TERM PAPER OF BASIC

FINANCIAL MANAGEMENT

NEGOTIABLE INSTRUMENTS

Submitted To:
Ms. Shikha Dhawan

Submitted By:
Leena Mohan
RA17B1A30
B-Tech(Hons)+MBA(CSE)
 ACKNOWLEDGEMENT
The satisfaction that accompanies the successful completion of the task would be

incomplete without the mention of the people whose ceaseless cooperation made it

possible, whose constant guidance and encouragement crown all efforts with success. I am

grateful to my lecturer Ms.Shikha Dhawan for the inspiration and the constructive

suggestions that helped us in preparation of the report on NEGOTIABLE INSTRUMENTS.

 CONTENT
INTRODUCTION

 Objective
 Rationale
 Characteristics of a Negotiable Instrument
 Presumptions in a Negotiable Instrument
 Payee in a Negotiable Instrument
 Types of Negotiable Instrument

DETAILED DESCRIPTION

 PROMISSORY NOTES
 Essentials of Promissory Notes
 Parties to a Promissory Note
 Samples of Promissory Notes
 BILL OF EXCHANGE
 Characteristic Features of Bill of Exchange
 Parties to Bill of Exchange
 Special Benefits of Bills of Exchange
 Kinds of Bills of Exchange
Accommodation Bill
Fictitious Bill
Forged Bill
 Differences between Promissory Notes and Bills of Exchange
 Samples of Bill of Exchange
 CHEQUE
 Characteristics of Cheque
 Types of Cheque
 Differences between Bills of Exchange and Cheque
 Samples of Cheque
 MATURITY OF NEGOTIABLE INSTRUMENT
 LIABILITIES OF PARTIES TO NEGOTIABLE INSTRUMENT

CONCLUSION

REFERENCES
 INTRODUCTION
Negotiation1 is the ability to be sold or transferred to another party as a form of payment.
Something which is negotiable is transferable by endorsement and delivery is negotiable.
An instrument2 is a formal documentation which possess monetary value or which records a
financial transaction in monetary terms.
Negotiable instrument 3 is a document of title or evidence of indebtedness which is
unconditionally transferable in trading as a substitute for money is. Negotiable instruments are
unconditional orders or promise to pay, and include cheques, drafts, bearer bonds, some
certificates of deposit, promissory notes, and bank notes or currency. A negotiable instrument
has three principle attributes:
An asset or property passes from the transferor to the transferee by mere delivery and/or
endorsement of the instrument.
A transferee accepting the instrument in good faith and for value obtains an indefeasible
title and may sue on the instrument in his or her name.
No notice of the transferor need to be given to the party liable in the instrument.
In other words, negotiable instrument 4is a document contemplated by a contract which
warrants:
The payment of money, the promise of or order for conveyance of which is
unconditional.
Specifies or describes the payee, who is designated on and memorialized by the
instrument and which is capable of change through transfer of valid negotiation of the
instrument.

As payment of money is promised subsequently, the instrument itself can be used by the holder
in due course as a store of value.
According to section 13 of Negotiable Instrument Act, 5a negotiable instrument 6means a
promissory note, bill of exchange or cheque payable either to order or bearer.

OBJECTIVES
The objective of this report is to explain the meaning of the negotiable instruments and indentify
the various features and types of negotiable instruments. Also, it will vividly differentiate
between bills of exchange, promissory notes and bill of exchange. It will explore the various the
maturity of negotiable instruments and the liabilities of various parties to negotiable instruments.
The report concludes with the applicability of the negotiable instruments.

RATIONALE
1
http://www.investorwords.com/3224/negotiable.html
2
http://www.investorwords.com/3224/negotiable.html
3
http://www.businessdictionary.com/definition/negotiable-instrument.html
4
http://en.wikipedia.org/wiki/Negotiable_instrument
5
http://barjatyanikhil.tripod.com/banking/negotiableinstrumentsact.htm
6
This report is prepared in order to gain an insight of the various negotiable instruments and it
also highlights their practical aspects. Additionally, this report is in partial fulfillment of the
course completion.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

Freely transferable: The property in a negotiable instrument passes from one person to
another by mere delivery,
Title of holder free from all defects: A person taking an instrument bona fide and for
value, known as a holder in due course, gets the instrument free from all defects in the
title of the transfeRor.
Recovery. The holder in due course can sue upon a negotiable instrument in his own
name for the recovery of the amount.

