NEGOTIABLE INSTRUMENT

ACT1881
 INTRODUCTION TO NEGOTIABLE 2
INSTRUMENTSACT, 1881
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. The Act operates subject to the provisions of Sections
31 and 32 of the Reserve Bank of India Act, 1934.
MEANING OF NEGOTIABLE 3
INSTRUMENT
The word negotiable means „transferable by delivery‟, and word
instrument means „a written document by which a right is created in favour
of some person. Thus, the term “negotiable instrument” means “a written
document transferable by delivery”.
According to Section 13 (1) of the Negotiable Instruments Act,
“A negotiable instrument means a promissory note, bill of exchange, or
cheque payable either to order or to bearer”. “A negotiable instrument
may be made payable to two or more payees jointly, or it may be made
payable in the alternative to one of two, or one or some of several payees”
[Section 13(2)].
FEATURESOF NEGOTIABLE 4
INSTRUMENTS
Writing and Signature
Money
Freely Transferable
Title of Holder Free from all Defects
Notice
Presumption
Special Procedure
Popularity
Evidence
TYPESOF NEGOTIABLE 5
INSTRUMENTS
There are two types of Negotiable Instruments:
1. Instruments Negotiable by Statute:
The Negotiable Instruments Act mentions only three kinds of
negotiable instruments (Section 13). These are:
1. Promissory Notes
2. Bills of Exchange, and
3. Cheques
2. Instruments Negotiable by Custom or Usage:
There are certain other instruments which have acquired the
character of negotiability by the usage or custom of trade. For example:
Exchequer bills, Bank notes, Share warrants, Circular notes, Bearer
debentures, Dividend warrants, Share certificates with blank transfer
deeds, etc.
PROMISSORY NOTES 6

Section 4 of the Act defines, “A promissory note is an instrument in

writing (note being a bank-note or a currency note) 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.”
The person who makes the promissory note and promises to pay is
called the maker. The person to whom the payment is to be made is called
the payee.
CHARACTERISTICS OF A 7
PROMISSORY NOTE
It is an Instrument in Writing
It is a Promise to Pay
Signed by the Maker
Other Formalities
Definite and Unconditional Promise
Promise to Pay Money Only
Maker must be a Certain Person
Payee must be Certain
Sum Payable must be Certain
It may be Payable on Demand or After a Definite Period of Time
It cannot be Made Payable to Bearer on Demand
PARTIESTO A PROMISSORY NOTE 8

Maker:
Maker is the person who promises to pay the amount statedin the
note.
Payee:
Payee is the person to whom the amount of the note ispayable.
Holder:
He is either the payee or the person to whom the note may
have been endorsed.
SPECIMEN OF PROMISSORY NOTE 9

Rs. 10,000
Lucknow April
10, 2013

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

Stamp

To, Sd/-
Shri Ramesh, Ram
B-20, Green Park,
Mumbai.
(Maker)
BILLOF EXCHANGE 10

According to Section 5 of the act, 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”. It isalso called a Draft.

Special Benefits of Bill ofExchange:

A bill of exchange is a double secured instrument.
In case of immediate requirement, a Bill may be discounted with a bank.
ESSENTIALELEMENTSOF BILLOF 11
EXCHANGE
It must be in Writing.
Order to pay
Drawee
Signature of the Drawer
Unconditional Order
Parties
Certainty of Amount
Payment in Kind is not Valid
Stamping
Cannot be made Payable to Bearer on Demand
PARTIESTO A BILLOFEXCHANGE 12

Drawer:
The maker of a bill of exchange is calledthe 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 BILLOF EXCHANGE 13

Rs. 10,000

Mumbai
April 10, 2013

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

To,
Sushil
B-20, Green Park,
Lucknow - 226020.

(Drawer) Stamp
In case of need with Accepted
Canara Bank, Delhi. Sushil Sd/- Ram
(Drawer)
CLASSIFICATION OF BILLOF 14
EXCHANGE
Inland and Foreign Bills [Section 11and12]
Inland Bill:
It is drawn in India on a person residing in India outside whether payable in or
India; or
It is drawn in India on a person residing outside India but payable in India.

Foreign Bill:
A bill drawn in India on a person residing outside India and made payable outside
India.
Drawn upon a person who is the resident of a foreign country.
CLASSIFICATION OF BILLOF 15
EXCHANGE (Cont.…)
Time and Demand Bills:
Time Bill: A bill payable after a fixed time is termed as a time bill. A bill payable
“after date” isa timebill.
Demand Bill: A bill payable at sight or on demand istermed as a demand bill.
Trade and Accommodation Bills:
Trade Bill: A bill drawn and accepted for a genuine trade transaction is termed as
“trade bill”.
Accommodation Bill: A bill drawn and accepted not for a genuine trade
transaction but only to provide financial help to some party is termed as an
“accommodation bill”.
CHEQUE 16

According to Section 6 of the act, A cheque is “a bill of

exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand”. A cheque is also, therefore, a bill of exchange
with two additional qualification:
It is always drawn on a specifiedbanker.
It is always payable on demand.

