NEGOTIABLE

INSTRUMENTS ACT , 1881

In Bangladesh only three kinds of instruments are

recognized as negotiable instruments viz.,
promissory notes, bills of exchange and cheques.
Negotiable Instruments
 Documents of a certain type, used in
commercial transactions and monetary
dealings, are called Negotiable instruments.
 “Negotiable” means transferable by delivery
and “instrument” means a written document
by which a right is created in favour of some
person.
 Thus, negotiable instrument means “ a
document transferable by delivery”
Negotiable Instruments
Definition:
Negotiable Instruments Act , 1881 states that,
“ A negotiable instrument means a promissory
note, bill of exchange or cheque payable
either to order or to bearer”.
---Sec. 13(1)
Promissory Note
(Pro-Note or Hand-Note)
Definition:
“ A promissory note is an instrument in writing (not
being a bank note or currency note) containing an
unconditional undertaking signed by the maker, to
pay a certain sum of money only to , or to order of a
certain person, or to the bearer of the instrument.”
-------Sec. 4
The person who makes the promise to pay is called
the Maker. He is the debtor and must sign the
instrument.
The person who will get the money (the creditor) is
called Payee.
Essential Elements of a
Promissory Note
1. The instrument must be in writing.
2. It must be signed by the maker of it. The signature or mark may be
placed anywhere on the instrument, not necessarily at the bottoms. It
may be at the top or at the back of the instrument.
3. It must contain a promise to pay. It must be expressed not implied or
inferred.
e.g. “Mr. Sen I.O.U. Rs. 1000”. Here I.O.U. stands for “ I owe you.” This is
only an admission of indebtedness and not a promise to pay. So it’s
not a promissory note.
4. The promise to pay must be unconditional. If it is coupled with a
condition , it is not a promissory note.
e.g. “ I promise to pay B Rs.300 on D’s death provided D leaves me
enough to pay this sum.”
Promise to pay at a specified time or at a specified place or after
the occurrence of an event which is certain to occur or payment
after calculating interest at a certain rate
---------are not regarded as conditions.
Essential Elements for a
Promissory Note
5. The maker of the instrument must be certain and definite.
6. It must be stamped according to the Bangladesh Stamp Act.
7. The sum of money to be paid must be certain.
e.g. “ I promise to pay some money on the occasion of his marriage”
8. The payment must be in the legal tender money of Bangladesh and
certain quantity of goods or foreign money.
9. The money must be payable to a definite person or according to his
order i.e. payee is indicated by his official designation. A note is
valid even if the payee is misnamed or is indicated by his
official designation only.
10. It must be payable on demand or after a certain definite period of
time.
Specimens of Promissory Notes
 “ One year after date I promise to pay B or order Rs.
500.” ---- Sd/X.Y.
Date…………
 “ On demand I promise to pay A.B of No.37, College
Street or order Rs1000(Rupees one thousand only)
with interest at 8 percent per annum, for value
received in cash.” Sd/X.Y
Date…………………
Address……………….
 “ I acknowledge myself to be indebted to B in Rs.
1000 to be paid on demand, for value received.”
Sd/X.Y
Specimen of a Promissory Note

Rs 1,000 New Delhi, 25 Aug’11

One month after date I promise to pay to Mr.
A.K.Jha or order the sum of rupees one
thousand only, for value received.

Revenue
Stamp

Sd/X.Y.
Bill of Exchange
Definition:
“ A Bill of Exchange is an instrument in writing containing
an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or
to the order of a certain person or to the bearer of the
instrument.”
----Sec. 5
e.g. To A.B.
“ Six months after date pay P.Q. or order Rs. 1000”
Sd/X.Y.
Date………………..
Stamp…………………
Bill of Exchange
 The maker of a bill of exchange is called the Drawer.
The person who is directed to pay is called the
Drawee. The person who will receive the money is
called the Payee.
 When the payee has custody of the bill, he is called
the Holder. It is the holder’s duty to present the bill to
the drawee for acceptance. The drawee becomes the
Acceptor after signing on the bill.
 Sometimes the name of another person is mentioned
as the person who will accept the bill if the original
drawee does not accept it. Such a person is called
the Drawee in case of Need.
 Essential Elements of a Bill of
Exchange
A Bill of Exchange to be valid must fulfill the following
requirements:
1. The instrument must be in writing.
2. It must be signed by the drawer.
3. It must contain an order to pay, which is express and
unconditional.
4. The drawer, drawee and the payee must be certain and definite
individuals.
5. The amount of money to be paid must be certain.
6. The payment must be in the legal tender money of
Bangladesh.
7. The money must be payable to a definite person or according
to his order.
8. It must be properly stamped.
 Essential Elements of a Bill of
Exchange
9. The bill may be payable on demand or after a definite
period of time.
If any of the requirements mentioned above is not fulfilled, the
document is not a bill of exchange.
Specimen of a Bill of Exchange
Rs 1,000 New Delhi, 25 Aug’11
One month after date pay to Mr. A.K.Jha or
order the sum of rupees one thousand only,
for value received.

