DR.

ITISHREE MISHRA

NEGOTIABLE INSTRUMENT ACT-

1881
MEANING OF NEGOTIABLE
INSTRUMENT
It’s a transferable written document creating a
right in favor of some person
It’s a credit instrument in modern business to
facilitate trade and commerce when its not
possible to settle business and commercial
transaction in money terms.
NI are money and cash equivalent. They can be
converted into liquid cash subject to certain
conditions
Plays a vital role in economic development by
settlement of debts and claims
History behind the enforcement
of NI Act
 It started in 1881 when India was under the
clutches of British ruler.
 Prior to it ,it was discussed under Indian
Contract Act 1872
 It was amended 23 times to meet the need of
time
 The last amendment was made in 2002.
THE ANSWER IS NO
DOES THIS ACT ANY EFFECT TO RBI ACT 1934?
Provision of Reserve Bank of
India Act -1934
 It has no effect on the provision of RBI Act that
which is mentioned under section 31 and 32 of
RBI Act
 Section 31 speaks about no person other than
RBI and Central Government can draw, accept or
make or issue any bill of exchange ,promissory
note payable to bearer on demand neither can
make or issue promissory note payable to the
bearer of the instrument.
 Section 32- If any person found of doing this act
shall be punishable with fine
Defination of Negotiable
Instrument
 Section 13 of NI Act defines negotiable
instrument as a promissory note, bill of
exchange or cheque payable either in order or
to the bearer on demand.
Explanation of the
defination
 It means to which it is expressed to be
payable to a particular person and does not
contain words prohibiting transfer or
indicating an intention that it shall not be
transferable.
 It can be payable to two or more person
jointly or it may be payable alternatively to
one or two or some of the several payees
 In section 13 it emphasises on 3 instrument
which is payable either to order or to bearer
Characteristic of Negotiable
Instrument
 Freely transferable
 Holders title is free from all defects:It is not based on
maxim “nemo dat quod non habet”(no one can
better title than he himself has)provided that the
holder is bonafide holder and get it for value paid
 Case law-Raephel V. Bank Of England
 The holder in due course can sue on the instrument
in his own name and for this purpose a notice of
tranfer may not be given.
 A negotiable instrument is subject to presumption
explained under 118 and 119 of NI act:-
Presumptions 118 and 119

 Consideration 118(a)
 Date118(b)
 Time of acceptance118(c)
 Time of transfer118(d)
 Order of endrosement 118 (e)
 Stampted118(f)
 Holder in due course 118(g)
 Proof of Protest 119
Instrument which are not
negotiable Instrument
 Money order and postal order`,deposit
reciepts
 Share certificates,dock warrants,bill of
lading,railway reciepts,wharfingers
cerificates.
 Some of this are tranferable by endrosement
or delivery but it lacks with one of the
essential qualities i.e better title so these
documents are said to be quasi negotiable
instruments
TYPES OF NEGOTIABLE INSTRUMENTS

There are two types of negotiable instrument

1. Negotiation by statute:- Promissory
notes,Bill of exchange and cheques as per
section 13 of the NI Act is payable to bearer
or order.
2. Negotiation by custom or usage:-dividend
warrant, share certificates, circular notes,
bearer debentures
Payee in a Negotiable
Instrument
 On basis of section 13 of NI Act ,NI has been
divided into 3 parts and it could be made payable
in any of the following ways:
 1.Payable to bearer :- which is expressed to be
payable or on which last endorsement is in blank
 2.Payable to order: a)the order of a specified
person.
 b)a specified person or his order.
 c)a specified person without addition of the word
“order or his order.
 classification of NI
1.Bearer and order Instruments:
When an NI is said to be payable to bearer when i)it is expressed to be so payable orii) only or last
endorsement is a blank endorsement
2.Inland and foreign Instruments: if all the Nis is both drawn and payable in India or drawn on a person
resident in India
Is said to be Inland bill
A bill which is not an Inland bill is a foreign will and it must be protested for dishonor
3.Demand or Time instruments: An instrument which is payable on demand when it is expressed to be
so payable or when no time is so specified. Ex-cheque

