Negotiable instrument act

1881
Content
 Meaning of Negotiability,
 Negotiable Instruments

◦ Bill of Exchange,
◦ Promissory Note,
◦ Cheque:
 Crossing of cheques,
 Endorsement,
 Dishonor of cheques
 Introduction
 The Negotiable Instruments Act was enacted, in India,
in 1881.
 Prior to its enactment, the provision 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.

 MEANING OF NEGOTIABLE
INSTRUMENTS
 Negotiable : Transferable
 Instrument: Document

 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
 Definition
 According to Section 13 (a) of the Act,

 “Negotiable instrument means a promissory note, bill

of exchange or cheque payable either to order or to
bearer, whether the word “order” or “ bearer” appear on
the instrument or not.”
 Definition
 Thus, the term, negotiable instrument means a written
document which creates a right in favour of some person
and which is freely transferable.

 Although the Act mentions only these three instruments

(such as a promissory note, a bill of exchange and cheque)

 There are other instruments considered as negotiable

instruments bank notes, bank drafts, share warrants,
bearer debentures, dividend warrants, scripts and treasury
bills are negotiable by usage.
Conditions of negotiability
 1. Freely transferable. Transferability may be by (a)
delivery, or (b) by endorsement and delivery.

 2. Holder’s title free from defects. Its holder in due

course acquires a good title notwithstanding any
defects in a previous holder’s title.

 A holder in due course is one who receives the

instrument for value and without any notice as to the
defect in the title of the transferor.
 Essential Elements of a Negotiable
Instrument
 Itmust be in writing, which includes, typing, computer
print out or engraving.

 The instrument must be signed by the person who is

the maker (in the case of a promissory note) or a
drawer (as in the case of a bill of exchange or a cheque).

 There must be an unconditional promise (as in the case

of a promissory note) or order (as in the case of a bill of
exchange or cheque) to pay.
 Essential Elements of a Negotiable
Instrument
 Theinstrument must involve payment of a certain sum
of money only and nothing else.

 The instrument must be payable at a time which is

certain to arrive. If it is payable ‘when convenient’ the
instrument is not a negotiable one.

 Theinstrument must be such or in such a state that it can

be transferred like cash by mere delivery (as in the
case of a bearer instrument) or by delivery and
endorsement (as in the case of an order instrument).
Conditions of negotiability
 The holder can sue in his own name.

A negotiable instrument can be transferred infi

nitum, i.e., can be transferred any number of times, till
its maturity.
 TYPES OF
NEGOTIABLE
INSTRUMENT
TYPES OF NEGOTIABLE
INSTRUMENT
 Section 13 of the Negotiable Instruments Act states that
a negotiable instrument is a promissory note, bill of
exchange or a cheque payable either to order or to bearer.
 Negotiable instruments recognised by statute are:
 (i) Promissory notes (ii) Bills of exchange (iii) Cheques.

 Negotiable instruments recognized by usage or custom

are: (i) Hundis (ii) Share warrants (iii) Dividend warrants
(iv) Bankers draft (v) Circular notes (vi) Bearer
debentures (vii) Debentures of Bombay Port Trust (viii)
 Railway receipts (ix) Delivery orders.
 Promissory notes
 Section 4 of the Act defines,

 “A promissory note is an instrument in writing

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.”

 Made on stamp paper

 Promissory notes
 A promissory note is a financial instrument that contains a
written promise by one party (the note's issuer or maker) to
pay another party (the note's payee) a definite sum of
money, either on demand or at a specified future date.

 A promissory note typically contains all the terms pertaining

to the indebtedness,
◦ Such as the principal amount,
◦ Interest rate,
◦ Maturity date,
◦ Date and place of issuance,
◦ And issuer's signature.
 Parties of Promissory Note

 All promissory notes constitute three primary parties.

These include the drawee, drawer and payee.
 Drawer: A drawer is a person who agrees to pay the

drawee a certain amount of money on the maturity of

the promissory note. He/she is also known as maker.

 Drawee: She /He is an individual, in whose favour the

note is prepared. In usual cases the drawee is also the
payee until and unless the promissory note is transferred
specifically in favour of the payee.
 Parties of Promissory Note

 For e.g. Ram is considered a drawer of the promises to

pay Shyam Rs.5000 (Shyam is the drawee).
 However, if the same promissory note is transferred in

favour of Rohan, then Rohan becomes the payee.

 Payee: A payee is someone to whom the payment is

made.
 Essential elements

 An instrument to be a promissory note must possess the following

elements:
 1. It must be in writing:
 The method of writing (either in ink or pencil or printing, etc.) is
unimportant, but it must be in any form that cannot be altered easily.