ted r
cep ende
Ac aty
To d /-S
S Revenue
Stamp
Satyender
12 miles
MIM, Ranchi Sd/Ritesh.
 Cheque
Definition:
“ A cheque is a bill of exchange drawn upon a
specified banker and payable on demand.”
----Sec. 6
Specimen of a cheque
Cheques are usually printed in the form shown below.
e.g.
Date……………
Pay A.B. or order (or bearer) the sum of Rupees Five Hundred
only Rs. 500/-
To
X.Y. Bank Sd/C.D.
SPECIMEN OF CHEQUE 15

Kapoorthala Bagh,
Mumbai – 400033
IFSCode:MAHB0000316
D D M M Y Y Y Y
Pay ……………………………………………………………………………………………………………......
……………………………………………………………………………………………………. Or Bearer
Rupees ……………………………………………………………………………………………………………
…………………………………………………………………………………………… Rs.

A/c No.

SHANKAR GAJARE
Signature
Please sign above

“ΙΙ473792ΙΙ” 000240000 000000 10

 Essential Features of Cheque
1. A cheque must fulfill all the essential requirements of a bill
of exchange.
2. A cheque may be payable to bearer or to order but in either
case it must be payable on demand.
3. The banker named must pay it when it is presented for
payment to him at his office during the usual office hours,
provided the cheque is validly drawn and the drawer has
sufficient funds to his credit.
4. Bills and notes may be written entirely by hand. There is no
legal bar to cheques being handwritten. Usually , banks
provide their customers with printed cheque forms which
are filled up and signed by drawer.
5. The signature must tally with the specimen signature of
the drawer kept in the bank.
 Essential Features of Cheque
 A cheque must be dated. A banker is entitled to refuse to pay a
cheque which is not dated. A cheque becomes due for payment on
the date specified on it.
 A cheque drawn with a future date is valid but it is payable on and
after the date specified. Such cheques are called post-dated
cheques.
 A cheque may be presented for payment after due date but if there
is too much delay the bank is entitled to consider the circumstance
suspicious and refuse to honour the cheque. The period after
which a cheque is considered too old or stale varies according to
custom from place to place. It is usually 6 months in Bangladesh
cities.
 In some circumstances the bank is not bound to pay the cheques
Types of Cheques
Two Types:
1. Open Cheques: An open cheque is one which is payable in
cash across the counter of the bank

2. Crossed Cheques: A crossed cheque is one which has two

short parallel lines marked across its face. It can be paid only to
another banker.
 The advantage of crossing is that it reduces the danger of
unauthorized persons getting possession of a cheque and
cashing it.
 A crossed cheque can only be cashed through a bank of which
the payee of the cheque is a customer.
 TYPES OF A CHEQUE
19

 Cross Cheque

.
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Co go a ego
om e
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an No No
 Cheque Crossed Specially

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a
o f Ind le
SBI k of I k
Ban egotia
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A/ C Ban N
Not
 Restrictive Crossing (A/c Payee Only)

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Not
 Modes of Crossing a Cheque
1. General Crossing: The simplest mode of crossing is to put two
parallel lines across the face of the cheque. This is called General
Crossing.
A cheque crossed generally will be paid to any bank through which it
is presented.

2. Special Crossing: When the name of bank is written in between the

parallel lines, it is called Special Crossing.
A cheque crossed specially will be paid only when it is presented for
collection by the bank named between the parallel lines.

