NEGOTIABLE INSTRUMENTS ACT

OF 1881

Prof. (CS) Monica Suri

Fellow Member of the Institute of
Company Secretaries of India
 NEGOTIABLE INSTRUMENTS ACT,
1881

Negotiable Instrument means any

document transferable from one person
to another.
• Definition
• Section 13 states negotiable instrument means:
• “ promissory note or bill of exchange or
cheque payable to order or the bearer whether
the words oredr or bearer appear on the
instrument or not.”
• Negotiable Instrument means any document
transferable from one person to another.
• Essential features of negotiable
instrument:
1. Free transferability
2. Offer better title to the transferee.
3. Holder in due course is the owner.
4. Holder in due course can file recovery
on suits
5. The instrument is transferable till
maturity
 TYPES OF NEGOTIABLE
INSTRUMENTS

• PROMISSORY • BILLS OF • CHEQUES

NOTES EXCHANGE
• DISHONOUR
• SECTION 4 • SECTION 5 UNDER SEC
138
• *PROMISSORY NOTES…… SECTION 4

• “Instrument in writing containing unconditional

undertaking signed by the maker to pay a
certain sum of money to or to the order of a
certain person or to only the bearer of the
instrument”

• Parties : Maker, payee, holder,

endorser, endorsee.
• Essentials of Promissory note:
1. Instrument in writing
2. Undertaking to pay
3. The undertaking to pay is unconditional.
4. It must be signed by the maker.
5. Amount payable must be certain and in
money form.
6. The payee must be certain.
7. Must be duly stamped as per the Stamp
Act.
• LETS TEST OUR UNDERSTANDING
 IS IT PN ?

• Q1. I OWE YOU RS. 50000 RUPEES

TO BE PAID BY END OF NEXT MONTH

• Q2. I PROMISE TO PAY RS. 1 LAC IF

YOU MAKE ME A JOINT OWNER IN
COMPANY HOLDINGS.
 BILLS OF EXCHANGE
…SECTION 5

• IS AN INSTRUMENT IN WRITING
UNCONDITIONAL ORDER SIGNED BY THE
MAKER DIRECTING A CERTAIN PERSON TO
PAY A CERTAIN SUM OF MONEY ONLY TO
OR THE ORDER OF CERTAIN SUM OR TO THE
BEARER OF THE INSTRUMENT.

• Parties: Drawer, Drawee, Acceptor, payee, holder,

endorser, endorsee, drawee, acceptor
• Essentials of Bills of Exchange
1. It must be in writing
2. It must be an order to pay
3. The order to pay must be unconditional
4. It must be signed by the drawer.
5. The parties to the bill must be certain.
6. The oder to pay must be in money.
7. The formalities like date , stamp and
others should be there
SPECIMEN OF B/E
• FORMS OF BILL OF EXCHANGE
Inland Bill
Foreign Bill
Trade Bill
Accomodation Bill
Bank Draft
 Negotiation and
Endorsement
• Negotiation is a process of transfering
from one person to another ( first hand
transfer). Thus also confirms the right of
the owner to bring a legal suit if necessary.
• Indorsement ( endorsement) means
writing of the persons name on the back of
the instrument for the purpose of
negotiation.The person who signs is
endorser, who recives is called endorsee.
NEGOTIATION BY ENDORSEMENT AND DELIVERY

Types:

-BLANK OR GENERAL: SIGNS OR WRITES AT THE BACK

PAYABLE TO BEARER.

-SPECIAL OR FULL: ORDERED TO SPECIFIC PERSON

-RESTRICTIVE : PROHIBITS OR RESTRICTS FURTHER

NEGOTIATION OF INSTRUMENTS.

-PARTIAL : ENDORSEMENT OF HALF OF THE AMOUNT

-CONDITIONAL OR QUALIFIED : CONDITIONS STIPULATED

CHEQUE
A cheque is a bill of exchange drawn on a specified banker
and not expressed to be paid otherwise than on
demand.

-It is a B/E with two additional features:

-Always drawn on a banker.
-Always payable on demand.

A cheque could be open cheque( payable across counter ) or

closed cheque ( named with two parallel lines.)
TYPES OF CROSSINGS
General Crossing-
shown by two parallel lines
Special Crossings-
• mentions name of the banker on the face of
cheque
• Not negotiable may or may not be written.
Restrictive Crossings-
• Adopted for commercial or banking usage.
 Section 138
• Section 138 of the act talks about punishment for
dishonoring of cheques.

• Section 138 was introduced as a criminal offence in

1989 by way of an amendment to the Negotiable
Instruments Act, 1881.
• The main objective of introduction of this section was to
encourage the use of cheques and increasing the
credibility of transactions through cheques by making
the dishonoring of the cheques as an offence.
• Section 138 provides that when the
cheque is dishonored for insufficiency of
funds or for any of the prescribed reasons,
the one who is at defaulter can 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 both. This is also
a non-cognizable offence.
•
• LETS TEST OUR UNDERSTANDING
• Q1. What is endorsement of Instrument
• Q2. Any one difference between Bills of
Exchange and PN.
• Q3. What does Section 138 state ?