 It must certainly an express promise or clear understanding to

pay:

 There must be an express undertaking to pay. A mere

acknowledgment is not enough. The following are not promissory
notes as there is no promise to pay.
 Essential elements
 If A writes:
 (a) “Mr. B, I.O.U. (I owe you) Rs. 500”
 (b) “I am liable to pay you Rs. 500”.
 (c) “I have taken from you Rs. 100, whenever you ask for it have
 to pay” .
 The following will be taken as promissory notes because there is
an express promise to pay:
 If A writes:
 (a) “I promise to pay B or order Rs. 500”
 (b) “I acknowledge myself to be indebted to B in Rs. 1000 to be
 paid on demand, for the value received”.
 Essential elements
 Promise to pay must be unconditional: A conditional
undertaking destroys the negotiable character of an
otherwise negotiable instrument. Therefore, the
promise to pay must not depend upon the happening of
some outside contingency or event. It must be payable
absolutely.

 (4) It should be signed by the maker: The person

who promise to pay must sign the instrument even
though it might have
 Essential elements
 The maker must be certain: The note self must show
clearly who is the person agreeing to undertake the
liability to pay the amount.

 The payee must be certain: The instrument must

point out with certainty the person to whom the
promise has been made. The payee may be ascertained
by name or by designation
 Essential elements
 The promise should be to pay money and money only:
Money means legal tender money and not old and rare
coins.
 A promise to deliver paddy either in the alternative or
inaddition to money does not constitute a promissory
note.

 The amount should be certain: One of the important

characteristics of a promissory note is certainty—not
only regarding the person to whom or by whom payment
is to be made but also regarding the amount.
Bill of exchange
 Bill of exchange
 Section 5 of the Act defines, “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.
 Bill of exchange
 A bill of exchange, therefore, is a written acknowledgement of
the debt, written by the creditor and accepted by the debtor.

 A bill of exchange transaction can involve up to three parties.

The drawee is the party that pays the sum specified by the bill
of exchange.
 The payee is the one who receives that sum.
 The drawer is the party that obliges the drawee to pay the
payee.
 The drawer and the payee are the same entity unless the
drawer transfers the bill of exchange to a third-party payee.
 .
Example of Bill of Exchange

 Say Company ABC purchases auto parts from Car Supply XYZ for
$25,000.
 Car Supply XYZ draws a bill of exchange, becoming the drawer and
payee in this case.
 The bill of exchange stipulates that Company ABC will pay Car Supply
XYZ $25,000 in 90 days.
 Company ABC becomes the drawee and accepts the bill of exchange and
the goods are shipped.
 In 90 days, Car Supply XYZ will present the bill of exchange to
Company ABC for payment.
 The bill of exchange was an acknowledgment created by car supply
XYZ,
 Which was also the creditor in this case, to show the indebtedness of
company ABC, the debtor.
Essential conditions of a bill of exchange
 (1) It must be in writing.
 (2) It must be signed by the drawer.
 (3) The drawer, drawee and payee must be certain.
 (4) The sum payable must also be certain.
 (5) It should be properly stamped.
 (6) It must contain an express order to pay money and

money alone.
 (7) The order must be unconditional.
Essential conditions of a bill of exchange
 ORDER TO PAY,
 For example, In the following cases, there is no order

to pay, but only a request to pay. Therefore, none can

be considered as a bill of exchange:

 (a) “I shall be highly obliged if you make it convenient

to pay Rs. 1000 to Suresh”.
 (b) “Mr. Ramesh, please let the bearer have one

thousand rupees, and place it to my account and oblige

Essential conditions of a bill of exchange
 However, there is an order to pay, though it is
politely made, in the
 following examples:
 (a) “Please pay Rs. 500 to the order of ‘A’.
 (b) ‘Mr. A will oblige Mr. C, by paying to the order of’

P”.
 6.3.3 Distinction between a Promissory Note and a
Bill of Exchange
Promissory Note Bill of Exchange
There are only two parties – the There are three parties – the
maker (debtor) and the payee drawer, the drawee and the payee
(creditor). although drawer and
payee may be the same person.
A note contains an unconditional It contains an unconditional order
promise by the maker to pay the to the drawee to pay according to
payee. the drawer’s directions.
No prior acceptance is needed. A bill payable ‘after sight’ must be
accepted y the drawee or his agent
before it is presented for payment.
The liability of the maker or drawer The liability of the drawer is
is primary and absolute. secondary and conditional upon
non-payment by the drawee.
Cheques
 Cheques
 A cheque, in essence, 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.

 The Amendment Act, 2002 has substituted new section for

Sec.6.
 It provides that a ‘cheque’ is a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise
than on demand and it includes the electronic image of a
truncated cheque and a cheque in the electronic from.
 Cheques

 Cheque truncation is a cheque clearance system that

involves the digitalisation of a physical paper cheque
into a substitute electronic form for transmission to
the paying bank.

 The process of cheque clearance, involving data

matching and verification, is done using digital
images instead of paper copies
 PARTIES
 MR A : DRAWER
 ICICI BANK : DRAWEE
 MR C : PAYEE

 ‘A cheque in the electronic form’ means a cheque

which contains the exact mirror image of a paper
cheque, and is generated, written and signed in a secure
system ensuring the minimum safety standards with the
use of digital signature and asymmetric crypto system.
Specimen of a Cheque
 Cheques
 Every bank has its own printed cheque forms which are
supplied to the account holders at the time of opening the
account as well as subsequently whenever needed.

