Negotiable

Instruments Act,
1881
 Introduction
The word negotiable means “transferable from one person to another
in return for consideration” and
instrument means “ written document by which a right is created in
favour of some person”.
Thus, a negotiable instrument is a document which can be used to
secure the payment of money.
Instances of negotiable instruments are bill of exchange (Sec.5),
promissory notes (Sec.4), cheques (Sec.6), etc.
 The Negotiable Instruments Act came into force on March 01, 1882.
 Meaning and definition of
negotiable instruments
According to Sec. 13 of the Negotiable Instrument Act, 1881 “a
negotiable instruments means a promissory note, bill of exchange, or
cheque, payable either to order or to bearer”.
The term negotiability is not mere assignability. It is something, more
than assignability. ‘assignability or transferability’ of a thing is simple
delivery without any other formality like writing, stamping, etc.
The Negotiable Instruments Act came into force on March 01, 1882.
Cheque is also kind of Bills of Exchange
 Characteristics of a
negotiable instrument
1. It is a contract to pay money.
2. It is freely transferable either by delivery or by endorsement and delivery.
3. It can be transferred ad infinitum till maturity.
4. The transferor need not give any notice of transfer to the person liable to pay
the instrument.
5. It possesses the quality of negotiability.
6. Transferee can use it in his own name.
7. It is good as cash because cash can be obtained at any time paying a small
commission.
8. It is capable of proof as it has got special rules of evidence.
 Negotiation
Negotiation is the transfer of an instrument from one person to another
in such a manner so as to convey the title and constitute the transferee
the holder thereof.
According to Sec. 14 of the Act “when a promissory note, bill of
exchange or cheque is transferred to any person, so as to constitute that
person the holder thereof, the instrument is said to be negotiated”.

Negotiation can be done by two ways:

◦ By Delivery
◦ By Endorsement
 Negotiable by mere delivery
A bill or cheque payable to the bearer is negotiated by mere delivery of
the instrument. In such a case no endorsement is necessary.
An instrument is payable to the bearer:
i) Where it is made so payable, or
ii) Where it is originally made payable to order but the only or the
last endorsement is in blank.
iii) Where the payee is a fictitious or a non- existing person.

Example: Bearer Instruments i.e. without specific names of Payee -

CHEQUE
 Negotiable by endorsement and
delivery (Sec. 48)
An instrument payable to order can be negotiated only by endorsement
and delivery. Unless the holder signs his endorsement on the instrument,
the transferee does not become a holder.
Condition must be fulfilled:
 Instrument must be in written form
 Instrument must be signed by the Holder

Example: Order Instruments i.e. with specific names of Payee

 Negotiable by endorsement:
Types
 General OR Blank
 Without name of Payee but always signed by the Holder.
 Special OR Full
 Both name of Payee and signature of Holder are available.
 Restrictive Endorsement
 Ex: Pay to Mr. X only.
Further endorsement is not possible.
 Partial Endorsement/ Illegal Endorsement
 Conditional Endorsement
 SANS RECOURSE means without any risk
Eg: Pay to Mr. Y Sans Recourse.
 Holder (Sec.8)
A holder is the person who is entitled to hold a negotiable instrument. As
per the Indian law, every person who is in the possession of the
instrument can not be called a holder.
To be a holder, the person must be named in the instrument as the
payee, or the endorsee, or he must be the bearer thereof.
 Holder in Due Course
(Sec.9)
A holder in due course is the person who actually possesses the
instrument.
He should obtain the possession of the instrument in good faith, that too
in payment of value before the maturity of the instrument.
The forms in which an Instrument must be Payable so as to
Constitute a Negotiable Instrument