In addition to general or special crossing, a cheque may maintain

various remarks written on it to restrict payment in certain ways.
The usual remarks are “ Account Payee Only” and “ Not Negotiable”
Difference between Promissory Note
& Bill of Exchange
 Number of parties:
In a promissory note there are two parties otherwise in a bill of
exchange there are three parties
 Promise & order
 Acceptance
No acceptance is necessary for negotiable instrument But……
 Liability
The maker of PN primarily liable on the instrument But……
 Relationship
In a PN the maker stands immediate relationship to the payee BUT
in BoE the maker stands immediate relationship with acceptor.

 Notice

 Protest
 Difference between Cheque & Bill of Exchange
Cheque Bill of exchange

1. Drawee: Cheque can be drawn only 1. The drawee may be any person.
on a banker.
2.  Time of payment: A cheque is
payable on demand.
3.  Grace period: Cheque is payable
on demand and no grace period is
allowed.
4.  Notice of dishonour: Notice of
dishonour is not necessary.
5.  Acceptance: A cheque is not
required to be presented for
acceptance. It needs to be
presented only for payment.
6. Crossing: A cheque may be
crossed.
7. Validity period: A cheque is usually
valid for a period of six months.
2. A bill may be drawn payable on
demand or on expiry of certain
period after date or sight.
3.  While calculating maturity three
day’s grace is allowed.
4.  A notice of dishonour is required.
5.  Bills require presentment for
acceptance and it is better to
present them for acceptance even
when it is not essential to do so.
6. A bill of exchange cannot be
crossed.
7.  A bill may be drawn for any period.
Parties to Negotiable Instruments
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 the parties
there to.----Sec.8

In order to be called as a ‘holder’ a person must satisfy the

following two conditions:
 He must be entitled to the possession of the instrument in his
own name.
 He must be entitled to receive or recover the amount due
thereon from the parties liable thereto.
Parties to Negotiable Instruments
Holder in due course
Holder in Due Course is defined as a holder who acquires the
negotiable instrument in good faith for consideration before it
becomes due for payment and without any idea of a defective
title of the party who transfers the instrument to him.
Holder in due course is a particular kind of holder. The holder of a
negotiable instrument is called the holder in due course if he
satisfies the following conditions.----Sec 9
1. He must be a holder.
2. He obtained the instrument for valuable consideration i.e.
lawful consideration
3. He became holder of the instrument before its maturity, i.e.
before the amount mentioned in it became payable.
4. He had no cause to believe that any defect existed in the title
of the person from whom he derived his title
Capacities of Parties

“ Every person capable of contracting ,

according to the law to which he is subject,
may bind himself and be bound by making,
drawing, acceptance, indorsement, delivery
and negotiation of a promissory note, bill of
exchange or cheque”------------Sec. 26
Who can be parties to a negotiable instrument?

