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For Private Circulation only (SIWS-S.Y.B.Com-Law)

NEOGOTIABLE INSTRUMENT ACT 1881

A) Definition:
Section 13 of Negotiable Instrument Act 1881 defines a negotiable instrument as
A negotiable instrument means a promissory note, bills of exchange or cheque payable
either to order or to bearer [Sec 13(1).
Negotiable literally means transferable. Instrument means a document. The
Negotiable Instrument means a transferable instrument.
B) Characteristics of A Negotiable Instrument:
1. Property: The possessor of the instrument is the holder and owner thereof. A
negotiable instrument does not merely give possession of the instrument, but right
to property. The complete right of ownership in a negotiable instrument passes by
a mere delivery where instrument is payable to bearer.
2. Defects in title: The holder in good faith and for value called the holder in due
course gets the instrument free from all defects of any previous holder.
3. Remedy: The holder can sue upon the negotiable instrument in his own name. All
prior parties are liable to him. A holder in due course can recover the full amount
on the instrument.
4. Rights: The holder in due course is not affected by certain defences, which might
be available against previous holder for example fraud to which he is not party.
5. Payable to order: A promissory note, bill of exchange is payable to order which
is expected to be. So payable or which is expressed to be payable to a particular
person.
6. Payable to bearer: Where the negotiable instrument is payable to bearer, the
property in it passes from one person to another by delivery.
7. Payment: A negotiable instrument may be made payable to two or more payees
jointly, or in may be made payable in the alternative to one or two, or some of
several payees [sec 13(2)]
8. Consideration: Consideration in the case of a negotiable instrument is presumed.
Every such instrument, when it has been accepted, negotiated or transferred, was
accepted endorsed, negotiated or transferred for consideration.

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D) PROMISSORY NOTE (Sec.4)
I) Definition: Sec 4 of Negotiable Instrument Act 1881 defines a promissory note as an
instrument in writing 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 to the bearer of
the instrument.
The person who promises to pay is called the maker. The person who is promised the
payment is called the payee.
II) Essential Elements of a Promissory Note
a) In writing: A promissory note must be in writing. Oral engagement or promise is
excluded. It may be written in ink or pencil or may be printed. The intention to
make a note must be clear.
b) Undertaking to pay: It is not necessary to use the word promise but the
intention must be clearly shown an unconditional undertaking to pay the amount.
c) Unconditional: It must contain definite and an unconditional undertaking to pay.
Promise to pay should be unconditional. A conditional instrument is invalid. It
must be certain of payment.
d) Signed by the maker: The instrument must be signed by the maker thereof. The
sign or a mark would constitute signature, if the maker intended to subscribe to
the document. Person must sign with his free consent. It should not only be a
physical act but also a mental act with an intention to sign.
e) Certain persons: The maker and payee of the instrument must be certain and
definite persons. A note may be made by several persons jointly to bind
themselves jointly or severally.
f) Specific sum: The sum promised must be certain and specific. Uncertain amount
will make the instrument invalid.
g) Stamping: Promissory notes are chargeable with stamp duty. It is advisable to
cancel the stamps with makers signature or intials. An unstamped or improperly
or insufficiently stamped promissory not is not admissible in evidence. No suit
can be maintained upon an unstamped or improperly stamped promissory note.