(i) Pay A;
(ii) Pay A or order;
(iii) Pay to the order of A;
(iv) Pay A and B;
(v) Pay A or B;
(vi) Pay A or bearer;
(vii) Pay bearer.
Types of NI’s
A. On the basis of Location
 Inland Instruments
 Foreign Instruments
B. On the basis of Payee
 Bearer Instruments
 Order Instruments
C. On the basis of Payment
 Demand Instruments
 Time Instruments
D. On the basis of Validity
 Inchoate Instruments
 Ambiguous Instruments
Inland Instruments
 Defined in Sec. 11
 Which is made & drawn in India AND (Drawn on the person resident of India OR Payable
in India)
Foreign Instruments
 Defined in Sec. 12
 Which is not an Inland Instrument.
Bearer Instruments
Which has no name of Payee but signed by Holder.
Eg: Cheque for SELF; Cheque without name of Payee
Order Instruments
Which has specific name
Inchoate Instruments: Incomplete instruments
Ambiguous Instruments: Not Clear, with ambiguity, Either BOE or Promissory Note
Eg: demand Draft (bcs it has features of both BOE and Promissory Note)
Promissory Note
A promissory note is an instrument in writing (not being a bank or a
currency note)
containing an unconditional undertaking,
signed by the maker to pay a certain sum of money to (or to the order
of), a certain person or to the bearer of the instrument.
 Illustrations
Sixty days after the due, I promise to pay Mr. Z or
Order the sum of rupees forty thousand only.
Essentials of a Promissory Note
1. Promissory must be in writing (includes print and typewriting) and
also signed by the maker.
2. It must contain an undertaking or promise to pay. A mere
acknowledgment of indebtedness is not sufficient.
Also, a receipt for money, if it does not contain an express promise to
pay is not a promissory note.
But if the receipt is coupled with a promise to pay, it shall be promissory
note.
Example: “We have received a sum of ` 9,000 from Shri R.R. Sharma.
This amount will be repaid on demand. We have received this amount
in cash.”
Essentials of a Promissory Note
3. The promise to pay must not be conditional.
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.
Examples:
(a) A promises to pay B ` 500 provided C leaves sufficient money in
favour of A after C’s death. It is not a promissory note.
(b) A promises to pay B ` 5000 seven days after his marriage with C. It is
not a promissory note.
Essentials of a Promissory Note
4. The instrument must point out with certainty the maker and the payee
of the promissory note,
e.g., son of……. resident of……, etc.
The identification of payee by description does not invalidate the
promissory note.
For example, the note drawn payable to the ‘General Manager of HDFC Ltd.’
5. A promise to pay money only and certain sum of money
6. It may be payable in installments
7. It may be payable on demand or after a definite period.
8. It cannot be made payable to bearer no matter whether it is payable on
demand or after a certain time.
Essentials of a Promissory Note
9. It must be duly stamped under the Indian Stamp Act.
stamps of the requisite amount must have been affixed on the
instrument and duly cancelled either before or at the time of its
execution.
10. A promissory note which is not so stamped is a nullity.
11. It cannot be crossed unlike a cheque
12. Regulated by RBI
13. No Promissory can be Bearer as per RBI Act.
Specimen of a Promissory Note
Rs. 10,000 New Delhi - 1100 01
Jan. 10, 2006
On demand [or six months after date] I promise to pay X or order the
sum of rupees ten thousand with interest at 12 per cent per annum only
for value received.
To X Sd/-A
Address……………....................... Stamp
Parties to a Promissory Note
Maker: person who makes the note promising to pay the amount stated
therein.
Payee: person to whom the amount of the note is payable.
Holder: It is either the original payee or any other person in whose
favour the note has been endorsed.
Endorser: person who endorses the note in favour of another person.
Endorsee: person in whose favour the note is negotiated by
endorsement.
 Bill of Exchange
‘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’.
 Features of a Bill of Exchange
It must be in writing. It has grace period of 3 Days.
It must contain an order to pay and not a promise or request.
◦ Words, like ‘Please pay ` 10,000 to A on demand and oblige,’ do not constitute the
instrument a bill of exchange.
The order must be unconditional.
There must be three parties, viz., drawer, drawee and payee.
However, one person may assume the role of two parties, e.g., a person may
draw a bill of exchange in his own favour, i.e., he may be drawer as well as a
payee.
He cannot, however, be a drawer as well as a drawee because that will render
that instrument a promissory note.
 Parties to a Bill of Exchange
(i) The drawer - the person to whom the amount of the bill is payable, who writes
the Bill
(ii) The drawee – the person on whom the bill is drawn.
Thus, drawee is the person responsible for acceptance and payment of the bill. In
certain cases however a stranger may accept the bill on behalf of the drawee.
(iii) The payee - the person to whom amount of the bill is payable.
It may be the drawer himself or any other person (such as Creditor of Drawer).
(iv) The holder - is the original payee but where the bill has been endorsed, the
endorsee. In case of a bearer bill, the bearer or possessor is the holder.
(v) The endorser - is the person who endorses a bill.
(vi) The endorsee - is the person to whom the bill is negotiated by endorsement.
 Sample Bill Of Exchange
` 10, 000 New Delhi - 110 016
Jan. 13, 2006
Six months after date pay to A or order/bearer the sum of ten thousand rupees only for value
received.
To X Sd/-Y
Address ………….................................................... Stamp
……………………………………………………………...

