UNIT 3

Ms.Shruti Minocha

NEGOTIABLE INSTRUMENT
NEGOTIABLE INSTRUMENT

Means a written document which can be

transferred to another party as a form of payment.
A negotiable instrument is a document
guaranteeing the payment of a specific amount of
money, either on demand, or at a set time.
According to the Negotiable Instruments Act, 1881
in India there are just three types of negotiable
instruments i.e., promissory note, bill of exchange
and cheque.
 Sec. 23. When Instrument Payable To Order:
payable to the order of a specified person or to
him or his order.
Instruments to order, customarily read "Pay to the
order of John Brown" or "Pay to John Brown, or
order."
SEC. 24. WHEN INSTRUMENT PAYABLE TO BEARER

The instrument is payable to bearer:

1. When it is expressed to be so payable; or
2. When it is payable to a person named therein or
bearer; or
3.When the only or last endorsement is an
endorsement In blank.
For Eg.: a cheque is payable to A.A endorse it merely
by putting his signature on the back and delivers
to B with the intention of negotiating it .In the
hand of B cheque is A Bearer instrument.
CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
Freely Transferable : It must be transferable.
Holders title free from defects: A holder in due
course is one who receives the instrument for
(i) value (ii) before maturity
(iii)without any notice as to the defect in the
title of the transferor.
The holder in due course ,can sue on the
instrument in his own name.
CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
Presumptions
a} Every instrument was made for some
consideration
b} Was made on such date
c} Was accepted within reasonable time after its
date and before its maturity
d} Transfer was made before maturity
e} Endorsement were made in order in which they
appear
F}The negotiable instrument is duly stamped
G} The holder of instrument is holder in due course.
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.
ESSENTIALS OF A PROMISSORY NOTE
1)It must be in writing:
An oral promise to pay does not become
promissory note.
2) It must state a clear undertaking to pay ,not
necessity of word promise.
Eg: A signs the instrument in following manner:
I promise to pay B(Valid P-note)
I acknowledge myself to be indebted to B in Rs.
1000 to be paid on demand for value
received.(Valid P-note)
ESSENTIALS OF A PROMISSORY NOTE
3) Promise to pay must be unconditional:
The promise to pay depend upon the happening
of uncertain event is invalid:
Eg: I promise to pay B rs.500 seven days after my
marriage with C.
If happening of an event is certain but time is not
certain than its a valid promissory note.
Eg: I promise to pay B rs.500 seven days after Cs
death.
ESSENTIALS OF A PROMISSORY NOTE

4) It must be signed by maker:

signature may be at any part of the instrument
may not be necessarily at the bottom.
If a maker is illiterate-thumb mark is sufficient.
ESSENTIALS OF A PROMISSORY NOTE

5) The maker must be certain person:

It must indicate with certainty the person who
is the maker:
Eg; I,Alok Kumar promise to pay.
In case a person signs in a assumed name, he
is liable as a maker because a maker is taken
as certain identity,
ESSENTIALS OF A PROMISSORY NOTE

6)The payee must be certain

Payee must be certain on the face of the
instrument.
A note is valid even if the payee is misnamed
or indicated by his official designation provided
he can be ascertained by evidence.
ESSENTIALS OF A PROMISSORY NOTE

7) The sum payable must be certain

The amount payable capable of contingent
additional or subtraction is invalid promisory
note.
Eg: I promise to pay B rs.500 and all other sums
which shall be due to him.
to be valid the amount to be paid must be
certain.
ESSENTIALS OF A PROMISSORY NOTE
8) The amount payable must be in legal tender
money of India
A document containing a promise to pay a
certain amount of foreign money or to deliver a
certain quantity of goods is not a promissory
note.
Eg: A say I promise to pay B rs.500 and to
deliver him my black horse on next 1st jan is
not a valid promissory note.
ESSENTIALS OF A PROMISSORY NOTE

9)Other formalities
must be properly stamped as required by the
Indian stamp act.
An unstamped or inadequately stamped
promissory note is invalid.
BILLS OF EXCHANGE
A bill of exchange is an instrument in writing containing
an unconditional order, signed by maker, directing a
certain person to pay a certain sum of money only to or
to the order of, certain person or to the bearer of the
instrument

