Unit 2 Negotiable Instrument Act, 1881

U nit 2 Negotiable Instrument Act,1881 (15%)
• Definition of Negotiable Instrument

• Characteristics of a NI
• Types of NI
• Parties to NI
• Holder and Holder in Due Course
• Liabilities of parties
UNIT 2 THE NEGOTIABLE INSTRUMENTS ACT, 1881
INTRODUCTION
The Businessmen adopted a new method of exchanging documents (such as Bills of

Exchange, Promissory Note, Cheque, Bank Drafts) in place of actual currency for their
day-to-day transactions. These documents which are used as the substitute of money are
known as Negotiable Instruments.
The Negotiable Instrument Act came into force on the first day of March 1882. It deals
with Bills of Exchange, Promissory Note and Cheque.
DEFINITION
The term Negotiable instrument can be defined as a written promise or order to pay money
which may be transferred from one hand to another as a substitute of money.
Section 13 defines it as follows:
“A Negotiable Instrument means a promissory note, bill of exchange or cheque

payable either to order or to bearer”.
CONDITIONS FOR NEGOTIABILITY
Following are the two conditions for a negotiability:
1. It should be freely transferable.

2. The person who obtains a negotiable instrument in good faith and for value, becomes
entitled to recover the money mentioned in it. His title is not affected by any defect in the
title of the person from whom he obtained the instrument.
CHARACTERISTICS OR FEATURES OF A NEGOTIABLE INSTRUMENT
1. A negotiable instrument must be in Writing.

2. A negotiable instrument must be Signed by its maker.
3. A negotiable instrument must contain an Unconditional promise or order to pay some
money.
DRB & BCP BBA COLLEGE, ASST PROF Dr. HIRAL MEHTA
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4. A negotiable instrument must contain a certain amount of money only.

5. A negotiable instrument must be freely transferable from one person to another. It is an
important characteristic of a negotiable instrument.
6. The person who obtains a negotiable instrument in good faith and for value, becomes
entitled to recover the money mentioned in it. His title is not affected by any defect in
the title of the person from whom he obtained the instrument.
PRESUMPTIONS ABOUT NEGOTIABLE INSTRUMENTS
1. Consideration
2. Date
3. Time of acceptance
4. Time of transfer
5. Order of endorsement
6. Stamp
7. Holder in due course
8. Fact of dishonor
TYPES OF NEGOTIABLE INSTRUMENT
1. Promissory Note
2. Bill of Exchange
3. Cheque
Note: The Negotiable Instruments Act speaks of only above 3 instruments, but it does not
mean that there cannot be any other negotiable instruments than these three.
1. PROMISSORY NOTE:
Section 4 of the act defines Promissory Note as follows:
“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”.
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Example:
1. I promise to pay B or order Rs.500.

PARTIES TO A PROMISSORY NOTE:
1. Maker: It is a person who makes the promissory note and promises to pay the money
stated therein.
2. Payee: It is a person to whom the amount of promissory note is payable.
SPECIMEN OF PROMISSORY NOTE:
Rs. 500 Bombay, April 14, 1998
Three months after date, I promise to pay B or order the sum of rupees five
hundred for value received.
To B
Bombay. Stamp
Sd/ - A
ESSENTIAL ELEMENTS OF PROMISSORY NOTE
1. It must be in Writing: A Promissory note must be in writing; it is the first

requirement for a valid promissory note. An oral promise to pay some sum of money is
not a promissory note.
2. Must contain an express promise to pay: It must contain an express promise to pay
money. An implied promise to pay or acknowledgement of a debt is not sufficient.
Example: The following are not a valid Promissory Notes, as they contain a mere
acknowledgement of debt.
a. B, I owe you Rs.1000
b. B, I am liable to pay you Rs.500
3. Promise to pay must be Unconditional: The promise to pay should not be depend
upon a condition or upon the happening of uncertain event.
Example: The following are not a valid Promissory Notes, as they contain certain conditions.
a. I promise to pay B Rs.500 7 days after my marriage to C. it is an uncertain promise as
A may never marry C.
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4. Promise to pay in terms of money: A promissory note must be payable in terms of

