Unit-8 Law of Negotiable Instruments

Program : MBA
Semester : III
Subject Code : MB0051
Subject Name : Legal Aspects of Business
Unit number :8
Unit Title : Law of Negotiable Instruments
Lecture Number : 1

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 Unit-8 Law of Negotiable Instruments

Lecture Outline

• Introduction
• Negotiable Instrument
• Important Terms
• Promissory Notes and Bills of Exchange
• Cheques
• Holder and Holder in due Course
• Activity

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 Unit-8 Law of Negotiable Instruments

Law of Negotiable Instruments

Objectives

• Define some negotiable terms

• Describe promissory notes
• Analyze holder

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 Unit-8 Law of Negotiable Instruments

Introduction
• In this unit you will study law relating to negotiable instruments is primarily
contained in the Negotiable Instruments Act, 1881, which came into force on
1st March, 1882.
• ‘Instrument’ means ‘any written document by which a right is created in favour
of some person’.
• The word ‘negotiable’ has a technical meaning whereby rights in an instrument
can be transferred by one person to another.

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 Unit-8 Law of Negotiable Instruments

Negotiable Instrument

• An ‘Instrument’ as referred to in the Act is a legally recognised written

document, whereby rights are created in favour of one and obligations are
created on the part of another.
• The word ‘negotiable’ means transferable from one person to another
either by mere delivery or by endorsement and delivery, to enable the
transferee to get a title in the instrument.

• Negotiable Instruments by Statue: promissory note, bills of exchange

and cheque.
• Negotiable Instruments by Usage: Bank note, draft, share warrants,
bearers, debentures, dividend warrants and treasury bill

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 Unit-8 Law of Negotiable Instruments

Negotiable Instrument

Features of a Negotiable Instrument:

• Freely transferable
• Holder’s title free from defects
• The holder can sue in his own name.
• It can be transferred infinitum
• A negotiable instrument is subject to certain presumptions

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 Unit-8 Law of Negotiable Instruments

Important Terms

• Ambiguous instrument (Sec.17)

An ambiguous instrument is one which may be construed either as a
promissory note or as a bill of exchange
• Inchoate stamped instruments (Sec.20)
An inchoate instrument means an instrument that is incomplete in certain
respects
• Capacity of parties to the negotiable instrument
The capacity of a party to draw, accept, make or endorse a negotiable
instrument is coextensive with his capacity to enter into contract

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 Unit-8 Law of Negotiable Instruments

Promissory Notes and Bills of Exchange

Promissory note

• Sec.4- A promissory note is an instrument in writing (not being a bank or a

currency note) containing an unconditional undertaking, signed by the maker
to pay a certain sum of money to, or to the order of, a certain person or to
the bearer of the instrument.

Specimen of a promissory note

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 Unit-8 Law of Negotiable Instruments

Promissory Notes and Bills of Exchange

Parties to a promissory note

• The maker
• The payee
• The holder
• The endorser
• The endorsee

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 Unit-8 Law of Negotiable Instruments

Promissory Notes and Bills of Exchange

Bills of Exchange

• Sec.5- 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’.
Specimen of a bill of exchange

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 Unit-8 Law of Negotiable Instruments

Promissory Notes and Bills of Exchange

Parties to a bill of exchange

• The drawer
• The drawee
• The payee
• The holder
• The endorser
• Drawee in case of need.
• Acceptor for honour.

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 Unit-8 Law of Negotiable Instruments

Cheques

• A cheque is an order by the customer of the bank directing his banker to

pay on demand, the specified amount, to or to the order of the person
named therein or to the bearer.

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 Unit-8 Law of Negotiable Instruments

Cheques

Requisites of a cheque
• Written instrument
• Unconditional order
• On a specified banker only
• A certain sum of money
• Payee to be certain
• Payable on demand
• Dating of cheques

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 Unit-8 Law of Negotiable Instruments

Holder and Holder in due Course

• Sec.8- A person entitled in his own name to the possession thereof and
to receive or recover the amount due thereon from the parties thereto

• Sec.9- A 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 becomes payable and without having sufficient cause to
believe that any defect existed in the title of the person from whom he
derived his title

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 Unit-8 Law of Negotiable Instruments

Holder and Holder in due Course

Privileges of a holder in due course

• Privilege against inchoate stamped instruments (Sec.20)
• Every prior party to a negotiable instrument, i.e., the maker or drawer, the
acceptor and all the intermediate endorsers continue to remain liable to the
holder in due course until the instrument is duly satisfied (Sec.3)
• Fictitious drawer or payee (Sec.42)
• When a negotiable instrument is made, drawn accepted or transferred
without consideration and the negotiable instrument gets into hands of a
holder in due course, then plea of absence of consideration can’t be raised
against him or any subsequent holder deriving title from him (Sec.43).
• Where an instrument is negotiated to a holder in due course, the parties to
the instrument cannot escape liability on the ground that the delivery of the
instrument was conditional or for a special purpose only (Sec.46).
• Right of an endorsee from a holder in due course.
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 Unit-8 Law of Negotiable Instruments

