Part IV The Negotiable Instruments Act,

1881

Chapter 13
Negotiable Instruments: An Introduction
 The Negotiable Instruments Act: Highlights

 A negotiable instrument is a document, guaranteeing the payment of a specific

amount of money, either on demand, or at a set time.
 The notable feature of a negotiable instrument is that it is freely passable from
one person to another wherein the transferee can get a defect free title.

 The law regulating a negotiable instrument is contained in The Negotiable

Instruments Act, 1881.
 The Act recognizes only three principal types of negotiable instruments, namely
 promissory notes,
 bills of exchange and
 cheques.
 However, other instruments which satisfy the conditions of negotiability by
usage or custom of trade such as, hundi, share warrant, bearer debentures, etc.,
also come under its purview.
 Learning Objectives

Negotiable Instruments: Meaning, Definition, Characteristics

Kinds of Negotiable Instruments:

Promissory Notes, Bills of Exchange, Cheques, Hundi

Payment-in-due-course

Interest on Negotiable Instruments

Negotiable Instruments: Special Rules of Evidence

Holder and Holder-in-due-course

Negotiable Instruments: Meaning and
Definition

A negotiable instrument is essentially an instrument of credit readily

convertible into money and easily carried from one hand to another.
The word negotiable means ‘passable by delivery’, and instrument
means ‘a written document which, creates a right in favour of some
person.’
Thus, the expression ‘negotiable instrument’ literally implies a written
document transferable by delivery from one person to another.
It is transferable with a simple procedure requiring a signature and
delivery (in case of order instruments) or just delivery (in case of
bearer instruments).
The law endorses such a way of transfer of a negotiable instrument
and protects it. Contd.
Negotiable Instruments: As per NI Act

The Negotiable Instruments Act, however, has not defined the

term ‘negotiable instrument’ as such, but Section 13 gives us
an idea about it. Accordingly, a negotiable instrument means a
promissory note, bill of exchange or cheque payable either to
order or to bearer.
A major drawback of the Section 13 definition is that it hardly
defines a negotiable instrument. It does not explain any of its
salient features; rather it provides an idea of the types of
negotiable instruments. Contd.
Negotiable Instruments: Real Test

Transferee of a negotiable instrument gets the better title than that of

transferor provided that he (transferee) acquires it in good faith and
for valuable consideration.

X steals a bearer cheque from the drawer of Y and transfers it to Z who

takes it for value and in good faith. In this case title of the transferee
(Z) will be free from defect though the title of the transferor (i.e., X)
is defective as the cheque is a stolen one.

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Salient Features of A Negotiable Instrument

1 2 3 4 5 6 7 8
Defect free No Ceiling Payable to Payable to
Freely Presumption
transferable title to the Recovering on number order bearer Payment s
transferee of transfers
Salient Features of A Negotiable Instrument

1. Freely transferable. Hassle free transferability is the indispensable feature of a

negotiable instrument. Negotiable Instruments are moveable from one person to
another without any legal or documentary procedure. The property in a negotiable
instrument passes by
– mere delivery if the instrument is payable to bearer
– by endorsement and delivery if it is payable to order.

2. Defect free title to the transferee . The real test of a negotiable instrument is whether the
transferee gets the instrument free of all defects. The general rule is that a person cannot
transfer better title to property that s/he himself/herself does not have. For example, if a
person steals a car and sells the same, the buyer does not get any legal title to the car, as
the transferor himself had no title to the car. The real owner of car can anytime obtain
possession from the buyer, even if the buyer had purchased the car in good faith and even
if he had no idea that the seller had no title to the car. However, if a person acquires a
negotiable instrument in good faith and without knowledge of defect in title of the
transferor, the transferee can enjoy better title to the instrument, even if the title of
transferor was defective.
 Salient Features of A Negotiable Instrument