PRESUMPTIONS IN A NEGOTIABLE INSTRUMENT

Consideration. Every negotiable instrument is presumed to have been made, drawn,

accepted, indorsed, negotiated or transferred, for consideration. This would help a holder
to get a decree from a Court without any difficulty.
Date. Every negotiable instrument bearing a date is presumed to have been made or
drawn on such date.
Time of acceptance. When a bill of exchange has been accepted, it is presumed that it
was accepted within a reasonable time of its date and before its maturity.
Time of transfer. Every transfer of a negotiable instrument is presumed to have been
before its maturity.
Order of endorsements. The endorsements appearing upon a negotiable instrument are
presumed to have been made in the order in which they appear thereon.
Stamp. When an instrument has been lost, it is presumed that it was duly stamped.
Holder presumed to be a holder in due course. Every holder of a negotiable instrument
is presumed to be holder in due course.
Proof of protest. In a suit upon an instrument which has been dishonored, the Court, on
proof of the protest, presumes the fact of dishonor, until such fact is disproved.

PAYEE IN A NEGOTIABLE INSTRUMENT

All three kinds of negotiable instruments mentioned under section 13 of the Negotiable
Instrument Act(promissory note, bill of exchange, cheque) could be made payable in any of the
following ways – 
Payable to bearer: The expression bearer instrument signifies an instrument, be it
promissory note, bill of exchange or a cheque, which is expressed to be so payable or on
 which the last endorsement is in blank. In such a case, the holder of the instrument is
unable to negotiate the instrument by mere delivery. He will be required to endorse the
instrument before delivering it. 
Payable to order: An instrument is payable to order when it is payable to: 
 the order of a specified person, or
 a specified person or his order, or
 a specified person without the addition of the words “or his order” and does not
contain words prohibiting transfer or indicating an intention that it should not be
transferable.
 When an instrument is not payable to bearer, the payee must be indicated with reasonable
certainty
 
TYPES OF NEGOTIABLE INSTRUMENTS

There are two types of negotiable instruments.

Instruments negotiable by Statute. The Negotiable Instruments Act mentions only
three kinds of negotiable instruments which are negotiable by law or statute. They are:
 Promissory notes,
 Bill of exchange and
 Cheques.
Instruments negotiable by custom or usage: There are certain other instruments which
have acquired the character of negotiability by the usage or custom of trade. In India, the
examples of such instruments are:
 government promissory notes,
 banker’s drafts and pay orders,
 hundis,
 delivery orders
 railway receipts for goods
 currency

DETAILED DESCRIPTION
PROMISSORY NOTE
Referring to Section 4 of the Negotiable Instruments Act, a promissory note is an instrument (not
being a bank note or a currency-note) 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.

ESSENTIALS OF A PROMISSORY NOTE

It must be in writing.
Promise to pay: The promissory note must contain an express promise or undertaking to
pay.
The promise to pay must be unconditional: The promise to pay must be unconditional.
There must be a promise to pay money only: The instrument must be payable only in
money.
A definite sum of money: Certainty as to the amount, and as to the persons by whose
order and to whom payment is to be made
The instrument must be signed by the maker: A promissory note is incomplete until it
is so signed.
The person to whom the promise is made must be a definite person: The payee must
be a certain person.
Place and date of making it need not be mentioned.
An ante-dated or post dated instrument is not invalid.
It cannot be made payable to bearer on demand or payable to bearer after a certain
time. (Section 31 of the Reserve Bank of India Act)
Consideration need not be mentioned.
Place of payment need not be mentioned in the promissory note. However, it can be made
payable at any specified place.
It may be made payable on demand or after a certain time. A demand promissory note
becomes time barred on expiry of three years from the date it bears.
It must be duly stamped as per the state laws in which it is executed, under the Indian Stamp
Act. A promissory note which is not stamped is a nullity. Stamping may be before or after the
execution.
A promissory note cannot be made payable to the maker himself.
Where two or more persons sign the promissory note, their liabilities will be joint as well as
several. A note cannot be signed in alternative.
Section 4 of the Act recognizes three kinds of promissory notes – 
 payable to a specified person.
 payable to the order of a specified person.
 payable to a bearer.

