Negotiable Instruments

Chapter 19
 Definition of Instrument in Law
• An instrument in law refers to a formal, legally binding document that
represents an agreement, obligation or right.

• It can be a written or printed document, and it is enforceable by law.

• Instruments are often used in commercial transaction to establish legal right

and obligations between parties.

• For example: Promissory Notes, Bill of Exchange, Cheques, Bonds, stocks,

Deeds, Wills
 What is Negotiable Instrument?
• The word “negotiable” means transferable from one person to
another by mere delivery or by endorsement and delivery, in return
for consideration, and “instrument” means a written document
creating a right in favor of some person, which may be a duty for
another.
• Therefore a ‘negotiable instrument’ is a document which pays or
promises to pay the assignee a specified sum of money either on
demand or on a future date, after which the assignee holds full title to
that document, is called a negotiable instrument.
 Types of Negotiable Instruments
• Promissory Note
A promissory note is a written promise to one party to make a payment
of money at a date in the future. This document contains an
unconditional undertaking, which is signed by the instrument maker
(the person who creates the promissory note) to pay a specified sum of
money to the bearer.
Illustration: A makes a promissory note in writing to B stating that I
shall pay RS 100,000 to B on 20.11.2025 and sign the same.
Bill of Exchange
• A “bill of exchange” is an instrument in writing containing an
unconditioned order, signed by the maker, directing a certain person
to pay on demand or at fixed or determinable future time a certain
sum of money only to, or to the order of, certain person or to the
bearer of the instrument.
• Illustration: A, an exporter, exports items worth Rs. 5,00,000 to B, and
addresses a bill of exchange to B. C, a bank, will act as a guarantor for
the payment made by B to A.
Cheques
• A cheque is a written order from a bank account holder to their bank
to pay a specified amount of money to named payee or bearer on
demand.
• Cheques are widely used for payment of goods and services, and they
are also used for salary payments, load payments and other financial
transactions.
 Essential Characteristics of Negotiable
Instrument
• Transferable
One of the major reasons for issuing a negotiable instrument is that they are
freely transferable, and do not require any condition to be fulfilled before the
transfer.

• On Demand or Specified time

A negotiable instrument is payable either to order or to bearer, and an be paid
on demand or at a specified time.
• In Writing
A negotiable instrument must be in writing, whether on paper or
any other material that preserves the information in a permeant and
legible form. A verbal agreement is not sufficient to create a
negotiable instrument.
• Signed by the Maker or Drawer
The maker or drawer of the negotiable instrument must sign it or
affix their mark to it. The signature indicates the intent to create a
binding obligation to pay the specified amount to the bearer or to
the person named on the instrument.
• Certain Sum of Money
The negotiable instrument must be specify a certain sum of money
that is payable on demand or at a specific time. The sum must be
stated in words and figures, and must be a fixed amount that can be
easily ascertained.
• Time of Payment must be certain
If the order is pay when convenient then such an order is not a
negotiable instrument. Here the time period has to be certain even
if it is not a specific date. For example, it is acceptable if the time of
payment is linked with the death of a specific individual. As death is
a certain event.
• Payee also must be certain
The Person to whom the payment is to be made must be a
specific person or persons. Also, there can be more than
one payee for a negotiable instrument. And “person”
includes artificial persons as well, like body corporates,
trade unions, chairman, secretary etc.
• Transferability by Endorsement and Delivery
A negotiable instrument must be transferable by
endorsement and delivery. The holder of the instrument
can endorse it by signing the back and delivering it to a
third party, who then becomes the new holder with the
right to receive payment.
• Transfer of title
The transfer of a negotiable instrument carries with it the transfer of
title, which means that the transferee acquires all the rights and
privileges of the original holder
• Unconditional Promise or order to pay
A negotiable instrument must contain an unconditional promise or
order to pay a specific amount of money, either on demand or at a
specific time. The promise or order to pay must be clear and
unambiguous, and must not be subject to any condition or
contingency.
 Meaning of Bill of Exchange
• A bill of exchange is a legal document that allows one party to
demand payment from another party for a debt or obligation owed.
• It is a type of negotiable instrument that can be used in international
trade or domestic transactions.
• According to Negotiable Instrument Act 1991, a bill of exchange is
defined as “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 certain person or to the
“bearer of he instrument.”
 Example of Bill of Exchange
• Company X has purchased $5000 worth of goods from Company Y.

• Company Y is concerned about receiving payment, so they request the company x sign a bill of
exchange.