The three parties in Bills of exchange are

Drawer The person who makes it

Drawee The person who is directed to pay
Payee The person to whom the payment is made
ESSENTIALS OF BILL OF EXCHANGE
1. Must be in writing
2. Must contain an order to pay
3. Must be unconditional
4. Must be signed by drawer
5. The drawer,drawee,payee must be certain
6. Sum payable must be certain
7. Must contain an order to pay money only
8. Must comply with formalities
DISTINCTION BETWEEN PROMISSORY NOTE AND BILL OF
EXCHANGE
Bases Promissory Note Bills of Exchange

No of parties 2 parties-maker and the 3 parties-drawer,

payee drawee and the
payee.
The maker of a The maker cannot be the The drawer and
note cannot be payee because promisor payee may be same
the payee and promisee cannot be person where a bill
same person. is drawn Pay to
Me
Promise and There is a promise to There is a order to
order make the payment make the payment.
DISTINCTION BETWEEN PROMISSORY NOTE AND BILL OF
EXCHANGE
Bases Promissory Note Bills of Exchange
Acceptance It requires no It must be accepted
acceptance as it is be accepted by
signed by the drawee before it is
person who is liable presented for the
to pay. payment.
Nature of liability The liability of the The liability of
maker is primary. drawer arises only
when acceptor or
drawee does not
honor the bill.
DISTINCTION BETWEEN PROMISSORY NOTE
AND BILL OF EXCHANGE
Bases Promissory Note Bills of Exchange
Makers position There is immediate There is immediate
relation between relation between
drawer and payee. drawer and drawee
but not between
drawer and payee.
CHEQUE
A cheque is a document/instrument (usually a
piece of paper ) that orders a payment of
money.
Drawer, the person or entity who makes the
cheque .
Payee, the recipient of the money .
Drawee, the bank or other financial institution
where the cheque can be presented for
payment
CHEQUE CLEARING SYSTEM
Wherever Reserve Bank of India has its office the
clearing house is managed by it.
Reserve Bank of India manages 14 clearing
houses at Ahmedabad, Bangalore, Bhubaneshwar,
Mumbai, Calcutta, Chennai, Guwahati, Hyderabad,
Jaipur, Kanpur, Nagpur, New Delhi, Patna and
Thiruvananthapuram.
In the absence of an office of the Reserve Bank,
the clearing house is managed by the State Bank
of India, its associate banks and in a few cases by
public sector banks.
TERMS
MICR- Magnetic Ink character recognition
9 digit no.
First 3 digits no. City code of bank
Next 3 digit no.- Bank code
Next 3 digits branch code .
Next 6 digits Account no. maintained by RBI
Last 2 digits- Current or saving account.
IFSC code-INDIAN FINANCIAL SYSTEM CODE
11 digits- first 4 characters bank remaining branch.
CHEQUE VS BE
Drawn on banker Drawn on any other person
Payable on demand On demand or after expiry of
certain period
Payable to bearer on demand Payable to bearer on demand
valid absolutely void
Not require acceptance by the Requires acceptance by the
drawee before payment is drawee
demanded.
No need to be stamped Must be stamped
No grace period allowed as it Three days of grace period
is payable on demand allowed while calculating
maturity date in case of time
bills
Cheques Bills of Exchange

Drawer not discharged Drawer is discharged

by the delay of the from liability if not duly
holder in presenting for presented for payment
payment
CROSSING OF CHEQUES

CROSSING OF CHEQUES Cheques can be of

two types:-
1. Open or an uncrossed cheque

2. Crossed cheque
OPEN OR AN UNCROSSED CHEQUE

Open Cheque
An open cheque is a cheque which is payable at
the counter of the drawee bank on
presentation of the cheque.
CROSSED CHEQUE

A crossed cheque is a cheque which is payable

only through a collecting banker and not directly at
the counter of the bank.
Crossing ensures security to the holder of the
cheque as only the collecting banker credits the
proceeds to the account of the payee of the
cheque.
When two parallel transverse lines, with or without
any words, are drawn generally, on the left hand
top corner of the cheque.
TYPES OF CROSSING

Types of Crossing
General Crossing

Special Crossing

Account Payee or Restrictive Crossing

Not Negotiable Crossing

GENERAL CROSSING
Where a cheque bears across its face an addition
of the words and company or any abbreviation
thereof, between two parallel transverse lines, or of
two parallel transverse lines simply, either with or
without the words not negotiable, that addition
shall be deemed a crossing, and the cheque shall
be deemed to be crossed generally.

In general crossing ,the banker on whom it is drawn

shall not pay it otherwise than to a banker.

