The Negotiable Instrument

(Amendment) Act, 2018

 Lecture Outcomes
• Comprehend the meaning and characteristics of
Negotiable Instruments.
• Categorizing the Negotiable Instruments.
 NEGOTIABLE INSTRUMENTS

The word negotiable means ‘transferable by delivery’,

and the word instrument means ‘a written document by
which a right is created in favour of some person’.

Thus, the term “negotiable instrument” literally means

‘a written document which creates a right in favour of
somebody and is freely transferable by delivery.’

A negotiable instrument is a piece of paper which entitles

a person to a certain sum of money and which is
transferable from one to another person by a delivery or
by endorsement and delivery.
 Cont..
“A negotiable instrument” means a promissory
note, bill of exchange or cheque payable either to
order or to bearer.
- Sec. 13
“It is written instrument that is signed by the
maker or drawer, includes an unconditional promise or
order to pay a specific sum of money, it is payable on
demand or at a definite time, and is payable to order or
to bearer.”
- Black’s Law Dictionary
CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS

1.Free transferability or easy negotiability

• True owner could transfer the property (Right
of ownership) by mere delivery (Bearer
instrument) or Endorsement & delivery (Order
instrument) without formalities.
 Cont.
2. Transfer of absolute and good title

• Negotiability confers absolute and good title

on the transferee.
• Bona-fide holder also known as holder in due
course (who gets the instrument for
value/consideration and in good faith) gets a
good and undisputable title to the instrument.
• However, the holder in due course should
have no knowledge of the defects in title of
previous holder.
 Cont.
X issued a bearer cheque payable to Y. It was
stolen from Y by a person, who passed it on Z. If Z
received it in good faith and for value and without
knowledge of cheque having been stolen, he
would be entitled to receive the amount of the
cheque. Here, Z is the regarded as “Holder in Due
Course”
 CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS

3. Written Instrument: Must be in writing includes

handwriting, typing, computer printout, engraving
etc.

4. Unconditional order or promise

5. Only for money

 CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
6.Time of payment:
•Should be certain
•“when convenient” should not be the case

Case: When time of payment is linked to the death

of person, will it be a negotiable instrument???
No, as death is certain and time is not.
 CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
7. Payee a certain person:
•Payee means in whose favor the instrument is
made.
•Payee can be individual, corporate, trade union,
secretary, chairman etc
•Payee can be more than 1 person.
 CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
8. Signature: A negotiable instrument must bear
the signature of its maker or drawer.

