MODULE 3:

Negotiable Instruments
• Negotiable Instruments Act was enacted, in India, in 1881
• According to Section 13 (a) of the Act, “Negotiable instrument means
a promissory note, bill of exchange or cheque payable either to
order or to bearer, whether the word “order” or “ bearer” appear on
the instrument or not.”
• means a written document which creates a right in favour of some
person and which is freely transferable by delivery or by endorsement
and delivery
• Guaranteeing payment of a specific amount either on demand or at a
set time.
RELATED TERMS
Negotiable Means transferable from one person to another in
return for consideration.
Instrument means a written document by which a right is
created in favour of some person.
Negotiable Instrument literally means is a written document
transferable by delivery
Order –specific payee named on the instrument
Bearer- Instrument payable to possessor
 Essential Characteristics of Negotiable
Instruments
1) Property:
• Bearer instrument-property passes by mere delivery to the transferee-
possessor is the owner- has the right to the property
• Order instrument-endorsement and delivery are required for the
transfer of property
2) Title:
• Transferee of a negotiable instrument is known as ‘holder in due course’
• Value not affected by any defect in title of transferor or previous holders
3. Rights
• Sue in case of dishonour
• Transferred any number of times till maturity
4. Presumptions
• Not necessary to write ‘for value received’
5. Prompt payment
• Enables the holder to expect prompt payment because a dishonour
means the ruin of the credit of all persons who are parties to the
instrument
 Presumptions
1. Consideration
• presumed that every negotiable instrument was drawn, accepted or
endorsed for consideration
• may be rebutted by proof that NI obtained from, its lawful owner by
means of fraud or undue influence.
2. Date: If NI is dated – presumed that NI is made/ drawn on that date
3. Time of acceptance :presumed to have been accepted within a
reasonable time after its issue and before its maturity
4. Time of transfer: presumed that every transfer of a negotiable
instrument was made before its maturity
5. Order of endorsement: presumed that endorsements appearing
upon a NI were made in the order in which they appear
6. Stamp: presumed that a lost promissory note, bill of exchange was
duly stamped.
7. Holder in due course: presumed that the holder of a negotiable
instrument is the holder in due course
8. Proof of protest : presume the fact of dishonour
Types of Negotiable Instrument
a. Promissory notes
b. Bills of exchange
c. Cheques
Promissory note
Section 4 of the Act defines “A promissory note is an instrument in
writing containing an unconditional undertaking, signed by the maker,
to pay a certain sum of money to or to the order of a certain person,
or to the bearer of the instruments.”
Parties to a Promissory : 2 parties
• The maker: the person who makes or executes the note promising to
pay the amount stated therein,
• The payee: one to whom the note is payable
Essential Features /elements of promissory
notes
a) It must be in writing;
b) It must certainly be an express promise or clear understanding to pay;
c) Promise to pay must be unconditional;
d) It should be signed by the maker;
e) The maker must be certain;
f) The payee must be certain;
g) The promise should be to pay money and money only;
h) The amount should be certain; and
i) Other formalities regarding number, place, date, consideration etc. though
usually found given in the promissory notes but are not essential in law.
Bills of exchange
Section 5 of the Act defines, “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 the instrument”.
• Three parties to a bill of exchange: drawer, acceptor or drawee and
payee.
Essential conditions of a bill of exchange include

a) It must be in writing;
b) It must be signed by the drawer;
c) The drawer, drawee and payee must be certain;
d) The sum payable must also be certain;
e) It should be properly stamped;
f) It must contain an express order to pay money and money alone;
g) The order must be unconditional.
h ) It must be accepted and signed by the drawee
 CHEQUE
• Under Section 6 of the Negotiable Instruments Act, 1881, a cheque is
defined as a “bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand.”
• It is an unconditional order, drawn on a specified banker, signed by
the drawer, directing the banker, to pay on demand, a certain sum of
money only to or to the order of a certain person or to the bearer of
the instrument.
 Features of cheque
1. It is an instrument in writing;
2. It contains unconditional order;
3. It is drawn by the drawer;
4. It is drawn upon a specified banker;
5. To pay a certain sum of money;
6. Payable on demand;
7. Payable to a certain person or his order or to the bearer of the instrument.
8. A cheque should be properly dated
9. It is signed by the maker
10. There are three parties to a cheque, viz
(a) Drawer (b) Drawee, and (c) Payee.
Parties to a Cheque

Basically there are three parties to a cheque viz., (1) Drawer (2) Drawee, and (3) Payee.

1. Drawer: A drawer is the person who has an account in the bank and who draws a cheque
for making payment. He is the customer or account holder.

2. Drawee: A drawee is the person on whom the cheque is drawn. He is liable to pay the
amount. In case of a cheque, the drawee happens to be the banker on whom the cheque is
drawn, he is also called the Paying-Banker.

