UNIT 3

Negotiable Instrument Act 1881

Negotiable Instruments :- The word negotiable menace transferable from one
person to another in return for consideration and instruments means written
document which a right is created in favour of some person.

For Example :- Cheque

Non-Negotiable Instruments :- In the case of Non-Negotiable instruments

negotiability is restricted. The ownership of these instruments can be
transferred only after fulfilling certain legal conditions.

For Example :- Postal Order

 Characteristics of Negotiable Instruments

1) Writing and Signature :-

2) Money :-

3) Freely Transferable:-

4) Title of Holder free from all Defects :-

5) Notice:-

6) Presumption:-

7) Special Procedure:-

8) Popularity :-

9) Evidence:-
 Types of Negotiable Instruments

Types of
Negotiable
instruments

Promissory Bills of
Cheques
Note Exchange
 Promissory Notes

“ A promissory note is 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 instruments.”

For Example:-
1) I promise to pay B order Rs. 500.
2) I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand
for value received.
3)“I promise to pay B Rs. 500 and all other sums that shall be due to him”
4) I promise to pay B Rs. 500 seven days after my marriage with C.

Here (1) (2) are promissory Notes.

 Characteristics of Promissory Notes

1) It is an Instruments in writing:-

2) It is a Promise to Pay:-

3) Signed by the maker:-

4) Other formalities :- (number, date, place, consideration)

5) Definite and Unconditional:-

6) Promise to Pay money only:-

7) Maker must be certain person:-

8) Payee must be certain:-

9) sum payable must be certain:-

10) It may be payable on Demand or After a definite period of time :-

 Parties to Promissory Note

Maker :- maker is the person who promise to pay the amount stated in the note.
He is debtor.

Payee:- payee is the person to whom the amount of the note is payable i.e.
creditor.

Holder :- he is either the payee or the person to whom the note may have been
endorsed.
 Specimen of Promissory Note

Rs. 10,000

Shegaon
July 01, 2014

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

To,
Shri Ramesh Stamp
B-20, Green Park
Khamgaon Sd/- Raju
 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
instruments. It is also called a draft.
Characteristics of Bill of Exchange
1) It must be in writing:-
2) Order to pay:-
3) Drawee:-
4) Signature of the Drawer:-
5) Unconditional order:-
6) Parties:-
7) Certainty of amount:-
8) Payment in kind is not valid:-
9) Stamping:-
10) Cannot be made payable to Bearer on Demand:-
 Parties to a Bill of 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 are directed to be paid by the instruments are called the payee.
 Specimen of Bill of Exchange

Rs. 500
Shegaon
July 01, 2014

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

To,
Shri Ramesh Stamp
B-20, Green Park
Khamgaon Sd/- Raju
(Drawee)
In case of need with Accepted
Canara Bank, Delhi Sushil
Basic of Distinction Bill of Exchange Promissory notes
No. of parties There are three parties the There are two parties the
drawer, the drawee and the maker and the payee
payee
Promise/Order A bill contains an A note contains an
unconditional order to pay unconditional promise to
pay.
Nature of liability The liability of the drawer of The liability of the maker of
a bill is secondary and a note is primary and
conditional absolute
Debtor/Creditor The drawer of a bill is the The maker of a note is a
creditor who direct the debtor and he himself
drawee to pay undertake to pay
Identity of pay or the payee In a bill the drawer and the A note cannot be made
payee may be one and the payable to the maker
same person himself
Basic of Distinction Bill of Exchange Promissory notes
Acceptance A bill payable after sight or after A note require no
a certain period must be acceptance as it is signed by
accepted by the drawee before it the person who is liable to
is presented for payment pay
Payable to Bearer It can be payable to bearer. It It cannot be payable to
cannot be drawn as payable to bearer.
bearer on demand.
Immediate relation The drawee of the bill stand in The maker of a note stand
immediate relation with the in immediate relation with
acceptor and not the payee the payee
Notice of Dishonor Notice of Dishonor must be Such notice is not required
given to all the persons who are to be given to the maker.
to be made liable to pay.
Protest for Dishonor It requires the protesting for It does not require any
dishonor protesting.
 Cheque

“ a bill of exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand”