4.Genuine,accomadation and fictitious bill: when a bill is drawn,acceptd or endorsed for consideration
is said to be genuine bill, when it is drawn ,accepted or endorsed without consideration is said to
be accommodation bill. when drawer and payee both are fictitious it’s a fictitious bill
5.Clean and documentary bill:-_when no document are annexed to the bill is said to be documentary
bill
6.Ambiguous Instrument: due to faulty drafting may be interpretive either as bill or note, it is an
ambiguous bill .It can be stated differently in words and figures.
7.Inchoate Instrument:- An instrument incomplete in all respect is inchoate instrument.
8.Escrow Instrument:- when an instrument is done conditional or for a specific purpose as a collateral
security not for the purpose and transferring of property is done throgh
 Comparision between the 3
Negotiable Instrument
Promissory Note Bill of exchange
1.3 parties-drawer,drawee and payee
1. 2 parties –maker and payee
2.Contains an unconditional order to the drawee to
2. Contains an unconditional promise to pay the
payee pay the payee.
3.Not necessary for acceptance. 3.Acceptance is necessary if the bill is payable after
sight
4..Liability of the maker is primary and absolute.
5.Notice of dishonor not necessary.
4.Liability of the drawer is conditional and secondary
upon non payment by drawee
6.Payable on demand or after a specified time
period but cannot be payable to bearer on 5.Notice of dishonor is necessary
demand even after certain period 6.Payable on demand or after a specified period but
7.Crossing not possible. cannot be payable to bearer on demand
8.Noting and protesting in case of dishonor is not 7.Crossing is not possible
required
8.Required to establish the fact of dishonor
8.Grace period is available if payable after specified
time 9. Grace period is available after a specified
9.Number,date ,place not essential but it needs to time(usance bill)
be stamped. 10.number,date ,place is not essential but must be
stamped
PROMISSORY NOTE
 (sec-4)An unconditional undertaking signed by the maker to pay
ascertain sum of money only to or to order of certain person or to the
bearer of the instrument.
 It must be in writing includes print and typewriters
 Must contain an express promise or undertaking to pay
 Must bear a necessary stamp according to stamp Act 1899.
 It cannot be made payable to the bearer on demand
 Bank notes and currency notes are not promissory notes but it itself is a
money.
 Consideration need not be mentioned
 Place and date making it need not be mentioned
 Ante-dated and post-dated instrument is not valid
 A promissory note cannot be payable to the maker himself
 It may be payable on demand or after a certain period.
 Where two or more person sign a promissory note their liability remains
joint and several.
 It is usual to mention in a promissory not “for the value received”
Parties to promissory note

 The maker-the person who promise to pay

the amount stated therein
 The payee-is the person to whom the
payment is to be made
 The holder-is either the original payee or any
other person in whose favor the note has
been endorsed.
 The endorser-the person who endorses the
note in favor of another person.
 The endorsee-the person in whose favor the
note is negotiated.
 Specimen of promissory note

kolkata
8TH SEP,2017
Rs5,000
On demand I promise to pay Mr Q or order the sum of rupees five thousand with
interest at 5% per annum for the value received.

To stamp
Mr Q Mr x

kolkata
BILL OF EXCHANGE

 A Bill of exchange is defined section 5

 It is an instrument in writing containing an
unconditional order signed by maker
directing a certain person or to the bearer of
the instrument.
Special benefits associated
with Bill of exchange
 Is a doubled secured instrument i.e where the
drawee fails to honour the order,the holder of
the instrument may look to the drawer for
payment.
 In case of immediate requirement a bill may
be discounted with a bank.
 The drawer or any endorser thereof may
mention a person as “drawee in case of need”
to be resorted to for payment by the payee in
case of dishonour of the bill by the drawee.
Essential features of bill of
exchange
 Must be in writing
 Must contain an unconditional order.
 The order must be to pay money only
 The amount must be certain
 Requires three parties-drawers,drawee and
payee.
 The parties must be certain
 It should be signed by the drawer
 Necessary stamp must be affixed
 Neither a promissory note nor a bill of exchange
Parties to the Bill of
exchange
 It has been stated in section 7
 Maker is the drawer of bill of exchange
 The person to whom it is directed to pay is
the drawee
 Payee is the person named in the instrument
Cheque

 It’s a usual method of withdrawal of money from bank both

from saving bank account and current account.
 An amendment act 2002 defined cheque in different way
 As per section 6 cheque has been defined as a bill of
exchange drawn on a specified banker payable on demand.
 As per the amendment act as defined two kinds of cheque
 Truncated cheque :a cheque which is truncated during the
course of a clearing cycle either by clearing house or by the
bank.
 An Electronic cheque: is a cheque in electronic form as
against the usual paper instrument in writing generated
,written and signed with the use of digital signature.
 All cheques are bill of exchange but all bill of exchange are
not cheques.
Essential features of
cheques
 Cheques contains an unconditional order
 Must be writing
 Cheques is drawn by the customer by his bank
 It must be signed by the customer
 Must be payable on demand
 Must mention the exact amount to be paid.
 It must be for money only
 Drawee must be certain to whom payment is made
 It must be duly dated by customer bank
 It has 3 parties-drawer,banker and payee
 According to RBI rule the normal grace period for
presenting the cheques is changed from 6 months to 3
months after which the cheques looses its validity and
stated as outdated,stale or overdue cheques .