3. Recovery . The holder-in-due-course is presumed to be the owner of the property contained in the negotiable
instrument and is entitled to sue the instrument in his own name (in case of dishonour) for the recovery of the amount.
Also, he need not give notice to the debtor of the fact that he has become holder.
4. No ceiling on number of transfers. There is no definite upper limit on the number of transfers in case of a negotiable
instrument. It can be transferred any number of times till its maturity. But a cheque whether by order or bearer can be
transferred any number of times till it becomes stale i.e., within six months from the date of its original issue.
5. Payable to order. It should be noted that where the instrument prohibits its transferability or indicates that it shall not
be transferable but remains valid as between the parties thereto, it is not a negotiable instrument, as it cannot be
negotiated further. Thus for an instrument to be negotiable, it should be made payable to order. The various forms in
which an instrument may be made payable to order are as follows.
• Pay Ram
• Pay Ram or Order
• Pay to the Order of A
• Pay Ram and Shyam, and.
• Pay Ram or Shyam etc
A promissory note, bill of exchange, or cheque payable to order, which is expressed to be so payable, or which is
expressed to be payable to a particular person and does not contain words prohibiting transfer or indicating that it shall
not be transferable, are all examples of negotiable instruments.  
But a negotiable instrument may contain any words restricting its transferability, expressly or impliedly, e.g., ‘pay to Ram
only’ or ‘pay to Ram and none else’. If it is made so, it will not be treated as ‘payable to order’ and thereby shall not be a
negotiable one.
Salient Features of A Negotiable Instrument

6.Payable to bearer.  Bearer refers to the person who is in the possession of an

instrument; therefore ‘payable to bearer’ means payable to any person who possesses
it. A promissory note, bill of exchange, or cheque is payable to bearer which is
expressed to be so payable, or on which the only or last endorsement is an
endorsement in blank.  The most common forms of a bearer instrument are:
• ‘Pay Ram or bearer’
• ‘Pay Ram, Shyam or bearer’
• ‘Pay bearer’
In all the above cases the sum of money contained in a negotiable instrument would be
payable to the bearer. It should also be noted that if an instrument is originally made
‘payable to order’, it may become ‘payable to bearer’ if it is endorsed in blank by the
payee. For example a cheque is made ‘payable to Kumar’. Kumar endorses it merely by
signing on the back (without making it payable to Verma or Verma’s order) and delivers
it to Verma with a view to making it negotiable. The cheque then becomes a bearer
instrument in the hands of Verma.
7.Payment. A negotiable instrument may be made payable to two or more payees jointly
or it may be made payable in the alternative to one or two, or one or several payees.
Salient Features of A Negotiable Instrument:
Presumptions

Sections 118-19 of the Act lay down following presumptions that generally apply to
negotiable instruments unless the contrary is proved:
1. Consideration  It is presumed that every negotiable instrument was made,
drawn, accepted, endorsed, negotiated or transferred for negotiation.
2. Date  Every negotiable instrument bearing a date was made or drawn on the due
date [Section 118 (b)]. An instrument could also be post-dated and even be
booked on a public holiday. But a post-dated instrument can be sued upon only
after the expiry of the due date.
3. Time of Acceptance  It is presumed that every accepted bill of exchange was
accepted within a reasonable time after its date and before its maturity. [S 118 (c)]
4. Time of Transfer  It is presumed that every transfer of a negotiable instrument
was made before its maturity.
Salient Features of A Negotiable Instrument:
Presumptions
5. Order of endorsement  It is presumed that the endorsements appearing upon a
negotiable instrument were made in the order in which they appear thereon. [S
118 (e)]
6. Stamp  It is presumed that a negotiable instrument except a cheque (as no
stamp duty is prescribed for cheques under the Indian Stamp Act) was duly
stamped. This proves helpful in case the instrument is destroyed or lost.
7. Holder-in-due-course  It is presumed that the holder of a negotiable instrument
is also a holder-in-due-course unless it is proved that the holder has obtained the
instrument from its lawful owner y committing an offence, fraud, or for unlawful
consideration.
8. Proof of Protest  In the event of dishonour of a negotiable instrument, the
holder can file a suit for recovery of the amount contained in instrument but
before doing so s/he should obtain a certificate from a notary about the fact of
dishonour. This certificate is called protest. The court shall, on proof of protest,
presume that the instrument was presented for payment or acceptance and that
it was dishonoured by non-acceptance or non-payment, as the case may be.
Kinds of Negotiable Instruments

The Negotiable Instruments Act recognizes only three kinds of instruments:

1. Promissory notes,

2. Bills of exchange and

3. Cheques.

The Act, however does not exclude any other instrument if it entitles a person to a sum of

money and is transferable by delivery and the transferee can acquire a better title.

Accordingly, shares/dividend warrants, bearer debentures, government bonds payable to

bearer, treasury bills, port trust debentures and instruments written in local languages

i.e. hundis etc., also included in the category of negotiable instruments.