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. In the above specimen, Sanjeev is the maker or drawer.
The Payee – the person to whom the amount is payable. In the above specimen it is
Ramesh.
In course of transfer of a promissory note by payee and others, the parties involved may be:
The Endorser – the person who endorses the note in favour of another person. In the
above specimen if Ramesh endorses it in favour of Ranjan and Ranjan also endorses it in
favour of Puneet, then Ramesh and Ranjan both are endorsers.
The Endorsee – the person in whose favour the note is negotiated by endorsement. In the
above, it is Ranjan and then Puneet.

SAMPLES OF PROMISSORY NOTES

Promissory note payable on demand 

Patna October 24, 2010

On demand I promise to pay Vijay Kumar or order the sum of Rupees four thousand only, for value
received.
Rs. 4000                                                                                                    Leena Mohan

  
Promissory note payable after date with interest

Patna October 30, 2010

On month after date I promise to pay Vijay Kumar or to his order the sum of Rupees four thousand only,

with interest @15% per annum until payment.

Rs. 4000                                                                                             Leena Mohan

Joint Promissory note

Patna October  26, 2010

On month after date we promise to pay Vijay Kumar or to his order the sum of Rupees four thousand

only, with interest @15% per annum until payment.

Rs. 4000                                                                                                       Leena and Mohan

Joint and Several Promissory Note

 Patna October 26, 2010

On month after date we jointly and severally promise to pay Vijay Kumar or to his order the sum of

Rupees four thousand only, with interest @15% per annum until payment.

Rs.4000                                                                                                        Leena & Mohan

  

BILL OF EXCHANGE

According to the Section 5 of the Negotiable Instrument Act, 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 persons or to the bearer of the
instrument.

CHARACTERISTIC FEATURES OF A BILL OF EXCHANGE

It must be in writing: The bill of exchange must be in writing.

Order to pay: There must be an order to pay. It is of the essence of the bill that its
drawer orders the drawee to pay money to the payee.
Unconditional order: This order must be unconditional, as the bill is payable at all
events.
Signature of the drawer: The drawee must sign the instrument.
Drawee: A bill, in order to be perfect, must indicate a drawee who should be called upon
to accept or pay it.
Parties: The drawer, the drawee (acceptor) and the payee- the parties to a bill are to be
specified in the instrument with reasonable certainty.
Certainty of amount: The sum must be certain. 
Payment in kind is not valid: The medium of payment must be money and money only.
Stamping: A bill of exchange, to be valid, must be duly stamped as per the Indian Stamp
Act.
Cannot be made payable to bearer on demand: A bill of exchange as originally drawn
cannot be made payable to the bearer on demand.

In a bill where a time period is mentioned is called a Time Bill. A bill made payable on demand
is called a Demand Bill.

PARTIES TO A BILL OF EXCHANGE

There are three parties involved in a bill of exchange. They are:
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.

SPECIAL BENEFITS OF BILL OF EXCHANGE

 
A bill of Exchange is a double secured instrument i.e. where the drawee fails to honour
the order, the holder of the instrument may look to the drawer for payment. 
In case of immediate requirement a Bill may be discounted with a bank.
The drawer or any endorser thereof may mention a person as ‘drawee in case of need’ to
be resorted to for payment by the payee in case of dishonour of the bill by the drawee.

KINDS OF BILLS
 
Accommodation Bill (Sections 43-45)
 
An accommodation Bill is quite similar to that of a bill of Exchange but it is distinguished from
an ordinary bill by the fact that such a bill is not supported by any consideration or transaction.
The drawer does not give any consideration to the drawee. The relationship between the drawer
and drawee are not that of a debtor and creditor.
 
