Module 2

NEGOTIABLE INSTRUMENTS
 CONTENTS
Meaning, Functions, Types

Promissory Notes, Bills of Exchanges, Holder & Holder in due course

Inland instruments, Foreign instruments

Cheques, Kinds, Types, Marking, Material Alterations, MICR & Endorsement

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INTRODUCTION

INSTRUMENTS
MODERN DISCHARGE CUSTOMERS CAN ENCASH
USED
BUSINESS PAYMENT THE INSTRUMENT
BY BANK

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Negotiable Instrument
DEFINITION
“PROMISSORY NOTE, BILL OF
EXCHANGE OR CHEQUE PAYABLE
EITHER TO ORDER OR TO THE BEARER.”
- INDIAN NEGOTIABLE INSTRUMENT ACT,
1881

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 NEGOTIABLE INSTRUMENT

IT IS A DOCUMENT OR INSTRUMENT WHOSE PROPERTY(LEGAL RIGHT TO MONEY REPRESENTED BY

IT) CAN BE TRANSFERRED FROM ONE PERSON TO ANOTHER BY MERE DELIVERY OR BY

ENDORSEMENT AND DELIVERY, AND WHICH GIVES A VALID TITLE TO THE BONAFIDE HOLDER FOR

VALUE.

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CHARACTERISTICS OF NEGOTIABLE INSTRUMENT

FREE RIGHT OF
NEGOTIABILITY PRESUMPTIONS
TRANSFER ACTION

It is
Transfer
transferable Right to sue upon The acceptance
from
from one the instrument of the instrument
one person
person to of his name
to another
another
 PRESUMPTIONS
• Every negotiable instrument bearing a date was made and drawn on that date

• Every accepted bill of exchange was accepted within a reasonable time after its date

and before maturity.

• Every transfer of a negotiable instrument was made before its maturity

• The endorsement appearing on the negotiable were made in the order in which

they appear therein

• A lost or destroyed negotiable instrument was duly stamped and the stamp was

duly cancelled

• The holder of a negotiable instrument is a holder in due course.

• In a suit upon a dishonoured instrument, the court, on proof of protest, presumes

that it was dishonoured unless this fact is disproved.

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TYPES OF NEGOTIABLE INSTRUMENTS

INSTRUMENT NEGOTIABLE BY LAW

Promissory Bill of Cheque

Note Exchange

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TYPES OF NEGOTIABLE INSTRUMENTS

Instruments negotiable by custom or usage of trade.

Dividend Warrant Share Warrant

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Promissory Note
DEFINITION
NEGOTIABLE INSTRUMENT ACT “AN
INSTRUMENT IN WRITING (NOT BEING FROM A
BANK NOTE OR 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 TO THE BEARER OF THE
INSTRUMENT."

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FEATURES
•IT IS AN INSTRUMENT IN WRITING

•IT IS A PROMISE TO PAY

•THE UNDERTAKING TO PAY IS UNCONDITIONAL

•IT SHOULD BE SIGNED BY THE MAKER

•THE MAKER MUST BE CERTAIN

•THE PROMISE MUST BE TO PAY MONEY AND MONEY ONLY

•THE AMOUNT BE CERTAIN

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Bill of Exchange
DEFINITION
"NEGOTIABLE INSTRUMENTS ACT DEFINES “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.”

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 Drawer: the person who makes the bill and gives the order to pay a
certain sum of money.

Drawee: the person who is directed to pay a certain sum.

Payee: The person receiving payment is called the payee. It is the

drawer himself in the vast majority of the cases, but can be a
designated person too.

Acceptor: The person who accepts the bill. The drawee is normally the
acceptor but a third person can accept a bill on behalf of the drawee.

Bearer: the person who is in possession of a bill of exchange. He is

also called the holder. The bearer and the payee is usually the same
person.

Endorser: the person who endorses a bill of exchange.