Promissory Note

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 the order of a certain person, or only to
bearer of the instrument. [Section 4]
The person making the promise to pay is called the ‘maker’
and the person who is to receive the money stated in the note
is called the ‘payee.’
 Parties to a Promissory Note

A promissory note, also called pro-note, may have the following parties:
1. Maker  A person who issues or executes the note promising to pay the
amount stated therein is called the maker.
2. Payee  This is the person who is to receive the money stated in the pro-
note.
3. Holder  This is the person who is entitled in his own name to the
possession of a pro-note, and to receive or recover the amount
thereon. S/He may be either the payee or some other person to whom
he may have endorsed the note.
4. Endorser  This is the maker or payee who may endorse an instrument.
5. Endorsee  The ‘endorsee’ is the transferee or the person in whose
favour the pro-note has been endorsed.
 Essentials of A Valid Promissory Note

Following are the essential characteristics of a promissory note:

1. Must be in writing
2. Must contain an express undertaking to pay
3. The promise or undertaking to pay must be unconditional
4. The promise must be for paying certain sum of money
5. Must be signed by the maker
6. The maker must be a certain person
7. The payee must be certain
8. Payment must be in legal tender money of India
9. Must be properly stamped
10.Must contain number, place and date of signature
 Specimen of Promissory Note

Specimen 1
Rs. 5000/
New Delhi
2 November 2010
Sixty days after date I promise to pay Mr. X the sum of rupees five thousand only with interest thereon at 12%
per annum for value received.
To,
Mr. X Revenue Stamp
New Delhi Mr. X (Sd/- on stamp)
 

 
Specimen 2
Rs. 5000/- New Delhi
2 November 2010 Ninety days after date I promise
to pay Mr. Y or order the sum of rupees Five thousand only.
  To, Revenue Stamp
Mr. Y
New Delhi Mr. Y (Sd/- on stamp)
 Specimen of Promissory Note

Specimen 3
Rs. 5000/
New Delhi
2 November 2010
Forty-five days after date I promise to pay Mr. Z or order the sum of rupees five thousand only.
 
To,
Mr. Z Revenue Stamp
New Delhi Mr. X (Sd/- on stamp)
 

 
Specimen 4
Rs. 5000/- New Delhi
2 November 2010
On demand I promise to pay Mr. A or order the sum of rupees five thousand only with interest thereon at 12% per
annum for value received.

  To, Revenue Stamp

Revenue Stamp
Mr. A
New Delhi Mr. X (Sd/- on stamp)
 Cheques

A cheque is a bill of exchange drawn on a specified banker and not

expressed to be payable otherwise than on demand [Section 6].

Cheque is a kind of bill of exchange drawn on a bank that is always payable

on demand.

Cheque includes electronic image of a truncated cheque and a cheque in

electronic form. This makes provision for electronic submission and
clearance of cheque. 
A cheque being a kind of a bill of exchange satisfies all the requirements of
a bill except that it does not have any acceptance and stamp.
Thus, a cheque must be signed by the drawer (i.e., the maker); it payable
must contain an unconditional order to pay a certain amount of money to
a specified person named therein or his order, or to the bearer; must
specify the banker upon whom it is drawn, and must be dated.
 Parties to a Cheque

A cheque generally involves the following parties :

1. Drawer  The person who makes the cheque
2. Drawee  The bank of the drawer on whom the cheque is drawn
3. Payee   The person who is to receive the money stated in the cheque
4. Holder  A person who is in the possession of a cheque and is entitled
to receive or recover the amount thereon.
5. Endorser  The maker, drawee, payee or endorsee can endorse a
cheque by signing on the back of it. The endorser of a cheque has
the status of a new drawer.
6. Endorsee  The transferee or the person in whose favour the
instrument has been endorsed.
 Essentials of a Cheque

If one takes a close look at the definition of a cheque, as per Section 6, it becomes
clear that a cheque has the following 10 essential elements or characteristics:
1. It must be in writing  A cheque must be in writing. An oral order to pay does not
constitute a cheque.
2. It should be drawn on banker  It is always drawn on a specified banker. A cheque
can be drawn on a bank where the drawer has an account.
3. It contains an unconditional order to pay  A cheque cannot be drawn so as to be
payable conditionally. The drawer’s order to the drawee bank must be
unconditional and should not make the cheque payable dependent on a
contingency. A conditional cheque shall be invalid.
4. The check must have an order to pay a certain sum  The cheque should contain
an order to pay a certain sum of money only. If a cheque is drawn to do something
in addition to, or other than to pay money, it cannot be a cheque. For example if a
cheque contains ‘Pay Rs 5,000 and a T.V. worth Rs to A’, It is not a cheque.
5. It should be signed by the drawer and should be dated  A cheque does not carry
any validity unless signed by the original drawer. It should be dated as well.
 Essentials of a Cheque

