ONE SHOT Business Laws

The Negotiable Instruments Act, 1881

By- Kunal Mandhania Sir

Negotiable
Instrument Act, 1881
By Kunal Sir
 Basics
 Negotiable  Transferable

 Instrument  Document in writing

 It is a instrument in writing which can be transferred from one person to
another.
 Came into force from 1st Mar. 1882
 Act applies to whole of India.
 Main Objective  To legalise system

By which instruments made under it

Could pass from hand to hand

By negotiation like any other goods
Essential Characteristic of N.I
Shortcut Characteristics
• 1) Transferable from one person to another
Negotiable • 2) Can be transferred any no of times
Instrument • 3) Has to be in writing

• S  4) Signed by drawer
Of SUM • U  5) Contains unconditional promise / order
• M  6) Promise/ order to pay money only

Crores • C  7) Amt/ Time / Payee  Certain

Delivered • 8) Instrument made should be delivered

• 9) Holder in due course (HDC) gets title FREE
For Free from defect
 Types of N.I
On basis of receiver of On basis of time of On Basis of Other as per
Basically
payment payment location customs

i. Order i. Time 1) InLand

1. Bill of ii. Bearer ii. Demand 2) Foreign 1. Treasury
Exchange Instrument Bill
2. Promissor
2. Bearer
y Note Whether name of payee
Whether time of debenture
3. Cheque specified
payment specified 3. Railway
receipt
4. Delivery
Yes No
Yes No order
5. Bill of
lading
Order Bearer
Time Demand

Note : 1) If last /only endorsement is blank, it is bearer instrument

Question
As per Negotiable Instruments Act, 1881,
Negotiable Instruments means(module)
a.Promissory Note
b.Bills of Exchange
c.Cheque
d.All the above
Answer

D
Question
On which of the followings, even not defined in
Negotiable Instruments Act 1881, provisions of Act are
applicable: (module)
a.Hundies
b.Treasury Bills
c.Bearer Debentures
d.All of the above
Answer

D
 Promissory Note [Sec. 4]
Meaning Parties Essential Characteristics

Instrument in writing (1) Maker Shortcut  WE – US – CM

 who promise to pay W  Writing  oral not allowed
 Debtor
Containing a unconditional E  Express Promise to pay
undertaking (mere acknowledgement not
(2) Payee sufficient)
To whom amt. payable U  Unconditional  Promise
Signed by maker  If condition then should be
certain to happen
To pay certain sum of money S  Signed by maker
only S - Stamped
Note : P.N cannot be bearer C Certain Sum
To order of certain person or at all only RBI/ C.G can Maker
bearer make bearer P.N. e.g.
Payee
currency note. M  Money  Promise to pay
money only
Question
State whether the following statements are promissory notes or not?
1. “I promise to pay B or order Rs. 500”
2. “Mr. B, I owe you Rs. 500”
3. “I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on demand, for value received”.
4. “I am liable to B, in a sum of Rs. 500 to be paid by instalments.
5. “I am bound to pay the sum of Rs. 500 which I received from you”.
6. “I promise to pay B Rs. 500 and all other sums which shall be due to him”.
7. “I promise to pay B Rs. 1000 and the fine according to the rules”.
8. “I promise to pay B Rs. 500, first deducting there out any money which he may owe me”.
9. “I promise to pay B Rs. First deducting there out any money which he may owe me”.
10. “I promise to pay B a sum of Rs. 500 when convenient or able”.
11. “I promise to pay B Rs. 500 when he delivers the goods”.
12. “I promise to pay B Rs. 500 seven days after my marriage with C”.
13. “I promise to pay B Rs. 500 on D’s death
14. “I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay that sum”.
15. “I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next”
16. “I promise to pay B in 20 shares and 10 bonds of XY Ltd.
Solution
1. Yes.
2. No , only acknowledgement of debt
3. Yes
4. No , conditional
5. No , mere acknowledgement of debt
6. No , sum uncertain
7. Yes , sum can be calculated as fine fixed
8. No , sum uncertain
9. No , sum uncertain
10. No , conditional
11. No , conditional
12. No , conditional
13. Yes as death is certain
14. No , conditional
15. No. Promise to pay money only
16. No. Promise to pay money only
Rama executes a promissory note in the following form, 'I
promise to pay a sum of `10,000 after three months'. Decide
whether the promissory note is a valid promissory note.
(module)