Minor: Sec 26 declares that a minor may draw, indorse, deliver and negotiate a
negotiable instrument so as to bind all parties except himself. He does not incur
any liability but other adults parties do remain liable. He can be a indorsee or
payee.
Lunatic, idiot or drunken person:
Insolvent: He is not competent to draw, make, accept or indorse
Corporation: A company cannot incur liability under negotiable instrument unless
expressly or impliedly permitted by the Memorandum of Association or Article of
Association. But can be a payee or indorsee.
Agent: Every person capable of binding himself or being bound, by a negotiable
instrument, may so bind himself or be bound by a duly authorized agent acting in
his name.-----Sec 27
Legal Representative (Sec.29): He can deal with the negotiable instruments
belonging to the deceased to the same extent as the deceased could have done. If
he signs , he must use words to indicate that he is not personally responsible.
Joint Hindu Family: The Karta can bind the joint family by executing negotiable
instrument provided the transaction it for the benefit of family, other members are
not liable personally.
 Liability of the Parties
 Maker and Acceptor: The maker of the promissory note and the
acceptor of a bill of exchange are primarily responsible for the
payment due. ---------Sec 32
 Drawer: The drawer of a bill of exchange or cheque , case of
dishonour by the drawee or acceptor thereof, to compensate the
holder, provided due notice of dishonour has been given to, or
received by the drawer.----------Sec.30
 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 damaged caused by such default.----- Sec. 31
 Indorser: He is liable to all subsequent parties in case of dishonour
of the instrument provided due notice of dishonour has been given
to him.-----------Sec. 35
Nature of liability of Various prior
parties.
A bill drawn by P on Q in favour of R is made payable
three months after date. It is indorsed by R in favour of
X, by X in favour of Y, and by Y in favour of Z. The bill
has been accepted by Q, and Z presents it on maturity
for payment to Q who duly pays the amount and
indorses the fact of payment of the bill. On payment by
Q the bill is duly satisfied. But if payment had not been
made, Z could sue P, Q, R, X, Y – all or any of them; Y
could sue P,Q,R,X; and so on
Meaning of Endorsement
When a maker or holder writes the person’s name on
the face or back of the instrument & puts his
signatures thereto for the purpose of negotiation, it is
called ‘endorsement’.
 Person who signs – endorser
 To whom it is endorsed – endorsee.
 A legal term that refers to the signing of a
document which allows for the legal transfer of a
negotiable from one party to another.
 When an employer signs a cheque, they are
endorsing the transfer of money from the business
accounts to the account of the employee.
Kinds of endorsement
 Endorsement in full– An endorsement with the
direction to pay amount mentioned in the instrument
to a specified person or his order & the endorser
writes his signature under it.
Example: Pay to X or order . Sd/Y
 Endorsement in Blank– where endorser simply puts
his signature on the back of the instrument without
writing name of the person in whose favor the
instrument is endorsed.
Example: Pay…………….. SD/Y
Rules of Endorsement:
1. Endorsement may be made on the face of
the instrument or on the back. If there is no
space on the instrument, the endorsement
may be made on an attached slip of paper,
such a slip is known as allonge
2. Mere signature without any words amounts
to an endorsement in blank, provided the
endorsement was made with the intention of
transferring the instrument.
3. For an endorsement in full, no particular
words are necessary.
 4 If the payee’s or the endorsee’s name is wrongly
spelt, he should sign the name as spelt in the
instrument, and write the correct spelling within
brackets after his endorsement.
5. A negotiable instrument endorsed blank is
payable to the bearer thereof. Sec. 54. but not
for the crossed cheques.
6. The endorsement must be signed by the holder
or his duly authorized agent.
7. Usually endorsements are not accepted unless it
is signed in ink. A rubber stamp can be used for
mentioning designation of the holder.
8. Complementary prefix such as sri, sm, md, is
usually not written in negotiable instruments.
But it may be done.
9. An illiterate person may indorse a negotiable
by putting a thumb impression of his left hand
with witnesses who must also sign.
10. It is presumed that the endorsement
appearing upon a negotiable instrument were
made in the order in which they appear
thereon. Sec 118(e)
Dishonor of A Negotiable Instrument
 Negotiable instrument may be dishonored in
two ways.
 By non-acceptance
 By non-payment

Only bills of exchange can be dishonored by

non-acceptance, since only bills require
acceptance.
 1. Dishonor by non-acceptance

 When after due presentation, the bill is not accepted by

the drawee.
 In cases where presentation for acceptance is excused
 Where the drawee is incompetent to contract. Sec. 91
 If the acceptance is qualified (limited), the bill may be
treated dishonored
 Drawee in case of need: where a drawee in case of need
is named in a bill or in any case endorsement thereon,
the bill is not dishonor until it has been dishonored by
such drawee. Sec. 115
2. Dishonor by non-payment
A promissory note, bill of exchange or cheque is
dishonored by non-payment when the maker
of the note or the acceptor of the bill of
exchange or the drawee of the cheque makes
default in payment upon being duly required
to pay the same. Sec. 92
Instrument which are not Negotiable
An instrument becomes non-negotiable when the endorsement on
it contains express words which.
1. Restrict or exclude the right of further negotiation; or
2. Merely constitute the indorsee an agent to indorse the
instrument; or
3. Merely entitle the indorsee to receive the contents for the
indorser or for some other specified person. (Sec. 50)
Example: 1. pay the content C only
2. Pay C for my use
3. pay C or order for the account of B
4. the within must be credited to C

Cheque which are marked “not negotiable” or “account payee” are

nevertheless transferable & the transferee does not become the
holder in due course