Unit VII

The Negotiable Instruments

Act, 1881
Meaning of a Negotiable Instrument

 Negotiable means “transferable from

one person to the other in return for a
consideration.”
 Instrument means “a written document
by which a right is created in favor of
some person.”
Definition
 Sec 13 of the Act says
 ‘a negotiable instrument means a promissory note, bill of exchange or a cheque
payable either to order or to bearer.
 According to Justice Willis a negotiable instrument “is one the property in
which is acquired by anyone who takes it bona fide and for value
notwithstanding any defect of title in the person from whom he took it.”
 Characteristics of a negotiable
instrument
1. Freely transferable.
2. Title of holder free from defects.
3. Recovery.
4. Presumptions.:- vis-à-vis
 Consideration.
 Date.
 Time of acceptance.
 Time of transfer.
 Order of endorsements.
 Stamp.
 Holder presumed to be holder in due course.
 Proof of protest.
Types of negotiable instruments
 Negotiable by statute.
 Negotiable by custom or usage.
Notes, bills of exchange or cheque
 Promissory Note
 A promissory note 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 the bearer of the document.
 The person who is promising to pay is the maker.
 The person to whom the promise has been made is called
the payee.
Specimen of a promissory note
Rs1000
Delhi,January24,

Three months after date I promise to pay Mr. A or order the

sum of one thousand rupees, for value received.

Stamp
To,
Mr. A
222, Ashok Vihar Sd/ - B
Delhi - 110052
Essential elements
1. Writing.
2. Promise to pay
3. Definite and unconditional.
4. Signed by the maker.
5. Certain parties.
6. Certain sum of money.
7. Promise to pay money only.
8. Currency note is not a promissory note.
9. Formalities like number, date and place, consideration etc.
10. It may be payable on demand or after a definite period of
time.
11. It cannot be made payable to bearer on demand.
Are these promissory notes?
1. “I promise to pay B or order Rs. 500.
2. “I acknowledge myself to be indebted to B Rs
1000 to be paid on demand for value received.
3. “Mr. B I.O.U Rs. 500.
4. “I promise to pay B Rs. 500 and all other
sums which shall be due to him.
5. “I promise to pay Rs.500 seven days after my
marriage with C.
6. “I promise to pay B Rs 500 on D’s death
provided D leaves me enough.
Bill of exchange
 A bill of exchange is 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.
 Parties to a bill of exchange:-
 Drawer
 Drawee (acceptor)
 Payee
Example
 Sham of Delhi buys goods on credit
from krishan of Mumbai for Rs. 500
to be paid 3 months after date.
krishan buys goods from Ram of Delhi
for Rs. 500 on similar terms.
Specimen of a BOE

Rs. 500 Mumbai, Jan. 10, 2000

Three months after date pay to Ram or order the sum of five hundred,
for value received

To,
Sham
235, Shubash Marg,
Delhi - 110006
Stamp

In case of need with Accepted Sd/-

Canara Bank, Delhi Sham Krishan
Essential elements of a bill of exchange.

 It must be in writing.
 It must contain an order.
 The order must be unconditional.
 There must be three parties.
 The sum must be certain.
 It must contain an order to pay money only.
 All other formalities of date, sign and stamp.
 A bill as originally drawn cannot be made
payable to bearer on demand.
 Promissory Note Bill of Exchange

