COURSE NAME- Legal Aspects Of Business

Session No.-

By- Asst.Prof. Niji Shajan

Learning Objectives-

• To acquaint students with general business law issues to help become

more informed, sensitive and effective business leaders.

• To provide the students with an understanding of fundamental legal

issues pertaining to the business world to enhance their ability to
manage businesses effectively
 Unit 3. The Negotiable Instruments Act, 1881

Table of Content
• Negotiable Instruments – Meaning, Characteristics
• Types. Parties
• Holder and holder in due course
• Negotiation and Types of Endorsements
• Dishonour of Negotiable Instrument
• Noting and Protest
•Introduction

•The law relating to negotiable instruments is contained in the Negotiable

Instruments Act of 1881 which applies and extends to the whole of India. ( Act
No 26 of 1881 )
•It is a pre independence Act which helps to complete valid contracts which are
signed by either two or three parties.
•It is based on English common Law
Negotiable Instruments are the most common credit devices used in modern
business.
They are basically written promises or orders to pay certain money & it is
transferred from one person/one account/one place to another.
The chief objective of this law is to legalize the system under which negotiable
instruments pass from one hand to other like an ordinary goods
Definitions
.

The word negotiable’ means “transferable by delivery” and instrument means “a

written document by which a right is created in favor of some person or persons.

Thus, the term negotiable instrument literally means a written document which
creates a right in favor of somebody and is freely transferable from one person to
another.
•A negotiable instrument is a piece of paper which entitles a person to a certain sum of
money and which is transferable from one to another person by a common delivery or by
endorsement and delivery.
Eg - Promissory note, Cheque and a Bill of exchange.
Types of Negotiable Instruments
Negotiable instruments are of two types which are as follows:

•Negotiable Instruments recognized by status: e.g. Bills of exchange, cheque and

promissory notes.

•Negotiable instruments recognized by usage or customs of trade:

e.g. Bank notes, Exchequer bills, share certificate ,share warrants, stamp papers,
Travelers cheques, Dividend certificates, warrants,.Hundis,Treasury Bills etc
 Characteristics of Negotiable Instruments

1)Free transferability or easy negotiability Negotiable instrument is freely without any

formality transferable from one person to another because it is a property.
2)Title of holder is free from all defects A person who takes negotiable instrument bona-
fide and for value gets the instrument is free from all defects in the title. The holder in due
course is not affected by defective title of the transferor or of any other party.
 Presumptions:
3) Consideration : that every negotiable instrument is made or drawn for certain
consideration.
4)As to date : that every negotiable instrument bearing a date is important as it was made
or drawn on such date. It defines its validity of payment.
5)As to time of endorsements : that the endorsements appearing on the negotiable instrument
should be made in the order in which they appear always.

6)As to time of acceptance : that every negotiable instrument must be accepted within a
reasonable time after its date and before its maturity.( Cheque : 3Months)

7)As to stamps : that a promissory-note, bill of exchange or cheque must be duly stamped if
required by drawer/maker.
8)As to a holder in due course : that every holder of a negotiable instrument is also a holder in
due course.( Authority of receipt of payment)

9)As to time of transfer : that every transfer of a negotiable instrument must be made before
its maturity otherwise it expires.

10)The legal Remedy :The holder can sue to the defaulter and can seek the legal remedy for
compensations
. 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 certain sum of money only to, or to the order
of a certain person or to the bearer of the instrument.
Eg - Mr. Suresh purchasesd goods from Mr. Ramesh for Rs. 10000/- Mr. Ramesh has
bought the goods from Mr.Naresh for Rs. 10000/- Then Mr. Ramesh may order Mr. Suresh
to pay Rs. 10000/- Mr. Naresh which will be nothing but a bill of exchange.
Specimen of a Bill of Exchange

Rs. 100000/- New Delhi,15 August, 2022

Three months after the date pay to Mr. Manjeet Singh Randhawa or order the sum of rupees one lakh
only, for the value received.
To
Mr.Alok Saxena
Address : 135 Sadar Bazar,
New Delhi 110011. Stamp
------------------------ Signature of Mr Basha
Accepted & Signature of Mr. Alok Saxena.
Essential Characteristics

A) There must be three parties available.