6. It is payable on demand  A cheque is always payable on demand.

7. Validity  A cheque is normally valid for three months from the date it
bears. Thereafter it is termed as stale cheque. A post-dated or
antedated cheque will not be invalid. In both cases the validity of the
cheque is presumed to commence from the date mentioned on it.
8. It may be payable to the drawer himself  Cheques may be payable to
the drawer himself. It may be drawn payable to bearer on demand
unlike a bill or a pro-note.
9. Banker is liable only to the drawer  The banker on whom the cheque
is drawn shall be liable only to the drawer. A holder or bearer has no
remedy against the banker if a cheque is dishonoured

10.It does not require acceptance and stamp  Unlike a bill of exchange a
cheque does not require acceptance on part of the drawee.
11.Similarly, no revenue stamp is required to be affixed on cheques.
 Bill of Exchange

A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker,

directing a certain person to pay a sum of money only to, or to the order of a certain person, or to

the bearer of the instrument.

Parties to bills of exchange . A bill of exchange may involve the following parties:

1. Drawer This is the person who writes and signs the bill.

2. Drawee This is the person on whom the bill is drawn

3. Acceptor This is the person who accepts the bill. In practice, the drawee is the acceptor but a third

person may accept a bill on behalf of the drawee .

4. Payee This is the person to whom the money stated in the bill is payable. He may be the drawer or any

other person to whom the bill has been endorsed.

5. Holder This is the person who has the possession of the bill. After being drawn s/he may be the original

payee, endorsee and bearer in case of a bearer bill.

 Bill of Exchange

6. Endorser The person, either the drawer or holder, who endorses the bill to any one by signing on the
back of it is called an endorser.
7. Endorsee is the person in whose favour the bill is endorsed.

8. Drawee in case of need This is a person who is introduced at the option of the drawer. Any endorser
may insert the name of such person, and the effect of it is that a resort may be had to him in case the
bill is dishonoured for non-acceptance or non-payment or in any other need .
9. Acceptor for honour The person who may become a party to a bill as acceptor voluntarily in the event
of the refusal by original drawee to accept the bill if demanded by the notary.

Usually there are three parties to a bill of exchange – drawer, drawee and payee. It is also not necessary
that three separate persons should answer to the description of drawer, drawee and payee. Depending
upon the situation one person may fill any two of three positions. When a bill is drawn as ‘pay to me or my
order’, drawer and drawee may be the same person. Similarly, when a principal draws a bill on his agent or
upon himself, drawee and payee may be the same person .
 Specimen of a Bill of Exchange

Rs. 5000/-
New Delhi
1st April 2010
Sixty days after date pay ‘B’ or order the sum of rupees five thousand
only for value received.
To,
C
Stamp
Jamia Nagar,
New Delhi-110025 Accepted Sd/- C Mr. X (Sd/- on stamp)
 Essentials of a Bill of Exchange

The definition of a bill of exchange is very close to that of a promissory note. Therefore bills of
exchange have more or less the same essential characteristics as a promissory note. Following are
the essential elements of a bill of exchange:
1. It must be in writing
2. It must contain an express order directing a certain person to pay
3. The order to pay must be unconditional
4. There are parties to a bill of exchange viz., drawer, drawee, and payee
5. It must be signed by the drawer
6. The drawer must be a certain person
7. The drawee must be certain
8. The payee must be certain
9. The sum payable must be certain
10.The order must be pay money only
11.A bill of exchange can be drawn payable to bearer but cannot originally be drawn payable to
bearer on demand
12.It must be duly stamped according to the Indian Stamp Act
13.Other formalities like, date, place and the words ‘For value received’ etc. are usually found in a bill
of exchange though they are not necessary in law.
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 Distinction between a Promissory Note & a
B/E

1. Number of Parties  A promissory note is a two-party instrument with a maker and the
payee, both being distinct and different persons. In a bill of exchange there are three
parties- drawer, drawee and payee. It is possible that any two out of three positions may be
filled up by the same person.
2. Promise and Order  A promissory note contains an unconditional undertaking to pay the
drawee  whereas a bill contains an unconditional order to pay.
3. Maker as a Payee  In case of a promissory note the maker cannot be the payee. That is a
pro-note cannot be made payable to the maker. But in a bill of exchange the drawee and
the payee may be one and the same person when a bill is drawn as ‘pay to me or my order.’
4. Nature of Liability  The liability of the maker of a pro-note is primary and absolute since
the maker himself promises to pay. But the liability of the drawer of a bill is secondary and
conditional. He becomes liable to pay only when the drawee or acceptor refuses to honour
the bill or fails to pay.
5. Acceptance  A pro-note does not require any acceptance before it is presented for
payments. A bill of exchange on the other hand generally requires acceptance of the
drawee before it is presented for payment since it is payable by the other person directed
by the drawer. Contd.