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Specimen of Promissory Notes
ABC
Mumbai
400016
Rs. 1,00,000/th
6 September 2013
Three months after date I promise to pay XYZ or his order a sum of Rupees
One Lakh only for the value received.
Sd/ABC
To,
XYZ
Mumbai - 400031
E) BILLS OF EXCHANGE (Sec.5)
I) Definition: Section 5 of Negotiable Instrument Act 1881 Act defines a bill of
exchange 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 a certain person or the bearer of the instrument.
II) ESSENTIAL ELEMENTS OF A BILL EXCHANGE:
1. Writing: It must be in writing and may be in any language, and in any form.
2. Parties: There must be three parties to the bill of exchange, for example, Drawer,
Drawee and Payee. The person who draws a bill is called Drawer or Maker.
The person on whom the bill is drawn is called a Drawee and the person to
whom the money is to be paid is called a Payee.
3. Order to pay: The bill of exchange must contain an order by the drawer to the
drawee to pay under any circumstance. The order must be imperative and not in
the form of excessive request.
4. Unconditional: The order in the bill must be unconditional, for example, payable
under all events and circumstances.
5. Signed by the Maker: The bill must be signed by the drawer. A bill without
signature is incomplete.
6. Person directed must be certain: The order to pay must be directed to a certain
person. Certainty of the drawee helps the payee to present the bill for acceptance
or payment to certain person.
7. Money: The order must be to pay money only.
8. Payee must be certain: It must payable to a definite person or his order. The
payee must be certain. Bill may be made payable to two or more payees jointly or
in the alternative.

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9. Certain sum: The sum payable must be certain. The sum payable may be
certain although it includes future interest or is payable at an indicated rate of
exchange, or is according to the course of exchange.
10. Stamping: Bill of Exchange is chargeable with stamp duty.
Specimen of Bills of Exchange

Rs. 5,000/-

XYZ
Mumbai 400016
6th September 2013

Sixty days after date pay to ABC or order the sum of Rupees Five Thousand only
for value received.
Sd/XYZ
To,
Accepted
PQR
Sd/Mumbai 400031
PQR

F) CHEQUE (Sec.6)
I) Definition: A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand. It includes the electronic image of a
truncated cheque and a cheque in the electronic form.
II) ESSENTIAL CHARACTERISTICS OF TA CHEQUE:
The following are the essential characteristics of a cheque:
1) A cheque must be in writing.
2) There should be an express order to pay and not a request to pay money.
3) The order must be definite and unconditional.
4) The cheque must be signed by the drawer.
5) The order must be to pay a certain amount of money only.
6) There should be three parties i.e. drawer, drawee and payee which must be certain and
must be stated clearly in the instrument.
7) A cheque is always drawn upon a specified banker.
8) A cheque should always be payable on demand.

Specimen of a Cheque
S/B
06.09.2013
PAY
OR BEARER
RUPEES
Rs.
A/c No.
THE BANK OF INDIA
MUMBAI
340218

Sd/XYZ
400013020

III) CROSSING OF CHEQUES:

Section 123 to 131 of the Negotiable Instrument Act 1881 provide for crossing of chques.
1) Meaning of Crossing: A cheques is said to be crossed when it bears across its face
two parallel transverse lines which are usually drawn on the left hand top corner of the
cheque. It is an alteration which is authorised by the Act.
2) Purpose of Crossing: The general purpose of crossing is to direct the drawee (banker)
to pay the amount of cheque only to a banker so that party to whose account is credited
can be easily traced or identified in case of need.
3) Types of Crossing: There are two types of crossing general crossing and special
crossing:
(a) General Crossing (sec 123 & 126): A cheque is said to be crossed generally when;
i. it has two transverse parallel lines marked across its face; or
ii. it bears an abbreviation & Co. between the transverse parallel lines; or
iii. it bears the words not negotiable between the two parallel lines

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Specimens of General Crossing

(b) Special Crossing: A cheque is said to be crossed specially when it bears across its
face the name of a banker without lines or between two parallel lines as under:

(c) Cheque crossed A/c. Payee: The words A/c Payee are sometime entered on the
face of a cheque crossed whether generally or specially as under:

Classification of Negotiable Instrument

1) Accommodation bill (Sec.43):
When a bill of exchange is drawn, accepted, or endorsed without consideration, it
is called an accommodation bill.
Eg: A is need of Rs.10,000/-. He approached his friend B for borrowing the
amount. As B is not in a position to lend, he suggests that A might draw a bill on B,
which he would accept. If As credit is good, he would get the bill discounted with his
banker. On the due date, A would pay Rs.10,000/- to B, who would meet the bill.

