KAMAL K JINDAL Managing Director Global Management Services New Delhi Email kamaljindal@hotmail.

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Negotiable Instruments
All promissory notes, bills of exchange, cheques or other instruments in writing unconditional order signed by any person who promises to pay money, or acknowledges money to be due, shall be negotiable by delivery/endorsement and delivery thereon,

so as to vest the property thereof in each endorsee successively

Negotiable Instruments Act - MBIC

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What is a Negotiable Instrument: 
 

Negotiable means the quality of transferability by delivery or by endorsement and delivery. Instrument means a written document by which a right is created in favor of some person. In general terms, Negotiable Instrument means a written document, which is freely transferable and which creates a right in favor of some person to receive specific sum of money.

Negotiable Instruments Act - MBIC

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What is a Negotiable Instrument: 

The Act besides three negotiable instruments recognizes any other instrument satisfying the characteristics of negotiability, as Negotiable Instrument.

For Example I. Dividend Warrants II. Share Warrants III. Bearer Debentures IV. Government Promissory Notes etc. 

Negotiable Instruments Act - MBIC

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Features Of Negotiable Instruments
1. 2. 3. 4. 5.

A negotiable instrument is freely transferable Negotiability confers absolute and good title on the transferee A negotiable instrument must be in writing In every negotiable instrument there must be an unconditional order or promise for payment The instrument must involve payment of a certain sum of money only and nothing else

Negotiable Instruments Act - MBIC

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7. 8. 9.MBIC 6 .Features Of Negotiable Instruments 6. The time of payment must be certain The payee must be a certain person A negotiable instrument must bear the signature of its maker Delivery of the instrument is essential Stamping of Bills of Exchange and Promissory Notes is mandatory Negotiable Instruments Act . 10.

Law of Negotiable Instrument € € € € The object and purpose of this Act is to legalize the system under which claim on certain mercantile instruments are treated like ordinary goods passing from hand to hand. The Act does not declare what consideration is sufficient and valid for a Bill of Exchange. the general rules contained in the contract Act are applicable to such instruments. Promissory Note and Cheque. In the absence of any express provisions in this Act. any consideration which will support a simple contract will support a bill of exchange or promissory note.MBIC 7 . This Act regulates the issue and negotiations of Bills of exchange. Promissory Note and therefore. as to obligations of parties to the negotiable instruments are contractual in nature. Negotiable Instruments Act .

MBIC 8 .Negotiable Instruments Act .

Drawer ² Drawee ³Drawer³: The maker of a bill of exchange or Cheque € ³Drawee´: The person thereby directed to pay € "Drawee in case of need ": When the bill or in any endorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need such person is called a "drawee in case of need".MBIC 9 . € Negotiable Instruments Act .

Acceptor ² Payee € "Acceptor": After the drawee of a bill has signed his assent upon the bill. to whom or to whose order the money by the instrument is directed to be paid.MBIC 10 . is called the "payee" € Negotiable Instruments Act . or given notice of such signing to the holder or to some person on his behalf. he is called the "acceptor" "Payee": The person named in the instrument.

Holder € The "holder" of a promissory note. Negotiable Instruments Act .MBIC 11 . bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.

Holder in Due Course Better title to Holder in Due Course. Negotiable Instruments Act . Before the maturity of the instrument c.MBIC 12 . For consideration b. Holder in Due Course becomes holder of negotiable Instrument if he becomes Holder thereof : a. In good faith A holder in due course gets the instrument free from all defects of title.

may bind himself and be bound by the making. deliver and negotiate such instruments to as to bind all parties except himself. acceptance. according to the law to which he is subject. bill of exchange or cheque. € Minor € y A minor may draw. endorsement.MBIC 13 . drawing. delivery and negotiation of a promissory note. indorse.Capacity to make Negotiable Instruments Every person capable of contracting. Negotiable Instruments Act .

the drawer as herein after provided. to compensate the holder. provided due notice of dishonour has been give to.MBIC 14 . Negotiable Instruments Act .Liability of drawer € The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor. or received by.

Negotiable Instruments Act . and.Liability of drawee of cheque € The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do. in default of such payment. must compensate the drawer for any loss or damage caused by such default.MBIC 15 .

€ A cheque payable to bearer is negotiable by the delivery thereof.MBIC 16 . it must be made by the party making. bill of exchange or cheque is completed by delivery. acceptance or endorsement of a promissory note.Delivery The making. accepting or indorsing the instrument. € For delivery to be effectual. actual or constructive. € Negotiable Instruments Act . or by a person authorised by him.

MBIC 17 .Negotiable Instruments Act .

MBIC 18 . Negotiable Instruments Act . or to the bearer of the instrument.Definition € A ³promissory note´ is an instrument in writing (not being a bank-note or a currency-note) containing an unconditional under-taking. or to the order of. a certain person. signed by the maker. [Section 4]. to pay a certain sum of money only to.

