Negotiable Instruments Act,

1881
 Definition of Negotiable Instrument

• According to section 13 of the Negotiable

Instruments Act, 1881, a negotiable
instrument means “promissory note, bill of
exchange, or cheque, payable either to order
or to bearer”
 Promissory Note
• Section 4 of the Negotiable Instruments Act, 1881 defines a
promissory note as ‘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’
Parties to a Promissory Note
There are primarily two parties involved in a promissory note. They
are.
• The Maker or Drawer – the person who makes the note and
promises to pay the amount stated therein.
• ii. The Payee – the person to whom the amount is payable.

In course of transfer of a promissory note by payee and others, the

parties involved may be
• a. The Endorser – the person who endorses the note in favour of
another person.
• b. The Endorsee – the person in whose favour the note is negotiated
by endorsement.
 Bill of Exchange
• Section 5 of the Negotiable Instruments Act, 1881
defines a bill of exchange as ‘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
There are three parties involved in a bill of
exchange. They are
i. The Drawer – The person who makes the order for
making payment.
ii. The Drawee – The person to whom the order to
pay is
iii. The Payee – The person to whom the payment is
to be made
 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.

Essentials:
• Cheque is always drawn on a bank.
• Cheque is always payable on demand.
Since a cheque is a species of a bill of exchange, it must satisfy all the
requirements of a bill of exchange, i.e.
(i) it must be in writing and signed by the drawer;
(ii) it must contain an unconditional order to pay;
(iii) the order must be to pay a certain sum of money to or to the
order of a certain person, or to the bearer of the instrument.
Holder in Due Course
Holder in due course means a holder who takes the instrument
bona fide for value before it is overdue, and without any notice of
defects in the title of the person, who transferred it to him.

Thus, a person who claims to be ‘holder in due course’ is required

to prove that:
• on paying a valuable consideration, he became either the
possessor of the instrument if payable to order;
• he had come into the possession of the instrument before the
amount due there under became actually payable; and
• he had come to possess the instrument without having sufficient
cause to believe thatany defect existed in the title of transferor’s
from whom derived his title.
 Types of Crossing
Types of crossed cheques:
• General Crossing
• Special Crossing
• Restrictive Crossing
• Non Negotiable Crossing 

• https://www.youtube.com/watch?
v=hotkHSggsng
 Types of Endorsements
• Endorsement in Blank
• Endorsement in Full
• Restrictive Endorsement
• Endorsement sans recourse
• Conditional Endorsement
• Partial Endorsement
 Discharge of Negotiable Instrument
A negotiable instrument may be discharged in any
one of the following ways.
• By payment in due course
• By the principal debtor becoming the holder
• By renunciation of the rights by the holder
• By cancellation of the instrument
• By an act that would discharge an ordinary contract
 Dishonour of Negotiable Instruments
• By Non Acceptance
• By Non Payment

Dishonour of a Cheque
• Refer to Drawer
• Exceeds Arrangement
• Effects not cleared
• Funds Insufficient
• Payment Stopped by Drawer
• Account Closed
• On Types of Cheque (Undated, Stale, Post dated, Mutilated)
• Signature required
• Signature mismatch
 How is a party to a negotiable instrument discharged?

A party to a negotiable instrument is discharged in the following

ways
• By cancellation of the name of a party to the instruments
• by release of any party to the instruments
• by payments
• by delay in presenting a cheque for payment
• by payment in due course of a cheque (payable to order)
• by taking qualified acceptance
• by non-presentment for acceptance of a bill of exchange
• by operation of law
• by material alteration