Negotiable Instruments:

Definition: A negotiable instrument is a method of transferring a debt from one

person to another.The term “negotiable instrument” as such is notdefined in the
negotiable Instrument Act. Sec 13,however,says that ‘a negotiable instrument
means a promissory note ,bill of exchange or cheque payable either to order or to
bearer”.

Or

Definition of Negotiable Instrument

According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means
“promissory note, bill of exchange, or cheque, payable either to order or to bearer”.

Characteristics Of a negotiable Instrument:

1. Freely Transferable: The property in a negotiable instrument passes from one person to
another by delivery,if the instrument is payable to bearer ,and by indorsement and
delivery if it is payable to order.

2. Title of holder free from all defects: A person taking an instrument bonafide and for a
value ,known as a holder in due course,gets the instrument free from all defects in the
title of the transferor. He is not in any way affected by any defect in the title of the
transferor or of any prior party.

Example : A sells certain goods to B . B gives a promissory note to A for the price. He
refuses to pay the promissory note,claiming that the goods are not according to order. If A
sues B on the note ,B’s defence is good .But if he negotiates the note to C ,a holder in due
course, B’s defence will be of no avail.

The holder in due course is also not affected by certain defences which might be available
against previous holders, for example ,fraud,provided he himself is not a party to it.

3. Recovery: The holder in due course can sue upon a negotiable instrument in his own
name for the recovery of the amount.Further he need not give notice of transfer to the
party liable on instrumrent to pay.
Presumptions as to negotiable Instruments:
Presumptions: Certain presumptions apply to all negotiable instruments ,unless contrary is
proved. These presumptions are dealt within Secs. 118 and 119 and are as follows:

(a) Consideration: Every negotiable instrument is presumed to have been made , drawn,
accepted, indorsed, negotiated or transferred,for consideration. This would help a
holder to get a decree from a court without any difficulty.

(b) Date: Every negotiable instrument bearing a date is presumed to have been made or
drawn on such date.

(c) Time of acceptance: When a bill of exchange has been accepted ,it is presumed that it
was accepted within a reasonable time of its date and before its maturity.

(d) Time of transfer: Every transfer of a negotiable instrument is presumed to have been
made before its maturity.

(e) Order of indorsements: The indorsements appearing upon a negotiable instrument

are presumed to have been made in the order in which they appear thereon.

(f) Stamp: When an instrument has been lost, it is presumed that it was duly stamped.

(g) Holder presumed to be a holder in due course: Every holder of a negotiable

instrument is presumed to be a holder in due course (Sec. 118)

(h) Proof of protest: In a suit upon an instrument which has been dishonoured , the
court , on proof of the protest, presumes the fact of dishonor ,until such fact is
disproved (Sec. 119)
Cheque (Section 6)

Amending the Act in 2002 new definition of cheque is

“A cheque is a bill of exchange drawn on a specified banker and not expressed to

be payable otherwise then on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic form”

Meaning of

“a cheque in the electronic form” means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and singed in a secure
system ensuring the minimum safety standard with the use of digital signature
(with or without biometrics signature) and asymmetric crypto system.

“a truncated cheque” means a cheque which is truncated during the course of

clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substitution the further physical movement of the cheque in writing.

“Clearing house” means the clearing house managed by the Reserve Bank of
India or a clearing house recognized as such by the Reserve Bank of India
Essential characteristic features of a cheque:

• It is always drawn on a specified banker

• Always payable on demand
• It can be bearer, order or crossed
• It requires no acceptance in the ordinary course of business as it is intended
for immediate payment.
• Drawee is always a specified bank, drawer is the one who draws the cheque
and has account in the bank, payee is the one whom the amount of cheque is
made payable.
• Banker’s name must be honored the cheque by making payment to the
payee when cheque is presented for payment to the banker at his office
during the office hours, provided the cheque is properly and validly drawn
and the drawer has sufficient funds to this credit.
• Banks necessarily provide their costumers with printed cheques contained in
the cheque book duly numbered.
• The signature on the cheque must tally with the specimen signature of the
concerned drawer
• It must be dated. So as the payment is to be done after the dated day. A
cheque drawn in future is called “post dated cheque”.

Types of cheque

Bearer or open cheque:

On presentment to the bank at the counter, the amount of the bearer cheque is
paid to such person who presents the cheque.

Crossed cheque:

If a bearer cheque is lost or stolen, the owner of such cheque is put to loss as a
finder or any other person can cash it and hence cheques should be crossed. A
cross cheque is one which has two parallel lines drawn on the face of the cheque in
the left hand corner, the advantage of crossing the cheque is that it reduces the risk
of unauthorized person to get the payment of such cheque as a crossed is only
cashed through a bank of which the payee of the cheque is a customer.