Characteristics of a Cheque

1) In Writing:-
2) Express order to pay:-
3) Define and unconditional order:-
4) Signed by the Drawer:-
5) Order to pay certain sum:-
6) Order to pay Money only:-
7) Certain three parties :- (drawer , Drawee and payee)
8) Drawn upon a specified banker:-
9) Payable on demand:-
 Specimen copy of Cheque
Date ………………
PAY…………………………………………………………………………………………………………………
………………………… OR BEARER
RUPEES……………………………………………………………………………………………………………

Rs.
A/c No. L.F. INTLS

STATE BANK OF INDIA

Railway Station Road
Shegaon- 444001

“ll473792ll” 226002025
 Crossing of Cheque
A cheque is said to be crossed when two transverse parallel lines with or
without any words are drawn across its face. A crossing is a direction to
the paying banker to pay the money generally to a banker or a particular
banker as the case may be , and not to the holder at the counter. Crossing
may be writing, stamped or printed.

Types of
Crossing

General Special
Crossing Crossing
General Crossing: A cheque is said to be crossed generally when it bears
across its face any of the following:
• Two transverse parallel lines.
• Two transverse parallel lines with the word “And Company” or “And Co”.
• Two transverse parallel lines with any abbreviation of the word “&
Company”.
• Two transverse parallel lines with the words “Not Negotiable”.
• Two transverse parallel lines with the words “Account Payee Only”.
Special or Restrictive crossing :- It is a cheque in which the name of the bank is
written between the two parallel lines and hence it can be paid to that
specific banker only. Inclusion of the name of a banker is essential in special
crossing . Special Crossing can never be converted to General Crossing. In
Special Crossing paying banker to honor the cheque only when it is
presented through the bank mentioned in the crossing and no other bank.
Basic of Distinction Cheque Bill of Exchange
Drawer It is always drawn on a bank It is usually drawn on some
person or firm
Payable on demand It is always payable on It may be payable on
demand demand or on the expiry of
a fixed period
Acceptance It does not require an It requires an acceptance
acceptance of the drawee
Stamp It does not require a stamp It must be properly
stamped
Grace Period It is payable immediately on In the case of a time bill of
demand without any days of exchange, three days of
grace grace are allowed from the
due date, within which the
payment can be made
Basic of Distinction Cheque Bill of Exchange
Payable to Bearer on A cheque drawn payable to A bill payable on demand
Demand bearer on demand shall be can never be drawn
valid payable to bearer
Crossing It can be crossed It cannot be crossed
Notice of dishonour Notice of dishonour is not Notice of dishonour is
required usually required
Basic of Distinction Cheque Promissory note
Drawer It is always drawn on a bank It is usually drawn on some
person or firm
Payable on demand It is always payable on It may be payable on
demand demand or on the expiry of
a fixed period
Acceptance It does not require It must be accepted by the
acceptance drawee
Stamp It does not require an stamp It must be properly
stamped
Crossing It can be crossed It cannot be crossed
 NEGOTIATION
‘when a promissory note, bill of exchange or cheque is transferred to any
person so as to constitute that person the holder thereof, the instrument is
said to be negotiated.’
Negotiation thus requires two conditions to be fulfilled, namely:
1. There must be a transfer of the instrument to another person; and
2. The transfer must be made in such a manner as to constitute the transferee
the holder of the instrument.
Modes of negotiation
1. Negotiation by delivery (Sec. 47): Where a promissory note or a bill of
exchange or a cheque is payable to a bearer, it may be negotiated by
delivery thereof.
Example: A, the holder of a negotiable instrument payable to bearer, delivers it
to B’s agent to keep it for B. The instrument has been negotiated.
2. Negotiation by endorsement and delivery (Sec. 48): A promissory note, a
cheque or a bill of exchange payable to order can be negotiated only be
endorsement and delivery. Unless the holder signs his endorsement on the
instrument and delivers it, the transferee does not become a holder. If there
are more payees than one, all must endorse it.
 ASSIGNMENT