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 Distinction between a Promissory Note & a
B/E

6. Maker’s Position  In a pro-note, the maker stands in immediate relationship with the payee,
but the drawer of a bill stands in immediate relation with the acceptor and not the payee.
7. Payable to Bearer  A pro-note cannot be made payable to bearer, even if it is made payable
otherwise than on demand. A bill can be made payable to bearer provided it is not made
payable to bearer on demand.
8. Notice of Dishonour  In case of dishonour of a pro-note, no notice (of dishonour) needs to be
given to maker. But when a bill is dishonoured, due notice must be given by the holder to all
the parties who are liable under the bill, particularly the drawer and the immediate
endorsee. If notice of dishonour is not given, such parties will not be liable to pay.
9. Protest  No protest is necessary in case of a promissory note. But foreign bills must be
protested for dishonour if the law of the land where they are drawn so requires. The term
‘protest’ refers to a formal certificate of dishonour issued by the Notary Public to the holder
of a bill in question.
10. Exemption  The provisions related to presentment for acceptance, acceptance supra
protest , drawing of bills-in-sets, especially foreign bills do not apply in case of promissory
notes. All these provisions are applicable to a bill of exchange.

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 Forms of Bills of Exchange

The various forms of bill of exchange can be classified as follows:

1. Inland bill
2. Foreign bill
3. Trade bill
4. Accommodation bill
5. Documentary bill
6. Clean bill
7. Fictitious bill
8. Bill-in-sets
9. Escrow
10.Bank draft
1. Inland bill  A bill of exchange is an inland bill if it is (i) drawn or made payable in India even though it has been
drawn on a foreign resident or (ii) drawn in India upon any person who is a resident in India even though it is made
payable in a foreign country. Thus, to be an inland instrument, it must satisfy either of the following two conditions.
• The instrument must have been drawn or made payable in India, or
• The drawee must be in India.
A bill drawn in India and payable in India but drawn upon a person in Canada is an inland bill. Similarly a bill drawn
in India made payable in Canada upon a person in in India is also an inland bill.
2.Foreign bills  Bills, which are not inland bills, are deemed to be foreign bills. Normally foreign bills are drawn in sets
of three copies. Contd.

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 Forms of Bills of Exchange

3. Trade bill  When a bill is drawn, accepted or endorsed for a genuine trade transaction, it is a trade bill. A
trader usually makes use of a trade bill when he sells good on credit. A trade bill is invariably backed by
consideration and based on a genuine trade transaction.
A sells goods worth Rs 4,000 to B on credit and gives him 60 days to pay the price. A owes the same
amount of money to C who supplies goods to A. To conclude the transaction, A may draw a bill on B
directing him to pay the money after 60 days of the date of bill to C. A will sign the bill and present it to
B for acceptance If B agrees to obey the order of A he will accept the bill by writing across its face the
word ‘accepted’ and signing his name underneath and then delivering the bill to the holder. By doing so
B, the drawee, now becomes the acceptor of the bill and liable to its holder. Such a bill is termed as a
genuine trade bill.
4. Accommodation bill  An Accommodation bill is one, which is made to provide financial help to some
party. It is a bill in which a person lends or gives his name to oblige a friend or some person to whom he
is known or otherwise. An accommodation bill is drawn, accepted, or endorsed without consideration.
The party lending his name to oblige the other party is known as the accommodating party and the
party so obliged is called the accommodated party.
A, who is need of Rs 10,000, approaches his friend B who instead of lending the money directly,
suggests that A should draw a bill in his favour, which he would accept. Accordingly, A draws the bill and
B accepts it. A in turn gets the bill discounted with his banker at discount. On due date, A would pay Rs
10,000 to B to enable him to meet the bill. The real creditor in this case is the banker and not B. B is
mere surety and A is the real debtor. Contd.
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 Forms of Bills of Exchange