money and money only. If it contains a promise to pay something other than money or
something in addition to money it will not be a valid promissory note. Example: The
following are not a valid Promissory Notes, as they contain certain do not contain to pay in
terms of money only.
a. I promise to B to deliver 100 bags of rice.
b. I promise to pay to B 30 shares and 20 bonds of a company.
c. I promise to pay B Rs.500 and also to deliver a black horse on 1st January.
5. Promise to pay certain (definite) amount of money: A valid promissory note is that the
amount of money payable must be definite. The promise must be to pay certain sum of
money. If the amount payable is not definite, then the promissory note is not valid.
Example: The following are not a valid Promissory Notes, as they do not contain the
promise to pay definite sum of money.
a. I promise to pay B Rs.1000 and all the other sums which shall be due to him
6. It must contain certain parties: The money must be payable to a definite person, parties
or according to his order. Both the parties the maker and the payee must be certain and both
must be indicated with certainty on the face of the instrument. If from the face of the
instrument the maker and the payee cannot be identified with certainty, it is not a valid
promissory note. The promissory not must show who is liable to pay the money and who is
entitled to receive the money.
7. It must be signed by the maker: A valid promissory note must be signed by the maker.
The instrument will be complete only when it is signed by the maker. If the maker is
illiterate, he must put his thumb impression.
8. Intention to make a promissory note and its delivery: A promissory note is incomplete,
inchoate until it is delivered to the payee (section 46). If a person signs a promissory note in
his home and keeps it there, it is not a promissory note, and he does not become liable to any
one even if somebody’s name is mentioned on it.
9. Other formalities: There are certain other formalities such as date, number, place,
consideration, stamp etc. which are usually found in a promissory note. They are not
essential in law. A promissory not must be properly stamped as required by the Indian
Stamp Act, 1889 and stamp must also be properly cancelled.
10. The promissory note must be payable on demand or after a definite period of time.
11. A promissory note cannot be payable to the bearer, because The Reserve Bank of
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India Act prohibits the issue of such promissory notes.
2. BILL OF EXCHANGE:
Section 5 of the Negotiable instrument act defines bill of exchange as follows:
“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, or to the bearer of the instrument”.
Generally, a bill of exchange is drawn by the creditor, who directs his debtor to pay the
money to the person specified in the instrument.
Example: A wrote and signed an instrument ordering B to pay Rs.500 to C. This is a bill
of exchange. In this instrument B has been ordered to pay Rs.500 to C.
• Like promissory note a bill of exchange cannot be made payable to the bearer on
demand, because The Reserve Bank of India Act prohibits the issue of such bill of
exchange.
Example: On demand pay to the bearer the sum of Rs.500 for value received.
• A bill of exchange payable on demand in which the name of the payee is mentioned is
valid.
Example: On demand pay to A or order the sum of Rs.500 for value received.
• The bill of exchange being an order upon the drawee to pay the money, is not binding
on him unless he accepts to pay the money due on the bill of exchange.
• A bill of exchange becomes dishonored by non-acceptance.
PARTIES TO THE BILL OF EXCHANGE
1. Drawer: The maker of the bill of exchange is known as the drawer.

2. Drawee: It is the person who is directed to pay the amount in the bill of exchange.
3. Acceptor: When the drawee accepts the bill of exchange i.e., when he gives his consent
to make the payment of the bill on due date, he is called the acceptor
4. Payee: It is a person to whom the amount of bill of exchange is payable.
• Sometimes the drawer and payee of the bill of exchange may be the same person.
Sometimes the drawer and the drawee may also be the same person.
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• The acceptance of the BOE is given by the rawer in writing only. The acceptance can be
either by writing the word accepted or signing the BOE or by simply putting a signature.
SPECIMEN OF BILL OF EXCHANGE
Rs.500 Delhi, April 14, 1998

Three months after date pay to C or order the sum of rupees five hundred, for
value received.
To B
11, Model Town Stamp
Delhi. Sd/ - A
ESSENTIALS OF A VALID BILL OF EXCHANGE
1. It must be in Writing.
2. It must be signed by the drawer.
3. It must contain an express order to pay.
4. The order to pay must be unconditional.
5. It must contain an order to pay in terms of money only.
6. It must contain an order to pay a definite amount of money.
7. It must contain certain parties.
8. Intention to make a bill of exchange and its delivery.
9. Other formalities include stamp, date, time, place, consideration etc.
DIFFERENCE BETWEEN PROMISSORY NOTE AND BILL OF