THANK YOU

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 Unit-8 Law of Negotiable Instruments

Program : MBA
Semester :I
Subject Code : MB0051
Subject Name : Legal Aspects of Business
Unit number :8
Unit Title : Law of Negotiable Instruments
Lecture Number : 2

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 Unit-8 Law of Negotiable Instruments

Lecture Outline

• Negotiation of a Negotiable Instrument

• Presentment
• Dishonour
• Crossing of Cheques
• The Paying Banker

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 Unit-8 Law of Negotiable Instruments

Law of Negotiable Instruments

Objectives

• Explain presentment
• Describe paying banker

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 Unit-8 Law of Negotiable Instruments

Negotiation of a Negotiable Instrument

Negotiation

• The transfer of an instrument by one party to another so as to constitute

the transferee a holder thereof is called ‘negotiation’.
Endorsement

• An endorsement is the mode of negotiating a negotiable instrument.

• Sec.15 -When the maker or holder of a negotiable instrument signs the
same otherwise than as such maker, for the purpose of negotiation, on the
back or face thereof or on a slip of paper annexed thereto, or so signs for
the same purpose a stamped paper intended to be completed as a
negotiable instrument, he is said to endorse the same and is called the
endorser”.
• The person to whom the instrument is endorsed is called the endorsee.

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 Unit-8 Law of Negotiable Instruments

Negotiation of a Negotiable Instrument

Forged endorsement (Sec.85)

• In case an instrument is endorsed in full, it cannot be endorsed or

negotiated except by an endorsement signed by the person to whom or to
whose order the instrument is payable.
• If such an instrument is negotiated by way of a forged endorsement, the
endorsee will acquire no title even though he be a purchaser for value and
in good faith, because the endorsement is nullity.

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 Unit-8 Law of Negotiable Instruments

Presentment

• Presentment of a negotiable instrument is made for two purposes: (i) for

acceptance and (ii) for payment.

Maturity (Secs.21-25)

• Sec.22- Cheques are always payable on demand but other instruments like
bills, notes, etc., may be made payable on a specified date or after the
specified period of time. The date on which payment of an instrument falls
due is called maturity .

Presentment for payment

• Sec.64- A negotiable instrument must be presented for payment to the
maker, acceptor or drawee thereof, as the case may be, by the holder or
his agent. In case of default, the parties to the instrument other than the
maker, acceptor or drawee are not liable to such holder
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 Unit-8 Law of Negotiable Instruments

Dishonour

Dishonour of a bill

• Sec.92- A negotiable instrument is said be dishonoured by non-payment

when the maker, acceptor or drawee, as the case may be, makes default in
payment upon being duly required to pay the same .

Noting

• Noting is a convenient method of authenticating the fact of dishonour.

Where an instrument is dishonoured, the holder, besides giving the notice
as referred to above, should get the bill or promissory note ‘noted’ by the
notary public.
• ‘Noting’ must be made within a reasonable time after dishonour

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 Unit-8 Law of Negotiable Instruments

Crossing of Cheques

• Sec.123- Payment on a crossed cheque can be collected only through a

banker.
• Sec.123 defines crossing as, “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 simply,
either with or without the words, ‘not negotiable’, that addition shall be
deemed a crossing, and the cheque shall be deemed to be crossed
generally.

Types of crossing
• General
• Special.

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 Unit-8 Law of Negotiable Instruments

Crossing of Cheques

• Specimen of general crossing

• Specimen of general crossing

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 Unit-8 Law of Negotiable Instruments

The Paying Banker

• The ‘paying banker’ is a term used to denote the position and duties of
the drawee-banks in paying the cheques of their customers.
• Sec.10- conditions must be satisfied before a payment of a negotiable
instrument can be called as a payment in due course:
• Payment must be in accordance with the apparent tenor of the
instrument.
• Payment must be made in good faith and without negligence.
• Payment must be made to the person in possession of the instrument.
• Payment must be made under circumstances which do not afford a
reasonable ground for believing that a person is not entitled to receive
payment of the amount mentioned therein.
• Payment must be made in money only

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 Unit-8 Law of Negotiable Instruments

Activity

Activity 1
Analyze the parties involved in Promissory Note.

Activity 2
Discuss the various effects of forged endorsement.

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 Unit-8 Law of Negotiable Instruments

THANK YOU

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