The party lending his name to oblige the other party is known as the accommodation or
accommodating party and the party being obliged is known as accommodated party. The
accommodating party is not liable to the accommodated party on the instrument as there is no
consideration and the instrument was drawn only to help the accommodated party. But the
accommodating party is liable to the ‘holder for value’.

Rules for Accommodation Bill

 
An accommodation bill creates no obligation of payment between the parties to the
transaction. The accommodation party is not liable to the accommodated party on the
maturity date. 
No party for whose accommodation a negotiable instrument has been made, drawn,
accepted or endorsed can, if he has paid the amount thereof, recover thereon such amount
from any person who became a party to such instrument for his accommodation.
According to section 59, an accommodation bill can be negotiated even after its maturity
i.e. when it becomes overdue, with all benefits of a ‘holder in due course’ to the
transferee.
Non-presentment of the accommodation bill to the acceptor for payment does not
discharge the drawer from his liability.
In the case of dishonour of an accommodation bill, failure to give notice of dishonour
does not discharge the liability of prior parties as against the case in the Ordinary bill.
 
Fictitious Bill
 
A fictitious bill is a bill of Exchange in which the name of both the drawer and the payee are
fictitious i.e. imaginary. Such a bill cannot be enforced by law but it is good in the hands of a
holder in due course if it has been accepted by a genuine person. This is provided that he can
show that the first Endorsement on the bill and the signature of the supposed drawer (being the
holder as well) are in the same hand writing, and the acceptor is liable on the bill to him. In this
connection section 42 of the Act states that an acceptor of a bill of exchange drawn in a fictitious
name and payable to the drawer’s order is not, by reason that such name is fictitious, relived
from the liability to any holder in due course claiming under an Endorsement by the same hand
as the drawer’s signature, and purporting to be made by the drawer.

Forged Bill
 
A bill in which name of the drawer or the payee has been forged. Such a bill cannot be enforced
by law and does not hold good even in the hands of holder in due course.
 
Bill Discounting
While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before
it is due and credits the value of the bill after a discount charge to the customer's account. The
transaction is practically an advance against the security of the bill and the discount represents
the interest on the advance from the date of purchase of the bill until it is due for payment.

DIFFERENCES BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHANGE

Promissory Note Bill of Exchange

1. It contains a promise to pay.
2. The liability of the maker of a note is
primary and absolute (S.32).
3. It is presented for payment without any
previous acceptance by the maker.
4. The maker of a promissory note stands
in immediate relationship with the
payee and is primarily liable to the
payee or the holder.
5. It cannot be made payable to the maker
himself. The maker and the payee
cannot be the same person.
6. In the case of a promissory note there
are only two parties, viz., the maker
(debtor) and the payee (creditor).
7. A promissory note cannot be drawn in
sets.
8. A promissory note can never be
conditional.
9. In case of dishonour no notice of
dishonour is required to be given by
the Holder.
SAMPLES OF BILL OF EXCHANGE
1. It contains an order to pay.
2. The liability of the drawer of a bill is
secondary and conditional.
3. If a bill is payable some time after
sight, it is required to be accepted
either by the drawee himself or by
some one else on his behalf, before it
can be presented for payment.
4. The maker or drawer of an accepted
bill stands in immediate relationship
with the acceptor and the payee.
5. The drawer and payee or the drawee
and the payee may be the same person.
6. There are three parties, viz, drawer,
drawee and payee, and any two of
these three capacities can be filled by
one and the same person.
7. The bills can be drawn in sets.
8. A bill of exchange too cannot be drawn
conditionally, but it can be accepted
conditionally with the consent of the
holder.
9. A notice of dishonour must be given in
case of dishonour of a Bills of
Exchange. 

