Law Relating to

Negotiable Instruments
 Negotiable Instruments

 Negotiable means transferable (from one person to

another by delivery) in return of consideration and
instrument means a written document by which a
right is created in favor of some other person. The term
negotiable instrument literally means a document
transferable by delivery.
 Negotiable Instruments Act, 1881: Sec. 13: “a
negotiable instrument means a Promissory note, Bill of
Exchange or Cheque payable either to order or to
bearer”
 Thus in India only three kinds of instruments are
recognized as negotiable instruments viz., Promissory
Notes, Bills of Exchange and Cheques.
Characteristics of Negotiable Instruments

Essentials of a
Negotiable Instrument

Fixed Sum Holder is

Writing, of Money presumed to Essentials of
Signed and be the owner a Contract
Dated
Freely Certain
Unconditional Transferable Presumptions

Prof. Rajkumar Bagadia

Characteristics of Negotiable Instruments

• It is a contract to pay money, legal tender money only.

• Must be written and signed by the maker/drawer.
• It shall be dated.
• It shall be unconditional.
• It shall be for a fixed sum of money only.
• The right of ownership passes automatically to the
transferee. Can be transferred by a simple process.
Bearer instruments – mere delivery to the transferee is
sufficient. Other instruments – endorsement
(signature of the holder) and delivery are required.
• It is transferrable infinitum (any number of times) till
maturity.
Prof. Rajkumar Bagadia
 Characteristics… Contd…

• The holder of the instrument is presumed to be the

owner of the property contained in it.
• The transferee, who fulfils certain conditions, is called
the holder in due course, who gets a good title even
where the title of the transferee is defective.
• There are certain presumptions in every negotiable
instrument… Consideration is always presumed.
• Essentials of a Contract like capacity, consideration,
free consent, lawful object must be there.
• Maker/Drawer shall be a specific person. Person in
whose favor the instrument is drawn shall also be
named in the instrument.
Prof. Rajkumar Bagadia
 The Promissory Note

• A Promissory Note is an instrument in writing (not

being a bank note or a currency note) 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.
• The person who makes the promise to pay is called the
Maker/drawer. He is the debtor and must sign the
instrument. The person who will get the money is the
creditor and is called Payee.
• A promises to pay B Rs. 10,000/- on 1st April, 2019.  ✔
• A promises to pay B Rs. 10,000/- after C’s death.  ✔
• A promises to pay B Rs. 10,000/- as soon as possible….???
Prof. Rajkumar Bagadia
Essential Characteristics of a Promissory Note

• Must be in writing.
• Must be signed by the maker/drawer, dated.
• Must contain a an express promise to pay…an unconditional
promise to pay a certain sum of money only.
• The maker/drawer and the payee must be certain.
• Promissory note may be payable on demand or after a date
mentioned in the note.
• It must be duly stamp under the Indian Stamp Act.
• I promise to pay B Rs. 10,000/- ten days after he delivers
goods to me.
• I promise to pay B Rs. 10,000/- and all other sums due to him
on 1st November, 2015.
• I promise to pay B Rs. 10,000/- plus interest @ 12%.
• I promise to pay B or bearer Rs. 10,000/- on 1st Nov. 2015
Prof. Rajkumar Bagadia
 Specimen of a Promissory Note

Rs.10,000/-

Sixty days after date I promise to pay Mr. Ashokkumar

Sharma, or order a sum of Rs. 10,000/- (Rs. Ten thousand
only).

Mumbai (signatures)
8th March, 2019
Stamp Ms. Sujata Singh

• In the specimen given above the note is payable after

a specified period of time. A note may be drawn
payable on demand.
• As per Sec. 31 of RBI Act, a promissory note cannot
be made payable to bearer on demand.
Prof. Rajkumar Bagadia
 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 an instrument.
• A bill of exchange has three parties:
a) The drawer, who draws the bill.
b) The drawee, who is to make the payment.
c) The payee, who is entitled to receive the payment.
• Sometimes the drawer and the payee may be one and the
same person.
• When the drawee accepts the bill, he is also known as an
accepter.
• B, pay Rs. 10,000/- to C or order…..signed A.
• B, I shall be obliged to you if you pay Rs. 10,000/- to C.
Prof. Rajkumar Bagadia
Essential Characteristics of a Bill of Exchange

• Must be in writing, signed by the maker/drawer, dated.

