y Negotiable means µsomething legally transferable

from one person to another for a consideration¶.
y Instrument means µ a written document by which

some legal rights are created in favour of some person¶

What is ³Negotiable Instrument´?
y Sec13. (1) A ³negotiable instrument´ means a

promissory note, bill of exchange or cheque payable either to order or to bearer.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS 1. Property: The possessor of the negotiable instrument is presumed to be the owner of the property contained there in. A negotiable instrument does not merely give possession of the instrument but right to property also. The property in a negotiable instrument can be transferred without any formality. In the case of bearer instrument, the property passes by mere delivery to the transferee. In the case of an order instrument, endorsement and delivery are required for the transfer of property.

2. The holder of the instrument need not give notice of transfer to the party liable on the instrument to pay. . A negotiable instrument can be transferred any number of times till it is at maturity. Title: The transferee of a negotiable instrument is known as µholder in due course.¶ A bona fide transferee for value is not affected by any defect of title on the part of the transferor or of any of the previous holders of the instrument. Rights: The transferee of the negotiable instrument can sue in his own name. 3. in case of dishonor.

a presumption that consideration has been paid under it.g. :It is not necessary to write in a promissory note the words µfor value received¶ or similar expressions because the payment of consideration is presumed. 5. . Prompt payment: A negotiable instrument enables the holder to expect prompt payment because a dishonor means the ruin of the credit of all persons who are parties to the instrument. Presumptions: Certain presumptions apply to all negotiable instruments e..4. The words are usually included to create additional evidence of consideration.

In other words these presumptions need not be proved as they are presumed to exist in every negotiable instrument. stamped properly. protest is a proof of dishonor. endorsed properly. . It presupposes certain presumptions such as consideration is paid. made on date of signature. Until the contrary is proved the following presumptions shall be made in case of all negotiable instruments Freely transferable. transferred in time. etc. holder is in-due-course. Recovery can be made in own name. by delivery (to bearer) or endorsement (to order) Title of holder-in-due-course free from all defects. it is accepted properly.PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which the court presumes in regard to negotiable instruments.

He or she has certain legal rights and is presumed to be unaware that (if such were the case) the instrument was at any time overdue. note. had any claims against it. . etc. draft. anyone who accepts a third-party check is a holder in due course. or the party required to pay it has valid reason for not doing so .holder in due course Definition Legal term for an original or any subsequent holder of a negotiable instrument (check. For example. dishonored when presented for payment.Also called protected holder.) who has accepted it in good-faith and has exchanged something valuable for it.

This list of negotiable instrument is not a closed chapter. . The courts in India usually follow the practice of English courts in according the character of negotiability to other Instruments. bill of exchange or a cheque payable either to order or to bearer. Negotiable instruments recognized by statute are: (i) Promissory notes (ii) Bills of exchange (iii) Cheques. With the growth of commerce.TYPES OF NEGOTIABLE INSTRUMENT Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a promissory note. new kinds of securities may claim recognition as negotiable instruments. Negotiable instruments recognized by usage or custom are: (i) Hundis (ii)Share warrants (iii) Dividend warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii) Debentures of Bombay Port Trust (viii)Railway receipts (ix) Delivery orders.

The person to whom the promise has been made is called the payee. maker. The person who is promising to pay is the maker.Notes. bills of exchange or cheque 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 the bearer of the document. payee. document.

(c) ³I have taken from you Rs. (I owe you) Rs. 100. I. etc. The method of writing (either in ink or pencil or printing. but it must be in any form that cannot be altered easily. 500´. 500´ (b) ³I am liable to pay you Rs. 2. whenever you ask for it have to pay´ . A mere acknowledgment is not enough. . B.U.) is unimportant.O. It must certainly an express promise or clear understanding to pay: There must be an express undertaking to pay. It must be in writing: A mere verbal promise to pay is not a promissory note. The following are not promissory notes as there is no promise to pay If A writes: (a) ³Mr.An instrument to be a promissory note must possess the following elements: 1.