Bill of Exchange payable to order on demand 

 Patna October 24, 2010
On demand pay Mr. Vijay Kumar or order the sum of Rupees two thousand only.
Rs.2000/-             
Leena Mohan
To.
Mr._______________
__________________

 
Order Bill payable on presentment or sight
Patna, October 24, 2010 
On presentment (or sight) pay Mr. Vijay Kumar or order the sum of Rupees two thousand only.
Rs.2000/-                                                                                                                        
Leena Mohan
To.
Mr._______________
__________________
 
 

Ordinary bill payable to the order after date or sight with interest 
Patna October 23, 200X
Two months after the date (or sight or presentment) pay Mr. Vijay Kumar or order the sum of
Rupees one thousand only with interest thereon at 18% per annum. 
Rs.5000/-                                                                                                                                   
Leena Mohan
To.
Mr._______________
__________________
 
 
Bill payable to bearer 
Patna October 24, 2010
Eighteen days after date (or sight) please pay the bearer the sum of Rupees four thousand only. 
Rs.4000                                                                                                       
Leena Mohan
To.
Mr._______________
__________________
 

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.

A cheque in the electronic form means a cheque which contains the exact mirror image of a
paper cheque, and is generated, 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.

A truncated cheque means a cheque which is truncated during the course of a clearing cycle,
either by the clearing house or by the bank whether paying or receiving payment, immediately on
generation of an electronic image for transmission, substituting the further physical movement of
the cheque in writing. 

CHARACTERISTICS OF CHEQUE 

A cheque is an unconditional order on a specified banker where the drawer has his
account.
A cheque can be drawn for a certain sum of money.
Cheque is payable by the banker only on demand.
A cheque does not require acceptance by the banker as in the case of bill of exchange.
A cheque may be drawn up in three forms i.e.
 Bearer cheque  is one which is either expressed to be so payable or on which the last
or only endorsement is an endorsement in blank.
 Order cheque is one which is expressed to be so payable or which is expressed to be
payable to a particular person without containing any prohibitory words against its
transfer or indicating an intention that it shall not be transferable (Section 18); and
 Crossed cheque is a cheque which can be collected only through a banker.
The cheque is a revocable mandate and the authority can be revoked by countermanding
payment.
The cheque is determined by notice of death or insolvency of the drawer.
All cheques are bills of exchange but all bills of exchange are not cheques.

Types of Cheque

Primarily, cheques are of four types:

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: The payment of crossed 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: 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 and requires no endorsement
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.

There is another categorization of cheques which is discussed below:

Ante-dated cheques:- Cheque in which the drawer mentions the date earlier to the date
of presenting if for payment. For example, a cheque issued on 20th May 2003 may bear a
date 5th May 2003.
Stale Cheque:- A cheque which is issued today must be presented before at bank for
payment within a stipulated period. After expiry of that period, no payment will be made
and it is then called ‘stale cheque’.
Mutilated Cheque:- In case a cheque is torn into two or more pieces and presented for
payment, such a cheque is called a mutilated cheque. The bank will not make payment
against such a cheque without getting confirmation of the drawer. But if a cheque is torn
at the corners and no material fact is erased or cancelled, the bank may make payment
against such a cheque.
Post-dated Cheque:- Cheque on which drawer mentions a date which is subsequent to
the date on which it is presented, is called post-dated cheque. For example, if a cheque
presented on 8th March 2010 bears a date of 16th March 2010, it is a post-dated cheque.
The bank will make payment only on or after 16th March 2010.

DIFFERENCES BETWEEN CHEQUE AND BILL OF EXCHANGE 

Cheque Bill of Exchange

1. Cheque can be drawn only on a banker. 1. The drawee may be any person.

2. A cheque is payable on demand. 2.  A bill may be drawn payable on demand or

on expiry of certain period after date or sight. 

3. Cheque is payable on demand and no grace 3.  While calculating maturity three day’s grace

period is allowed. is allowed. 

4. Notice of dishonour is not necessary.  4. A notice of dishonour is required. 

5. A cheque can be drawn to bearer and made 5. A bill cannot be made bearer if it is payable

payable on demand.  on demand. A bill drawn ‘payable to bearer on

demand’ is void. 

6. A cheque is not required to be presented for 6. Bills sometimes, require presentment for
acceptance. It needs to be presented only for acceptance and it is advisable to present them

payment.  for acceptance even when it is not essential to

do so. 

7.  No stamp duty is payable on cheques. 7. Affixation of proper stamps is necessary in

  case of Bills of Exchange.