B) It must have some considerations.
C) It must be related with some goods/ Articles.
D) There must be good understanding between all the parties at Bill Of
Exchange.
E) All the transactions must be legally qualified.
Promissory Note :

A “promissory –note” is an instrument in writing [not being a bank-note or a

currency-note} 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 the
bearer of the instrument
Specimen of a promissory note

Rs. 5000/- Pune August 25, 2022

Three months after on 26th of the date of that month, I promise to pay to Mr. X of
Mumbai or order a sum of Rupees Fifty Thousand for value received by me.

To
Mr.
Address………..
…………… Stamp
Mumbai Signature of Mr Y
Essential characteristics of a Promissory Note

• Promissory note is a negotiable instrument

• It must be in writing
• It is a promise to pay money only.
• It. must be definite. The promise to pay must be definite.
• It must be unconditional. Undertaking to pay must be unconditional.
• It must be signed by the maker.
 .
• Maker of the promissory note must be a certain person and the payee
must also be certain.
• Amount of the promissory note must be certain.
• Other formalities like number, date, consideration, place etc. are
generally found in the promissory notes & they are essential as per the
law.
• Promissory note must be properly stamped according to the provisions
of the Indian Stamp Act, 1899
Cheque

“A cheque is a bill of exchange drawn on a specified banker and

expressed to be payable otherwise than on demand.”
The maker of a bill of exchange or Cheque is called the “Drawer";
the person thereby directed to pay is called the "Drawee“ & the
person receiving an amount is called payee
Essential characteristics of a Cheque

• A cheque is a negotiable instrument.

• It is one of the type of bill of exchange.
• It is always drawn on a specified banker.
• It is always payable on demand.
• A cheque can be bearer, ordered or crossed.
• A cheque requires no acceptance in the ordinary course of business
as it is intended for immediate payment.
• In case of a cheque, a drawee is always a specified bank, a drawer is
a person who draws a cheque and who has an account in the bank ad
payee is a person to whom the amount of cheque is made payable.
• There are three parties .
Negotiation

“It is a process of transferring the ownership, right, title, interest of a

person in a negotiable instrument to another person so as to give a good
title to the transferee and make a transferee a holder of such instrument.”
Negotiation does not mean a simple transfer. Simple transfer may not
necessarily involve the transfer of property in the negotiable
instrument but negotiation implies the transfer of property or
ownership in total.
Eg -X hands over a cheque to Mr. Y here Mr. X has negotiated for
the instrument.
But if he hands over a cheque to Mr. Y asking him to keep the same
in his safe, the cheque is not negotiated to Mr. Y, Mr. Y does not
become its holder but only a bailey.
Essentials of negotiation

• There must be transfer of a negotiable instrument to another

person.
• As a result of such transfer, the transferee must become the holder
of the instrument.
Modes of negotiation:
• Negotiation by delivery – The negotiable Instrument is transferred
by delivery, actual or constructive.” It is physical act of delivering
the instrument or handing over the delivery, actual possession of the
instrument is not passed only the product is delivered.
• Negotiation by endorsement and delivery – The negotiable
Instrument payable to order is negotiable by the holder by
endorsement and delivery thereof totally
Endorsement

“Literal meaning of the term endorsement is writing on an instrument.”

Endorser - The person who signs on the back or on the face of the
instrument or on the slip is an endorser.
Endorsee - The person to whom the instrument is endorsed is called the
endorsee.
Types of Endorsement

• General or blank endorsement - Endorser signs his name either on the

back or face of the instrument.
• Full or special endorsement - It specifies the full name of the person to
whom or to whose order the payment must be made
• Partial endorsement – Endorsement is made for remaining balance of
payment.( Eg.The installment payment to the party)
• Conditional endorsement – The liability of the endorser is limited or
negative. The endorsement will be effective only when the conditions are
fulfilled
Forged Endorsement : The endorsement is made by some another
person in the absence of original one and not by the original
endorser.
Restrictive Endorsement: The endorser has instructed to the drawee
not to clear the instrument for some valid reason
 Dishonour of negotiable instrument

• Negotiable instruments, Promissory notes and Cheques may be

dishonored by non payment.