9. Delivery of Instrument

10. Stamping: As per Indian Stamp Act, 1899, it is

necessary for promissory note and bills of
exchange and its value depends on the value of
note or bill and time of payment.
What is Holder
• Section 8 of Negotiable Instruments Act 1881defines the
term Holder as The holder of a negotiable instrument is
any person who is for the time being entitled in his own
name and right to the possession of the instrument and
to receive and recover the amount due on the
instrument. A person is said to be held only if he has
possession and entitled for that possession along with
entitled to claim money under it. In the case of an order
instrument, the name of the holder appears on the
document as payee or endorsee. In the case of a bearer
document, a payee claims the money without having his
name mentioned on the cheque.
Contd..
• According to this section, the holder has
the capacity to receive payment or recover
the amount by filing a suit in his own name
against other parties, to negotiate the
instrument and to give a valid discharge. If
the promissory note, cheque or bill is
destroyed or lost by any chance then it is
the holder so entitled at the time of such
destruction or loss.
 Kinds of Holder:
• (a) De jure- The holder of a negotiable
instrument as a matter of legal right.
• (b) De facto- The holder of a negotiable
instrument by the virtue of possession but
not entitled in his own name.
Holder’s Rights and Powers:
• In Special Endorsement, the holder of a cheque endorsed in blank
may convert the blank endorsement, by writing above the endorser’s
signature which gives direction to pay the cheque to or to the order
of himself or any other person.
• • In Crossings, a cheque may be crossed generally or specifically;
when it’s uncrossed whilst when it’s crossed generally, the holder
may cross it specifically.
• • In Duplicate of Cheque, in case of misplacing of the cheque, the
holder can ask to the drawer to give him another cheque of the same
tenor, but holder must give security to the drawer to indemnify him
for all the loses if the lost cheque has been found again.
• • In Negotiation, a holder of a cheque has a right to negotiate to
another person. Moreover, in some cases, a holder has a power of
negotiation even though cheque has no title or faulty title.
Contd..
• In Presentation, if a cheque is an open cheque then the person can
take it to the drawee bank and request payment in cash; but in case
of crossed cheques one cannot anticipate drawee bank to pay in
cash, and he should, therefore, present it to the drawee bank for
payment.
• In Notice of Dishonour, a cheque holder presents the cheque for
payment and it does not get paid then he may give notice of
dishonour outright to prior parties in order to hold back their liability
to him.
• • In Right of Action, a holder can sue on it in his own name. whether
his action on the cheque succeeds or not is depended on whether
he is a holder or holder in due course.
 Holder in due course-
• In Banking or Commercial law, a holder in due course is a person
who accepts a negotiable instrument in a value-for-value exchange
without doubting its legitimacy so ultimately in a good faith. Now the
person who took it for value in good faith now becomes a real owner
of the instrument and is known as “holder in due consideration”.
According to Section 9, “Holder in due course means any person
who for consideration became the possessor of a promissory note,
bill of exchange or cheque is payable to bearer, or the payee or
endorsee thereof, if payable to order before the amount mentioned
in it became payable and without having sufficient cause to believe
that any defect existed in the title of the person from whom he
derived his title”.
The phrase “in good faith and for value” has split into 4
rudiments under sec 9-
• • The instrument taken by the holder is should be for
value.
• • It’s necessary to obtain the instrument before its
maturity.
• The instrument should be complete and regular on its
face.
• • The instrument should have been received in a good
faith without noticing any defect or error neither in the
instrument, title nor in the person negotiating it to him.
 Conclusively
• The holder of a negotiable instrument is any person who
is for the time being entitled in his own name and right to
the possession of the instrument and to receive and
recover the amount due on the instrument. a holder in due
course is a person who accepts a negotiable instrument in
a value-for-value exchange without doubting its legitimacy
so ultimately in a good faith. Now the person who took it
for value in good faith now becomes a real owner of the
instrument and is known as “holder in due consideration”.
To sum it up every holder in due course is a holder but
every holder in due course is not a holder.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
1. Bearer Instruments
a) It is expressed to be so payable
b) The only or last endorsement is blank
Provisions of RBI with regard to Bearer Instruments:
a)No person other than RBI, Central Govt. can
issue a promissory note payable to bearer.
b)A bill of exchange cannot be made payable to
bearer on demand though it can be made payable
to the bearer after a certain time.
c)But a cheque (though bill of exchange) payable to
the bearer or demand can be drawn on a person’s
account with a banker.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
2. Order Instruments
•It is expressed to be so payable
•It is expressed to be payable to a particular
person and does not contain any words
prohibiting transfer.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
3. Inland Instruments
•Drawn and made payable in India, or
•Drawn in India upon some persons resident
of India, even though it is made payable in
foreign countries.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
4. Foreign Instruments
•Must be drawn outside India and made
payable outside or inside India or
•Must be drawn in India and made payable
outside India and drawn on a person
resident outside India
 5. Demand Instrument
• Demand Instrument is a document that
serves as a written order by a drawer to a
drawee to pay a specified sum on its
presentment. A negotiable paper payable
at sight or on presentation and that in
which no time for payment is stated is a
demand instrument
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS

5. Demand Instrument: (Sec 19)

 6. Time Instruments
/Usance Bill
• It is a time-bound bill which means the
payment has to be made within the given
time period and time.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS

6. Time Instruments
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
7. Ambiguous Instruments (Sec. 17)
An instrument which is in such form that it
may either be treated as bill or note.
Eg. A promissory note addressed to a third
person may be treated as a bill by such
person by accepting it, while a bill not
addressed to anyone may be treated as
note.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
8. Inchoate or Incomplete Instruments
(Sec. 20)

•When one person signs and delivers to another

person a paper stamped, either wholly blank or
having written thereupon an incomplete negotiable
instrument.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS

9. Accommodation Bills A bill which is drawn, accepted or

indorsed without consideration.
•Accommodating or accommodation party and
Accommodated party.
•Nothing is on the face of accommodation bill to distinguish
it from ordinary trade bill.
•Accommodation party is not liable on the instrument.
 EXAMPLE
• P was in need of money for 3 months. He induced his
friend Q to accept a bill of exchange drawn on him for
Rs. 10000 for 3 months. The bill was drawn and
accepted.
• The bill was an accommodation bill.
• P might get the bill discounted from his banker, paying
small amount as discount.
• He could use the fund for 3 months and before maturity
remit the amount back to Q.
• Here, P is “accommodated party” and Q is
“accommodating party”.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
10. Bills in sets:
•Foreign bills are usually drawn in sets to avoid the
danger of loss.
•Bill of exchange drawn in part are known as bills
in sets.
•Each part is numbered and it contains a provision
that it shall continue to be payable only as long as
the others remain unpaid.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
11. Fictitious Bill (Sec. 42)
When the name of drawer or payee or both
are fictitious. The fictitious means:
a)A non-existing person
b)A pretended person
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
12. The Documentary Bill and Clean Bill

The bill which has documents attached is

documentary bill
a)Documents against acceptance (D/A) bills
b)Documents against payment (DIP bills)
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
13. Escrow
When a bill is indorsed or delivered to a
person subject to the understanding that it
will be paid only if certain conditions are
fulfilled, such a bill is called an “escrow”.
 CLASSIFICATION OF NEGOTIABLE
INSTRUMENTS
14. Undated bills and Note:
If an instrument is expressed to be payable at a
fixed period after the date is issued undated, or
where the acceptance of an instrument payable at
a fixed period after sight is undated, any holder
may insert therein the true date of issue or
acceptance and the instrument is payable
accordingly.