(6) The payee must be certain: The instrument must point out with certainty the person to whom the promise has been made. (4) It should be signed by the maker: The person who promise to pay must sign the instrument even though it might have been written by the promisor himself. The payee may be ascertained by name or by designation. (3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable character of an otherwise negotiable instrument. It must be payable absolutely.The following will be taken as promissory notes because there is an express promise to pay: If A writes: (a) ³I promise to pay B or order Rs. Therefore. the promise to pay must not depend upon the happening of some outside contingency or event. for the value received´. . 1000 to be paid on demand. 500´ (b) ³I acknowledge myself to be indebted to B in Rs. (5) The maker must be certain: The note must show clearly who is the person agreeing to undertake the liability to pay the amount.

However. (9) Other formalities: The other formalities regarding number. A promise to deliver paddy either in the alternative or in addition to money does not constitute a promissory note. consideration etc. (b) the amount is to be paid at an indicated rate of exchange.(7) The promise should be to pay money and money only: Money means legal tender money and not old and rare coins. (8) The amount should be certain: One of the important characteristics of a promissory note is certainty²not only regarding the person to whom or by whom payment is to be made but also regarding the amount. . (c) the amount is payable by installments with a condition that the whole balance shall fall due for payment on a default being committed in the payment of anyone installment. place. date. though usually found given in the promissory notes but are not essential in law. paragraph 3 of Section 5 provides that the sum does not become indefinite merely because (a) there is a promise to pay amount with interest at a specified rate.

.Features of µpromissory note¶ y Instrument in writing y Not a bank note or currency note y Contains unconditional undertaking y Signed by the maker of the instrument y To pay a certain sum of money only y To or to the order of certain person y Or to the bearer of the instrument.

B. provided D leaves me enough to pay that sum. 500 and all other sums which shall be due to him.000.O. 1.´ (b) ³I acknowledge myself to be indebted to B in Rs. Rs. 500. 500 first deducting there out any money which he may owe me. for value received. 500 seven days after my mar-riage with C. 1.000. 500 on D¶s death.´ (e) ³I promise to pay B Rs.U.´ (d) ³I promise to pay B Rs.´ (h) ³I promise to pay B Rs.Illustrations of µpromissory notes¶ A signs instruments in the following terms:² (a) ³I promise to pay B or order Rs.´ (f) ³I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next.´ (g) ³I promise to pay B Rs.´ . to be paid on demand. I.´ (c) ³Mr.

The instruments respectively marked (a) and (b) are promissory notes. (d). (e). The instruments respectively marked (c). (g) and (h) are not promissory notes. (f). .

to or to the order of a certain person or to the bearer of the instrument. Parties to a bill of exchange:exchange: y Drawer y Drawee (acceptor) y Payee . directing a certain person to pay a certain sum of money only.Bill of exchange y A bill of exchange is an instrument in writing containing an unconditional order . signed by the maker . instrument.

only. y It must contain an order to pay money only. sign and stamp. unconditional. y It must contain an order. y It must be in writing. order. y The order must be unconditional. y There must be three parties. y All other formalities of date. certain. demand. y The sum must be certain. parties.Essential elements of a bill of exchange. stamp. writing. y A bill as originally drawn cannot be made payable to bearer on demand. .

7. 6. 3.Promissory Note 1. 5. 5. Drawee and Payee Unconditional order to Pay The drawer of a bill is the creditor who directs the drawee (his debtor) to pay Acceptor may accept the bill conditionally because he is not the originator of the bill Liability of the Drawer is Secondary or Conditional Must be accepted by the Drawee The drawer and the Payee may be one and the same person . 6. 4. Three Parties ² Drawer. 3. 7. Two Parties ² Maker and Payee Unconditional Promise to Pay The maker of a note is the debtor and he himself undertakes to pay Maker cannot undertake to pay conditionally Liability of the Maker is Primary or Absolute Needs no acceptance Cannot be made payable to the maker himself 4. Bill of Exchange 1. 2. 2.