EXCHANGE
SRNO ASPECTS PROMISSORY NOTE BILL OF EXCHANGE
1. Name of parties There are 2 parties the There are 3 parties, the
maker & the payee. drawer, drawee & the
payee.
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2. Promise & order It is an unconditional It is an unconditional

promise to pay. order to pay.
3. Acceptance Since it is paid by the person Except in some cases, it is
liable to pay, acceptance is not required to be accepted by
necessary. drawee before it is binding
upon him.
4. Liability In this case, Liability of the In this case, the liability of the
maker of promissory note is maker of Bill of
primary & absolute. Exchange is secondary &
conditional.
5. Relationship The maker stands in the A drawer stands in the
immediate relationship with the immediate relationship with
payee. A promissory the acceptor & not with
note cannot be made payable to payee.
the maker itself.
6. Notice Notice of dishonor to the Notice must be given to all
maker is not necessary. the person liable to pay in
case of non- payment or
non-
acceptance of the bill.
7. Protest In case of promissory note Protest is necessary in case of
protest is not necessary. dishonor of foreign bill, if
such protest is necessary
according to the law at the
place where the bill is drawn.
8. Bearer It can never be made It can be made payable to
payable to bearer. bearer, but cannot be
made payable to a
“Bearer on demand”.
9. No. of copies Only one copy can be Bills can be written in
written. sets.
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10. Same person In this case the maker and A drawer and the payee
the payee cannot be the may be the same person,
same person, because a because the drawee can be
promise to self is not a ordered to pay the money
promissory note. to the drawer himself.
11. Writer Promissory note is written by It is written by the
a debtor who himself creditor, ordering the
promises to pay the money debtor to pay money.
to his creditor.
3. CHEQUE:
Cheque is therefore, such a bill of exchange which is drawn on a specified banker and not
expressed to be payable otherwise than on demand.
The cheque being a bill of exchange must possess all the requirements of bill of exchange
and should also meet the requirements of Section 6.
Definition of Cheque as per Section 6:

“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand”.
Banker: A banker is one, who in the ordinary course of business honor’s cheques drawn on
him by persons and receives money on current accounts”.
Parties to Cheque:
1. Drawer: It is the person who makes cheque, maker of the cheque.

2. Drawee: It is a banker who is directed to pay the amount of the cheque. In case of a cheque
the drawee is always the banker.
3. Payee: It is the person to whom the amount of cheque is payable.
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SPECIMEN OF CHEQUE:
No. LDA/E/HS/T 023126 15 – 9 – 2016

CENTRAL BANK OF INDIA
Pay Arun Trivedi or the sum of rupees One Thousand only.
bearer
Rs.1000 Sd/- A
ESSENTIAL ELEMENTS OF VALID CHEQUE:
• A cheque being a Bill of Exchange must have all the essential elements of Bill of
Exchange. In addition to these essential elements of Bill of Exchange, the cheque should
also satisfy the following two additional conditions.
1. It must be drawn on a specified banker. A cheque drawn on any person other than a
banker is not valid.
2. It must be payable on demand. A cheque is always payable on demand.
Note:
• Acceptance is not required in cheque.

• A cheque is also not required to be stamped.
• A cheque is equivalent to cash payment. The payment is deemed to be made on the date
of issue.
DIFFERENCE BETWEEN BILL OF EXCHANGE AND CHEQUE:
SR.NO ASPECTS BILL OF EXCHANGE CHEQUE

1. Drawee In bill of exchange It can only be a banker.
drawee can be any
person.
2. Acceptance Must be accepted before No acceptance is required.
the drawee can be called
upon to pay.
3. Days of grace Entitled 3 days of grace. Not entitled to such grace.
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4. Payment It is payable on demand or Always payable on