Hint - The promissory note is an unconditional promise in

writing. In the above question the amount is certain but the
date and name of payee is missing, thus making it a bearer
instrument. As per Reserve Bank of India Act, 1934, a
promissory note cannot be made payable to bearer -
whether on demand or after certain days. Hence, the
instrument is illegal as per Reserve Bank of India Act, 1934
and cannot be legally enforced.
Bills of Exchange (Sec. 5) [BOE]
Meaning Parties Essential Characteristics

Instrument in writing (1) Drawer Shortcut  WE – US – CM

maker of BOE
W  Writing
Containing a unconditional
E  Express  order to pay
undertaking (2) Drawee U  Unconditional and
 Who is directed to pay definite
Signed by maker  On acceptance he become S  Signed by drawer
acceptor C  Certain
 Liability primary &
Directing a certain person unconditional Drawer
Drawee
To pay certain sum of money (3) Payee Payee
only
To whom money paid Sum
(Note : BOE cannot be made
to certain person or his order payable to bearer on demand)
M  Money  order to pay
money only
Question
How many parties in Bills of exchange:
(module)
a.2
b.3
c.4
d.5
Answer

C
Question
Which is not the essential characteristic of Bill of
exchange: (module)
a.Must be in writing
b.Must contain an express promise to pay
c.Instrument must be signed
d.Must be stamped
Answer

B
Distinguish Between BOE & P.N
To give Bearer
Shortcut  Jisko Definition Yaad hogi  I Accept My liability And Promise Party to

Basis BOE P.N

1) Definition ‘Refer previous slides’ “Refer Previous Slides’

2) Acceptance Requires acceptance Do not require

acceptance
3) Primary Liable Drawee/Acceptor Maker

4) Promise /Order Order to pay Promise to Pay

5) Parties 3 Parties 2 Parties

(1) Drawer (2) Drawee (3) Payee Maker and payee
6 Bearer Cannot be bearer on demand Cannot be bearer at all
 Cheque  Sec. 6
Meaning Parties to Essential Dishonor of cheque (Sec. 138)
cheque Elements 
 
 Punishment  2x amt of cheque or 2 years
Cheque is BOE (1) Drawer
imprisonment or both
 • Who draws 1) All essentials

Drawn on specified cheque
of BOE Conditions
banker • Debtor
 2) Drawee 1) Cheque issued for discharge of debt
• liability is
Not expressed to be primary and 2) Cheque presented within validity period (3 months)
payable otherwise always banker
conditional 3) Reason for Dishonour –
than demand 3) Always a
(2) Drawee Insufficient fund or stop payment

• Bank who makes 
Includes demand
payment
a) Electronic image Within 30 days  Give notice to demand payment
• Always banker instrument
of truncated
(3) Payee 
cheque 4) All cheque are
Named in N.I to 15 days  Time to pay
b) Cheque in
whom money is bill all bill are
electronic form 
paid or his order not cheque
Within 1 month  File complaint with court
Question
Where any cheque drawn by a person is dishonoured due to
insufficiency of funds, such person shall be punished with:
(module)
a.imprisonment for a term which may extend to two years,
b.with fine which may extend to twice the amount of the cheque,
c.imprisonment for a term which may extend to two years, or with
fine which may extend to twice the amount of the cheque, or with
both,
d.No punishment
Answer

C
Bholenath drew a cheque in favour of Surendar. After having issued
the cheque; Bholenath requested Surendar not to present the cheque
for payment and gave a stop payment request to the bank in respect
of the cheque issued to Surendar. Decide, under the provisions of the
Negotiable Instruments Act, 1881 whether the said acts of Bholenath
constitute an offence? (module)