8. A cheque may be crossed.  8. A bill of exchange cannot be crossed. 

9. There is no system for noting and protesting 9. In case of dishonour of a bill proper noting

in case of dishonour. and protesting is necessary. 

11. In case of dishonour of cheque the drawee 11. In case of dishonour of the bill by non

is liable to the drawer and not to the payee. payment on an accepted bill of exchange the

drawee becomes liable to the payee. 

12. A cheque is usually valid fro a period of six 12.      A bill may be drawn for any period.

months.

SAMPLES OF CHEQUE

CROSSED CHEQUE
 OPEN CHEQUE

ORDER CHEQUE

MATURITY OF NEGOTIABLE INSTRUMENTS 

According to Section 22 of the Negotiable Instruments Act, the maturity of a promissory note or
bill of exchange is the date at which it falls due.

Days of grace
Every promissory note or bill of exchange which is not expressed to be payable on demand, at
sight or on presentment is at maturity on the third day after the day on which it is expressed to be
so payable. 
Negotiable instruments, except cheques, may be made payable either on demand or on a
specified date or after a specified period of time. Cheques are always payable on demand. The
date on which a negotiable instrument falls due for payment is the date of maturity of the
instrument.
Time instruments are given three days of grace and should be presented for payment only on the
last day of grace. Presentment of instrument earlier than third day will be premature. Thus, an
instrument will be deemed to have been dishonoured only if it remains unpaid after the expiry of
the grace period.
  
Payment in due course
 In accordance with Section 10 of the Negotiable Instrument Act, payment in due course” means
payment in accordance with the apparent tenor of the instruments in good faith and without
negligence 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.
 
The essentials for a payment in due course are: 
 
Payment on or after the maturity: The payment should be made in accordance with the
apparent tenor of the instrument. A payment before maturity is not a payment in
accordance with the apparent tenor of the instrument; and as such it is not a payment in
due course.

Payment in cash only: The payment should be made in money only, because the
instrument is expressed to be payable in money. A different form of payment may
however be adopted but only with the consent of the holder of the instrument.

Payment to a person in possession: That the person to whom payment is made should

be in possession of the instrument. Therefore, payment must be made to the “holder” or a
person authorized to receive payment on his behalf. Suppose, the instrument is payable to
a particular person or order and is not endorsed by him. Payment to any person in actual
possession of the instrument in such case, will not amount to payment in due course.
However, in the event of the instrument being payable to bearer or endorsed in blank, the
payment to a person who possess the instrument is, in the absence of suspicious
circumstances, payment in due course.

Payment in good faith: The payment should be made in good faith i.e. without
negligence, and under circumstances which do not afford a reasonable ground for
believing that the person to whom payment is made is not entitled to receive the amount.
If suspicious circumstances are there, then person making the payment shall put on an
enquiry. If he does not make the enquiry, the payment would not be in due course.

LIABILITIES OF PARTIES TO NEGOTIABLE INSTRUMENTS

 
Liability of drawer
Section 30 of the Act states that the drawer of a bill of exchange or cheque is bound in case of
dishonour by the drawee or acceptor thereof, to compensate to the holder, provided due notice of
dishonour has been given to, or received by, the drawer as hereinafter provided.
 
Liability of drawee cheque
 
Section 31 of the Act states that the drawee of a cheque having sufficient funds of the drawer in
his hands properly applicable to the payment of such cheque when duly required to do so, and in
default of such payment, must compensate the drawer for any loss or damage caused by such
default”.
The drawee of a cheque who is always a banker is liable to the drawer if he, having sufficient
funds of his customer, wrongfully refuses or fails to honour his customer’s cheque. The liability
of the drawee arises only when the cheque has been dishonored by mistake. But where the
cheque is dishonoured, the banker does not incur any liability for rightful dishonour.