after the expiry of certain demand.
period after date on sight.
5. Presentment Presentment for payment or Not necessarily
else drawer will be discharged.
discharged from liability.
6. Crossing There is no crossing in A cheque can be crossed.
bill of exchange.
7. Stamp Stamp is required. Stamp is not required.
8. Notice In case of dishonor of bill of In case of cheque notice of
exchange, notice of dishonor is not required.
dishonor must be given to
drawer. If notice is not given
to the drawer, he will not be
liable for payment.
9. Countermanding The payment of bill of It can be countermanded.
exchange cannot be i.e., on drawer’s request, the
countermanded. i.e., the banker can stop the
drawer of bill of exchange payment of a cheque in
cannot stop the other certain circumstances.
parties from making
payment.
10. Noting & A bill of exchange may be It is not required.
protect noted or protected for
dishonor.
11. Comparison All bills of exchange are All cheques are bills of
not cheques. exchange.
12. Parties It also has three parties;1) It has three parties; 1) Drawer
Maker/Drawer (Creditor) (Bank Customer) 2) Drawee
2) Drawee (Debtor) 3) (Bank) 3) Payee (Holder).`
Payee (Receiver).
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Distinguish between Cheque and Promissory Note:
Points Cheque Promissory Note
1. Parties It has three parties; 1) Drawer There are two parties – maker
(Bank Customer) 2) Drawee (Bank) (promisor) and payee (promise)
3) Payee (Holder)
2. Nature It contains an unconditional order It contains an unconditional

to pay promise to pay.
3. Drawee Only a banker can be a drawee. Any individual can be a drawee.
4. Relation In case of cheque the drawer and A promissory note cannot be made
payee may be one and the same payable to the maker himself. The
person. In other words, the maker maker stands in the immediate
and the receiver may be the same relation to the payee.
person.
5. Days of grace A bearer cheque is always payable A promissory note is normally

on demand without any days of entitled to three days of grace after
grace. maturity unless payable on
demand.
6. Stamp Cheque requires no stamp. A promissory note must be affixed

by sufficient stamp.
7. If the drawer of a cheque feels that In case of promissory note no such

Countermanding the amount in cheque should not be instruction can be given. In other
paid to the payee, then he may words, payment of the promissory
instruct the baker to do so. In short, note cannot be countermanded.
payment of cheque may be
countermanded by the drawer.
8. Crossing A cheque may be crossed Promissory note can never be

crossed
9. Payable to A cheque drawn to bearer payable A note payable on demand can

bearer on on demand shall be valid. It can be never be drawn to bearer. It cannot
demand drawn so. be drawn so.
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10. Liability In case of cheque, the liability of the The maker of the promissory note
drawer is secondary and is primarily and absolutely liable to
conditional. payee. In other words, the liability
of maker is primary and absolute.
11. Payment A cheque can only be drawn A note may be also drawn payable
payable on demand. on demand, or on the expiry of a
certain period after date.
HOLDER AND HOLDER IN DUE COURSE
HOLDER:
“The holder of a negotiable instrument means any person entitled in his own name to the
possession thereof and to receive or recover the amount, due thereon from parties thereto.”
(Section 8)
Before a person can claim to be a holder of a negotiable instrument two conditions are
necessary:
1. He should be entitled in his own name the possession of the instrument, and
2. He should have the right to recover the amount due thereon from the parties.
Every instrument initially belongs to the payee and he is entitled in his own name to its
possession and receive the amount due on it. The payee of a negotiable instrument can transfer
the same to any person in payment of his own debts. This transfer of the negotiable instrument
is known as Negotiation and it takes place in two ways:
1. By mere delivery. The person to whom it is delivered becomes the holder.

2. In case of an order instrument, it can be negotiated by endorsement & delivery
and such endorsee becomes the holder.
• A holder means either the payee, or the bearer or endorsee of an instrument.

