CHAPTER 4:-NEGOTIABLE INSTRUMENTS

Negotiable instrument is a document which is transferrable by mere delivery or by endorsement and

delivery and which entitles holders for value to the sum of money specified Theron.
Definition : According to section 13 of the negotiable instruments Act, “A negotiable instrument
means a promissory note, bill of exchange or cheque payable either to order or to bearer.”
Features:
1. Negotiability: they are transferable from one person to another without any formality. The
property in these instruments passes by both endorsement and delivery.
2. Better title to a bonafide transferee for value: the person who gets a negotiable instrument
for value and in good faith and becomes the holder in due-course and gets the better title
than that of other holders.
3. Right of action in his own name: the holder in due course of a negotiable instrument gets
the right to sue upon the instrument in his own name. he can sue the transferor or any
other person liable on the instrument in his own name without giving him any notice.
4. Transfer: A negotiable instrument can be transferred any number of times, till its maturity.
5. Unconditional promise or order: The maker or drawer of the instrument promises or orders
unconditionally without imposing any condition for the fulfillment of his promise or order.
6. Sum certain: the promise or order under a negotiable instrument is always for a sum
certain.
7. Principle of privity of contract not applicable: the principle of privity of contract states that
only a person to a contract may sue upon it. This principle does not apply to a negotiable
instrument.

Presumptions:
1. Consideration: every N.I is made, drawn, accepted, endorsed, negotiated or transferred for
consideration.
2. Date: every N.I bearing date is made or drawn on that date.
3. Time of acceptance: every bill of exchange is accepted within a reasonable time after its date
and before its maturity.
4. Order of endorsement: the endorsements appearing on a negotiable instrument are made in
the order in which they appear therein.
5. Stamp: A lost or destroyed N.I is duly stamped, and the stamp is duly cancelled.
6. Holder is a holder in due course: the holder of the N.I is a holder in due course.

Types
1. Bills of exchange
2. Promissory notes
3. Cheques

1. BILLS OF EXCHANGE:
It is an instrument in writing, containing an unconditional order, signed by the maker, directing
a certain person to pay on demand or at fixed or determinable future time, a certain sum of
money only, to or to the order of certain person, or to the bearer of instrument.
Definition: section 5 of the N.I act defines a Bill of exchange as” 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.”
Essentials:
 It must be in writing
 It must be an order to pay
 The order must be unconditional
 The order must be signed by the maker
 The order must be directed to certain person who must be named
  The order must be for the payment of money only
 The money payable must be certain
 It must be payable on demand or after certain date

Specimen
Mangalore
15-3-2018
Stamp
RS.2,000
Three months after date, pay Mr.Madhav or order the sum of Rupees
two thousand only for value received.

To
Mr.Ashwin
Bunder. Viraj
Mangalore

2. PROMISSORY NOTE:
It is an instrument in writing, 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.
Section 4 defines promisory note as” 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 to the bearer of the
instrument.”

Specimen:

Mangalore
15-3-2018

On demand or Three months after date,I l promise to pay Mr.Madhav

or order the sum of Rupees two thousand only with interest at 5% per
annum for value received.

RS.2,000
Stamp
Viraj

3. CHEQUES:
Definition: according to section 5 “A cheque is a bill of exchange drawn on a specified banker
and not expressed to be payable otherwise than on demand.”
 Features:
1. It must be in writing
2. It must contain an order to pay and not a request to pay
3. The order must be unconditional
4. It must be drawn on a banker
5. It must be drawn on specified banker where the drawer has account
6. It must be drawn only by customer of the bank
7. It must be signed by the drawer
8. The order must be for the payment of money only
9. The order must be for the payment of certain sum of money
10. The amount must be payable in demand

CROSSING OF CHEQUES:
It means drawing across the face of the cheque two parallel lines with or without the words “AND
COMPANY” or “ACCOUNT PAYEE” between two parallel lines.
The drawer, the holder or even banker can cross the cheque if it is not done the former parties

Types of crossing:
1. General crossing: It means drawing across the face of a cheque two parallel transverse lines
with or without the words “ACCOUNT PAYEE” between two parallel lines.

2. Special crossing: It means writing across the face of a cheque the name of some banker with or
without lines or words such as account payee.

3. Not negotiable crossing: It means a crossed cheque with the words NOT NEGOTIABLE written
between the two parallel lines on the cheque

4. Account payee crossing: it is a crossed cheque with the words ACCOUNT PAYEE, PAYEE'S
ACCOUNT written between two parallel lines on the cheque.
 5. Double crossing: It means crossing a cheque specially to more than one banker. The payment
on such cheque is restricted According to the INDIAN NEGOTIABLE INSTRUMENTS ACT 1881

DISHONOUR OF CHEQUES:
A cheque can be dishonoured when it is not particularly d by the paying banker on presentation under
certain circumstances.

Reason or circumstances for dishonour of cheques:

1. When the cheque is conditional one. If the drawer attached condition to the cheque.
2. When the banker receives the notice from the holder of cheque about the loss of the cheque
3. On receipt of notice of drawer's death.
4. When the banker receives the notice of the drawer’s insolvency.
5. On receipt of the notice of drawer’s insanity.

According to section 138 of negotiable instruments Act 1881 drawing cheque by customer without
having sufficient funds in his account will become a criminal case if the following conditions are
satisfied
 The cheque is issued to settle the debt or for consideration and not as a gift
 The cheque is presented for payment before the 6 months from date of its issue
 Cheque so dishonoured only because insufficient funds in customer’s account
 The drawer failed to make payment within 15 days of receipt of notice from payee.

