NEGOTIABLE

INSTRUMENTS ACT, 1881

 INTRODUCTION TO 2
NEGOTIABLE INSTRUMENTS
ACT, 1881
The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its
enactment, the provisions of the English Negotiable Instrument Act were
applicable in India, and the present Act is also based on the English Act with
certain modifications. It extends to the whole of India except the State of Jammu
and Kashmir. The Act operates subject to the provisions of Sections 31 and 32 of
the Reserve Bank of India Act, 1934.
MEANING OF NEGOTIABLE 3
INSTRUMENT
The word negotiable means ‘transferable by delivery’, and word
instrument means ‘a written document by which a right is created in favour of
some person. Thus, the term “negotiable instrument” means “a written
document transferable by delivery”.
According to Section 13 (1) of the Negotiable Instruments Act, “A
negotiable instrument means a promissory note, bill of exchange, or cheque
payable either to order or to bearer”. “A negotiable instrument may be made
payable to two or more payees jointly, or it may be made payable in the
alternative to one of two, or one or some of several payees” [Section 13(2)].
TYPES OF NEGOTIABLE 4
INSTRUMENTS
There are two types of Negotiable Instruments:
1. Instruments Negotiable by Statute:
The Negotiable Instruments Act mentions only three kinds of negotiable
instruments (Section 13). These are:
1. Promissory Notes
2. Bills of Exchange, and
3. Cheques
2. Instruments Negotiable by Custom or Usage:
There are certain other instruments which have acquired the character of
negotiability by the usage or custom of trade. For example: Bank notes,
Share warrants, Circular notes, Bearer debentures, Dividend warrants, Share
certificates etc.
PROMISSORY NOTES 5

Section 4 of the Act defines, “A promissory note is an instrument in

writing (note being a bank-note 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 instruments.”
The person who makes the promissory note and promises to pay is
called the maker. The person to whom the payment is to be made is called the
payee.
CHARACTERISTICS OF A 6
PROMISSORY NOTE
 It is an Instrument in Writing
 It is a Promise to Pay
 Signed by the Maker
 Other Formalities
 Definite and Unconditional Promise
 Promise to Pay Money Only
 Maker must be a Certain Person
 Payee must be Certain
 Sum Payable must be Certain
 It may be Payable on Demand or After a Definite Period of Time
 It cannot be Made Payable to Bearer on Demand
PARTIES TO A PROMISSORY NOTE 7

 Maker:
Maker is the person who promises to pay the amount stated in the note.
 Payee:
Payee is the person to whom the amount of the note is payable.
 Holder:
He is either the payee or the person to whom the note may have been
endorsed.
SPECIMEN OF PROMISSORY 8
NOTE
Rs. 10,000
Lucknow
April 10, 2013

Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the sum of Rupees Ten Thousand, for
value received.

Stamp

To, Sd/-
Shri Ramesh, Ram
B-20, Green Park,
Mumbai.
(Maker)
BILL OF EXCHANGE 9

According to Section 5 of the act, 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”. It is also called a Draft.

Special Benefits of Bill of Exchange:

 A bill of exchange is a double secured instrument.
 In case of immediate requirement, a Bill may be discounted with a bank.
ESSENTIAL ELEMENTS OF BILL 10
OF EXCHANGE
 It must be in Writing.
 Order to pay
 Drawee
 Signature of the Drawer
 Unconditional Order
 Parties
 Certainty of Amount
 Payment in Kind is not Valid
 Stamping
 Cannot be made Payable to Bearer on Demand
PARTIES TO A BILL OF 11
EXCHANGE
 Drawer:
The maker of a bill of exchange is called the drawer.
 Drawee:
The person directed to pay the money by the drawer is called the drawee.
 Payee:
The person named in the instrument, to whom or to whose order the money is
directed to be paid by the instruments are called the payee.
SPECIMEN OF BILL OF 12
EXCHANGE

Rs. 10,000

Mumbai
April 10, 2013

Three months after date pay to Ram (Payee) order the sum of Ten Thousand Rupees, for value received.

To,
Sushil
B-20, Green Park,
Lucknow - 226020.
(Drawer) Stamp
In case of need with Accepted
Canara Bank, Delhi. Sushil Sd/- Ram
(Drawer)
CLASSIFICATION OF BILL OF 13
EXCHANGE
 Inland and Foreign Bills [Section 11 and 12]
 Inland Bill:
 It is drawn in India on a person residing in India whether payable in or outside India; or
 It is drawn in India on a person residing outside India but payable in India.

 Foreign Bill:
 A bill drawn in India on a person residing outside India and made payable outside India.
 Drawn upon a person who is the resident of a foreign country.
CLASSIFICATION OF BILL OF 14
EXCHANGE (Cont.…)
 Time and Demand Bills:
 Time Bill: A bill payable after a fixed time is termed as a time bill. A bill payable
“after date” is a time bill.
 Demand Bill: A bill payable at sight or on demand is termed as a demand bill.
 Trade and Accommodation Bills:
 Trade Bill: A bill drawn and accepted for a genuine trade transaction is termed as
“trade bill”.
 Accommodation Bill: A bill drawn and accepted not for a genuine trade transaction
but only to provide financial help to some party is termed as an “accommodation bill”.
 Promissory Note
1. It contains a promise to pay.
2. It is presented for payment without
any previous acceptance by the maker.
3. It cannot be made payable to the
maker himself. The maker and the
payee cannot be the same person.
4. In the case of a promissory note there
are only two parties, the maker and
the payee.
5. A promissory note can never be
conditional.
6. In case of dishonour no notice of
dishonour is required to be given by
the Holder
Bill of Exchange
1. It contains an order to pay.
2. It is required to be accepted either by the
drawee or by some one else on his
behalf, before it can be presented for
payment.
3. The drawer and payee or the drawee and
the payee may be the same person.
4. There are three parties, drawer, drawee
and payee.
5. A bill of exchange cannot be drawn
conditionally, but it can be accepted
conditionally with the consent of the
holder.
6. A notice of dishonour must be given in
case of dishonour of a Bills of
Exchange. 
CHEQUE 16