• Must have three parties…drawer, drawee and payee.
• Must contain a an express order to pay…an unconditional
order to pay a certain sum of money only.
• The maker/drawer, drawee and the payee must be certain
• A Bill of Exchange may be payable on demand or after a date
mentioned in the note.
• Stamp Duty.
• Special Benefits of Bill of Exchange:
• A bill is a double secured instrument. If the bill is
dishonoured by the drawee/accepter, the payee or the
holder may look to the drawer for payment.
• In case of some immediate need of money, a bill can be
discounted with a bank or some other party.
Prof. Rajkumar Bagadia
 Bill of Exchange
• The drawee, once he accepts to make the payment on the bill,
he is called the accepter.
 The acceptance must be in writing and signed. Mere
signature without any words is also valid acceptance.
 Acceptance may be absolute or qualified (conditional).
 Acceptance is complete only by delivery of the bill to the
holder or by giving notice to the holder of acceptance.
 Where the bill has several drawees, all need to accept.
• Drawee in case of Need: In a bill, when the name of any
person is mentioned in addition to that of the drawee, he is
called drawee in case of need. This person is to be resorted to,
only if the original drawee does not accept or after acceptance
fails to make payment. The bill will not be considered
dishonoured unless it has been dishonoured by the drawee in
case of need too.
Prof. Rajkumar Bagadia
 Specimen of a Bill of Exchange

Rs.10,000/-

Sixty days after date pay to Mr. Ashokkumar Sharma or

order, a sum of Rs. 10,000/- (Rs. Ten thousand only).

Mumbai
8th March, 2019

To:
Ms. Rajesh Singh Signature
Stamp
Mumbai (Ms. Sujata Singh)

• In the specimen given above the bill is payable after a

specified period of time. A bill of exchange may be drawn
payable ‘at sight’, i.e. on demand or it may be payable ‘after
certain time after sight’.
Prof. Rajkumar Bagadia
Distinction between Promissory Note and
Bill of Exchange
Promissory Note
• Only TWO parties.
• Unconditional promise by
he maker to pay the payee
• No prior acceptance is
needed
• The liability of the
drawer is primary and
absolute.
• Notice of dishonour need
not be given
Bill of Exchange
• THREE parties
• Unconditional order to the
drawee to pay
• A bill needs to be accepted by
the drawee.
• Liability of the drawer is
secondary and conditional
upon non-payment by the
drawee.
• Notice of dishonour must be
given by the holder to the
drawer and the intermediate
endorsers to hold them liable.
Prof. Rajkumar Bagadia
 Cheque
• Sec. 6 of the Negotiable Instruments Act, defines a
cheque as a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise
than on demand.
• Further, the expression includes the electronic image
of a truncated cheque and a cheque in the electronic
form.
• A cheque in the electronic form means a cheque
which contains the exact mirror image of a paper
cheque, and is generated, written and signed in a
secure system ensuring the minimum safety standard
with the use of digital signature (with or without
biometrics signature) and asymmetric crypto system.
Prof. Rajkumar Bagadia
 Essential Characteristics of a Cheque

• It must contain all the essentials of a bill of exchange.

• Drawn on a specified banker: The drawee is always a banker.
• A cheque is always payable on demand.
• A cheque does not require a stamp.
• No acceptance is necessary by the drawee. A cheque is
presented for payment and not for acceptance.
• A cheque may be made payable to the bearer.
Date…………………………....

Pay……………………………………………………………………………………………………. OR BEARER
Rupees………………………………………………………………………………………………………………
……………………………………………………………………………………….
Rs.
A/C No. L.F. Intls.

STATE BANK OF INDIA

M.G. ROAD, GHATKOPAR (EAST)
MUMBAI – 400077.

528551 400022001 10
 Types of Cheques
1. Bearer Cheque: payable by the bank across the counter.
2. Crossed cheque: Crossing is done by drawing two parallel
transverse lines on the top left hand corner with or without
any words written within the lines. Payment of such a cheque
is made only to a banker and not to the bearer.
• There are three types of crossings: (a) General crossing;
(b) Special crossing; (c) Restrictive crossing
• In case of general crossing the payment will be made to the
banker through whom it is presented.
• In case of special crossing in between the two parallel
transverse lines the name of the banker is also written and the
drawee bank will make the payment to the banker to whom it
has been crossed or its collection agent.
• In case of restrictive crossing…the words a/c payee is written.
The payment is to be credited to the account of the payee only.
Prof. Rajkumar Bagadia
 Cheque and a Bill of Exchange
• Drawee…only a banker.
• A cheque requires no
acceptance
• Payable on demand…no
days of grace.
• Cheque is always payable on
demand.
• A cheque does not require
stamp.
• Cheque can be crossed.
• Notice of dishonour need
not be given
• Any one can be a drawee
including a banker.
• A Bill must be presented for
acceptance…drawee liable
only after acceptance.
• Normally three days of grace
after maturity.
• Bill need not always be
payable on demand.
• A bill requires stamp as per
the Stamp Act.
• A bill can not be crossed.
• Notice of dishonour is
required.
Prof. Rajkumar Bagadia
Endorsement of a Negotiable Instrument

