Negotiable Instruments Act

1
1881
Soumendra Roy
2 Promissory Note

 It is an unconditional written promise by one person to

another in which the maker (Payer) promises to pay on
demand on any future date, a stated sum of money to the
specified person or to the bearer of the instrument.

Soumendra Roy 02/03/2022

3

 1. Written :-The promise to pay must be in writing. Oral

promise will not be considered.
 2. Maker's Signature :-Promissory note must be signed by
the maker or payer.
 3. Unconditional :-The promise to pay must be
unconditional. If it contains a conditional promise, it is not
a valid.

Soumendra Roy 02/03/2022

4

 4. Definite Sum of Money :-The amount to be paid must

be definite in terms of money, for example I promise to
pay one thousand two hundred and fifty paisa 1200/50
only.
 5. Time Decision :-The promissory note must be payable
on demand or at a fixed determinable future date.

Soumendra Roy 02/03/2022

5

 6. Payee To be Certain :-The promissory note must be

payable to the bearer or to specified person.Example :- A
promissory note payable to the principal of the college is
regarded as payable to certain person.
 7. Parties Involved :-There are two parties involved in the
promissory note, the maker and the payee. The promissory
note may differ in maturity.

Soumendra Roy 02/03/2022

6

 Some promissory note mature after a long period, some

after a year or month and some are payable on demand. A
promissory note can be divided into two categories :
 1. Secured.
 2. Unsecured.

Soumendra Roy 02/03/2022

7

 8. Important Point :-
 1. The promise to pay must be lawful.
 2. The pro-note must be properly stamped
 .3. The stamps must be cancelled.
 4. The date must be mentioned.
 5. The place must be stated where it is made.

Soumendra Roy 02/03/2022

8 Bill of Exchange

 A three-party negotiable instrument in which the first party,

the drawer, presents an order for the payment of a sum
certain on a second party, the drawee, for payment to a third
party, the payee, on demand or at a fixed future date.
 A bill of exchange is distinguishable from a promissory
note, since it does not contain a promise and the drawer
does not expressly pledge to pay it. It is similar to a note,
however, since it is payable either on demand or at a
specific time.

Soumendra Roy 02/03/2022

9

 Parties to a Bill of Exchange: There are three parties to a

bill of exchange. Drawer is the maker of the bill of
exchange. A seller/creditor who is entitled to receive
money from the debtor can draw a bill of exchange upon
the buyer/debtor. The drawer after writing the bill of
exchange has to sign it as maker of the bill of exchange.

Soumendra Roy 02/03/2022

10

 Drawee is the person upon whom the bill of exchange is drawn.

Drawee is the purchaser or debtor of the goods upon whom the
bill of exchange is drawn. Payee is the person to whom the
payment is to be made. The drawer of the bill himself will be
the payee if he keeps the bill with him till the date of its
payment.

Soumendra Roy 02/03/2022

11

 The payee may change in the following situations:

 In case the drawer has got the bill discounted, the person
who has discounted the bill will become the payee;
 In case the bill is endorsed in favour of a creditor of the
drawer, the creditor will become the payee.
 Normally, the drawer and the payee is the same person.
Similarly, the drawee and the acceptor is the person.

Soumendra Roy 02/03/2022

12

 For example, Mamta sold goods worth Rs.10,000 to Jyoti and

drew a bill of exchange upon her for the same amount
payable after three months. Here, Mamta is the drawer of the
bill and Jyoti is the drawee. If the bill is retained by Mamta
for three months and the amount of Rs. 10,000 is received by
her on the due date then Mamta will be the payee.

Soumendra Roy 02/03/2022

13

 If Mamta gives away this bill to her creditor Ruchi, then

Ruchi will be the payee. If Mamta gets this bill discounted
from the bank then the bankers will become the payee.
 In the above mentioned bill of exchange, Mamta is the
drawer and Jyoti is the drawee. Since Jyoti has accepted
the bill, she is the acceptor. Suppose in place of Jyoti the
bill is accepted by Ashok then Ashok will become the
acceptor.

Soumendra Roy 02/03/2022

14 Cheque
 A cheque is a bill of exchange in which one party (Drawee) is a
Bank. So a Drawer (account Holder) draws the Cheque on the
(Drawee bank) in the name of a Payee. The Drawer has to
write the amount in both in figures and words. If different
values are written in Figures and words, the value of words can
be paid as per section 18 NI act.

Soumendra Roy 02/03/2022

15

 This means that if a person writes a cheque with the following:

Figures : Rs. 5000, Words: Rupees Five Lakh Only. This means
that amount of Five lakhs is to be paid.
 If the amount is written in words only and NOT in figure than
NO payment will be made because it would be Inchoate. This
means that a person writes a check with the following: Figures:
_________ (Left Blank)Words: Rupees Five
Lakh Only. No payment would be made (Section 20 NI Act)

Soumendra Roy 02/03/2022

 NEGOTIABLE INSTRUMENT
16  The document that contains a guarantee or promise to pay a specific
amount of money to a person or entity in possession of the
instrument, whether on a specified date or on demand, is known as a
“negotiable instrument.”
 A negotiable instrument features the name of the person who is to
make payment. Examples include cheques, banknotes, and
promissory notes.
 Transferable from one person to another in return for something of
equal value. Able to be transferred from one person to another by
delivery, with or without signature or endorsement, so that ownership
or title passes to the transferee.

Soumendra Roy 02/03/2022

17
 The instrument itself is a document that contains the specifics of
what is promised to be paid.
 In other words, whoever possesses the instrument will be paid the
specified amount of money on the agreed upon date, whether that
is immediately, or some time in the future.
 A negotiable instrument may be transferred to a third party,
holding the same value to the new holder.
 An everyday example of a negotiable instrument is a bank
cheque, which is given to a payee (person to be paid), who then
takes it to his bank to be cashed or deposited into his account.

