Unit-II

NEGOTIABLE INSTRUMENTS

The Negotiable Instruments Act, 1881 contains important provisions relating to the negotiable
instruments which are dealt by banks. The popular and main negotiable instruments are promissory
notes, bills of exchange and cheques. This Act came into force from March 1, 1882 and the Act is divided
into 17 chapters and contains 137 sections.

The words "negotiable" and "instrument" refer transferability by delivery and any written document by
which there is a creation of a right in favour of certain individual some person. The terms negotiable
instrument is understood as a document transferable by delivery.

The three instruments, promissory note, bill of exchange and cheque are regarded as negotiable
instruments. The characteristics of a negotiable instrument is that it is a transferable document and
passes on freely from one person to another. The three instruments expressed above are negotiable
instruments by statute. Apart from these instruments, there are also certain negotiable instruments by
the custom of trade. For example in India, government promissory notes, hundies, railway receipts and
delivery order have been regarded negotiable by usage or custom or trade.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

Following are the important characteristics of negotiable instruments:

(1) The holder of the instrument is presumed to be the owner of the property contained in it.

(2) They are freely transferable.

(3) A holder in due course gets the instrument free from all defects of title of any previous holder.

(4) The holder in due course is entitled to sue on the instrument in his own name.

(5) The instrument is transferable till maturity and in case of cheques till it becomes stale (on the expiry
of 6 months from the date of issue).

(6) Certain equal presumptions are applicable to all negotiable instruments unless the contrary is proved

Types of Negotiable Instruments

The negotiable instruments are classified into two types, they are

i) instruments negotiable by law, ie.under the negotiable instruments act 1881

ii) instruments negotiable by usage orncustom of trade

In India, the following are regarded as negotiable instruments

The instruments negotiable by law are

I) Promissory notes

II) Bills of exchange

III) cheques

The instruments negotiable by custom of trade are

I) Govt. promissory notes

II) Dividend warrants

III) Share warrants

IV) Bearer debentures

PROMISSORY NOTES

DEFENITION: A signed document containing a written promise to pay a stated sum to a specified
person or the bearer at a specified date or on demand.

FEATURE OF PROMISSORY NOTES

 Printed/Written Agreement
 Pay Defined Amount
 Signed Documents
 Unconditional Promise
 Legal Composition
 Detailed Information

TYPES OF PROMISSORY NOTES

 Personal Promissory Notes

 Commercial
 Real Estate
 Investment.

Bill of Exchange

Bill of exchange means a bill drawn by a person directing another person to pay the specified sum of
money to another person. A bill of exchange is of real use if it is accepted by the person directed to pay
the amount
Features of Bills of Exchange

The following are the features of bills of exchange:

1.A bill of exchange an instrument in writing.

2.It is drawn and signed by the maker i.e. drawer of the bill.

3.It is drawn on a specific person i.e. drawee, to pay the specified amount.

4.Contains an unconditional order to a person i.e. drawee.

5.To make an instrument of value the drawee must accept it.

6.The specified amount is payable to the person whose name is mentioned in the bill or to his order or
to the bearer.

7.It specifies the date by which amount should be paid.

8.Payment of the bill must be in the legal currency of the country.

9.It must be properly stamped.

10.It must bear a revenue stamp

TYPES OF BILL OF EXCHANGE

Types of BoE

1) Documentary bill of exchange :

2) Demand bill :

3) Usance bill :

4) Inland bills :

5) Clean bill :

6) Foreign bills

7) Accommodation bill :

8) Trade Bill :

9) Supply bills :

10) Fictitious Bill :

11) Hundis :
CHEQUE

Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the
person who has deposited money with the banker, requiring him to pay on demand a certain sum of
money only to or to the order of the certain person or to the bearer of the instrument.

FEATURES OF A CHEQUE

Must be in writing
Must be in unconditional
Must be drawn on a specifoed banker
Certain sum of money
Certain payee
Date

TYPES OF CHEQUE

 Open cheque
 Crossed cheque
 Bearer cheque
 Order cheque
 Anti-dated cheque
 Post dated cheque
 Stale cheque

CHEQUE VS BILL OF EXCHANGE

BASIC FOR COMPARISON CHEQUE BILL OF EXCHANGE

MEANING A document used to make easy A written document that shows

payments on demand and can the indebtness of the debtor
be transfered throughnhand towards the creditor
delivery is known as cheque

DEFINED IN Section 6 of the negotiable Section 5 of the negotiable

instruments act 1881 instrument act 1881

VALIDITY PERIOD 3 months Not applicable

 PAYABLE TO BARER ON Always Cannot be made payable on
DEMAND demand as per RBI act 1934

GRACE DAYS Not applicable, as it is always 3 days of grace arw allowed

payable at the time of
presentment

ACCEPTENCE A cheque does not require Bill of exchange needs to

acceptance accepted

STAMPING No such requirement Must be stampestamped

CROSSING Yes No

DRAWEE Bank Person or bank

NOTING OR PROTESTING If the cheque is dishounoured it Of a bill of exchange is

cannot be noted or protested dishounoured it cannot be
nited or protested

CROSSING OF CHEQUE

Definition: Crossing of a cheque is nothing but instructing the banker to pay the specified sum through
the banker only, i.e. the amount on the cheque has to be deposited directly to the bank account of the
payee.

TYPES:

1.General crossing

2.Restrictive crossing

3.Special crossing

4.Not negotiable crossing.

5.Double crossing