• Endorsement means signing the instrument for the

purpose of transferring it to the transferee.
• When the payee or the holder of a negotiable
instrument signs on the face or the back thereof or
on the slip of paper annexed thereto, he is said to
endorse the same, and he is called the Endorser and
the person to whom the endorsement is made is
called the Endorsee.
• The slip of paper used for this purpose is called
allonge. The endorsement must be made with an
intention to negotiate the instrument.

Prof. Rajkumar Bagadia

 HOLDER
• The holder of a Negotiable Instrument 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.
• The holder is held responsible for the loss or
destruction when the instrument is lost or destroyed.
• Mere right to have possession of the instrument will
not constitute the possessor a holder thereof.
• He should be entitled to receive or recover the
amount thereon – the holder must have obtained the
instrument in a lawful manner and must have a right
to sue in his own name to recover the amount.
Prof. Rajkumar Bagadia
 Holder In Due Course

• He is a person who (a) for consideration becomes the

owner of the negotiable instrument, (b) before the amount
mentioned in it became payable and (c) without having
sufficient cause to believe that some defect existed in the
title of the person from whom he derived his title.
• The holder in due course can file a suit in his own name
against the parties liable to pay. He receives the instrument
free of any defects. However in case of forgery even he
does not get a good title.
• Every prior party to the instrument is liable to him until the
instrument is duly satisfied.
• A holder deriving title from a holder in due course has the
rights therein of the holder in due course.
Prof. Rajkumar Bagadia
Presumptions as to Negotiable Instruments

• Unless contrary is proved, it is always presumed that every

Negotiable Instrument –
1. Was made, accepted and endorsed for consideration.
2. Bearing a date was made on that date.
3. Every bill of exchange was accepted within a reasonable
time after its date and before its maturity.
4. Every transfer of a negotiable instrument was made
before its maturity.
5. The holder of a negotiable instrument is the holder in due
course.
6. A lost promissory note or bill of exchange was duly
stamped and signed.
7. Endorsement appearing upon the instrument were made
in the order in which they appear thereon.
Prof. Rajkumar Bagadia
Dishonor of Cheques – Criminal Liability:
Sections 138 to 142
• To ensure better discipline in matters of circulation and
payment of cheques, these sections were introduced by the
Amendment Act of 1988 which came in force with effect
from 1.4.1989.
• Further amendment by an Act of 2002 was made effective
from 6th February, 2003.
• A drawer of a dishonoured cheque, now, is deemed to have
committed a criminal offence.
• Whenever a cheque has been issued towards payment in
discharge of a legally enforceable debt or liability is
returned by the bank unpaid due to insufficiency of funds,
the person issuing such a cheque is liable to be punished
with imprisonment up to 2 years or fine up to twice the
amount of the cheque or both.
Prof. Rajkumar Bagadia
 Dishonor of Cheques – Criminal Liability

• Before the penal provisions can be invoked against the drawer

of a bounced cheque, following conditions must be satisfied:
1. The cheque is dishonored by reason of paucity or
insufficiency of funds.
2. Payment is in discharge of a legally enforceable claim,
debt or liability.
3. Cheque should have been presented to the bank for
payment within 3 months or within the validity period.
4. The holder of such a cheque should give notice to the
drawer within 30 days of receiving information of
dishonorment. (within 30 days of ‘cause of action’).
5. The drawer is given 15 days time to make the payment
and he fails to pay.
6. The written complaint is made to the court within one
month of the expiry of the aforesaid period of 15 days.
Prof. Rajkumar Bagadia
 Offences by Companies

• If the person committing an offence u/s. 138 is a company,

every individual who, at the time the offence was
committed, was in charge of the conduct of the business
of the company, as well as the company, shall be deemed
to be guilty of the offence and shall be liable to
punishment.
• However, if such an individual proves that the offence was
committed without his knowledge or that he exercised all
due diligence to prevent the happening of the offence, then
he shall not be liable for the punishment.
• It is to be noted that these remedy available u/s. 138 to 142
is an additional remedy. Rights under civil law are
unaffected.
Prof. Rajkumar Bagadia
THANK YOU