Endorsee: the person in whose favour the bill of exchange is endorsed

and who receives it after endorsement. He becomes the new bearer
and payee after endorsement.
FEATURES
•IT MUST BE IN WRITING

•IT MUST BE SIGNED BY THE DRAWER

•THE DRAWER, DRAWEE AND PAYEE MUST ALSO BE CERTAIN

•THE SUM PAYABLE MUST ALSO BE CERTAIN

•IT SHOULD BE PROPERLY STAMPED

•IT MUST CONTAIN AN EXPRESS ORDER TO PAY MONEY ONLY

•THE ORDER MUST BE UNCONDITIONAL

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Cheques

DEFINITION
“A BILL OF EXCHANGE DRAWN ON A SPECIFIED BANKER AND NOT
EXPRESSED TO BE PAYABLE OTHERWISE THAN ON DEMAND AND
IT INCLUDES THE ELECTRONIC IMAGE OF A TRUNCATED CHEQUE
AND A CHEQUE IN THE ELECTRONIC FORM.”

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 MEANING

IT IS AN INSTRUMENT IN WRITING, CONTAINING AN UNCONDITIONAL ORDER, DRAWN ON A SPECIFIED

BANKER, SIGNED BY THE DRAWER, DIRECTING THE BANKER, TO PAY ON DEMAND, A CERTAIN SUM OF

MONEY ONLY, TO A CERTAIN PERSON OR TO HIS ORDER OR TO THE BEARER OF THE INSTRUMENT.

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Essentials of a Contract

A cheque must be in writing. Oral orders do not

constitute a cheque. But, the law has not
specified the writing materials with which a
cheque has to be written.

It must contain an order. This implies that the

cheque must contain an order to pay, and not to
request to pay

The order to pay must be unconditional. No

condition should be attached to the order. In
other words, the banker should not be ordered to
do anything else except to pay the money.

It must be drawn on a banker. It cannot be

drawn on any other person, except on the banker

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Essentials of a Contract

It must be drawn only by the customer of the

bank, i.e, only by the account holder

It must be signed by the drawer(Account Holder)

or his authorised holder. Rubber stamp signature
are not accepted by the bankers, though legally
permissible
The order must for the payment of money only.
The order must direct the banker to pay only
money and not any other thing

The order must be for the payment of certain

money. The amount of money ordered to be paid
must be certain
Essentials of a Contract

The amount fo the cheque must be made

payable otherwise than on demand

The amount of the cheque must be made

payable to a certain person or to his order or to
the bearer of the cheque.

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KINDS OF CHEQUES
BEARER CHEQUES
A Bearer Cheque Is One Payable To The Bearer Or The Possessor.

ORDER CHEQUES
AN Order Is A Cheque Which Is Payable To A Certain Person Or To His Order.

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CROSSING OF CHEQUES

WHO CAN
NEED MEANING OBJECT
CROSS

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CROSSING OF CHEQUES

WHO CAN
NEED MEANING OBJECT
CROSS

An Open, Or
Uncrossed Cheque
Payable Across The Crossing Of A Cheque Crossing Affords The Drawer Of A
Counter Of The Paying Means Drawing Security And
Cheque Ny Holder Can
Banker Lends To Cross An Uncrossed
Across The Face Of Protection To The True
Fraud By Cheque.The Banker In
The Cheque Two Owner, Since Payment
Unscrupulous Persons Whose Favour A
Parallel Transverse Of Such A Cheque
And Causes Loss Cheque Has Been
Lines With Or Without Has To Be Made Crossed Can Again
Either To The Words. Through A Banker. Cross It.
Consumer Or To The
Banker
TYPES OF CROSSING
A crossed cheque is a cheque that is payable only through a collecting banker and not directly at the
counter of the bank. Two parallel transverse lines, with or without any word, are generally drawn on the
top left-hand corner of the cheque.

GENERAL CROSSING
It Is Defined As “Where A Cheque Bears Across Its Face, An Addition Of The Words
“And Company” Or Any Abbreviation There Of Between Two Parallel Transverse Lines.”