Here Y is the drawer, A is the payee and X is the drawee. X will express
his willingness to Notes pay ‘accepting’ the bill by writing words
somewhat as below across the face of the bill:
The specimen given above is of a usance bill, payable after a specified
period of time. A bill of exchange may be drawn payable ‘at sight’, i.e., on
demand or payable ‘after certain time after sight’ also.
ACCEPTED

Sd-X
Jan. 16, 2006.
Differences between Promissory
Note and Bill of Exchange
 Negotiation Vs Assignment
Negotiation requires delivery only to
constitute a transfer.
Consideration is always presumed in the
case of transfer by negotiation.
Notice of transfer is not necessary.
In case of negotiation a transferee can
sue the third party in his own name
In case of negotiation the transferee takes
the instrument free from all the defects in
the title of the transferor.
Assignment requires a written
document signed by the transferor.
In the case of assignment
consideration must be proved.
Assignment notice of the transfer
must be given by the assignee to the
debtor in order to complete his title.
An assignee cannot do so.
The assignee takes the instrument
subject to all the defects in the title
of the transferor. If the title of the
assignor was defective the title of
the assignee is also defective.
 Fraud Case – False Information
“I didn’t receive the products. The supplier said the goods were detained in the Customs Office because
Customs didn’t find the original invoice attached to the goods. The supplier explained that it’s his
company’s policy was to issue original invoices only when quantities are above 5 units.
He told me to pay for another 2 units for another $150 USD, but I have refused. I paid by Western Union.
He registered on your website as a US company, but actually it is Chinese Company. All his information is
fraudulent. His is a fraudulent company!”
If you think their price is very attractive and want to deal with them, it is very necessary for you to verify
that they are legitimate company and their contact information is correct. In this case, the fraudster is
pretending to be a US company, but all his registered information is false. This can be judged easily by
calling his company telephone number or by searching the company name on related state government
websites.
Western Union is a dangerous payment method, it can be picked up anywhere in the recipient’s country,
with no way of tracing the person who picked it up. The criminal remains anonymous. So it is a commonly
used payment method for con-artists. So try to avoid adopting this payment method and consider other
more secure payment methods like escrow.
Questions
1. What would you understand if the seller requests you to send payment to another country instead of
his registered country showed on the website?
2. What would be the protection available to the seller of the goods in this scenario?
3. Analyse the ways in which a person can find out that whether the company is fraudulent.
 Kinds of Bills
Inland bill:
(a) must be drawn or made in India and made payable in India,
Examples: A of Delhi draws a bill on B of Mumbai payable at Kolkata.
(b) must be drawn in India upon a person resident in India although it
may be payable outside India.
Eg: A of Mumbai draws a bill on B of Delhi payable at Yorkshire (U.K.).
 Kinds of Bills
Foreign bills
(a) drawn in India upon a person resident outside India and made
payable outside India
Eg: X of Mumbai draws a bill of exchange on Y of London payable at
London.
(b) drawn outside India and payable in India.
Eg: A of London draws a bill of exchange on B of Delhi payable at
Mumbai.
 Kinds of Bills
Trade and accommodation bills:
◦ A trade bill is a bill of exchange issued in respect of a genuine trade
transaction.
◦ Such bills are drawn by the seller on the buyer in respect of payment of the
price of the goods sold and purchased.
Accommodation bill:
◦ X may be in need of money and approaches his friend Y who instead of
lending money directly, accepts a bill exchange, say for ` 5,000, drawn by X
on Y.
Time bills (usance bills):
◦ bills payable at a fixed period after date or sight of the bills.
◦ bill of exchange drawn payable at 3 months after the date it is drawn is a
time or usance bill.
◦ bill drawn payable at 90 days after sight is again a time or usance bill.
 Kinds of Bills
Demand bills: ‘on demand’ or ‘at sight’ or ‘on presentation’
Clean and documentary bills:
◦ It is a common practice in home as well as foreign trade to deliver to
the banker along with the bills of exchange, the documents to title to
the goods (for example, Lorry Receipt, Railway Receipt or Bill of
Lading).
◦ Where the banker is instructed to deliver to the drawee of the bill
the documents of title against acceptance of the bill, the bill is called
as Documents against Acceptance of Bill (D/A Bill),
◦ Where the documents are to be released only against payment, it is
called as Documents against Payment of Bill (D/P Bill.)
◦ Where no documents of title to goods are enclosed to the bill, it is
called a clean bill.
 Noting and Protest

Dishonour of Promissory Note & Bills of Exchange (by non-acceptance

or non-payment)

The Holder may cause such dishonour to be noted & certified by a

Notary Public upon the instrument, or upon a paper attached thereto,
or partly upon each, within a reasonable time after dishonour and must
specify the date of the dishonour with reasons. Such certificate is called
a Protest.
 Cheques

A cheque, in essence, is an order by the customer of the bank directing his banker
to pay on demand, the specified amount, to or to the order of the person named
therein or to the bearer.

Sec. 6 of the negotiable instruments Act defines “ a bill of exchange drawn on a

specified banker payable on demand”.