• Where a negotiable instrument is lost or destroyed, its holder is the person entitled to claim
the instrument at the time of such loss or destruction.
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HOLDER IN DUE COURSE:
“Holder in Due Course means, any person who for consideration became the possessor of a
promissory note, bill of exchange or cheque, if payable to bearer, or the payee or endorsee
thereof, if payable to order, before the amount mentioned in it became payable, and without
having sufficient cause to believe that defect existed in the title of the person from whom he
derived his title.” (Section 9)
A person becomes the holder in due course of the negotiable instrument if all the
following conditions are fulfilled:
1. He must be the holder of the negotiable instrument.
2. He must have obtained the instrument before its maturity.
3. He must have obtained the instrument for valuable consideration.
4. He must have obtained the instrument in good faith.
5. He must take the negotiable instrument which is complete and regular on the face.
Thus, a person cannot be said to be a holder in due course when:
1. He has obtained the instrument by gift or for an unlawful consideration or by illegal
methods.
2. He acquires the instrument after its maturity.
3. When the circumstances are such that a reasonable person would suspect that the title
of the transferor is defective.
RIGHTS OF A HOLDER IN DUE COURSE:
The holder in due course enjoys certain rights or privileged position. He has the
following rights:
1. Instrument purged of all defects (Section 53): A holder in due course who gets the
instrument in good faith in the course of its currency is not only himself protected against all
defects of title of the person from whom he has received it, but also serves, as a channel to
protect all subsequent holders. A holder in due course can recover the amount of the instrument
from all previous parties although, as a matter of fact, no consideration was paid by some of
the previous parties to instrument or there was a defect of title in the party from whom he took
it. Once an instrument passes through the hands of a holder in due course, it is purged (clean)
of all defects. It is like a current coin. Whosoever takes it can recover the amount from all
parties previous to such holder.
Thus, the holder in due course gets a good title to the instrument though the title of the
transferor or any prior party to the instrument is defective. He can recover the full amount
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unless he was a party to fraud; or if the instrument is negotiated by means of a forged

endorsement. Illustration: X obtains Y's acceptance to a bill by fraud X endorses it to who takes
it as a holder in due course. The instrument is purged of its defects and Z gets good title to it.
In case Z endorses it to some other person he will also get a good title to it except when he is
also a party to the fraud played by X.
2. Rights not affected in case of an inchoate instrument' (Section 20): Right of a holder in
due course to recover money is not at all affected even though the instrument was originally an
inchoate (unformed) stamped instrument and the transferor completed the instrument for a sum
greater than what was intended by the maker.
3. All prior parties liable (Section 36): All prior parties to the instrument continue to remain
liable to the holder in due course until the instrument is duly satisfied. The holder in due course
can file a suit against the parties liable to pay, in his own name. In simple words, the prior
parties to an instrument are maker, drawer, acceptor and endorser. The instrument is duly
satisfied when the parties to the instrument are discharged by payment or when the liabilities
to the parties are extinguished. Till then all the prior parties to the instrument continue to remain
liable to the holder in due course.
4. Can enforce payment of a fictitious bill' (Section 42): Where both drawer and payee of a
bill are fictitious persons, the acceptor is liable on the bill to a holder in due course. If the latter
can show that the signature of the supposed drawer and the first endorser are in the same hand,
for the bill being payable to the drawer's order the fictitious drawer must endorse the bill before
he can negotiate it.
5. Negotiable instrument without consideration (Section 43): Even if the negotiable
instrument is made without consideration and it gets into the hands of the holder in due course,
he can recover the amount on it from any of the prior parties thereto.
6. No effect of 'conditional delivery' (Section 46): Where negotiable instrument is delivered
conditionally or for a special purpose and is negotiated to a holder in due course, a valid
delivery of it is conclusively presumed and he acquired good title to it. In short, the other parties
liable to pay cannot plead that the delivery of the instrument was conditional or for a specific
purpose only. For instances 'P', the holder of a bill indorses it "Q or order" for the express
purpose that Q may get it discounted. Q does not do so and negotiates it to R, a holder in due
course. S acquires a good title to the bill and can sue all the parties on it.
7. No effect of absence of consideration or presence of an 'unlawful consideration'
(Section 58): The plea (appeal) for absence of consideration or presence of an unlawful
consideration is not available against the holder in due course. The party responsible will have
to make payment
8. Right to file a suit (Section 118): Holder in due course can file a suit in his own name
against the parties liable to pay. He is deemed prima facie to be a holder in due course. A holder
of a negotiable instrument who derives title from a holder in due course has the rights thereon
of that holder in due course. The law presumes that every holder is a holder in due course until
the contrary is proved.
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9. Estoppel against denying original validity of instrument (Section 120): The plea of
original invalidity of the instrument cannot be put forth, against the holder in due course by the
drawer of a bill of exchange or cheque or by an acceptor for the honour of the drawer. But
where the instrument is void on the face of e.g. promissory note made payable to "bearer", even
the holder in due course cannot recover the money. Similarly, a minor cannot be prevented
from taking the defence of minority. Also, there is no liability if the signatures are forged.
10. Estoppel against denying capacity of the payee to endorse (Section 121): No maker of
promissory note and no acceptor of a bill of exchange payable to order shall, in a suit therein
by a holder in due course, be permitted to resist the claim of the holder in due course on the
plea that the payee had not the capacity to endorse the instrument on the date of the note as he
was a minor or insane or that he had no legal existence. In other words, the maker of a note or
an acceptor of a bill payable to order cannot deny the payee's capacity to endorse the same at
the date of the note or bill.
11. Estoppel against endorser to deny capacity of parties (Section 122): An endorser of the
bill by his endorsement guarantees that all previous endorsements are genuine and that all prior
parties had capacity to enter into valid contracts. Therefore, he on a suit thereon by the
subsequent holder cannot deny the signature or capacity to contract of any prior party to the
instrument.
DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE:
SRNO ASPECTS HOLDER HOLDER IN DUE
COURSE
1. Consideration He may become the He is one who obtains
possessor or payee of an possession for
instrument even without consideration.
consideration.
2. Maturity He may become the He must become the
possessor before or after possessor or payee of the
maturity. instrument before the
amount thereon becomes
payable.
3. Knowledge of He may have knowledge of He must have become the
defects defect in the title of the holder of the instrument in
person from whom he good faith and after
derived his title. exercising due care and
caution.
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4. Good faith A person becomes a holder For being a holder in due