1. Two Parties – Maker and 1. Three Parties – Drawer, Drawee

Payee and Payee
2. Unconditional Promise to 2. Unconditional order to Pay
Pay 3. The drawer of a bill is the
3. The maker of a note is the creditor who directs the drawee
debtor and he himself (his debtor) to pay
undertakes to pay 4. Acceptor may accept the bill
4. Maker cannot undertake conditionally because he is not
to pay conditionally the originator of the bill
5. Liability of the Maker is 5. Liability of the Drawer is
Primary or Absolute Secondary or Conditional
6. Needs no acceptance 6. Must be accepted by the Drawee
7. Cannot be made payable 7. The drawer and the Payee may
to the maker himself be one and the same person
 Promissory Note
1. Maker of a note stands in
immediate relation with the
payee
2. No provisions apply for
notes
3. No such notice is to be
given in case of dishonor of
a note
Bill of Exchange
1. The drawer of a bill stands in
immediate relation with the
acceptor and not the payee.
2. Certain provisions apply to
Bills of Exchange
3. In case of dishonor of a bill
due notice must be given to all
the persons who are to be
made liable to pay
Cheque

 ‘Cheque is a bill of exchange drawn upon

a specified banker and payable on
demand and it includes the electronic
image of a truncated cheque & a cheque in
the electronic form.’
Specimen of a cheque
HDFC BANK Date:

Pay --------------------------------------------------- ---------OR BEARER

Rupees ---------------------------------------------------------------------
--------------------------------------------- Rs.

A/c No. 12345678

HDFC BANK
FLORENCE BUILDING
VIMAN NAGAR
PUNE XYZ
Bill of exchange Vs. Cheque.
1. May be drawn on any person, 1. Is always drawn on a banker
including Bank
2. Must be accepted 2. No Acceptance required
3. Entitled to three days of grace 3. No days of grace
4. May be payable on demand or 4. Always payable on demand
after the expiry of a certain
period 5. The drawer of a cheque is not
discharged from his liability by
5. Must be duly presented for delay of the holder in
payment to the acceptor or else presenting it for payment
he is discharged of his liability
6. Can be Crossed
6. Cannot be Crossed
7. Does not require any stamp
7. Must be stamped
8. Payment may be
8. Payment cannot be countermanded by the Drawer
countermanded
9. Not required to be noted or
9. May be noted or protested for protested for dishonour
dishonour
Crossing of cheques
 They are two types of cheques:-
 Open cheques.
 Crossed cheques.
 Types of crossing:
 General crossing
 Special crossing
 Restrictive crossing.
General Crossing
HDFC BANK Date:
Not negotiable

Pay --------------------------------------------------- ---------OR BEARER

Rupees ---------------------------------------------------------------------
--------------------------------------------- Rs.

A/c No. 12345678

HDFC BANK
FLORENCE BUILDING
VIMAN NAGAR
PUNE XYZ
Special Crossing
HDFC BANK Date:
ICICI

Pay --------------------------------------------------- ---------OR BEARER

Rupees ---------------------------------------------------------------------
--------------------------------------------- Rs.

A/c No. 12345678

HDFC BANK
FLORENCE BUILDING
VIMAN NAGAR
PUNE XYZ
Restrictive Crossing
HDFC BANK Date:
A/c Payee

Pay --------------------------------------------------- ---------OR BEARER

Rupees ---------------------------------------------------------------------
--------------------------------------------- Rs.

A/c No. 12345678

HDFC BANK
FLORENCE BUILDING
VIMAN NAGAR
PUNE XYZ
Parties to negotiable instrument.
 Parties to a promissory note:
1. Maker
2. Payee
3. Holder
4. Endorser
5. Endorsee
 Parties to a bill of exchange
 Drawer
 Drawee
 Acceptor
 Drawee in case of need.
 Holder
 Endorser
 Endorsee
 Payee.
 Parties in case of a cheque
 Drawer
 Banker
 Payee
 Holder
 Endorser
 Endorsee
Holder And Holder In Due Course
 Holder Sec 8
 Any person who is entitled in his own
name
1. To the possession of the instrument
2. To receive or recover the amount due on
it.
So, a payee or endorsee or a holder of a
bearer document is the holder
 Holder in due course
 Any person is a holder in due course if
he fulfills the following conditions:-
 He received it for consideration.
 He became the holder before maturity.
 He took it in good faith.
Negotiation
 Transfer of a negotiable instrument is through
Through delivery
 Negotiation
Through
endorsement
and delivery
Kinds of delivery
 Actual
 Constructive
Endorsement
 Meaning of endorsement.
 Who can endorse?
 Essentials of a valid endorsement:-
1. It must be on the instrument itself.
2. It must be signed by the endorser
3. It must be completed by delivery.
Types of endorsement

