The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881 which applies and extends

to the whole of India. The word negotiation means transferable from one person to another in return for consideration and instrument means a written document by which a right is created in favour of some person. Thus, a negotiable instrument is a document which entitles a person to a sum of money and which is transferable from one person to another by mere delivery or by indorsement and delivery. A negotiable instrument is a written order promising to pay a sum of money. According to section 13 of the negotiable instruments act, a negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.

(a) Meaning of Negotiable Instrument Payable to order: A promissory note, bill of exchange or cheque is payable to order if, either of the following two conditions is fulfilled: (a) It must be expressed to be so payable (b) It must be expressed to be payable to a particular person and it must not contains words which prohibit transfer or indicate and intention that it shall not be transferable. (c) for example: (i) Pay A, (ii) Pay A or order, (iii) Pay to the order of A, but prohibiting transfer is pay to A only or Pay to A and none else is not treated as

(b) Meaning of Negotiable instrument Payable to Bearer. A Promissory note, bill of exchange or cheque is payable to bearer if either of the following condition is fulfilled (a) It must be expressed to be so payable (b) The only and last endorsement must be endorsement in blank.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENT: 1. Freely transferable: the property in a negotiable instrument passes from one person to another by delivery (if instrument is payable to bearer) and by indorsement and delivery (if instrument is payable to order). 2. Title of holder free from all defects: the holder of the instrument is presumed to be the owner of the property contained in it. A holder in due course gets the instrument free from all defects of title of any previous holder. 3. Recovery: the holder in due course can sue upon a negotiable instrument in his own name for the recovery of the amount. 4. The instrument is transferable till maturity and in case of cheques till it becomes stale (on the expiry of 6 months from the date of issue). 5. Presumptions: Certain presumptions apply to all negotiable instruments unless contrary is proved.

INLAND INSTRUMENTS: A promissory note, bill of exchange or cheque drawn or made in India, and made payable or drawn upon any person, resident in India shall be deemed to be an inland instrument. It should be drawn and made payable in India, drawn in India upon some persons resident therein, even though it is made payable in a foreign country. FOREIGN INSTRUMENTS: An instrument which is not an inland instrument is deemed to be a foreign instrument. The essential of foreign instruments include that: It must be drawn outside India and made payable outside or inside India or it must be drawn in India and made payable outside India and drawn on a person resident outside India.

KINDS OF NEGOTIABLE INSTRUMENT: Suppose Pitamber, a book publisher has sold books to Prashant for Rs 10,000/- on three months credit. To be sure that Prashant will pay the money after three months, Pitamber may write an order addressed to Prashant that he is to pay after three months, for value of goods received by him, Rs.10,000/- to Pitamber or anyone holding the order and presenting it before him (Prashant) for payment. This written document has to be signed by Prashant to show his acceptance of the order. Now, Pitamber can hold the document with him for three months and on the due date can collect the money from Prashant. He can also use it for meeting different business transactions. For instance, after a month, if required, he can borrow money from Sunil for a period of two months and pass on this document to Sunil. He has to write on the back of the document an instruction to Prashant to pay money to Sunil, and sign it. Now Sunil becomes the owner of this document and he can claim money from Prashant on the due date. Sunil, if required, can further pass on the document to Amit after instructing and signing on the back of the document. This passing on process may continue further till the final payment is made.