Features Must be in writing. duly signed and properly stamped as per Indian Stamp Act. It must contain a promise to pay money only. It must contain an undertaking or promise to pay. Negotiable Instruments Act . The promise to pay must not be conditional. The parties to a promissory note must be certain. May be payable on demand or after a certain date.MBIC 19 . The sum payable mentioned must be certain or capable of being made certain.

1.MBIC 20 . "I acknowledge myself to be indebted to B in Rs. 500". to be paid on demand. 000. for value received.Illustrations: Promissory Notes "I promise to pay B on order Rs." Negotiable Instruments Act .

" "I promise to pay B Rs.000.MBIC 21 .U Rs. provided D leaves me enough to pay that sum. 500 and all other sums which shall be due to him. 500 and to deliver to him my black horse on 1st January next. 500 first deducting there out any money which he may owe me." "I promise to pay B Rs. 1.Illustration: Not Promissory Notes "I promise to pay B Rs." I promise to pay B Rs.O. B." "Mr." "I promise to pay B Rs. 500 seven days after my marriage with C." Negotiable Instruments Act . 500 on D's death. I.

Parties to a Promissory Note Primary Parties Maker or Drawer The Payee Negotiable Instruments Act .MBIC In case of transfer Endorser Endorsee 22 .

MBIC .Components Date of the note Due dates for payment of principal and interest Name of the parties Interest Rate Address to where payment will be sent 23 Negotiable Instruments Act .

MBIC 24 .Specimen of a Promissory Note PAYEE MAKER/DRAWER Negotiable Instruments Act .

Specimen of a PN Negotiable Instruments Act .MBIC 25 .

MBIC 26 .Negotiable Instruments Act .

MBIC 27 . Negotiable Instruments Act .What is a Cheque? € A ''cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

MBIC 28 .Specimen of a cheque Negotiable Instruments Act .

Parties to a Cheque € Drawer Drawee Holder € € Negotiable Instruments Act .MBIC 29 .

Negotiable Instruments Act .MBIC 30 .

in order to charge the drawer. within banking hours. € Presentment for payment must be made during the usual hours of business and.MBIC 31 . if at a banker¶s. the other parties are then not liable thereon to such holder. € A cheque must. be presented at the bank upon which it is drawn € Negotiable Instruments Act . by the holder himself or on behalf or the holder as hereinafter provided.Presentment Cheques must be presented for payment to the drawee. € If this is not so.

Presentment of instrument payable on demand A negotiable instrument payable on demand must be presented for payment within a reasonable time after it is received by the holder € Delay is excused if it is caused by € y Circumstances beyond the control of the holder y Actions not imputable to his default. misconduct or negligence € When the cause of the delay ceases to operate. Negotiable Instruments Act . presentment must be made within a reasonable time.MBIC 32 .

payment of the amount due must be made to the holder of the instrument in order to discharge the drawer Negotiable Instruments Act . clause (c).MBIC 33 .To whom payment should be made € € € € Subject to the provisions of section82.

Delivery of instrument on payment or indemnity in case of loss € € € Any person liable to pay. the amount due is before payment entitled to have it shown On payment entitled to have it delivered up to him If the instrument is lost or cannot be produced he is entitled to be indemnified against any further claim against him Negotiable Instruments Act .MBIC 34 . and called upon by the holder thereof to pay.

and to all parties deriving title under such holder By payment.MBIC 35 .Discharge from Liability € By cancellation ± to a holder who cancels with intent to discharge the indorser and all parties claiming under the holder By release ± to a holder who otherwise discharges such maker. acceptor or indorser.to all parties in due course of the due amount € € Negotiable Instruments Act .

the drawee is discharged by payment in due course. notwithstanding any endorsement whether in full or in blank appearing thereon. the drawee is discharged by payment in due course to the bearer thereof. € Where a cheque is originally expressed to be payable to bearer. and notwithstanding that any such endorsement purports to restrict of exclude further negotiation. € Negotiable Instruments Act .Cheque payable to order Where a cheque payable to order purports to be endorsed by or on behalf of the payee.MBIC 36 .

And any such alteration.MBIC 37 . discharges his endorser from all liability to him in respect of the consideration thereof. € Negotiable Instruments Act . if made by an endorsee.Affect of material alteration € Any material alteration of a negotiable instrument renders it void Alteration by endorsee:.

Negotiable Instruments Act .MBIC 38 .

MBIC 39 .Dishonours by non-payment € Dishonour by non-payment is when the drawee of the cheque makes default in payment upon being duly required to do so Negotiable Instruments Act .

MBIC 40 . must give notice that the instrument has been so dishonoured to all other parties whom the holder seeks to make liable It is not necessary to give notice to the maker of the dishonoured cheque Negotiable Instruments Act .By and to whom notice should be given € € When a cheque is dishonoured by nonpayment. the holder. or some party who remains liable.

where he has died. to his assignee It maybe oral or written It may. if written. where he has been declared an insolvent. or. to his legal representative.Mode in which notice may be given € Notice of dishonour may be given to a duly authorized agent of the person to whom it is required to be given. and in any form € € Negotiable Instruments Act . be sent by post. or .MBIC 41 .