SPECIAL CROSSING
It Is Defined As “Where A Cheque Bears Across Its Face An Addition Of The Name Of A
Banker With Or Without The Words “Not Negotiable”, That Addition Shall Be Demmed A
Crossing And The Cheque Shall Be Deemed To Be Crossed Specially And To Be
Crossed To That Banker

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 General Crossing

The Words “ And Company” Or Its

There Must Be Two Parallel Abbreviation “And Co.” Or “Co” Do Not
Lines Form A Necessary Part Of The General
Crossing

The Two Parallel Transverse

Words, Such As “Not
Lines Must Be On The Face Of
Negotiable” Or “Account Payee”
The Cheque.
Also Do Not Form

The Lines Are Generally Drawn The Paying Banker is required to

On The Left Hand Side. pay
 Special Crossing

The Paying Banker Is Required To Pay

The Amount Of A Specially Crossed
Two Parallel Transverse Lines Cheque Only To The Banker Named In
Are Not Required The Cheque Or His Agent For
Collection.

The Name Of The Collecting Banker

Must Be Necessarily Specified Across It Makes A Cheques Safer Than
The Face Of The Cheque, This Itself General Crossing
Constitutes Special Crossing

Words Such As “Not

The effect of special crossing is
Negotiable” Or “Account Payee”
that the bank makes payment
Also Do Not Form A Necessary
only to the banker whose name
Part Of Special Crossing
is written in the crossing.
OTHER TYPES
HOLDER
The Holder Of A Promissory Note, Bill Of
Exchange Or Cheque Means Any Person
Entitle In His Own Name To The Possession
Thereof And The Receive Or Recover The
Amount Due Thereon From Other Parties
Thereto.”

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Holder In Due Course
Holder In Due Course Means Any Person Who For Consideration Beame The Possessor
Of A Promissory Note, Bill Of Exchange Or Cheque If Payable To Bearer Ot The Payee Or
Endorsee Thereof If Payable To Order, Before The Amount Mentioned In It Became
Payable, And Without Having Sufficient Cause To Belive That Any Defect Existed In Th
Etitle Of The Person From Whom He Derived His Title.”

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INLAND INSTRUMENTS
According to Section 11 inland instrument means a promissory note bill of exchange, or cheque drawn
or Made in India and made payable in or drawn up on any person resident in India shall be Deemed to
be and inland instrument.

RULES
• Made Over Drawn In India And Also Made Payable In India
• Drawn In India Or A Person Resident In India

EXAMPLES
• A Promissory Note Made In Delhi And Payable In Bombay.
• A Bill Of Exchange Drawn In Delhi On A Person Resident In Bombay.

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INLAND INSTRUMENTS
FOREIGN INSTRUMENTS
According to Section 12 foreign instruments means any instrument which is not so drawn made or
made payable that it may be called and inland instrument shall be Deemed to be a foreign
instrument.Thus a foreign instrument is one which is not an inland instrument.

EXAMPLES
• A Promissory Note Made In India But Made Payable In England.
• A Promissory Note Made In England But Payable In India.
• A Bill Of Exchange Drawn In India And Payable In England.
• A Bill Of Exchange Drawn In England And Made Payable In India.

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FOREIGN INSTRUMENTS
 MARKING OF A CHEQUE
MARKING MEANS GIVING A CERTIFICATE BY THE BANKER TO A CHEQUE THAT IT IS GOOD FOR PAYMENT.

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Material Alterations
A Material Alteration Is An Alteration Which Alters(Changes)
Materially Or Substantially The Operation Of A Cheque, And
Thereby, The Rights And Liabilities Of The Parties Thereto.

Examples
• ALTERATION OF THE DATE, SUM PAYABLE OR PLACE OF PAYMENT OR THE NAME OF

THE PAYEE

• CHANGING AN ORDER CHEQUE INTO A BEARER CHEQUE

• CANCELLING THE CROSSING ON A CHEQUE

• CHANGING A SPECIALLY CROSSED CHEQUE INTO GENERALLY CROSSED CHEQUE.