• Bills of exchange may be dishonored by non payment or by non-

acceptance as they require acceptance from drawee.
DISHONOUR OF NEGOTIABLE INSTRUMENT
Promissory notes, cheques and bills of exchange are covered by this Act.
Of these negotiable instruments, promissory notes and cheques may be dishonoured
by non payment only while bills of exchange may be dishonoured by non payment
or by non-acceptance as they require acceptance from drawees.
Section 93 of the Act states that when a promissory note or a bill of exchange or
cheque is dishonoured by non-acceptance or non-payment the holder thereof, or
some party thereto who remains liable thereon, must give notice that the
instrument has been so honored to all other parties whom the holder seeks to make
severally liable thereon, and to some one of several parties whom he seeks to
make jointly liable thereon
Dishonour by Non-acceptance:
As mentioned earlier that a bill of exchange is dishonoured by non-acceptance. It stands
dishonoured by non-acceptance in the following cases.
a). when there are several drawees who are not partners and if all of them refuse to accept.
b). If the drawee refuses to accept the bill within forty eight hours from the time of its presentment
even though the bill is duly presented for his acceptance.
c) where the drawee is not competent to enter into contract.
d) When the presentment of a bill of exchange for acceptance is excused and it remains unaccepted.
e) where the drawee of the bill of exchange gives a qualified acceptance.
f) Where the drawee is a fictitious person and even after a reasonable search, he could not be found.
It should be noted that where a drawee in case of need is named in a bill of exchange or even in any
other instrument, the bill is not considered to be dishonoured unless it has been dishonoured by
such drawee [section 115].
Dishonour by non-payment:
A negotiable instrument i.e. a bill, a cheque or a promissory note is said to be
Dishonoured by non-payment when the maker of the promissory note, acceptor of the
bill of exchange or drawee of the cheque makes default in payment upon being duly
required to pay the same.
[section 2]. A bill or a promissory note is also said to be dishonoured by non-payment
when presentment for the payment is excused expressly by the maker of the note or the
acceptor of the bill and the note or bill remains unpaid or at after maturity [section 76]
If the bill is dishonoured either by non-acceptance or non-payment, the drawer and all
endorsers of the bill are held liable to the holder provided that a notice of such dishonour
is given by the holder. If the bill is dishonoured by non-payment, the drawee is held
liable.
NOTING AND PROTEST
Noting:
As mentioned above, when a negotiable instrument within the meaning of this Act is
dishonoured, the holder of the instrument, after giving notice of the same, can sue
any or all the prior parties liable thereon. But before he does so, he can get the fact
of the dishonour of the instrument authenticated by noting by a notary public.
Noting is the authentic and official proof of presentment and dishonour of the
instrument.
Noting means nothing but the recording of the fact of dishonor of the instrument by
a notary public within a reasonable time after dishonour. Of course, nothing is not
compulsory neither it affects the rights of the holder thereon,
Noting contains the following particulars.
a) The fact and the date of dishonour of the instrument
b) The reason or reasons if any, assigned for such dishonour.
c) The notary charges incurred.
d) If the instrument has not been expressly dishonoured, the reason
as to why the holder wants to treat the same as dishonoured
Protest:
According to section 100 of this Act, when a promissory note or a bill of exchange has been
dishonoured by non-acceptance or non-payment, the holder may, within a reasonable time,
cause such dishonour to be noted and certified by a notary public. Such certificate is called
a protest.
Thus protest is a formal certificate of dishonour of an instrument issued by the notary
public. Of Course, it is issued to the holder of the instrument on his demand only.
Contents of protest:
1.Either the instrument itself, or a literal transcript of the instrument and of every thing written or printed
thereupon;
2.The name of the person for whom and against whom the instrument has been protested;
3. A statement that payment or acceptance, or better security, as the case may be, has been demanded of
such person by the notary public; the terms of his answer. If any, or a statement that he gave no answer,
or that he could not be found;
4. When the note or bill has been dishonoured, the place and time of dishonour, and when better security
has been refused, the place and time of refusal;
5. The subscription of the notary public making the protest;
6 . In the event of an acceptance for honour or of a payment for honour, the name of the person by whom,
of the person for whom, and the manner in which, such acceptance or payment was offered and effected.
7. The signature of the notary public.
 Video Link
https://www.youtube.com/watch?v=MqesNGviU_E
https://www.youtube.com/watch?v=a5DkCgc2IYE
https://
www.youtube.com/watch?v=MqesNGviU_E&list=PLhUSPb-VG9dhMCO5b
CLNqnR-xDP45OJJ8
https://www.youtube.com/watch?v=rdCQuLsTLfU
 References

• Business Law By N. D. Kapoor.

• Business Law Book By Tulsian
• Elements of Business Law By N D Kapoor
• Business Law By M. C. Kuchhal and Vivek Kuchhal.
• Legal aspects of Business- S.D.Geet

https://www.geeksforgeeks.org/difference-between-electronic-signature-and-digital-si
gnature
/
THANK YOU