5. Documentary bill  When documents of title to the goods or other documents such as, bill of
lading, invoice, railway receipt, insurance policy, etc., are attached to the bill of exchange , it is
called documentary bill. Such documents are delivered to the buyer only on acceptance or
payment of the bill. Such bills are usually used in connection with foreign trade.
6.Clean bill  Contrary to documentary bill, a clean bill is one, with which no documents related to
the goods represented by the bill are attached. In inland trade normally clean bills are used.
7.Fictitious bill  When the name of the drawer or the payee or both is fictitious in a bill, the bill is
termed as fictitious bill. Such type of bill is drawn in a fictitious name and is made payable to
the drawer’s order and as such both the drawer and the payee are said to be fictitious persons.
A fictitious person is one who is non-existing or a pretended one.
8.Bill-in-sets  A bill-in-sets is one, which is drawn in sets of three. A bill is sometimes drawn in
more than one original copy, especially when such copies are required by various parties as in
case of a foreign trade transaction. The three copies (called parts) of a bill in set are sent by
different mail routes in order to avoid delay or inconvenience likely to arise due to loss or
miscarriage of the bill and to ensure safe transmission of at least one part of the bill to the
drawee and his acceptance thereon as early as possible. Contd.

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 Forms of Bills of Exchange

9.Escrow  When an instrument is delivered conditionally, or for a special

purpose as a collateral security, or for safe custody only, and not for the
purpose of transferring property absolutely therein i.e., negotiation, it is
termed as escrow. As between the immediate parties, when an instrument is
delivered, conditions agreed upon are fulfilled. Such an instrument does not
create any liability to pay until and unless conditions agreed upon are fulfilled
or the purpose for which the said instrument was delivered is satisfied.
10. Bank draft   Also known as demand draft, a bank draft is an order to pay
money drawn by one office or branch of a bank upon another office or
branch of the same bank or on a different bank instructing the latter to pay a
certain sum of money to a specified person or his order. When the order is on
another branch of the same bank, it is actually a cheque but the same is still
termed as a draft. When a draft is issued on another bank, it has all the
features of a bill of exchange except that is not stamped and accepted.

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Negotiable Instrument: Classifications

Negotiable instruments can broadly be classified under the following eight categories:
1. Bearer instrument
2. Order instrument
3. Inland instrument
4. Foreign instrument
5. Time instrument
6. Demand instrument
7. Ambiguous instrument
8. Inchoate instrument
1.  Bearer Instrument . A bearer instrument is a negotiable instrument payable to bearer. It
is one (i) which is expressed to be so payable; or (ii) on which the only best endorsement
 is an endorsement in blank.
A bearer instrument can be negotiated by mere delivery. The holder (anyone possessing it)
of a bearer instrument can obtain the payment of the instrument whether or not his name
appears on the instrument. The bearer however may be required to acknowledge the
receipt of money by putting his signature on the book of the instrument. Contd.
Classification of Negotiable Instruments

Exception  There is an exception to bearer instruments. In the light of Section 31 of the

RBI Act, a promissory note, or bill of exchange cannot be made payable to bearer.
Similarly, a bearer instrument cannot be made into a promissory note or bill of exchange.  
The various forms in which a negotiable instrument can be made payable to bearer are:
• Pay the bearer
• Pay to Ram or bearer
2. Order Instruments . A negotiable instrument is payable to order when
(i) it is expressed to be so payable; or
(ii) is expressed to be payable to a particular person and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable.
An instrument payable to order can be negotiated by endorsement and delivery. The
various forms by which an instrument can be made payable to order are as follows:
• Pay Ram
• Pay Ram or order
• Pay to the order of Ram Contd.
Classification of Negotiable Instruments

3.Inland Instruments.  A promissory note, bill of exchange, or cheque drawn or

made in India, and made payable, or drawn upon any person, residing in India
shall be deemed to be an inland instrument. [Section 11]
Since a promissory note has no drawee i.e. it cannot be drawn on any person,
an inland promissory note is one which is made payable in India. Subject to this
exception, an inland instrument is one, which is either:
Drawn and made payable in India, or
Drawn in India upon some persons resident therein, even though it is made
payable in a foreign country.
Examples: 
i) A bill drawn in Mumbai on a merchant in Kolkata made payable in Kolkata or
in USA;
ii) A bill drawn in Delhi on a merchant in USA made payable or accepted
payable in Mumbai. Contd.
Classification of Negotiable Instruments