• STRIKING OFF THE WORDS “NOT NEGOTIABLE” OR AN “ACCOUNT PAYEE” FROM A

GENERAL OR SPECIAL CROSSING

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Not Material Alterations
Changing A Bearer Cheque Into A Bearer
Cheque

Changing An Open Or Uncrossed Cheque Into

A Crossed Cheque

Changing A Generally Crossed Cheque Into A

Specially Crossed Cheque

Adding The Words “Not Negotiable” Or

“Account Payee” To A General Or To A Special
Crossing.

Completing An Incomplete Cheque By Filling

Up The Blanks.

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MICR Technology
MICR TECHNOLOGY- MAGNETIC INK CHARACTER RECOGNITION
This Was Introduced By Reserve Bank Of India For Speeding Up The Cheque Clearing Process.

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Endorsement
Endorsement of a cheque means signing ones name either on the back of a cheque or on its face or on
a slip of paper called the allonge for the purpose of transferring the interest, right, property or title in the
cheque to another person. The person who endorses the cheque is called the endorser of the cheque
and the person to whom the cheque is endorsed is called the endorsee of the cheque

1. BLANK OR GENERAL ENDORSEMENT

2. FULL OR SPECIAL ENDORSEMENT
3. RESTRICTIVE ENDORSEMENT
4. SANS RECOURSE ENDORSEMENT
5. CONDITIONAL OR QUALIFIED ENDORSEMENT
6. FACULTATIVE ENDORSEMENT
7. SANSFRAIS ENDORSEMENT

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Blank or General
A blank endorsement is an endorsement in which the endorser merely signs his name on the back of
the instrument without mentioning the name of the person to whom the instrument is endorsed. When an
instrument is endorsed in blank, it becomes a bearer instrument, even if it was originally made payable
to order. It can be negotiated further by mere delivery.

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Full or Special
It is an endorsement in which the endorser writes not only his name, but also the name of the person to
whom the instrument is endorsed on the back of the instrument. It can be negotiated further only by the
endorsee named in the endorsement.

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Restrictive
It is an endorsement in which the endorser restricts the further negotiation i.e transferability of the
instrument by expressed words or constitutes the endorsee just an agent to endorse the instrument or to
receive its contents for the endorser or some other specified person. The endorsee cannot negotiate the
instrument further as his right to negotiate the instrument further is restricted.

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Sans Recourse
Generally, when an instrument is endorsed, the endorser undertakes to compensate the endorsee in
case the instrument is dishonoured. But in case of a sans recourse endorsement, the endorser frees
himself from such a liability by writing the words “Sans recourse” or “Without recourse to me” after
writing the name of the endorsee. The endorsee cannot look to the endorser for payment, in case the
instrument is dishonoured.

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Conditional or Qualified
It is an endorsement in which the endorser makes his liability on the instrument or the right of the
endorsee to receive the payment of the instrument depends upon the happening of a specified event.
The endorser becomes liable or the property in the instrument will pass to the endorsee only if the
specified event takes place or if the particular condition is fulfilled

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Facultative
Generally, the endorser of an instrument is entitled to receive a notice of dishonour from the holder in case
of dishonour of the instrument, if he is to be held liable on the instrument. If he is not served with the notice
of dishonour, he will not be liable to the holder. But, when an instrument bears a facultative endorsement,
the endorser will be liable on the instrument in case of dishonour even if he is not given any notice of
dishonour. Through facultative endorsement, the endorser waives or surrenders his right to receive the
notice of dishonour by writing the words “Notice of dishonour Waived”, after writing the name of the
endorsee.

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Sans Frais
It is an endorsement in which, the endorser makes it clear that no one should incur any expense on his
account in respect of the negotiable instrument by writing the words “Sans Frais” which means ‘without
expense

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