Liability of maker of note and acceptor of bill

According to Section 32 of the Negotiable Instrument Act, in the absence of a contract to the
contrary, the maker of a promissory note and the acceptor before maturity of a bill of exchange
are bound to pay the amount thereof at maturity according to the apparent tenor of the note or
acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to
pay the amount thereof to the holder on demand.
The maker of a promissory note is bound to pay the amount at maturity, according to the tenor of
the note and in case of default of such payment; he is bound to compensate any party to the note
for any loss sustained by reason of such default 
A promisor in case of promissory note and a drawer in the case of bill of exchange or
cheque is the principal debtor. But after acceptance by the drawee the acceptor becomes the
principal debtor. Therefore, according to section 32, in case of a bill the liability of the drawee
arises only when he accepts the bills. In the event of the bill being accepted after maturity, he is
bound for the amount to the holder on demand. In default of such payment, he is bound to
compensate any party to the bill for any loss or damage caused to him by such a default.
 The following persons incur liability by acceptance; (1) drawee (2) person named as
drawee in case of need, and (3) acceptor for honour. Where there are several drawers, each
can accept only for himself, unless they are partners.
Effect of forged Endorsement on acceptor’s liability
According to section 41, an acceptor of a bill already endorsed is not relieved from liability by
reason that such endorsement is forged, if he knew or had reason to believe that the Endorsement
was forged when he accepted the bill.
 
Liability of acceptor of a bill drawn in a fictitious name
Section 42 of the Act provides that an acceptor of a bill of exchange drawn in a fictitious name
and payable to the drawer’s order is not, by reason that such name is fictitious, relieved from
liability to any holder in due course claiming under an Endorsement by the same hand as the
drawer’s signature, and purporting to be made by the drawer.

Liability of endorser
The endorser of an instrument by endorsing and delivering the instrument, before maturity,
undertakes the responsibility that –
1. That on the due presentment it shall be accepted, (if a bill), and paid; and
2. That if it is dishonoured by the drawee, acceptor or maker, he will indemnify the holder or
subsequent endorsers who are compelled to pay, provided due notice of dishonour is received by
him.
But he may or make his liability conditional. In this respect, his position is better than that of a
drawer or an acceptor, neither of whom can exclude his liability.
Where the holder of a negotiable instrument, without the consent of the endorser, destroys or
impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to
the holder to the extent as if the instrument had been paid at maturity.

CONCLUSION
Thus, we conclude that the three kinds of negotiable instruments are widely used in today’s
financial context and indispensible because they find applicability in a variety of arenas like:
To facilitate payment for exports
to provide proof of a debt
to provide ancillary or collateral security for the payment of an existing debt-promissory
notes
To grant a debtor an extension of time to pay an existing debt - bills of exchange and
promissory notes payable at future dates.
to accommodate a party short on credit -accommodation bills (bills of exchange drawn
upon a person of some financial standing and discounted with a third party)
To raise finance - Accommodation bills drawn upon financial institutions.
To provide investment.

Also, we now know that there are other forms of negotiable instruments which have arisen as a
custom like hundis, demand drafts, pay orders, bank drafts, etc.
A hundi is the form of a bill of exchange drawn in any local language in accordance with the
custom of the place. Some times it can also be in the form of a promissory note. A Hundi is the
oldest known instrument used for the purpose of transfer of money without its actual physical
movement.
If money is to be transferred from one branch of the bank to the other branch situated in different
city of the same bank then demand draft is used.
If money is to be transferred from one branch to other branch of the same bank within a city then
Pay Order is used.
If money is to be transferred from one city to another and from one bank to some different bank
then bank draft is used.

Hence, depending upon the requirements and circumstances, the different types of
negotiable instruments are used in sync with the features and benefits of the different types
of instruments.

REFERENCES
http://www.investorwords.com/3224/negotiable.html
http://www.investorwords.com/3224/negotiable.html
http://www.businessdictionary.com/definition/negotiable-instrument.html
http://en.wikipedia.org/wiki/Negotiable_instrument
http://barjatyanikhil.tripod.com/banking/negotiableinstrumentsact.htm
http://legalserviceindia.com/articles/sec138.htm
http://barjatyanikhil.tripod.com/banking/negotiableinstrumentsact.htm
http://www.nos.org/Secbuscour/17.pdf
http://www.scribd.com/doc/34792175/Negotiable-Instruments
http://www.scribd.com/doc/34792175/Negotiable-Instruments