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The person who signs, accept or endorses a bill without receiving any
consideration is said to have lent his name to an Accommodation Bill.
The person who so draws, accepts, endorses, or accommodates is called
Accommodation Party.
2) Ambiguous Instruments (Sec. 17 & 18)
An instrument which is vague and cannot be clearly identified either as a
promissory note or as bill of exchange, is an ambiguous instrument. Where an instrument
may be construed either as a promissory note or a bill of exchange, the holder may at his
option treat it as either, and the instrument shall henceforth shall be treated accordingly.
If the amount undertaken or ordered to be paid is stated differently in figures and
in words, the amount stated in words shall be the amount undertaken or ordered to be
paid (sec.18).
3) Foreign Instrument (Sec. 12)
The Foreign Instrument is one which is
a) Instrument drawn and made payable outside India.
b) Instrument drawn in India, upon persons resident outside India and
payable outside India.
Foreign bills of exchange must be protested for dishonour when such protest is required
by the law of the place where they drawn.
4) Inland Instrument (Sec. 11)
A promissory note, bill of exchange or cheque drawn or made in India and made
payable in or drawn upon any person resident in India shall be deemed to be an inland
instrument.
Following instruments are inland instruments:
i) An instrument drawn and made payable in India;
ii) An instrument drawn in India, upon some person resident in India, though payable in a
foreign country;

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5) Inchoate Stamped Instrument (Sec. 20)
An inchoate stamped instrument is an incomplete instrument. Sec. 20 lays down:
Where one person signs and delivers to another a paper stamped in accordance with the
law relating to negotiable instruments then in force in India, and either wholly blank or
having written thereon an incomplete negotiable instrument, he thereby gives prima facie
authority to the holder thereof to make or complete, as the case may be, upon it a
negotiable instrument, for any amount specified therein and not exceeding the amount
covered by the stamp.
Instrument may be incomplete as regards date, amount, drawer, payee, etc. The
holder may fill in any of the particulars to make it a negotiable instrument. As long as the
instrument is blank or incomplete, it is not a valid negotiable instrument. The liability of
a person signing a blank instrument, therefore, arises only when the instrument is
complete.

Escrow:
A bill delivered conditionally is called an Escrow. Where a bill or note is delivered
conditionally, the liability of the party delivering does not commence till the happening
of the event or the fulfillment of the condition. The rights of a holder in due course are
not affected. Such a bill may also be delivered for a special purpose as a collateral
security. The purpose should be fulfilled before such a bill can be made payable.
Eg. Mr. A makes a note in favour of his servant and hands it to his Solicitor, telling to
retain the note till his death and then to hand over it to the servant if he still continue in
service. If these conditions are complied with and the Solicitor hands over the instrument
to the servant, the servant can claim the amount of the note from the administrators of his
masters estate.

Noting & Protest:

NOTING: As per Section 99, when a promissory note or a bill of exchange is
dishonoured whether by non-acceptance or by non-payment, the holder of the instrument
may go to a Notary Public and have the fact of the dishonour noted by him.
A Note by the Notary Public must contain the following Particulars:
a) The fact of dishonour,
b) The date of dishonour,
c) The reason, if any, given for dishonour,

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d) If the instrument has not been expressly dishonoured then the reason for treating
it as dishonoured
e) A reference to his register and
f) The signature of the notary public.
PROTEST: Section 100 lays down that when a promissory note or bill of exchange has
been dishonoured by non-acceptance or non-payment, the holder may, within reasonable
time, cause such dishonour to be noted and certified by a notary public. Such a certificate
is called a protest.
A protest is a formal certificate issued by the Notary Public, certifying the fact of
dishonour of the bill of exchange or promissory note and based on the noting. A court
shall presume the fact of dishonour, if a protest is produced before it.