A cheque is a species of a bill of exchange but it has two additional qualifications,

i.e.
a. It is always drawn on a specified banker, and
b. It is always payable on demand.
Parties to a Cheque
There are three parties to a cheque:
1. Drawer (Depositor)
 Who writes the cheque or who draws the cheque
2. Drawee (Banker)
 Bank
3. Payee:
 Who will receive money from the Cheque
Contd..
Dating of a cheque:
Before issuing a cheque, the drawer should put the date on the cheque.
The banker may return the cheque unpaid unless it is dated.

Ante- dated cheque:

When a cheque bears a date earlier than the date of issue, it is known
as ante- dated cheque.
Contd..
Post-dated cheque:
When a cheque bears a date subsequent to the date of issue, it is known as
post- dated cheque.

Stale cheque:
A cheque which has been in circulation for more than three months from
the date of issue.

Maturity Period of Cheque = 3 Months (Fixed by RBI)

No Grace Days available
Cheque can be also negotiated.
Specimen of a Cheque
Requisites of a Cheque
Written instrument
Unconditional order: Pay not Please pay
On a specified banker only
A certain sum of money
Payee to be certain
Payable on demand
Amount of the cheque
Dating of cheques
 Cheque Types
 Bearer Cheque:
Bearer in nature, name of Payee is not mentioned
Payable over the Bank Counter
Order Cheque
Name of Payee is mentioned
Payable over the Bank Counter
Crossed Cheque
Two parallel Transverse lines on top left corner on cheque
Crossing: An instruction by the Drawer (of cheque) to the
Drawee Bank that payment should be collected through the
Banker/Bank only i.e. not over the Counter.
Distinction between a Cheque and a Bill of Exchange
 Holder and Holder in Due
Course
Holder:
“a person entitled in his own name to the possession thereof and to receive or
recover the amount due thereon from the parties thereto. Where the note, bill or
cheque is lost or destroyed, its holder is the person so entitled at the time of such
loss or destruction”.

Holder in Due Course:

“a person who for consideration became the possessor of a promissory note, bill of
exchange or cheque, if payable to bearer, or the payee or endorsee thereof,”
Holder must satisfy the following criteria so as to be known as a holder in due
course:
(i) he must have taken the instrument for value;
(ii) he must have obtained the instrument before maturity;
(iii) the instrument is not incomplete or irregular and does not have any defect on
the face of it;
(iv) he must have taken the instrument in good faith and without notice of any
defect in the title of the person from who he derived his title.
Crossing of Cheques
Crossing is a unique feature associated with a cheque affecting to a
certain extent the obligation of the paying banker and also its
negotiable character.
It is a peculiar method of modifying the instrument to the banker for
payment of the cheque.
Crossing on cheque is a direction to the paying banker by the drawer
that payment should not be made across the counter.
 Crossing of a Cheque
 General Crossing
Special Crossing
Into a specific Bank only

Not Negotiated Crossing

 Not Negotiated written between the lines,
Here the Transferor has always better title as compared to the Transferee

 Account Payee Crossing (not defined in this Act)

Payee’s name is mentioned on cheque and only that individual can withdraw
money through his/her Bank.
 Types of Crossing
I. General Crossing

There are two transverse parallel lines, marked across its face or
The cheque bears an abbreviation "& Co. "between the two parallel lines or
The cheque bears the words "Not Negotiable" between the two parallel lines
or
The cheque bears the words "A/c. Payee" between the two parallel lines.
A crossed cheque can be made bearer cheque by cancelling the crossing and
writing that the crossing is cancelled and affixing the full signature of drawer.
 Types of Crossing
Special or Restrictive Crossing

In addition to the word bank, the words "A/c. Payee Only", "Not Negotiable" may also be
written.
The payment of such cheque is not made unless the bank named in crossing is presenting the
cheque.
The effect of special crossing is that the bank makes payment only to the banker whose name
is written in the crossing.
Specially crossed cheques are more safe than a generally crossed cheques.
 Payment in Due Course
Payment must be in accordance with the apparent tenor of the instrument-
due date
Payment must be made in good faith and without negligence
Payment must be made to the person in possession of the instrument
Payment must be made under circumstances which do not afford a
reasonable ground for believing that a person is not entitled to receive
payment of the amount mentioned therein(peon of a company presents a
cheque for a big amount)
Payment must be made in money only
Dishonor of a Cheque on Ground
of Insufficiency of Funds
Amendment Act in 1988 provide for criminal penalties.
Punished with imprisonment up to 2 years or with a fine up to twice
the amount of the cheque or with both.
Further, the cheque will be deemed to have been dishonoured for
insufficiency of funds in the following situations:
1. where there is a notice of stop-payment to the bank, unless the notice
can be justified.
2. where the account has been closed by the drawer.
3. where the payee is directed by the drawer not to present the cheque
to the bank for payment.