Special Benefits of Bill ofExchange:

A bill of exchange is a double secured instrument.
In case of immediate requirement, a Bill may be discounted with a bank.
ESSENTIALELEMENTSOF A CHEQUE 17

In writing
Express Order to Pay
Definite and Unconditional Order
Signed by the Drawer
Order to Pay CertainSum
Order to Pay Money Only
Certain Three Parties
Drawn upon a SpecifiedBanker
Payable on Demand
PARTIESTO ACHEQUE 18

Drawer:
Drawer is the person who draws the cheque.
Drawee:
Drawee is the drawer‟s banker on whom the cheque has been drawn.
Payee:
Payee is the person who is entitled to receive the payment of a
cheque.
SPECIMEN OF CHEQUE 19

Kapoorthala Bagh,
Mumbai – 400033
IFSCode:MAHB0000316
D D M M Y Y Y Y

Pay ……………………………………………………………………………………………………………......
……………………………………………………………………………………………………. Or Bearer
Rupees ……………………………………………………………………………………………………………
………………………………………………………………………………………… …Rs.

A/c No.

SHANKAR GAJARE
Signature
Please signabove

“ΙΙ473792ΙΙ” 000240000 000000 10

TYPESOF A CHEQUE 20

Bearer Cheque
Cross Cheque

Cheque Crossed Specially

Restrictive Crossing (A/c Payee Only)

NEGOTIATION 21

According to section 14 of the Act, „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.‟ The main purpose
and essence of negotiation is to make the transferee of a promissory note, a
bill of exchange or a cheque the holder there of.
Negotiation thus requires two conditions to be fulfilled,namely:
There must be a transfer of the instrument to another person;and
The transfer must be made in such a manner as to constitute the transferee
the holder of the instrument.
MODES OF NEGOTIATION 22
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‟sagent to keep it for B. The instrument has been negotiated.
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.
ENDORSEMENT [SECTION15] 23

The word „endorsement‟ in its literal sense means, writing on the back of
an instrument. But under the Negotiable Instruments Act it means, the writing of
one‟s name on the back of the instrument or any paper attached to it with the
intention of transferring the rights therein. Thus, endorsement is signing a
negotiable instrument for the purpose of negotiation. The person who effects an
endorsement is called an „endorser‟, and the person to whom negotiable
instrument istransferred by endorsement iscalled the „endorsee‟.

Who may Endorse /Negotiate [Section 51]:

Every Sole maker, drawer, payee or endorsee, or all of several joint
makers, drawers, payees or endorsees of a negotiable instrument may endorse
and negotiate the same if the negotiability of such instrument has not been
restricted or excluded as mentioned in Section 50.
ENDORSEMENT (Cont….) 24

Essentials of a Valid Endorsement:

It must be on the back or face of instrument or on a slip of paper annexed
thereto.
It must be signed by the endorser.
It must be completed by the delivery of theinstrument.
It must be made by the holder of the instrument.

Kinds of Endorsement:
Blank or General Endorsement
Full or Special Endorsement
Partial Endorsement
Restrictive Endorsement
Conditional Endorsement
Endorsement and Crossing of
Cheques

LEGAL ASPECTS OF BUSINESS

 Endorsement

 Definition of Endorsement:
Endorsement has been defined in sec.15 of the
Negotiable Instrument Act 1881 as follows:
“Where 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 annex thereto… he is said to
endorse the same, and is called the endorser.”
 Endorsement can be made either on the back of the
instrument or on the face thereof.

 Allonge: If the space available on the back has been

completely covered, a piece of paper may safely be
attached to the instrument and subsequent
endorsements may be made on that paper. The paper
so attached is known as “Allonge.”
 Significance of Endorsement

 An endorsement consists of two contracts, viz:

1. Contract of transfer of the property in the
instrument, and

2.Contract of a contingent assumption of liability on

the part of the endorser.
 The endorser of a negotiable instrument, by his act of
endorsing signifies the following to his endorsee and
to any subsequent holder that, when the instrument
left his hands:
1. He had a good title.
2. It was genuine in all respects at the time of
endorsement.
3. All previous endorsement were genuine.
4. To indemnify the loss due to dishonour.
5. Right of further negotiation to the endorsee.
 Kinds of Endorsement

 Blank Endorsement
 Special Endorsement
 Restrictive Endorsement
 Conditional Endorsement
 Sans recourse Endorsement
 Sans Frais Endorsement
 Facultative Endorsement
 Partial Endorsement
 Per pro Endorsement
DISHONOUR OF CHEQUE

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 DEFINITION

 The Negotiable Instruments Act, 1881 makes the

dishonour of cheques a criminal offence.
 Section 138 of NIA provides that the dishonour of the
cheques for the reasons:
a. “insufficiency of funds” and
b. Signature on the cheque does not match that in the
bank records.