CRIMINAL PENALTIES IN THE CASE OF DISHONOUR OF A CHEQUE

(Section 138 142)
Whenever a cheque has been issued to discharge a legally enforceable debt or
liability has been dishonoured due to paucity of fund, the drawee or holder in due course
must within 30 days of receiving information of dishonour, give 15 days time to make the
payment. He shall be liable, if he fails to do so. In which case, the payee or holder in due
course can make a complaint within 1 month of cause of action. A court not lower than
that of the Metropolitan Magistrate or Judicial Magistrate of First Class shall try the
matter.
The trial shall be conducted expeditiously and endeavour shall be made to
conclude the trial within 6 months from the date of filing of the complaint.
The punishment may be imprisonment upto 2 years or fine up to twice the amount
of the cheque or both.
When Banker is justified in Dishonouring the Cheque?
1) Funds are not properly applicable to the payment of cheque for Eg. Funds are
subject to lien, on banker is entitled to set-off.
2) Cheque is irregular or ambiguous Cheque.
3) Customer becomes insolvent.
4) Death, lunancy or insolveny of the customer and the banker has the notice of the
same.
5) Post dated cheque is presented before its ostensible date.
6) Cheque presented beyond the period of six months from the date of issue.

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7) If the drawers signature does not tally with his specimen signature.
8) If the banker is not holding, sufficient funds of the drawer unless the banker has
agreed to honour the cheque without sufficient funds.
9) If the customer countermands payment and communicates the same to the bank
properly.
10) Holder gives notice to the banker of loss of cheque.
11) If the cheque is not presented within the usual banking hours.
12) Where a garnishee order has been issued by the court attaching customers
balance. (Garnishee is a person liable to pay to debt on behalf of the Judgment
Debtor).

Case Laws:
Negotiable Instrument Act, 1881
1) Rakesh Nemkumar Porwal v/s Narayana D. Joglekar: It was held that offence
under sec.138 is committed only when payment is not made by drawer on expiration
of the period of 30 days after service of notice and that the circumstances, under
which, the cheque is dishonored, are to be completely ignored.
2) K. K. Siddarthan v/s T.P. Praveena Chandran and Anr.: The supreme court held
that even if cheque is dishonored due to stop payment Instruction to the bank, it
would attract the provision of Sec. 138.
3) NEPC Micon Ltd. v/s Magma Leasing Ltd.: The Supreme court held that even if
cheque is dishonored on the ground that account is closed, it would be covered by the
phrase the amount of money standing to the credit of that account is insufficient to
honour the cheque
4) Anil Hada v/s Indian Acrylic Ltd.: It was held that where the drawer of the cheque
happens to be a body corporate, the company can be prosecuted.
5) ICDS Ltd. v/s Beena Shabeer and Another: It was held that if a cheque issued by a
guarantor as a security towards payment of the dues, dishonoured, is maintainable in
the court of law under Sec.138.
6) Shri Ishar Alloy Steel Ltd. v/s Jayaswals New Ltd. It was held that the cheque
must be presented to the drawee bank within the statutory period, which is computed
from the date that is written on the cheque.

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6) Fictitious: (Sec.42)
When the names of the drawer or payee or both are fictitious, the bill is called a fictitious
bill (Sec. 42). The word fictitious means (i) a non-existing person and (ii) a pretended
person, i.e., a person other than the actual person intended by the parties. Where a bill is
drawn in the name of a fictitious person and payable to the drawers order, the acceptor is
liable to pay to the order of the person who signed it as drawer.
Therefore, the endorsee can recover the amount as against the acceptor provided he is in a
position to show that the signature of the supposed drawer of the bill and the first
endorsement on it are in the handwriting of the same person. In case of fictitious
instruments, only a holder in due course can recover the money as against the acceptor.

Holder in Due Course

The property in a negotiable instrument is acquired by anyone who takes it bonafide and
for value inspite of any defect of the title in the person from whom he took it.
Such a person who takes an instrument in good faith and form value becomes the true
owner of the instrument and is called a holder in due course.
[S-9] says Holder in due course means any persona) who for consideration became the possessor of a promissory note, bill of
exchange OR cheque if payable to bearer, or
b) the payee or indorsee thereof, if payable to order,
c) before the amount mentioned in it became payable and
d) without having sufficient cause to believe any defect existed.
e) In the title of the person from whom he derived his title.