The holder may get it collected through some bank

.collecting bank can be of his choice.
 SPECIAL CROSSING
Where a cheque bears across its face an addition
of the name of a banker, either with or without the
words not negotiable, that addition shall be
deemed a crossing, and the cheque shall be
deemed to be crossed specially, and to be crossed
to that banker. [section 124]
Where a cheque is specially crossed ,the bank on
whom it is drawn is supposed to honor only when
it is presented by the banker mentioned on it or
agent of such bank.
ACCOUNT PAYEE.

This crossing can be made in both general and

special crossing by adding the words Account
Payee.
in this type of crossing the collecting banker is
supposed to credit the amount of the cheque to
the account of the payee only.
NOT NEGOTIABLE CROSSING

The words 'Not Negotiable' can be added to General as well

as Special crossing and a crossing with these words is
known as Not Negotiable crossing.

The effect of such a crossing is that it removes the most

important characteristic of a negotiable instrument i.e. the
transferee of such a crossed cheque cannot get a better title
than that of the transferor ( cannot become a holder in due
course ) and cannot covey a better title to his own
transferee, though the instrument remains transferable.
BOUNCING OR DISHONOURED OF CHEQUE

A cheque is said to be dishonoured when

drawee makes a default in payment.
The provisions for dishonour of a cheque is
contained under section 138 to 147.:
a drawer of a dishonoured cheque shall be
deemed to have commited offence
BOUNCING OR DISHONOURED OF CHEQUE
Section 138 of the Act deals with the dishonour of
cheque for insufficiency, etc, of funds in the account. It
provides that a person shall be punishable for two years
imprisonment or with fine, if the cheque issued by
drawer returned by the bank unpaid.
Section 139 of the act states that cheque must be
issued in discharge of whole or part, of any debt or other
liability. Where a cheque is issued for meeting social
obligations such as charity ,marriage present, birthday
gifts etc. ,the drawer would not have deemed to be
committed offence.
BOUNCING OR DISHONOURED OF CHEQUE

Further section 140 of the Act provides that a

person drawing a cheque cannot take up the
defence that when he drew the cheque he had
no idea that his credit balance in the account
was insufficient.
The cheque should have been presented within
3 months from the date on which it is drawn or
within the period of validity, whichever is earlier.
BOUNCING OR DISHONOURED OF CHEQUE

In case of dishonor the payee or the holder in

due course should have given a notice
demanding payment within 30 days. Notice can
be served through ordinary post or telegram
but the proof of notice sent is to be retained.
the drawer is liable if he fails to make a
payment within 15 days of such notice period.
BOUNCING OR DISHONOURED OF CHEQUE

The payee or Holder in due course of

dishonored cheque should have made a
complaint within one month of cause of action
arising out of section 138.
PARTIES TO NEGOTIABLE INSTRUMENT
Holder : Any person entitled to the possession of the
instrument in his own name and to receive or recover
the amount due thereon from the parties liable
thereto. Thus in order to be called holder a person
must satisfy the following condition:

1. He must be entitled to the posession of the

instrument in his own name
2. He must be entitled to receive or recover the
amount due thereon from the parties liable thereto.
FOLLOWING PERSONS ARE CALLED HOLDER OF
NEGOTIABLE INSTRUMENT
Principal whose name appear on an instrument.
where a instrument is a bearer instrument ,whosoever
holding it is a holder.
where a instrument is in name of a partner of a firm, it
becomes a holder as it is not a separate entity from
partner.
If a holder of negotiable instrument is dead,the heir of
deceased holder becomes holder.
A person on whose behalf a instrument is endorsed in
blank ,he is the holder of an instrument though his
name does not appear on the instrument.
HOLDER IN DUE COURSE
Any person who for consideration becomes the possessor of
instrument if payable to bearer or the payee or indorsee thereof
if payable to order before the amount mentioned in it beacame
payble.

He must be holder in due course.

He must be a holder for valuable consideration.
He must become a holder of the instrument before the date of
maturity.
He became owner without being aware that any defect existed
in the title of the person from whom he received it.
PRIVILEGES TO HOLDER IN DUE COURSE

He gets a better title than that of a transferor.

Privileges in case of inchoate stamped
instrument.
Privileges in case of fictitious bills.

Privileges when an instrument delivered

conditionally is negotiated.
MODES OF NEGOTIATING

Negotiating by mere delivery

Negotiating by endorsement and delivery
KINDS OF NEGOTIATING
Blank endorsement
Endorsement in full or specific endorsement
Partial endorsement
Restrictive endorsement
Conditional endorsement
Sans recourse endorsement
facultative endorsement

Note: Do this topic from the notes I dictated in class.