even if he does not obtain course, a person must obtain
the negotiable instrument the negotiable instrument in
in good faith. good faith.
5. Special A holder does not enjoy He enjoys certain special
Privileges any special privileges. privileges as specifies under
the Negotiable
Instrument Act.
6. Right to sue A holder cannot sue all A holder in due course can
the prior parties. sue all the prior parties.
LIABILITY OF THE PARTIES:
1. Liability of a drawer od Bill of Exchange or Cheque: The drawer is bound, in case of

dishonor by the drawee or acceptor thereof, to compensate the holder, provided due notice
of dishonor has been given to, or received by the drawer. (Section 30)
2. Drawee of a cheque: The drawee of a cheque having sufficient funds of the drawer, in
his hands, properly applicable to the payment of such cheque must pay the 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. (Section 31). The banker’s contractual duty to pay
cheques is owed only to customer and not to the payee or the holder of the cheque.
3. Maker or Acceptor: In the absence of a contract to the contrary, the maker of promissory
note and acceptor before the maturity of bill of exchange are bound to pay amount thereof at
maturity according to the apparent tenor of the note or acceptance respectively, and the
acceptor of the bill of exchange at or after maturity is bound to pay the amount thereof to the
holder on demand.
In default of such payment as aforesaid, such maker or acceptor is bound to
compensate any party to the note or bill of exchange for any loss or damage sustained
by him and caused by such default.
4. Liability of Endorser: The endorser of the negotiable instrument is liable to all the
subsequent parties incase of dishonor of the instrument, provided –
i. There is no contract to the contrary.
ii. The endorser had not limited or qualified his liability by using appropriate words and
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expression for the purpose.

iii. Due notice of dishonor has been given to or received by such endorser is herein after
provided, (Section 35)
GENERAL RULES REGARDING LIABILITY:
1. Principle of suretyship: “Every prior party to a negotiable instrument is liable thereon

to a holder in due course until the instrument is duly satisfied.” (Section 36).
2. Maker, Drawer and Acceptor as principals: “The maker of a promissory note the
absence of a contract to the contrary, respectively liable thereon as principal debtors, and
other parties thereto liable thereon as sureties for the makers, drawer or acceptor, as the case
may be.” (Section 37)
3. Prior party a principal in respect of each subsequent party: As between the parties
so liable as sureties, each prior party is, in the absence of a contract to the contrary also
liable thereon as principal debtor in respect of each subsequent party. (Section 38)
4. Suretyship: When the holder of an accepted bill of exchange enters into any contract
with the acceptor which, under Section 134 or 135 of the Indian Contract Act, 1872 would
discharge the other parties, the holder may expressly reserve his right to charge the other
parties, and in such case, they are not discharged. (Section 39)
5. Liability of endorser and acceptor:
a. Discharge of endorsers liability: Where the holder of a negotiable instrument, without
the consent of the endorser, destroys or impairs the endorsers remedy against a prior party
the endorser is discharged from the liability to the holder to the same extent as if the
instrument had been paid at maturity. (Section 40)
b. Acceptors liability on a forged instrument: An acceptor of a bill of exchange already
endorsed is not relieved from liability by reason such that such instrument is forged, if he
knew or has the reason to believe the endorsement to be forged when he accepted the bill.
(Section 40)
c. Acceptors liability for a bill drawn in a fictitious name: An acceptor of a bill of
exchange drawn in a fictitious name and payable to the owner’s order is not, by reason that
such name is fictitious, relieved from liability to pay 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. (Section 41)
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Unit 2 Negotiable Instrument Act, 1881