Certain provisions apply to Bills of Exchange In case of dishonor of a bill due notice must be given to all the persons who are to be made liable to pay . immediate relation with the payee No provisions apply for 2.Promissory Note Bill of Exchange 1. 2. Maker of a note stands in 1. given in case of dishonor of a note The drawer of a bill stands in immediate relation with the acceptor and not the payee. notes No such notice is to be 3. payee. 3.

assign for such dishonour or if the instrument has not been expressly dishonoured the reason why the holder treats it as dishonoured.Noting And Protest y Sec. if any. 99 When a promissory note or bill of exchange has been dishonoured by non-acceptance or non payment. or partly upon each. . y Such note must be made within a reasonable time after dishonour and must specify the date of dishonour. the holder may cause such dishonour to be noted by a notary public upon the instrument. and the notary¶s charges. the reason. or upon a paper attached thereto.

and this has happened before the maturity of the bill. This should be done within a reasonable time after the acceptors refusal to provide security . This should be done within a reasonable time. the holder may approach a notary public and ask him to demand from the acceptor a better security than the mere bill.Protest Protest for better security is a measure of protection against the consequences of the accepters insolvency. the holder should have the fact of refusal noted and certified by the notary. Such a certificate is called a protest for better security. If the acceptor refuses to oblige with any security. When the accepter of a bill of exchange becomes insolvent all his credit has been publicly impeached.

in a promissory note. in a bill of exchange. or protest for non-acceptance Thus. and. or noting for non-acceptance. after acceptance. the countdown starts only after document is µsighted¶ by the concerned party. ON PRESENTMENT. AFTER SIGHT In a promissory note or bill of exchange the expressions ³at sight´ and ³on presentment´ mean µon demand¶ The expression ³after sight´ means. .Section 21 AT SIGHT. in case of document µafter sight¶. after presentment for sight.

y The transaction is practically an advance against the security of the bill . the Bank buys before it is due and credits the value of the bill after a discount to the customers account.Bill discounting y While discounting a bill.

· Cheque truncation Electronic cheque .Cheque Sec 6 ¶Cheque is a bill of exchange drawn upon a specified banker and payable on demand and it includes the electronic image of a truncated cheque & a cheque in the electronic form.

but replace them with digital images -. To process payments faster and more efficiently. with the words "This is a legal copy of your check" appearing next to the image. .called substitute checks -. many banks no longer transport paper checks. in a system called check truncation.that can be transferred electronically. When you receive your account statements. However.Check truncation. many banks send out either a line item statement or an image statement with photocopies of multiple cancelled checks on each page. each formatted on a separate piece of paper. you can request a substitute check from your bank. the bank may send you substitute checks in place of cancelled checks. There may be a fee for this service. Most banks destroy original checks once they've archived the substitutes. If you need to verify a payment.

.²For the purposes of this section. either by the clearing house or by the bank whether paying or receiving payment. (b) ³a truncated cheque´ means a cheque which is truncated during the course of a clearing cycle. written and signed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system. immedi-ately on generation of an electronic image for transmission. . and is gener-ated.² (a) ³a cheque in the electronic form´ means a cheque which contains the exact mirror image of a paper cheque. substituting the further physical movement of the cheque in writing. the expression ³clearing house´ means the clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the Re-serve Bank of India.

7.Bill of exchange Vs. 3. including Bank Must be accepted Entitled to three days of grace May be payable on demand or after the expiry of a certain period Must be duly presented for payment to the acceptor or else he is discharged of his liability Cannot be Crossed Must be stamped Payment cannot be countermanded May be noted or protested for dishonour 1. 8. 8. Is always drawn on a banker No Acceptance required No days of grace Always payable on demand The drawer of a cheque is not discharged from his liability by delay of the holder in presenting it for payment Can be Crossed Does not require any stamp Payment may be countermanded by the Drawer Not required to be noted or protested for dishonour 6. 2. 9. 3. Cheque. 7. 1. 4. 9. 5. 4. 2. 5. May be drawn on any person. 6. .

. y Crossed cheques.Crossing of cheques y They are two types of cheques:cheques:y Open cheques. y Types of crossing: y General crossing y Special crossing y Restrictive crossing.

CROSSING OF CHEQUE y General crossing ± Two parallel lines or with word µ& Co. Nambudiri¶ . Two transverse lines are not necessary-the purpose is to instuct the drawee bank to make payment of check only if it is presented for payment through that particular bank y Restrictive crossing ± µA/c payee only¶ or µA/c payee Bank of India¶ µBank of India ± A/c.¶ etc. y Special crossing ± µNot negotiable¶ ± Clearable through a bank named.