4. Foreign Instruments . According to Section 12 a foreign instrument is one, which

is not an inland instrument.
Examples: 
• A bill drawn outside India and made payable outside or inside India;
• ii) A bill drawn in India and made payable outside India and drawn on a person
resident outside India.
5. Time Instrument . An instrument which is payable at sometime in future is
called a Time Instrument. Therefore, a promissory note or a bill of exchange shall
be known as time instrument, if it is payable:
a) After a fixed period; or
b) After sight; or
c) On a specified day; or     
d) On the happening of an event which is certain to happen. Contd.
Classification of Negotiable Instruments

The expression ‘after sight’ in a promissory note implies that the payment cannot be
demanded on it unless it has been shown to the maker. But in case of a bill of exchange, the
expression ‘after sight’ denotes after acceptance (if accepted), or after noting for non-
acceptance, or after protest for non-acceptance.
Examples: 
3 months after date
7 days after sight
Payable on 2nd Monday of July 2008
Forty days after Diwali
6. Demand Instrument . A promissory note or bill of exchange in which no time for payment
is specified, and a cheque, are payable on demand. Thus, a cheque is always payable on
demand while a promissory note and a bill of exchange in which no time is specified for
payment are payable on demand. Section 21 further provides that if a note or bill bears the
expression ‘at sight’ and ‘on presentation’, it would mean that these instruments are payable
on demand. But it should be noted that the expressions ‘payable at sight’ and ‘payable on
presentation’ are slightly different from ‘payable on demand’. The former must be presented
before payment is demanded on whereas the latter need not be presented for payment.
Classification of Negotiable Instruments

7. Ambiguous Instrument. An ambiguous instrument is one whose form or terms are such that
can be treated as a bill of exchange or as a promissory note depending on the holder’s choice,
and it shall be treated accordingly. Section 17 states, ‘where an instrument may be
constructed either as a promissory note or bill of exchange, the holder may, at his election,
treat it as either, and the instrument shall hence forth treated accordingly.’ Thus, an
instrument can be taken as ambiguous in the following cases:
Where drawer and drawee are the same person;
Where drawee is a fictitious person;
Where drawee is a person incompetent to enter into a contract.
8. Inchoate Instrument . The term ‘inchoate instrument’ implies an incomplete instrument. A
negotiable instrument duly signed and stamped but left blank or incomplete in some respect
is called an inchoate instrument. According to Section 20, if a person signs an incomplete
instrument and delivers it to another, it provides the holder thereof with prima facie
authority to complete it and if, in executing that authority, the instrument is completed, the
former i.e. signer will be liable on it to a holder as well as holder in due course.
 Difference between a Bill and a Cheque

Point

of
S.No. Bill of Exchange Cheque
Differe

nce

1. Drawee A bill can be drawn on any person A cheque is always drawn on a

(i.e., upon an individual or a banker) banker.

2. Payable It may be drawn payable on demand, It can only be drawn payable

or on the expiry of a certain period or on demand, and within six

days after sight or date. months of the date mentioned

on the cheque.  Contd.

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 Difference between a Bill and a Cheque

3. Grace A grace of 3 days is allowed in No grace is given in case of a cheque

period the case of payment of bill for payment for the sole reason that

payable after sight or date. a cheque is payable on demand.

4. Acceptance Acceptance by the drawee is It does not require any acceptance

must before payment can be and is intended for immediate

demanded in respect of a bill. payment.

5. Payable to A bill cannot be made payable A cheque can be made payable to

bearer to bearer on demand the bearer on demand. Contd.

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 Difference between a Bill and a Cheque

6. Estoppel of The drawer cannot stop Banker or the drawee is

payment payment of a bill. In other empowered to stop payment of a

words a bill of exchange cheque if all the related

cannot be countermanded. formalities not adhered to. 

7. Presentment The drawer of a bill is The drawer of a cheque is

for payment discharged (i.e., not liable to discharged only if he suffers any

pay), if it is not presented for loss or damage due to delay in its

payment presentment for payment and he

shall be discharged to the extent

of such damage.

Contd.
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 Difference between a Bill and a Cheque

8. Notice of Notice of dishonour of a bill is If a cheque gets dishonoured,

dishonour necessary in order to charge insufficiency of funds in the drawer’s

its drawer. account is sufficient and appropriate

evidence to charge him.

9. Crossing The Act contains no provision A cheque may be crossed.

for ‘crossing’ of a bill of

exchange.