3. Payee: A payee is the person to whom the amount stated in the cheque is payable.
It may be either drawer himself (self cheques) or any other third party stated in the cheque.
Types of Cheques

1. Order Cheque: A cheque which is payable to a particular person or his

order is called an order cheque.
2. Bearer Cheque: A cheque which is payable to a person whosoever
bears, is called bearer cheque.
3. Blank Cheque: A cheque on which the drawer puts his signature and
leaves all other columns blank is called a blank cheque.
4. Stale Cheque: The cheque which is more than three months old is a
stale cheque.
5. Multilated Cheque: If a cheque is torn into two or more pieces, it is
termed as mutilated cheque.
6) Post Dated Cheque: If a cheque bears a date later than the date of
issue, it is termed as post dated cheque.
7) Ante-Dated cheque: refers to cheques which have been written by
the drawer, and dated at some point in the past
8) Open Cheque: A cheque which has not been crossed is called an
open cheque. Even if a cheque is crossed and subsequently the
drawer has cancelled the crossing at the request of the payee and
affixes his full signature with the words “crossing cancelled pay
cash”, it becomes an open cheque.
9) Crossed Cheque: A cheque which carries too parallel transverse
lines across the face of the cheque .
10) Gift Cheques
11) Traveler's Cheques
CROSSING OF CHEQUES
• Cheques can be crossed in two ways (1) general crossing (2) special
crossing.
1. General crossing
(A) On the face of the cheque,
(B) Parallel to each other, and
(C) In cross direction (i.e., transverse).
• The effect of general crossing is that the cheque must be presented to
the paying banker through any other banker and not by the payee
himself at the counter
2.Special Crossing
The Special Crossing on the cheque is a direction to the paying banker
to honour the cheque only when it is presented through the bank
mentioned in the crossing and no other bank.
Other Types of Crossing
“Not Negotiable” Crossing : The Section 130 of the said Act states, “A person
taking a cheque, crossed generally or specially, bearing in either case the words
“not negotiable” shall not have and shall not be capable of giving a better title to
the cheque than that what the position from whom he took it had.”
Restrictive Crossing or Account Payee Crossing : “a direction to the collecting
banker that the proceedings of the cheque are to be credited only to the
account of payee named, written or mentioned in the cheque.”
Double Crossing : Cheque bears two special crossings. In such a situation, the
second bank act as the agent of the first collecting banker. It functions in
situations when the banker in whose favor the cheque is crossed does not have
the branch where the cheque is to be paid
Case
• A bearer cheque bearing a general crossing with the words ‘not
negotiable’ is stolen. Eventually, it comes into the possession of
Aman who takes it in good faith and for value. Subsequently,
Aman collects the amount of cheque through his bank. He receives
the amount and the paying banker also pays the amount. Is Aman
a holder in due course? Explain giving reasons.
Answer
• Aman is not a holder in due course because the title of the cheque is
tainted as it was stolen. The person who transferred the cheque to him
was not the real owner of the cheque. Hence his title is defective.
Lifting of crossing or Opening of Crossing
• when the crossing in the cheque is cancelled by the drawer himself
with his full signature then the cheque becomes an open cheque, in
which case, the banker can make payment across the counter.
• Other than drawer, no other person is authorized to lift the crossing
• affixes his full signature with the words “crossing cancelled pay cash”
Bank Draft or Demand Draft
• A bank draft or a demand draft is a pre-paid Negotiable Instrument,
wherein the drawee bank undertakes to make payment in full when
the instrument is presented by the payee for payment.
• The demand draft is made payable on a specified branch of a bank at
a specified centre.
• In order to obtain payment, the beneficiary has to either present the
instrument directly to the branch concerned or have it collected by his
/ her bank through the clearing mechanism.
The essential features of a bank draft are:
(a) It is always drawn by a bank upon its own branch.
(b) It is always payable on demand and it cannot be made payable to
bearer.
(c) Ordinarily, payment of a demand draft cannot be stopped or
countermanded. It is because of this reason payment is demanded
through a bank draft.
For example :
• State Bank of India, Nungambbakkam, Chennai branch issues a
demand draft for rupees 10000 favouring IGNOU payable at SBI, New
Delhi.
• Now you purchase the demand draft by payment of rupees 10000
along with commission to SBI, Nungambakkam, Chennai and the bank
issues the draft to you
• You are sending the DD to IGNOU by courier and IGNOU presents the
demand draft for collection through local clearing to their bankers
ICICI, Karolbagh, New Delhi.
 Endorsement
• The literal meaning of the word endorsement is writing on the back of
an instrument. Under the NI Act, it means, writing of the name of the
endorsee on the back of the instrument by the endorser under his
signature with the object of transferring the rights therein.
• The person to whom the instrument is endorsed is called the
endorsee. The person making the endorsement is the endorser.
• If an instrument is fully covered with endorsements and no space
is left, further endorsement can be made on a slip of paper (called
alonge) annexed thereto