen days of the receipt of the notice.
Cases in which a banker must refuse to
honour the customer’s cheque
A banker must do so, in case of following notice:
• Stop payment.(on instruction of drawer of cheque).
• Garnishee order. ( a prohibition order by any court attaching
the money in customer’s account).

• Death.
• Insanity.
• Loss of cheque.
• Defect in title. (when bank suspects that the title of the
person presenting the cheque is defective).

• Material alteration. (not authenticated0
• Different signature. ( signature of the drawer does not tally
with the specimen signature kept by the bank)

Cases in which a banker may refuse to
honour a customer’s cheque
 Insufficient funds.
 Presentment at different branch.( when the
cheque is presented at the branch other than

the branch where the customer has issued
the cheque, has the acccount).
 Presentment after banking hours.
 Stale cheque.(cheque issued after expiry of its
validity period).
 Post dated cheque.
 Undated cheque.
Who is a ‘holder’?
 A person is called the holder of a negotiable
instrument if
 He is entitled to the possession of the
instrument in his own name, or,

 He is entitled to receive/ recover the amount
due on the instrument from the parties liable

under the instrument.
 (Only a holder can bring a legal action to
recover the amount due on the instrument).

‘holder in due course’
 A person is called the ‘holder in due course’ if
has become the holder of an instrument for
consideration’ such consideration must not
be unlawful and need not be adequate.
 Also he must have obtained the instrument in
good faith.
 The instrument received by the ‘holder in due
course’ must also be complete and regular on

face of it.
Maturity of a negotiable instrument
 The maturity of a promissory note, or bill or
exchange or cheque is the date on which it
falls due.
 Every instrument payable otherwise than on
demand is entitled to three days of grace.

Methods of negotiating instrument
 By endorsement & delivery.

 By negotiation and Assignment.
 Assignment: An instrument is said to be
assigned when a promissory note, bill of

exchange, or cheque is transferred to by
means of a written and registered document
under the provision of TPA, 1882.
Endorsement
 The process of transferring an instrument is
called the endorsement.
 An endorsement means, signing the negotiable
instrument on the back or face thereof, or on a
slip of paper (called allonge) annexed there to,
for the purpose of negotiation.
 The person who endorses the instrument is
called the ‘endorser’, and the person in whose
favour the instrument is endorsed is called the
‘endorsee’
Kinds of endorsement
 Blank endorsement.(In this case, endorser puts his
signature only)
 Special or full endorsement( when endorser signs his
name, and adds a direction to pay the amount to or to the

order of a specified person).
 Restrictive endorsement.( when it restricts or excludes the
right of further negotiation)

 For example, “ pay the contents to Z only”.
 Partial endorsement: an endorsement is said to be partial
when it purports to transfer only a part of the amount of

the instrument. A partial endorsement is invalid.
 For example, “ In case,of a bill of Rs.1000 pay Rs. 500 to
B”.

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Negotiable instruments

Under negotiable instrument Act, 1881

 is signed by the maker or drawer,

 includes an unconditional promise or order to pay a specific sum of

 is payable to order or to bearer.”

specific classes of Negotiable Instruments,…

Act,1881: “ negotiable instrument means a

given to pay is called the drawee.

to whom or to whose order the money is by

A negotiable instrument must possess two qualities:

Rs 1000 Delhi, 10 August, 2010

Sixty days after due date I promise to pay to

Rs. 1000, to be paid on demand for value

my marriage with C” (Conditional, not a P.N)

him my black car on 1 may, 2014”. (other than

Rs 1000 Delhi, 04 August, 2009

Three months after due date pay to C or order the

 In general terms, a cheque is a bill of

B.O.E, save that the drawee must be a banker.

acceptance & is intended for immediate payment.

provisions of stamp Act.

 A cheque is valid for payment within a period of 3

months from the date on which it is drawn. There

cheque upto a specified date.

authorized by the Act. A cheque is said to be crossed when it

pay the amount of cheque only to a banker so that the party

 A cheque is said to be bounced or

the money in customer’s account).

person presenting the cheque is defective).

with the specimen signature kept by the bank)

cheque is presented at the branch other than

instrument in his own name, or,

due on the instrument from the parties liable

recover the amount due on the instrument).

course’ must also be complete and regular on

demand is entitled to three days of grace.

 By endorsement & delivery.

assigned when a promissory note, bill of

name, and adds a direction to pay the amount to or to the

right of further negotiation)

when it purports to transfer only a part of the amount of

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