BL Mod 3

Module 3
NEGOTIABLE INSTRUMENTS ACT,

1881
Asst.Prof
Syamili S Nair
Negotiable means transferable from one
person to another
INTRODUCTION
Instrument means any written document by

which a right is created in favor of some
person
“Negotiable instrument is a document by

which rights vested in a person can be
transferred to another person in accordance
with the provisions of the Negotiable
Instruments Act, 1881”.
INTRODUCTION
The Law in India relating to negotiable
instruments is contained in the Negotiable
Instruments Act, 1881.
This is an Act to define and amend the law

relating to Promissory Notes, Bills of
Exchange and Cheques
As per Section 13, a negotiable instrument

means a promissory note, bill of exchange
or cheque payable to order or to bearer
MEANING OF NEGOTIABLE
INSTRUMENTS
Negotiable Instruments is an
instrument (the word instrument
means a document) which is
freely transferable from one
person to another by delivery.
Essential Characteristics of
Negotiable Instruments
• It is necessarily in writing
• It should be signed
• It is free transferable from one person to another
• Holder’s title is free from defects
• Every negotiable instrument must contain either a
promise or order to pay money. Also, the promise or
order must be unconditional.
• The promise or order to pay must consist of money only.
Nothing be payable, whether in addition or in
substitution of money. Also, the sum payable must be
certain.
PROMISSORY NOTE
According to section 4 of the NI Act,

1881, “A “promissory note” is
• an instrument in writing
• containing an unconditional undertaking
• signed by the maker,
• to pay a certain sum of money only to.
• a certain person, or to the bearer of the
instrument.”
Entities involved
MAKER PAYEE
• The person who makes • The person who will
the promise to pay is get the money (the
called the Maker. creditor) is called
• He is the debtor and Payee.
must sign the
instrument.
Essential Characteristics of a Promissory
Note
In Writing
• An oral promise to pay is not sufficient
Express promise to pay

• There must be an express promise to pay. Mere
acknowledgment of debt is insufficient
Definite and Unconditional
• instruments payable on performance or non-performance of
a particular act or on the happening or non-happening of an
event, are not promissory notes.
Essential Characteristics of a
Promissory Note
Signed by the maker
• A promissory note must be signed by the maker otherwise it in
incomplete and ineffective
To pay money only

• A promise to pay B Rs. 500 and to deliver to him his black horse
on 1st January. – It is not a valid promissory note, as the
promisor needs to deliver its black horse which is not money
Certain sum
• I promise to pay B Rs. 500 and all other sums which shall be
due to him.”- Promissory note invalid as the amount payable is
not certain
Promissory Note
Stamping
• A promissory note must be properly
stamped in accordance with the
provisions of the Indian Stamp Act.
A “bill of exchange” is an instrument in
writing
containing an unconditional order,
BILLS OF signed by the maker,

EXCHAN
GE
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
Parties to the Bill of exchange
Drawer Drawee Payee

• The maker • The person • The person
of a bill of directed by named in
exchange. the drawer the
to pay is instrument,
called the directed to
'drawee'. be paid .
Essential characteristics of bill of
exchange
• It must be in writing
• Must contain an express order to pay
• The order to pay must be definite and
unconditional
• The drawer must sign the instrument
• Drawer, drawee and payee must be
certain.
• All these three parties may not
necessarily be three different persons.
One can play the role of two. But
there must be two distinct persons in
any case. .
• The sum must be certain
• The order must be to pay money only
• It must be stamped .
CHEQUE [SECTION 6]
A “cheque” is a bill drawn on a

of exchange specified banker
and not expressed

to be payable
otherwise than on
demand
Payable on demand means-
CHEQUE
It should be payable
[SECTIO
whenever the holder
N 6]
chooses to present it to the
drawee (the banker).
Parties to Cheque
Drawer Drawee Payee

The person who draws a The specific bank on whom The person named in the
cheque i.e. makes the cheque is drawn. He makes instrument (i.e. the person
cheque. (Debtor) the payment of the in whose favour cheque is
cheque. In case of cheque, issued), to whom or to
drawee is always banker whose order the money is,
by the instrument, directed
to be paid, is called the
payee.
cheque
According to the definition of cheque under section 6, a cheque
is a species of bill of exchange. Thus, it should fulfill:
All the essential characteristics of a bill of exchange
Must be drawn on a specified banker
It must be payable on demand
Cheque must be dated

SPECIMEN
SPECIMEN
SPECIMEN
CROSSING OF CHEQUES
There are two types

of cheques
• open cheques and
• crossed cheques
CROSSING OF CHEQUES
OPEN CHEQUE
• A cheque which can be presented to the
banker and can be paid at the counter of
the bank is called an open cheque.
• If the drawer loses an open cheque, the
finder of it may go to the bank and get
payment unless its payment has been
stopped
CROSSED CHEQUES
When a cheque bears across its face two parallel transverse lines,
the cheque is said to be crossed. The lines are usually drawn on the
left hand top corner, but may be drawn anywhere.
Crossing of a cheque means an instruction to the drawee i.e. the

paying bank that the payment is not to be made at the counter but
through a bank.
A crossing is a warning to the bank not to make payment of the

crosses cheque over the counter. Crossing operates as a caution to
the paying banker.
DISHONOR OF NEGOTIABLE
INSTRUMENTS
Dishonour of a bill
• A bill may be dishonoured by:
• (a) Non-acceptance, or
• (b) Non- payment.
Dishonour by Non-acceptance
• A bill of exchange is said to be dishonoured by non-
acceptance is any one of the following ways (Sec.
91):
• When the drawee either does not accept the bill within
forty-eight hours (exclusive of public holidays) of
presentment or refuse to accept it;
• When the drawee is incompetent to contract
Dishonour by non-payment
• A promissory note, bill of exchange and cheque is
said to be dishonoured by non-payment when the
maker of the note, acceptor of the bill or drawee of
the cheque makes default in payment upon being
duly required to pay the same (Sec. 92).
Dishonour of Cheque for insufficiency,
etc. of funds in the account
• As per section 138 of the Negotiable Instruments
Act 1881, where any cheque drawn by a person on
an account maintained by him with a banker for
payment is dishonoured due to insufficiency of
funds, he shall be punished with imprisonment for
a term which may extend to two years or with fine
which may extend to twice the amount of the
cheque or with both.
DISCHARGE OF NETOTIABLE
INSTRUMENT
The instrument is
discharged when rights
and obligations or claims of
all the parties are
extinguished
Discharge from liability on
Instruments
• The parties to the negotiable instrument may be
discharged in the following ways
• By cancellation
• By release
• By payment

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Module 3

NEGOTIABLE INSTRUMENTS ACT,

Instrument means any written document by

“Negotiable instrument is a document by

This is an Act to define and amend the law

As per Section 13, a negotiable instrument

According to section 4 of the NI Act,

Express promise to pay

To pay money only

containing an unconditional order,

BILLS OF signed by the maker,

only to, or to the order of a certain

Drawer Drawee Payee

A “cheque” is a bill drawn on a

and not expressed

Drawer Drawee Payee

All the essential characteristics of a bill of exchange

Must be drawn on a specified banker

It must be payable on demand

Cheque must be dated

There are two types

Crossing of a cheque means an instruction to the drawee i.e. the

A crossing is a warning to the bank not to make payment of the

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