Soumendra Roy 02/03/2022

18

 Uniform Commercial Code Governance Articles 3 and 4 of the

U.S. Uniform Commercial Code govern how negotiable
instruments may be issued and transferred. Article 3 also
specifies what conditions must be met in order for a written
document to be considered a negotiable instrument.
 A negotiable instrument must contain the following: An
unconditional promise or order to pay a specified amount of
money, though interest can be included.

Soumendra Roy 02/03/2022

19

 A specified date for payment, whether “on demand,” or a

certain date.
 Payment must be payable to the person or entity in possession
of the instrument.
 There can be no requirement for the person promising to pay to
perform any act other than paying the money.
 Negotiable Instrument vs. Contract - While a negotiable
instrument seems similar to a contract, it is different in that it
simply conveys the value part of the agreement.

Soumendra Roy 02/03/2022

20
 The contract itself is outlines the obligations of the parties, and
may give one party the right to hold the instrument.
 A negotiable instrument contains no promise to perform any
duties under a contract, and makes no consequence if the payer
defaults, as would a contract.
 A negotiable instrument merely gives the holder (1) the
authority to demand payment, and (2) the right to be paid.

Soumendra Roy 02/03/2022

21

 While many instruments must contain an endorsement,

usually in the form of a signature, by both parties involved in
the transaction, this is not a requirement for the document to
be considered a negotiable instrument.
 If such an instrument is lost or stolen, it may be deemed void.
The most commonly used types of negotiable instruments
include promissory notes, and bills of exchange.

Soumendra Roy 02/03/2022

 Promissory Note
22
 A promissory note is an unconditional promise to pay which is put into
writing by a person or entity and signed by the borrower or person
making the promise.
 Promissory notes are often created between a borrower and a lender in
which the borrower promises to pay the lender a specific amount of
money by the specified date.
 A promissory note, similar to a contract, contains all of the details
pertaining to the transaction such as the amount borrowed, late fees,
interest rates, and so forth, and should contain the term “promissory
note” within the body.
 In terms of enforceability, a promissory notes lies somewhere between
an informal IOU and a formal loan contract.
Soumendra Roy 02/03/2022
23 Bills of Exchange

 Another commonly used type of negotiable instrument is

the bill of exchange.
 A bill of exchange is a financial document that states an
individual or business will pay a certain amount on a
specific date.
 The date may range from the date it is signed, to within six
months into the future.

Soumendra Roy 02/03/2022

24 . Endorsement
 The person whose name is listed on the front of a cheque
or other negotiable instrument, the “payee,” must endorse
the document in order to transfer the instrument, in
exchange for the actual face value.
 This endorsement is done by placing his signature on the
back of the cheque. For example, if John receives a cheque
for payment, he places his signature on the back,
transferring it to the bank in exchange for cash.

Soumendra Roy 02/03/2022

25
 In some circumstances, more than one person may be
listed as payee on the cheque.
 How such a cheque may be endorsed depends on how the
names are written. If the cheque is made payable to “John
AND Sally Smith,” both John and Sally must endorse the
cheque. If the cheque is made payable to “John OR Sally
Smith,” only one signature is required. In the event the
check is made out to two individuals without specifying
“and” or “or,” it is likely the bank will require both
signatures.

Soumendra Roy 02/03/2022

26

 The person who signs endorses a negotiable instrument, does so

for the purpose of obtaining payment by giving up their rights to
the instrument itself. According to Article 3 of the UCC, there
are five types of endorsement:
 Blank Endorsement – The most common, and least restrictive,
type of endorsement, a blank endorsement features the signature
of the payee exactly how it appears on the front of the cheque.

Soumendra Roy 02/03/2022

  Special Endorsement – A special endorsement allows the payee
27
to assign the instrument to another person by writing on the back,
“Pay to the order of,” specifying to whom it is to be transferred,
then signing the document.
 This is also known as a “third party cheque.” Third party cheques
are rarely honored unless the original payee is present.
 Conditional Endorsement – A conditional endorsement specifies
certain conditions that must be met before the cheque can be
negotiated. For example, Mary has written a cheque to contractor
Bob for the installation of a new dishwasher.

Soumendra Roy 02/03/2022

  Bob hires Frank to do the job, endorsing the back of Mary’s
28
cheque as “Payable to Frank Williams upon completion of
dishwasher installation,” then signs his name. Frank can only
cash or deposit the check after he has finished the job for
which he was hired.
 Restrictive Endorsement – Restrictive endorsement limits
negotiability of the cheque. A common restrictive
endorsement is the phrase “for deposit only,” which specifies
that the cheque may only be deposited into the specified
account. This prevents another person from endorsing and
further negotiating the cheque in the case of theft.

Soumendra Roy 02/03/2022

29  Qualified Endorsement – Qualified endorsement limits the
responsibility of the holder of the instrument. For example, the
payee may write “without recourse” before signing the cheque,
signifying he has no responsibility if the check bounces for any
reason. Cheque cashers will not normally accept items with a
qualified endorsement.
 Related Legal Terms and Issues Authority – The right or power
to make decisions, give orders, or to control something or
someone.
 Contract – An agreement between two or more parties in which
a promise is made to do or provide something in return for a
valuable benefit.
Soumendra Roy 02/03/2022
30  Debtor – A person who is in debt, or under a financial
obligation to another.
 Default – Failure to fulfill an obligation, or to appear in a
court of law when summoned.
 Obligation – A promise or contract that is legally binding; the
act of binding or obliging oneself, as in a contract.
 Performance – The act of doing what is required by a
contract.
 Promissory – Containing, implying, or having the nature of a
promise.

Soumendra Roy
02/03/2022