Bills, notes and cheques represent debts and as such have been held to be
assignable without endorsement. Transfer by assignment takes place
when the holder of a negotiable instrument sells his right to another
person without endorsing it. The assignee is entitled to get possession and
can recover the amount due on the instrument from the parties thereto.
Of the two methods of transfer of negotiable instruments discussed,
transfer by negotiation is recognised by the Negotiable Instrument Act.
Basic of Difference Negotiation Assignment
Consideration Consideration is presumed Consideration must be proved
Title The title of the transferee is better The title of the assignee is
than that of the transferor subject to the defects and
equities in the title of the
assignor
Notice of transfer No notice of transfer is required A notice of transfer of debt is
required to be given
Formalities Instruments payable to bearer are An assignment can only be made
negotiated by mere delivery and in writing either on the
instruments payable to order are instruments itself or in a separate
negotiated by endorsement and documents transferring to the
delivery assignee the transferors rights in
the instruments
Right of negotiation A possessor of an instruments An assignee cannot negotiate it
under negotiation can negotiate it further as he does not become a
further holder without endorsements in
his favor.
 Holder
The person is said to be a holder of negotiable instruments who is legally
entitled to possess the instruments, in his name and to get its payment on
due date or on demand, as the case may be.

Holder in Due course

Section 9 of the Act defines ‘holder in due course’ as any person who
(i) for valuable consideration,
(ii) becomes the possessor of a negotiable instrument payable to bearer or the
endorsee or payee thereof,
(iii) before the amount mentioned in the document becomes payable, and
(iv) without having sufficient cause to believe that any defect existed in the title
of the person from whom he derives his title
 Qualification of Holder in Due Course

1) He must be a holder :-

2) He must be a holder for valuable consideration:-

3) He must have become the holder of the negotiable instruments before its
maturity :-

4) He must take the negotiable instruments complete and regular on the

face of it:-

5) He must have become Holder in good faith :-

 Privileges of a Holder in Due course

1) Instruments cleanse of all defects :-

2) Rights not affected in case of an inchoate instruments :-

3) All prior parties liable :-

4) Can enforce payments of a fictitious bill :-

5) No effect of conditional delivery:-

6) Instruments obtained by unlawful means or for unlawful consideration :-

7) Every holder is a holder in due course :-

8) Estoppels against denying original validity of instruments:-

9) Estoppels against denying capacity of payee to endorse:-

10) Endorser not permitted to deny the capacity or prior parties :-

 DISHONOUR OF A NEGOTIABLE INSTRUMENT
Dishonour by non-acceptance (Section 91)

1. If a bill is presented to the drawee for acceptance and he does not accept it
within 48 hours from the time of presentment for acceptance.
2. When the drawee is a fictitious person or if he cannot be traced after
reasonable search.
3. When the drawee is incompetent to contract, the bill is treated as
dishonoured.
4. When a bill is accepted with a qualified acceptance, the holder may treat
the bill of exchange having been dishonoured.
5. When the drawee has either become insolvent or is dead.
6. When presentment for acceptance is excused and the bill is not accepted
Dishonour by non-payment (Section 92)
1) The maker of the promissory note , acceptor of the bill of exchange or
the drawee or the cheque makes default in the payment upon being
duly required to pay the same.
2) When the bill remains unpaid at or after maturity in those cases where it
is not required to be presented for payment.

Notice of Dishonour (Section 93)

Notice by whom?
Notice to whom ?
What is reasonable time?
Place of notice ?

Duties of the holder upon dishonour

(1) Notice of dishonour.
(2) Noting and protesting.
(3) Suit for money.
 Reasons For Dishonor of Cheque
1. Insufficient Fund
2. The death of the Drawer
3. Irregular Signature
4. Non existing account
5. Bankruptcy
6. Frozen account
7. When there is alteration
8. Post dated cheque
9. Expired
10. If there is a difference between the amount written in words
and in figures
11. When payment is stoped
 Discharge of Negotiable instruments

Discharge of an instruments

1) By payment in due course

2) By cancellation

3) By party primarily liable becoming holder

4) By express waiver

5) By discharge as a simple contract

Discharge of Parties

1) By payment
2) By cancellation
3) By release
4) Ay allowing drawee more than 48 hours to accept
5) By taking qualified acceptance
6) By not giving notice of dishonour
7) By not presentation for acceptance of a bill
8) By delay in presenting cheque
9) Draft by one branch on another
10) By material alteration
11) Discharge by operation of law