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 Crossing of Cheques

When two parallel lines are drawn on the left hand top corner of the cheque, it is called
crossing and by doing so a cheque becomes a crossed cheque. A crossing acts as a
direction to the drawee or paying banker to pay the money to a specified banker as
desired by the payee or deposit the amount stated on the cheque in the account of the
payee if he has an account with the drawee bank and not to pay otherwise. The
primary objective of crossing is to secure payment to a holder so that it could be traced
to the person collecting the amount of cheque.
Modes of crossing . The Act recognizes two types of crossing of cheques, namely
• General crossing and
• Special crossing
General crossing Where a cheque bears across its face an addition of the words ‘and
company’ or any abbreviation thereof, between two parallel transverse lines, or of two
parallel transverse lines only, either with or without the words ‘not negotiable’ that
addition shall be deemed to be a crossing and cheque shall be deemed to be crossed
generally. Contd.

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 Crossing of Cheques

• Special crossing  When the name of a banker is written across the face of
a cheque with or without the words ‘not negotiable’, it is a special
crossing. The transverse parallel lines may or may not be used in this kind
of crossing. Thus, where the cheque is crossed specially, the paying
banker will pay only to the banker whose name appears across the
cheque, or to his collecting agent. Thus, in case of special crossing, the
paying banker is to honour the cheque only when it is presented through
bank mentioned in the crossing, or an agent of such bank, i.e., another
banker acting as agent.
A cheque crossed specially or generally bearing the words ‘not
negotiable’, lacks negotiability and therefore is not a negotiable
instrument in the true sense. This means in case of transfer, the
transferee will not get a better title than that of a transferor. It does not
restrict transferability but restricts negotiability only.
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 HUNDIS

HUNDIS are negotiable instruments written in various vernacular languages in the country.
The term is derived from the Sanskrit word ‘hundi’ which means ‘to collect’. These are
generally in the form of bills of exchange but may sometimes look like promissory notes in
form and contents. Hundis are quite popular among Indian merchants even today and are
governed by the Negotiable Instrument Act unless there is a local usage to the contrary.
Types of Hundis: 
1.  Darshani hundi.   A hundi payable at sight is called darshani hundi. It is negotiable and is
like a ‘demand bill’. It may be sold at par or at premium or at discount. A darshani hundi
should be presented for payment within a reasonable time of its receipt by the holder.
2. Miadi hundi . Also known as ‘muddati hundi’, miadi hundi is one which is payable after a
specified period of time like a ‘time bill’. Banks usually provide loans against the security of
such hundis.
3. Shahjog hundi . This is a hundi made payable only to a Shah (a respectable person of
financial worth and substance in the market). It may be miadi or darshani and can be
transferred freely from one person to another by mere delivery but it is not payable to
bearer. In some respects it is similar to a crossed cheque.
4. Namjog hundi . It is a hundi payable to the party named in the hundi or his order. Such a
hundi is similar to a bill of exchange payable to order. Contd.

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 Types of HUNDIS

5. Dhanijog hundi . Dhani in vernacular means owner. Thus, a dhani jog hundi is one which is made
payable to the owner, or a holder or bearer-owner. It is just like a bearer cheque and the holder of it
becomes holder in due course if he takes it bona fide and for value.
6. Jokhmi hundi . The term ‘Jokhmi’ has been derived from the Hindi work ‘jokhim’ meaning ‘risk’.
Such a hundi is usually drawn against goods shipped on a vessel and implies a certain risk involved in
the shipment of goods. Jokhmi hundi in fact is a combination of bill of exchange and insurance policy
and payable only when the goods arrive in safe and sound condition. If the goods are lost in transit,
the consignor cannot claim payment of the hundi from the consignee i.e., the drawee.
7. Jawabi hundi . A hundi, which is in the form of letter or recommendation to a banker for payment
of a certain sum of money to a specified person, is termed as jawabi hundi.
8. Zikri hundi . This is a hundi accepted for honour in writing on a Zikri chit (letter of protection)
without being protested. It is drawn in the name of a specified person residing in the town or city
where the hundi is payable. In case acceptance is refused by the drawee or when a refusal is likely to
occur, the hundi is furnished to the holder by some prior party to it.
9. Firmanjog hundi . The term ‘Firman’ refers to order in vernacular language and therefore, a
‘Firmanjog’ hundi is made payable to the order of payee. It is just opposite of ‘dhanijog hundi’ which
is payable to the bearer only.

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