Hint - the act of Bholenath, i.e., his request of stop

payment constitutes an offence under the provisions
of the Negotiable Instruments Act, 1881.
 * Inland Instrument or Foreign
Instrument [Sec. 11 & 12]
 Foreign Instrument  which is not inland
 Inland Instrument  (1) Drawn in India
+
(2) Payable in India
or
(3) Drawn upon Indian resident
Condition no. (1) Should always satisfy & atleast 1 condition should satisfy out of (2) & (3)
 Inland remains inland even if endorsed in foreign country
 Foreign bill  liability of (Sec. 134)

Maker/ Drawer Acceptor / indorser

Place where Where instrument

instrument made is payable
Example
A bill of exchange is drawn by A in Berkley where
the rate of interest is 15% and accepted by B
payable in Washington where the rate of interest is
6%. The bill is indorsed in India and is
dishonoured. An action on the bill is brought
against B in India. He is liable to pay interest at the
rate of 6% only. But if A is charged as drawer, he is
liable to pay interest at 15%.
Question
Which is not an Inland Instrument: (module)
a.P/N made in India + payable in India + drawn upon person resident
in India
b.P/N made in India + payable in India + drawn upon person resident
outside India
c.P/N made in India + payable outside India + drawn upon person
resident in India
d.P/N made in India + payable outside India + drawn upon person
resident outside India
Answer

D
 Question
State with reasons whether each of the following instruments is an Inland
Instrument or a Foreign Instrument:
1. A bill drawn in Delhi upon a merchant in Agra and accepted payable in
London.
2. A bill drawn in Delhi upon a merchant in London and accepted payable
in Agra.
3. A bill drawn in Delhi upon a merchant in London and accepted payable
in London.
4. A bill drawn in London upon a merchant in Agra and accepted payable
in Delhi.
5. A bill drawn in Delhi on a merchant in Agra but endorsed in London.
6. A bill drawn in London on a merchant in Agra and endorsed in Delhi.
Solution
1. Inland
2. Inland
3. Foreign
4. Foreign
5. Inland
6. Foreign
 *Inchoate Instrument [Sec. 20]

 Valid + Wholly Partially Blank


SSD Signed
Stamped
Delivered
 Effect
1) Holder / original parties can recover only upto consideration between
parties i.e. amount intended to be paid when made.
2)Holder in due course (HDC) can claim any amt. mentioned in instrument
subject to stamp duty
 Question of Inchoate Instrument
Played with
Actual Consideration  50 Cr.
Hardik Pandya

 Gave P.N  by mistake not mentioned amt

Wrote 60 Cr. Gifted to


Gifted Took Gifted

Against consideration To
Ritika
Ishan Kishan Rishabh Pant Rohit Sachdev
Obtained Instrument
Note:
1) Holder in Due Course (HDC) means (1) Against Consideration

2) If not HDC then holder

(2) Before Maturity
3) Holder gets title of transferor
4) HDC gets better title than transferor (3) In good faith
Solution of Inchoate Instument
If Instrument held by
following till maturity They can recoer
• Original party
Hardik Pandya • Can recover to amt of consideration between immediate party
• 50 cr

• Gift so holder only

Ishan • Gets title of transferor Hardik
• 50 Cr.

Rishabh • Gift so Holder only

• Gets Title of transferor Ishan
• 50 Cr.
• HDC
Rohit • Can Recover amt mentioned
• 60 Cr.

• Holder
Ritika • Gets Title of Transferor Rohit
• 60 Cr.
 *Ambigous Instrument [Sec. 17]

 An instrument which is vague and cannot be clearly

identified either as a bill of exchange, or as a
promissory note
 Holder as to assume one and transferred accordingly
Question
An instrument which is vague and cannot be
clearly identified either as a bill of exchange, or
as a promissory note, is called as: (module)
a) bearer instrument
b) Ambiguous instrument
c) Order instrument
d) Inland instrument
Answer

B
Question
Negotiable Instrument which can be treated either
P/N or BOE, is known as: (module)
a.Inland Instrument
b.Inchoate Instrument
c.Ambiguous Instrument
d.Foreign Instrument
Answer

C
 Negotiation (transfer)

Bearer Instrument Order Instrument

Indorsement (sign)
By mere delivery
& delivery
• Delivery can be actual or constructive
• If delivered to transferee’s agent  delivery 
• X drew a cheque for Rs. 50,000 payable to Y and delivered it to him. Y
indorsed the cheque in favour of Z but kept it in his table drawer.
Subsequently, Y died, and cheque was found by Z in Y’s table drawer. In this
case, Z does not become the holder of the cheque as the negotiation was not
completed by delivery of the cheque to him.
Question
A negotiable instrument is an instrument which
is freely transferable from one person to
another by: (module)
a.Simple delivery
b.Indorsement and delivery
c.Indorsement
d.Registered post
Answer

B
Question
Order Instrument can be negotiated by: (module)
a.By delivery only
b.By endorsement only
c.By endorsement & delivery
d.None of above
Answer

C
M drew a cheque amounting to ` 2 lakh payable to N and
subsequently delivered to him. After receipt of cheque N
indorsed the same to C but kept it in his safe locker. After
sometime, N died, and P found the cheque in N’s safe locker.
Does this amount to Indorsement under the Negotiable
Instruments Act, 1881? (module)
• No, P does not become the holder of the cheque as
the negotiation was not completed by delivery of the
cheque to him. (Section 48, the Negotiable
Instruments Act, 1881)
M owes money to N. Therefore, he makes a promissory note for the
amount in favor of N, for safety of transmission he cuts the note in
half and posts one half to N. He then changes his mind and calls
upon N to return the half of the note which he had sent. N requires M
to send the other half of the promissory note. Decide how rights of
the parties are to be adjusted. (module)

Hint -Delivery refers to the whole of the instrument and

not merely a part of it. Delivery of half instrument cannot
be treated as constructive delivery of the whole. So, the
claim of N to have the other half of the P/N sent to him is
not maintainable. M is justified in demanding the return of
the first half sent by him. He can change his mind and
refuse to send the other half of the P/N.
 Presentment for acceptance Presentment of Promissory Note for
(Only for BOE) sight

BOE payable after Must be presented within a P/N payable Must be presented
sight must reasonable time & in business at a certain within a reasonable
hours on a business day. period after time & in business
(Note : 48 hours, excluding sight hours on a business
public holidays, are given to day.
drawee for acceptance

In default of such No party liable If Drawee

presentment thereto not found In default of No party liable thereto
after such
reasonable presentment
If BOE is directed Must be search,
to drawee at a presented at that BOE is
particular place place dishonored
.
 Rules regarding presentment for payment (P/N, BOE, CH)
To whom Maker (P/N), Acceptor (BOE), Drawee (CH)
If default in presentment No party liable thereto
Exception If P/N is payable on demand and is not payable at a specified place, no
presentment is necessary.
Time During usual business hours
If instrument payable after Must be presented for payment at maturity
date or sight
P/N payable by Must be presented for payment on 3rd day after date fixed for payment of
instalments each instalment.
Instrument payable at Must be presented for payment at that place.
specified place
Where no exclusive place Must be presented for payment at the place of business (if any) or at the
specified usual residence
No known place of Presentment may be made to him in person wherever he can be found
business or residence
Instrument payable on Must be presented for payment within a reasonable time after it is
demand received by the holder.
Note: Delay in presentment for acceptance or payment is excused if the delay is caused by
circumstances beyond the control of the holder.
* When Presentment for payment unnecessary [Sec. 76]

Instrument dishonored on due date

CA  FEW  KID  Unnecessary
C  Closed POB during business day / hrs  if payable at POB.

A  Absent from place  if instrument payable at some place.

F  If cannot be Found after due search place not specified

E  Expressed to pay  notwithstanding non presentment

W  Waives to Present
Part payment
K  Knowledge of Non-Presentment
Promise to pay on future date
I  Party Intentionally prevents presentment
D  No Damages suffered  By Drawer  due to non Presentment
 Rules as to Compensation (Sec. 117)

In case of dishonor of NI, holder can claim:

1) Amount due on NI
2)Expenses incurred in presenting, noting &
protesting.
3)Interest 18% p.a. from due date of payment to
date of realization.
Note: In case of foreign currency, current rate of exchange.