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Unit 2 Negotiable Instrument Act, 1881

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Unit 2 Negotiable Instrument Act, 1881

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U nit 2 Negotiable Instrument Act,1881 (15%)

• Definition of Negotiable Instrument

The Businessmen adopted a new method of exchanging documents (such as Bills of

Section 13 defines it as follows:

“A Negotiable Instrument means a promissory note, bill of exchange or cheque

CONDITIONS FOR NEGOTIABILITY

Following are the two conditions for a negotiability:

1. It should be freely transferable.

CHARACTERISTICS OR FEATURES OF A NEGOTIABLE INSTRUMENT

1. A negotiable instrument must be in Writing.

4. A negotiable instrument must contain a certain amount of money only.

PRESUMPTIONS ABOUT NEGOTIABLE INSTRUMENTS

TYPES OF NEGOTIABLE INSTRUMENT

1. I promise to pay B or order Rs.500.

SPECIMEN OF PROMISSORY NOTE:

Rs. 500 Bombay, April 14, 1998

ESSENTIAL ELEMENTS OF PROMISSORY NOTE

1. It must be in Writing: A Promissory note must be in writing; it is the first

4. Promise to pay in terms of money: A promissory note must be payable in terms of

India Act prohibits the issue of such promissory notes.

“A Bill of Exchange is an instrument in writing containing an unconditional order, signed by

PARTIES TO THE BILL OF EXCHANGE

1. Drawer: The maker of the bill of exchange is known as the drawer.

SPECIMEN OF BILL OF EXCHANGE

Rs.500 Delhi, April 14, 1998

11, Model Town Stamp

ESSENTIALS OF A VALID BILL OF EXCHANGE

DIFFERENCE BETWEEN PROMISSORY NOTE AND BILL OF

2. Promise & order It is an unconditional It is an unconditional

Definition of Cheque as per Section 6:

1. Drawer: It is the person who makes cheque, maker of the cheque.

No. LDA/E/HS/T 023126 15 – 9 – 2016

ESSENTIAL ELEMENTS OF VALID CHEQUE:

• Acceptance is not required in cheque.

DIFFERENCE BETWEEN BILL OF EXCHANGE AND CHEQUE:

SR.NO ASPECTS BILL OF EXCHANGE CHEQUE

4. Payment It is payable on demand or Always payable on

Distinguish between Cheque and Promissory Note:

Points Cheque Promissory Note

2. Nature It contains an unconditional order It contains an unconditional

3. Drawee Only a banker can be a drawee. Any individual can be a drawee.

5. Days of grace A bearer cheque is always payable A promissory note is normally

6. Stamp Cheque requires no stamp. A promissory note must be affixed

7. If the drawer of a cheque feels that In case of promissory note no such

8. Crossing A cheque may be crossed Promissory note can never be

9. Payable to A cheque drawn to bearer payable A note payable on demand can

HOLDER AND HOLDER IN DUE COURSE

1. By mere delivery. The person to whom it is delivered becomes the holder.

• A holder means either the payee, or the bearer or endorsee of an instrument.

HOLDER IN DUE COURSE:

RIGHTS OF A HOLDER IN DUE COURSE:

unless he was a party to fraud; or if the instrument is negotiated by means of a forged

4. Good faith A person becomes a holder For being a holder in due

LIABILITY OF THE PARTIES:

1. Liability of a drawer od Bill of Exchange or Cheque: The drawer is bound, in case of

expression for the purpose.

GENERAL RULES REGARDING LIABILITY: