Negotiable Instrument

B.Legislation
CP (302)
Presented By :- Kanchan
Pandey
Meaning of Negotiable
Instrument
• The term Negotiable Instrument consists of
two parts viz; Negotiable and Instrument.
• The word ‘negotiable’ means transferable by
delivery and the word ‘instrument ‘ mean
written documents by which a right is
created in favour of some person.
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”.
Payable to order
A note , bill or cheque is payable to order which is expressed
to be ‘payable to a particular person or his order’. For
example
(i) Pay A
(ii) Pay A or order
(iii) Pay to the order of A
(iv) Pay A and B
(v) Pay A or B
Are various forms in which an instrument may be made
payable to order.
Payable to bearer
Payable to bearer means payable to any person
whosoever bears it . A note, bill or cheque in
the form “pay to A or bearer” or “Pay bearer
”is payable to bearer.
Negotiable instrument must possess
two features
• The right of ownership contained in the instrument can be
transferred from one person to another by mere delivery.
• The transferee taking the instrument in good faith and for
consideration gets a good title to the same even though the
title of the transfer is defective.
Essential Characteristic
Features of a Negotiable
Instrument

• Payable to order or bearer

• Freely transferable
• Presumption as to holder
• Title of holder in due course
• Presumption as to consideration
Essential Characteristic Features of a
Negotiable Instrument
•Payable to order or bearer: - It must be payable either to
order or bearer
• Freely Transferable:- A instrument payable to order is
negotiable by endorsement and delivery and an instrument
payable to bearer is negotiable by mere delivery
•Presumption as to Holder:- Every holder of negotiable
instrument is presumed to be holder in due course (Section
118)
Essential Characteristic Features of a
Negotiable Instrument
•Title of holder in due course:- A holder in due course ( i.e.
the person who become the possessor of negotiable
instrument before maturity, for valuable consideration and
in good faith ) get the instrument free from all defects in the
title of transferor
• Presumption as to considerations:- Every negotiable
instrument is presumed to have been made, drawn,
accepted, endorsed , negotiated or transferred for
consideration.
 Types of Negotiable
Instruments
According to the Negotiable Instruments Act, 1881
there are just three types of negotiable instruments
• Promissory note
•Bill of exchange
•Cheque.
“However many other documents are also recognized
as negotiable instruments on the basis of custom and
usage, like hundis, treasury bills, share warrants, etc.,
provided they possess the features of negotiability ”
 Promissory Note

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 to the
bearer of the instrument ( Section 4).
 Sample of promissory
note
Parties to a Promissory Note
There are two parties involved in a promissory
note.
• The Maker or Drawer – the person who
makes the note and promises to pay the
amount Stated.
• The Payee – the person to whom the amount
is payable.
Characteristic of Promissory
Note
• It must be in writing .
• The promise to pay must be unconditional .
• The amount promised must be a certain and
a definite sum of money .
• The instrument must be signed by the maker
• The person to whom the promise is made
must be a definite person.
Bill of Exchange
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
certain person to the bearer of the
instrument (Section 4).
 Characteristic of bill of
exchange
• The bill of exchange must be in writing
• It must contain an order to pay. Words like
‘please pay Rs 5,000/- on demand and oblige’
are not used.
• The order must be unconditional.
• The order must be to pay money and money
alone.
• The sum payable mentioned must be certain
or capable of being made certain.
• The parties to a bill must be certain .
Samples of Bill of exchange
 Parties to a Bill of
Exchange
There are three parties involved in a bill of
exchange.
•The Drawer – The person who makes the
order for making payment.
• The Drawee – The person to whom the
order to pay is made. He is generally a
debtor of the drawer.
• The Payee – The person to whom the
payment is to be made.
Types of bill
• Accommodation Bill :- Accommodation bill is quite similar to
an ordinary trade bill of exchange. The feature which
distinguish it from ordinary bill is that it is not supported by
any consideration or a trading transaction.
• Fictitious Bill :- When in a bill of exchange the name of both
the drawer and the payee are fictitious , the bill is said to be a
fictitious bill.
• Documentary Bill:- When document relating to the goods
represented by bill( railway receipt, invoice ) are attached to a
bill, then that is called as documentary bill.
 Cheques
Cheques:- a cheque as a bill of exchange drawn
on a specified banker and not expressed to be
payable otherwise than on demand. Actually, a
cheque is an order by the account holder of the
bank directing his banker to pay on demand, the
specified amount, to or to the order of the person
named therein or to the bearer.
Sample of
Cheques
Features of a cheque
• A cheque must be in writing and duly signed by the
drawer.
• It contains an unconditional order.
• It is issued on a specified banker only.
• The amount specified is always certain and must be
clearly mentioned both in figures and words.
• The payee is always certain.
• It is always payable on demand.
• The cheque must bear a date otherwise it is invalid and
shall not be honored by the bank.
 Types of Cheque
•Open cheque.
• Crossed cheque.
• Bearer cheque.
•Order cheque.
 Open cheque
Open cheque: A cheque is called ‘Open’ when it is
possible to get cash over the counter at the bank.
The holder of an open cheque can do the
following:
• Receive its payment over the counter at the
bank,
• Deposit the cheque in his own account
•Pass it to some one else by signing on the back of
a cheque
 Crossed cheque
Crossed cheque: Since open cheque is subject to
risk of theft, it is dangerous to issue such
cheques. This risk can be avoided by issuing
another types of cheque called ‘Crossed
cheque’. The payment of such cheque is not
made over the counter at the bank. It is only
credited to the bank account of the payee. A
cheque can be crossed by drawing two
transverse parallel lines across the cheque,
with or without the writing ‘Account payee’ or
‘Not Negotiable’
 Bearer cheque
Bearer cheque: A cheque which is payable to
any person who presents it for payment at
the bank counter is called ‘Bearer cheque’. A
bearer cheque can be transferred by mere
delivery.
 Order cheque
Order cheque: An order cheque is one which is
payable to a particular person. In such a
cheque the word ‘bearer’ may be cut out or
cancelled and the word ‘order’ may be
written. The payee can transfer an order
cheque to someone else by signing his or her
name on the back of it.
 Bank Draft
A bank draft is an order issued by one bank on another bank or on
its own branch instructing the latter to pay a specified sum of
money to a specified person or his order.

Distinguishing features of draft

•It can be drawn only by a bank on another bank or on its another branch and
not by an individual as in the case of cheque.
•It cannot so easily be countermanded as a cheque.
•It cannot be made payable to bearer.
Time and Demand Instruments
An instrument payable after a fixed time or on a
specified date is termed as a ‘time instrument’. An
instrument payable after happening of an event
which is certain to happen, (e.g. Death) is also
called a time instrument.
Ambiguous Instruments
An instrument , which in form is such that it may either
be treated as a bill of exchange or a promissory
note , is an ambiguous instrument.
Thank You

Kanchan Pandey