1. Blank endorsement.
2. Full or special endorsement.
3. Restrictive endorsement.
4. Partial endorsement
5. Conditional endorsement
6. Sans recours endorsement
Liability dependent on a contingency
1. Blank or general endorsement.
 Ex:- PAY B
Sd/- B
Sd/-A

 A bill is payable to the order of B. B signs

on the back of the bill. This is an
endorsement in blank by B.
 Full or special endorsement.:- when there is
a mention of the name of the endorsee it is
called full endorsement.
 Ex: the endorser writes “pay to C or order”.

Pay B PAY C

Sd/-A Sd/-B
 Restrictive endorsement:-
 Ex:- “pay A only”
 Partial endorsement:-
 When the endorser transfers only a part of
the instrument to the endorsee. This is not
allowed.
Pay A Rs 500 only
Pay B Rs.1000

Sd/-C signed B
 Conditional endorsement:-
 Where the endorsement is subject to certain
conditions. Such as “to be paid upon the
completion of the contract”.
Dishonor of a Negotiable instrument
 Because of Non payment.
 Because of Non acceptance :
 This can happen only in case of a Bill of exchange
when:-
 The Drawee or one of the several drawees
make default in acceptance.
 If the drawee does not accept the bill within 48
hours from the time of presentment.
 Where the drawee is incompetent to contract.
 When presentment for acceptance is excused
and the bill is not accepted
 Where the drawee gives a qualified acceptance
Noting and Protest
 Noting means the recording of the fact of
dishonour by a Notary public upon the
instrument, or upon a paper attached thereto, or
partly upon each, within a reasonable time after
dishonor.
 It must contain the following particulars:
 The fact of the dishonour
 The date of dishonour
 The reasons, if any, assigned for such dishonour
 The Notary charges
 If the instrument has not been expressly dishonoured
the reason why the holder treats it as dishonoured
 Protest is the formal notarial certificate attesting
the dishonour of a bill or a note.

 Contents:
 The instrument.
 The name of the person for whom and against whom the
instrument has been protested.
 The fact of and reason for dishonour.
 The place and time of dishonour.
 The signature of the notary public.
 In case of an acceptance for honour, the name of the
party accepting and the name of the person for whose
honour it is accepted or paid.
Holder Vs. Holder in due course
 He need not take it  He must take it for
for consideration consideration
 The question of a  He must prove that
holder taking it in he has taken it in
good faith does not good faith.
arise
 If an instrument is  Holder in due course
inchoate, a holder of acquires a good title
such instrument even if the instrument
cannot get a good is inchoate(just begun
title and not so fuly
formed or developed)
Banker and customer
 Meaning of a banker and a customer
 Relationship between the banker and the customer
 When banker must refuse the payment of his customers
cheques.
1. When the customer countermands payment.
2. An order from the court.
3. Death or insanity of the customer.
4. Defective title of the party.
5. Loss of a cheque.
6. Closing of account.
When a banker may refuse payment on his customers cheques

 Where the cheque is post dated and is presented

before the due date.
 Where the balance is insufficient.
 Where the cheque has become stale.
 When the cheque is irregular.
 Where the cheque is mutilated
 Where the cheque is presented at a branch other
than the one where the customer has the account.
Rights and obligations of banker
1. Obligation to honour cheques
2. Obligation to keep a proper record of
transactions
3. Obligation to abide by the instructions given
by the customer
4. General lien of bankers
5. Obligation not to disclose the state of his
customer’s account or affairs
6. Incidental charges and interest
7. Right to set off
8. Right of appropriation