Differences between cheque and Bill of exchange

Point of difference Cheque Bill of exchange
1. Drawee A cheque is always drawn on a A bill may be drawn on any person
banker including a banker
2. Acceptance A cheque does not require A bill must be accepted by the
acceptance by the drawee before drawee before he can be made
the demand of payment. liable to pay upon it.
3. Payment A cheque is always drawn payable A bill can be payable either on
on demand demand or after the expiry of a
certain period after date or sight.
4. Days of grace A cheque is payable immediately on A bill of exchange is entitled to a
demand without any days of grace. grace days of three days.
5. Payable to A cheque can drawn payable to A bill payable to bearer is
bearer on bearer on demand. absolutely void and illegal U/S 31
demand of RBI act 1934.
6. Notice of No notice of dishonor is required. Notice of dishonor to be given to
dishonor: all parties liable under it.
7. Noting and It is not required to be noted or It must be noted and protested for
protest protested for dishonor. dishonor
8. Countermandin A drawer may countermand(cancel) A drawer cannot countermand its
g the payment its payment payment
9. Crossing A cheque may be crossed A bill cannot be crossed
10. Stamp It does not require any stamp to be A bill must be properly stamped
affixed thereupon. under the provisions of the Indian
stamps act,1899.
11. Use Is generally used for inland It may be used both for inland or
payments foreign payments.

Differences between promissory note and bill of exchange

Point of difference Promissory note Bill of exchange

 1. Number of There are only two parties There are three parties-
parties: –maker and payee drawer, drawee and payee.
2. Promise and there is an unconditional There is an unconditional
order to pay ‘promise to pay ’to the ‘order to pay’ to the payee
payee or his order. or his order.
3. Acceptance It does not require any It must be presented to the
acceptance drawee for its acceptance
4. Notice of There is no need to give Notice must be given to all
dishonor notice of dishonor the parties to it and make
them liable.
5. Payable to It cannot be drawn ‘payable Can be made payable to
bearer to bearer’ bearer
6. Copies Only one set of copy Are drawn in three sets
7. Protest No protest is required Must be protested for
dishonor

Intellectual property rights

Intellectual property is defined as “ creations of mind, inventions literary artistic works, and symbols,
names, images, and designs used in commerce.”
Intellectual property rights are the rights on the intellectual property given to the creator/inventors for
a limited period of time .
Advantages of protecting intellectual property rights:
1) It contributes to healthy competition by promoting patents, trademarks and copyrights.
2) It controls piracy.
3) It encourages creativity and quality products and services.
4) It encourages innovation which in turn, increase the range of products and services.
5) Increase in innovations increase the scope of employment opportunities in the country.
6) It provides security to the inventors and encourages them to invest their money, time and
labour on inventions.
7) It promotes technological advancement, which makes human life easier.

Types of intellectual property

1) Trade mark: A trade mark is a recognizable name, word, figure, design, logo, symbol or
expression adopted by a manufacturer. The trademarks are protected by the intellectual
property rights. The Indian trade Marks act 1999 regulates the trademarks in India.
Functions:
a) It identifies the product and its origin
b) It proposes to guarantee its quality.
c) It advertises the product.
d) It creates an image of the product in the minds of the public.
Registration: registration of trademark can be obtained for words, logo, numerals, slogan, device and
more in India. The registration is not mandatory in India. Registration of trademark gives legal right. It
gives protection for 10 years at low cost.
2) Patent: A Patent is the right which confers an exclusive right or privilege on the inventor of a
new thing or a new process of manufacture for a term of years to use or sell his invention.
Purpose /need of patent:
a) To encourage research and promote the inventions.
 b) To give protection to the inventors
c) Recognition for creativity and inventions.
d) It provides a strong market position.
e) It gives an opportunity to license or sell the invention.
f) To maintain flow of inventions.
g) To provide positive image for the enterprise.
Term of patent: the term of patent is extended from a term of 14 years to 20 years.
3) Copyrights: copyright means exclusive right of artists, authors, producers of films to do or
authorize the doing of certain creative acts by the use of their artistic skills. It protects the
writer or creator of the original work from the unauthorized reproduction or exploitation of his
materials. Literary, dramatic musical or artistic works enjoy copyright protection for lifetime of
the author plus 60 years.
4) Industrial design: industrial design refer to aesthetic, novel and original creations affecting the
appearance of industrial products. The industrial design recognizes the creation of new and
original features of new shape, configuration, ornamentations and composition of lines or
colors applied to articles which in the finished state appeal to and are judged solely by the eye.
A design is valid for an initial period of 10 years from the period of registration with a further
extension of 5 years.
Essentials of design:
a) It must be applied to an article.
b) The design should be new or original.
c) It should not be published before or used in any country.
d) A design must have an eye appeal.
5) Geographical indications: it is defined as an indication or name used to identify the goods
whether natural or manufactured goods emanating from a particular geographical area or
territory. For eg: Basmati Rice, Banaras silks, Darjeeling tea etc…
6) Trade secret: it is a valuable information that provides a business man with an advantage over
his competitors who do not have that information. It includes ideas, concepts, inventions,
processes and other confidential information.
7) Plant variety rights: are also known as plant breeders , rights are intellectual property rights
granted to the breeders of new varieties of plants. These rights grant the plant breeder control
of the propagation material (seed, cuttings, divisions , tissue) and harvested material ( cut
flower, fruits, foliage) of a new variety and the right to collect royalties for a number of years.