• Company Y is creditor (Drawer/Maker/Payee), and Company X is the debtor

(Drawee/Acceptor/Payer).

• The bill of exchange specifies the amount of the debt, which is $5000 in this case.

• The bill of exchange also specifies the date on which payment is due.

• Company X has “accepted” the bill of exchange by signing it, which means they are legally
obliged to pay the debt to Company Y on or before the due date.
 Parties to the Bill of Exchange
The following three parties are essential for execution of a bill of exchange

(1) Drawer / Maker / Creditor / Payee

• The drawer is the maker of bill of exchange
• The bill is signed by Drawer.
• A creditor who is entitled to receive payment from debtor can draw a bill of exchange.

(2) Drawee / Acceptor/ Debtor/ Payer

• Drawee is the person upon whom the bill of exchange is drawn.
• Drawee is the debtor who has to pay the money to the drawer.
• He is also know as ‘Acceptor’.

(3) Payee/Drawer/Third Person

• The payee is the person to whom payment has to be made.
• The payee may be the drawer himself or a third party.
 Essential requirements of Bill of Exchange
• The essential requirements of Bill of Exchange are as follows
• Unconditional Order
The order to pay must be unconditional. It should not be subject to any
condition or contingency.
• Written Document
The bill of exchange must be in writing and signed by the drawer.
• Payment Amount
The amount payable must be stated clearly on bill of exchange
 Parties to Promissory Note
• 1) The Promisor / Maker / Drawer / Debtor / Borrower
This is the or entity wo promises to pay a certain amount of money to the other
party. This is typically the borrower or debtor, who is obliged to repay the money.
• 2) The Promisee / Payee / Drawee / Creditor / Lender
This is the person or entity to whom the promisor promises to pay the money. This
is typically the lender or creditor, who is owed the money.
• 3) Holder / Bearer
A holder essentially acts as the custodian of a promissory note. Sometimes a note is
endorsed to any other person. The person who has the promissory note at the date
of payment is called the Holder. He could be the payee or anybody else.
In some cases, a bank acting as an intermediary between the borrower and
lender.
Order Check
1. General crossing
• Section 123 of the Act refers to general crossing.
• Where a cheque bears across its face two traverse lines with or without the
words or the words ‘not negotiable, the cheque is said to have been
crossed generally
• Generally, cheques are crossed when
• There are two transverse parallel lines, marked across its face or
• The cheque bears an abbreviation "& Co. "between the two parallel lines or
• The cheque bears the words "Not Negotiable" between the two parallel
lines or
• The cheque bears the words "A/c. Payee" between the two parallel lines.
 L E
B
EE TIA
. Y O
CO PA G
& A/
C
T NE
N O

Specimen of General Crossing

2. Special crossing
• Section 124 of the Act refers to Special crossing.
• Where a cheque bears across its face in addition to the name of the
banker either with or without the words or the words ‘not negotiable,
then the cheque is said to have been crossed specially. The object of
special crossing is to direct the banker to pay the cheque only if it is
presented through the particular bank mentioned.
• When a particular bank's name is written in between the two parallel
lines the cheque is said to be specially crossed.
• In addition to the word bank, the words "A/c. Payee Only", "Not
Negotiable" may also be written
 n ly
Ltd b le tO d
k n
n tia Ltd ou k Lt
Ba e
o
g nk c
c n
b ib
t N Ba 's A Ba
a e ib
H No abib a
e
y ab
H P H

Specimen of Special Crossing

Account Payee Crossing
• In this type of crossing the words account payee or payee’s account or
A/c payee is added to the general or special crossing. It has the
following effects:
1. It becomes non transferable
2. It becomes duty of collecting bank to credit the proceeds of the
cheque only to the account of the payee named in the cheque
Not Negotiable Crossing
• The words 'Not Negotiable' can be added to general as well as special
crossing and a crossing with these words is known as not negotiable
crossing.
• The object of not negotiable crossing is to provide protection to the
holder or drawer of a cheques because even if such cheques goes into
wrong hands the true owner will not loose his claims.
Who may cross cheque?
1. When a cheque is uncrossed the holder may cross it generally or
specially.
2. When a cheque is crossed generally the holder may cross it
specially.
3. When a cheque is crossed generally or specially the holder may add
the words not negotiable.
4. When a cheque is crossed specially the bank to which it is crossed
may again cross it especially to an other bank
5. When an uncrossed cheque or cheque crossed generally is sent to
bank for collection the bank may cross it especially to itself.