MBIC 42 . either in clear terms that the instrument has been dishonoured. and that he will be held liable It must be given within a reasonable time after dishonour. at the place of business or at the residence of the party If the notice is duly directed and sent by post and miscarries. and in what way.Contd« € It must inform the party. it does not render the notice invalid € € Negotiable Instruments Act .

and the drawer thereof.MBIC 43 . the banker paying the cheque. shall respectively be entitled to the same rights.Payment in due course of crossed cheque € € € Where the banker on whom a crossed cheque is drawn has paid the same in due course. as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof The banker and the drawer in case the cheque is crossed would be entitled to same rights as the original owner of cheque That is the same rights as when the true owner would have drawn the cheque Negotiable Instruments Act . and be placed in the same position in all respects.

Negotiable Instruments Act . bearing in either case the words "not negotiable". shall not have and shall not be capable of giving.MBIC 44 . a better title to the cheque than that which the person from whom he took it had.Cheque bearing "not negotiable" € A person taking a cheque crossed generally or specially.

either because y The amount of money standing to the credit of that account is insufficient to honour the cheque y It exceeds the amount arranged to be paid from that account by an agreement made with that bank Negotiable Instruments Act .Penalty in case of Dishonour € If a cheque is returned by the bank unpaid.MBIC 45 .

or with both Negotiable Instruments Act .€ The person shall be deemed to have committed an offence and shall be y punished with imprisonment for a term which may extend to two years y fined as much as twice the amount of the cheque.MBIC 46 .

MBIC 47 . to the drawer. whichever is earlier. within fifteen days of the receipt of the notice € Negotiable Instruments Act . ³within thirty days´ of the receipt of information by him from the bank regarding the return of the cheques as unpaid. of the cheque. € The payee makes a demand for the payment of the said amount of money by giving a notice. and € The drawer of cheque fails to make the payment of the amount of money to the payee or holder in due course of the cheque. in writing.Conditions The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity.

it is deemed a crossing.Cheque crossed generally € Where a cheque bears across its face an addition of the words "and company" or any abbreviation between two parallel transverse lines. or of two parallel transverse lines simply.MBIC 48 . and the cheque shall be deemed to be crossed generally Negotiable Instruments Act . either with or without the words "not negotiable³.

and to be crossed to that banker. that addition shall be deemed a crossing. Negotiable Instruments Act .Cheque crossed specially € Where a cheque bears across its face an addition of the name of a banker. and the cheque shall be deemed to be crossed specially.MBIC 49 . either with or without the words "not negotiable".

Negotiable Instruments Act . € Payment of cheque crossed specially y Where a cheque is crossed specially. or his agent for collection.€ Payment of cheque crossed generally y Where a cheque is crossed generally. the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed. the banker on whom it is drawn shall not pay it otherwise than to a banker.MBIC 50 .

€ A ³bill of exchange´ is an instrument in writing containing an unconditional order. . or to the order of. signed by the maker. a certain person or to the bearer of the instrument. directing a certain person to pay a certain sum of money only to.

€ . or (2) where no time of payment is stated.Characteristics of Bill of Exchange € Bill of Exchange must contain an Order . though it is often hard to tell from the language used just what is meant. or at sight. or an authority to collect money due.³ An instrument is payable on demand (1) where it is expressed to be payable on demand. is not an order.It must in imperative terms direct the drawee to "pay to A" the sum specified. A request to pay. or on presentation. A Bill Of Exchange "Must Be Payable On Demand Or At A Fixed Or Determinable Future Time.

. for the amount payable at maturity is uncertain. The order to pay must be to pay money. The money must be that of the country where the order is payable.€ The amount to be paid must be certain If the bill reads "$500 and accrued taxes." then it would not be negotiable.

Important Terms € € € € DRAWER. is called the ³payee´ However. DRAWEE AND PAYEE . to whom. . or to whose order the money is by the instrument directed to be paid. the person thereby directed to pay is called the ³drawee´ The person named in the instrument. a drawer and payee can be one person as he can order to pay the amount to himself.The maker of a bill of exchange or cheque is called the ³drawer´.

must be added to the nominal due date of the bill . or on presentation or when notice for payment is expressed. three days. called days of grace.€A bill of exchange is payable on demand when it is expressed to be payable on demand. In calculating the maturity of bills payable at a future time. or at sight.

The acceptor of a bill "by accepting it engages that he will pay it according to the tenor of his acceptance.€By the acceptance of a bill the drawee becomes the principal debtor on the instrument and the party primarily liable to pay it." and is precluded from denying the drawer's right to draw or the genuineness of his signature .