Endorser 5. Endorsee . Payee 3. Holder 4.Parties to negotiable instrument. Maker 2. y Parties to a promissory note: 1.

y y y y y y y y y Parties to a bill of exchange Drawer Drawee Acceptor Drawee in case of need. . Holder Endorser Endorsee Payee.

7.Important terms y Sec. the person thereby directed to pay is called the ³drawee´. ³Drawer´. y The maker of a bill of exchange or cheque is called the ³drawer´. ³Drawee´. .

³Acceptor´ y After the drawee of a bill has signed his assent upon the bill. upon one of such parts. or.y Sec. 7. if there are more parts thereof than one. and delivered the same. . or given notice of such signing to the holder or to some person on his behalf. he is called the ³acceptor´.

is called the ³payee´. ³Payee´. y The person named in the instrument. . 7.y Sec. to whom or to whose order the money is by the instrument directed to be paid.

³Holder´. 8. bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. its holder is the person so entitled at the time of such loss or destruc-tion. y The ³holder´ of a promissory note. y Where the note. bill or cheque is lost or destroyed.Holder y Sec. .

³Holder in due course´ y Sec. ³Holder in due course´ means any person who for consideration became the possessor of a promissory note. . and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. if payable to order. y or the payee or indorsee thereof. bill of exchange or cheque if payable to bearer. before the amount mentioned in it became payable. 9.

10.³Payment in due course´ y Sec. ³Payment in due course´ means payment in accordance with the apparent tenor of the instrument in good faith and without negli-gence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. .

When a promissory note. 14. bill of exchange or cheque is trans-ferred to any person. y Sec.Negotiation. so as to constitute that person the holder thereof. . the instrument is said to be negotiated.

for the purpose of negotia-tion. on the back or face thereof or on a slip of paper annexed thereto.Indorsement y Sec. . and is called the ³indorser´. 15. When the maker or holder of a negotiable instrument signs the same. he is said to indorse the same. or so signs for the same purpose a stamped paper intend-ed to be completed as a negotiable instrument. otherwise than as such maker.

. y Sec. and (in case such cheque has come to the hands of the payee) the drawer thereof. 128. the banker paying the cheque. and be placed in the same position in all respects. as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.y Payment in due course of crossed cheque. shall respectively be entitled to the same rights. Where the banker on whom a crossed cheque is drawn has paid the same in due course.

or his agent for collection. or a cheque crossed specially otherwise than to the banker to whom the same is crossed. Any banker paying a cheque crossed generally otherwise than to a banker. y Sec. shall be liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid. 129.y Payment of crossed cheque out of due course. . being a banker.

or with both: . 138. such person shall be deemed to have committed an offence and shall.. y Sec. of any debt or other liability. without prejudice to any other provisions of this Act. or with fine which may extend to twice the amount of the cheque. is returned by the bank unpaid. either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank. be punished with imprisonment for a term which may extend to two years. Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge. etc. in whole or in part.Dishonour of cheque for insufficiency. of funds in the account.

as the case may be. and y (c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or. as the case may be. makes a demand for the payment of the said amount of money by giving a notice. to the holder in due course of the cheque. y (b) the payee or the holder in due course of the cheque. y Explanation: For the purposes of this section. ³debt or other liability´ means a legally enforceable debt or other liability. to the drawer of the cheque. within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid. in writing.y Provided that nothing contained in this section shall apply unless² y (a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity. within fifteen days of the receipt of the said notice. whichever is earlier. .

a demand notice should be given in writing by the payee or holder in due course to the drawer of the cheque. then the holder or holder in due course has right to file a criminal complaint for the offence within 30 days from the date of cause of action (refer to Section 142). 3) Within 15 days of receipt of above notice. 1) . if the drawer fails to make payment. 2) within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid.Important points in dishonour of cheques Cheque should presented for payment within 6 months from its date or within its validity period.

ii.Punishment for the offence of dishonour of cheque Imprisonment for a term which may extend to two years. or with fine which may extend to twice the amount of the cheque iii. or with both i. .