According to Section 6 of the act, A cheque is “a bill of exchange drawn

on a specified banker and not expressed to be payable otherwise than on demand”.
A cheque is also, therefore, a bill of exchange with two additional qualification:
 It is always drawn on a specified banker.
 It is always payable on demand.
ESSENTIAL ELEMENTS OF A 17
CHEQUE
 In writing
 Express Order to Pay
 Definite and Unconditional Order
 Signed by the Drawer
 Order to Pay Certain Sum
 Order to Pay Money Only
 Certain Three Parties
 Drawn upon a Specified Banker
 Payable on Demand
PARTIES TO A CHEQUE 18

 Drawer:
Drawer is the person who draws the cheque.
 Drawee:
Drawee is the drawer’s banker on whom the cheque has been drawn.
 Payee:
Payee is the person who is entitled to receive the payment of a cheque.
SPECIMEN OF CHEQUE 19

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

TYPES OF A CHEQUE 20

 Bearer Cheque
 Cross Cheque

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 Cheque Crossed Specially

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 Restrictive Crossing (A/c Payee Only)

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Who can cross a Cheque? 21

1. The drawer of a Cheque

2. Holder of the Cheque
3. The Banker in whose favor the cheque has been crossed
specially
 Cheque
1. Drawee: Cheque can be drawn only 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 three months.
Bill of exchange
1. The drawee may be any person.
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.
 Holder and Holder in Due Course
Holder
 A holder is a party who is
entitled in his own name and
has legally obtained the
possession of the negotiable
instrument, from a party who
transferred it, by delivery or
endorsement, to recover the
amount from the parties liable
to meet it.
23
Holder in due course
 HDC implies a person who
obtains the instrument in
good faith for consideration
before maturity, without any
knowledge of defect in the
title of the person transferring
the instrument.
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 instrument from
one party to another.
 For instance, when an employer signs a check, they are
endorsing the transfer of money from the business accounts
to the account of the employee.
Essentials of valid endorsement

1. On the back or face of the instrument.

2. Must be made by maker or holder.
3. Must be properly signed by the endorser.
4. It must be for the entire negotiation instrument.
5. No specific form of words are necessary for
endorsement.
Kinds of endorsement
1. Blank or general endorsement – where endorsee simply puts
his signature on the back of the instrument without writing
name of the person in whose favor the instrument is endorsed.
2. Special or full endorsement – 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.
3. Partial endorsement – When an endorser is willing to transfer
to an endorsee only a part of the amount of the instrument.
Such an endorsement does not operate as a negotiation of the
instrument.
Effects of Endorsement

 The property in instrument is transferred

from endorser to endorsee.
 The endorsee gets right to negotiate the
instrument further.
 Theendorsee get the right to sue in his
own name to all other parties.
 Dishonour of a Cheque 28

Reasons:
• In case the cheque is overwritten.
• In case the signature is missing or the signature within the cheque does not coordinate with the
example signature kept by the bank.
• In case the title of the payee is missing or not clearly written.
• In the event that the sum composed in words and figures does not coordinate with each other.
• On the off chance that the drawer orders the bank to stop installment on the cheque.
• In case the court of law has given an arrange to the bank to stop installment on the cheque.
• In the event that the drawer has closed the account some time recently showing the cheque.
• If the fund within the bank account is inadequately to meet the installment of the cheque.
• In case the account number isn’t specified clearly or is through and through absent.
• If the bank gets the data with respect to the passing or insanity or bankruptcy of the drawer.
• If any modification made on the cheque isn’t demonstrated by the drawer by giving his/her
signature.
• In case the date isn’t specified or composed inaccurately or the date specified is of three months.
 Consequences 29
 The Negotiable Instruments Act, 1881 is applicable for the cases of dishonour of
cheque. This Act has been amended many times since 1881.
 According to Section 138 of the Act, “the dishonour of cheque is a criminal offence and
is punishable by imprisonment up to two years or with monetary penalty or with both”.
 If payee decides to proceed legally, then the drawer should be given a chance of
repaying the cheque amount immediately. Such a chance has to be given only in the
form of notice in writing.
 The payee has to sent the notice to the drawer with 30 days from the date of receiving
“Cheque Return Memo” from the bank. The notice should mention that the cheque
amount has to be paid to the payee within 15 days from the date of receipt of the notice
by the drawer. If the cheque issuer fails to make a fresh payment within 30 days of
receiving the notice, the payee has the right to file a criminal complaint under Section
138 of the Negotiable Instruments Act.
 However, the complaint should be registered in a magistrate’s court within a month of
the expiry of the notice period. It is essential in this case to consult an advocate who is
well versed and experienced in this area of practice to proceed further in the matter.
THANK YOU