 These forms are printed on special security paper which is

sensitive to chemicals and makes any chemical alterations
noticeable.

 Although, legally, a customer may withdraw his money even

by writing his directions to the banker on a plain paper but
in practice bankers honour only those orders which are issued
on the printed forms of cheques.
 Requisites of a Cheque
 Written instrument.
◦ A cheque must be an instrument in writing.
◦ cheque may be written either with (a) pen (b) typewriter or
may be (c) printed.

 Unconditional order.
 A cheque must contain an unconditional order.

◦ It is, however, not necessary that the word order or its

equivalent must be used to make the document a cheque.
Generally, the order to bank is expressed by the word “pay”.
 Requisites of a Cheque
 On a specified banker only.
◦ A cheque must be drawn on a specified banker.
◦ To avoid any mistake, the name and address of the banker should
be specified.

 A certain sum of money.

◦ The order must be only for the payment of money and that too
must be specified.
◦ Thus, orders asking the banker to deliver securities or certain
other things cannot be regarded as cheques.
◦ Similarly, an order asking the banker to pay a specified amount
with interest,, is not a cheque as the sum payable is not certain.
 Requisites of a Cheque
 Payee to be certain.
◦ A cheque to be valid must be payable to a certain person. ‘
◦ Person’ should not be understood in a limited sense including only human
beings.
◦ The term in fact includes ‘legal persons’ also.
◦ Thus, instruments drawn in favour of a body corporate, local
authorities, clubs, institutions, etc., are valid instruments being payable
to legal persons.

 Payable on demand.
◦ A cheque to be valid must be payable on demand and not otherwise. Use
of the words ‘on demand’ or their equivalent is not necessary. When the
drawer asks the banker to pay and does not specify the time for its
payment, the instrument is payable on demand (Sec.19).
 Requisites of a Cheque
 Dating of cheques. The drawer of a cheque is
expected to date it before it leaves his hands.
 A cheque without a date is considered incomplete and

is returned unpaid by the banks.

 Can Be Of Present Date

 And Post Dated
 Crossing of Cheques
 Crossing on cheque is a direction to the paying banker
by the drawer that payment should not be made across
the counter.

 The payment on a crossed cheque can be collected only

through a banker.

 A cheque that is not crossed is a called an open cheque.

 Crossing of Cheques
 Significance of Crossing

 As payment cannot be claimed across the counter on a

crossed cheque,
 Crossing of cheques serves as a measure of safety

against theft or loss of cheques in transit.

 By crossing a cheque, a person, who is not entitled to

receive its payment,

 Is prevented from getting the cheque encashed at the

counter of the paying banker.

 Dishonoured
 A cheque is said to be honoured if the banks give the
amount to the payee.
 While, if the bank refuses to pay the amount to the

payee, the cheque is said to be dishonoured.

 In other words, dishonour of cheque is a condition in

which the bank refuses to pay the amount of cheque

to the payee.
Dishonoured
 What are the possible reasons due to which a bank
can dishonour a cheque?
 Insufficient funds in the payer's bank account.
 Signature missing or mismatch.
 Account number mismatch.
 Issue with the date of the cheque.
 Mismatch in the amount in words and numbers.
 Disfigured or damaged cheque.
 Crossing limit of the overdraft.
Endorsement
 https://www.youtube.com/watch?
v=Jyu7ysOuc2c&t=372s
 Endorsement
 An endorsement is the mode of negotiating a
negotiable instrument.
 An endorsement according to Sec.15, is “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”.
 Endorsement
 The person to whom the instrument is endorsed is
called the endorsee.
 Usually the endorsement is on the back of the

instrument; though it may be even on the face of it.

 Where no space is left on the instrument, the

endorsement may be made on a slip of paper attached

to it. This attached slip of paper is called ‘Allonge’
Types
 Blank or General Endorsement
 when the endorser puts his unmistakable just on the instrument and
doesn't compose the name of anybody to whom or to whose
request the installment is to be made.

 Full Endorsement or Special Endorsement

 when the endorser, notwithstanding his mark, additionally notice
the name of the individual to whom or to whose request the
installment is to be made.
 There is heading added by Endorsement to the individual indicated
called the endorsee of the instrument who presently turns into its
payee qualified for sue for the cash due on the instrument.
 Restrictive Endorsement
 Restrictive Endorsement tries to end the chief

qualities of a Negotiable Instrument and seals

its further debatability. This may sound
somewhat unordinary, yet the endorsee is
especially inside his privileges on the off
chance that he so signs that its resulting
move is limited. This forestalls the danger of
unapproved individuals acquiring installment
through misrepresentation or falsification and
losing his cash.