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 KINDS OF DISHONOUR OF CHEQUE

1. Dishonour by non-acceptance.

2. Dishonour by non-payment is said to

be dishonoured.

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 S.91[14] of the Act speaks of dishonour by non-
acceptance. Presentment for acceptance is required
only in the case of a bill of exchange. Usually
acceptance and payment go together and this
usually happens in case an instrument is payable
after sight, thus often it is difficult to distinguish
the two because dishonour by non-payment is
usually dishonour by non-acceptance, and thus it is
only this bill of exchange which can be
dishonoured by non-acceptance and not a cheque as
in the case of a cheque no acceptance is required to
be taken to the banker and cheques are mainly
instruments payable at sight.
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 The second kind of dishonour, is that of dishonour
by non-payment. A negotiable instrument is said
to be dishonoured by non-payment when the
drawee of a cheque makes default in payment upon
being duly required to pay the same.
 Payment countermanded:
When the drawer of the cheques issues instructions
to the bank not to make any payment of a particular
cheque issued by him, the bank then stands
revoked from making payment on that cheque, this
is known as countermand of cheques by the
drawer.

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 Insufficiency of funds:
When there are no funds to meet the cheque or the
account of the drawer does not hold sufficient funds
to meet the whole credit amount of the cheque, the
banker is then justified in refusing the payment of
such a cheque. However where the account has
sufficient funds, the banker is under an obligation to
its customer of honouring the cheque presented to it.
 Non-applicability of funds:
Under S.31 of the Act it is the banker’s duty to
honour the cheque when funds which are lying in the
account of the drawer are applicable for the purpose.
Thus when the funds in the account are lying for
other purposes, the will necessarily dishonour the
cheque presented before it for payment. 7
 EFFECTS OF DISHONOUR OF CHEQUE
1. Taking of legal action. The payee/holder can take action
against the drawer of such a bill may take action on the exact
time of dishonouring of the bill. Thus the holder need not wait
for the bill to mature and then to take action for dishonouring
the same.
2. When a cheque is said to be dishonoured it loses its basic
characteristic of negotiability with immediate effect.
3. On dishonouring of a cheque, nothing prevents the holder
thereof to present it again particularly on being asked by the
drawer of the cheque.
4. Mere dishonouring of cheques does not give rise to a cause of
action in favour of the complainant but it accrues only after
the issue of demand notice and failure of the drawer to make
the payment.
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 WHEN DISHONOUR OF A CHEQUE
IS AN OFFENCE 

 Returning the cheque unpaid by the

drawee bank,
 Giving notice in writing to the drawer of
the cheque demanding payment of the
cheque amount,
 Failure of the drawer to make payment
within 15 days of the receipt of the notice.

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LIABILITY ON DISHONOUR OF CHEQUE

 Necessary Ingredients for Liability

 Civil Liability
 Criminal Liability

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 Necessary Ingredients for Liability:
1. The cheque must have been issued in favour of the
payee.
2. The cheque so issued must have been issued in
discharge, either in whole or in part, of a legally
enforceable debt or liability.
3. The cheque should have been presented for
encashment within six months of the date it bears or
within its specific validity period which is earlier;
4. The cheque should have been returned by the bank
unpaid, because the amount of money standing to
the credit of the account is insufficient or it exceeds
the amount arranged. 11
 Contd…

The payee should have given a notice of dishonour

to the drawer within 15 days of the receipt of
information by him from the bank regarding
dishonour of the cheque demanding payment of the
cheque amount.
The drawer should have failed to make payment
within 15 days of the receipt of notice.

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 Civil liability:

 Civil Liability is also arises when the cheque is

presented for the payment to the bank gets
dishonoured.
 The legal responsibility of paying money for damage
to another person's health, business, or property.
 Eg: Company directors face criminal and civil liability
for knowingly filing false accounts in the annual
report. Section 138 also provides for civil liability
which provides for fine twice the amount of
dishonored cheque.
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 Criminal Liability:
 A criminal liability is provided under section 138 of
the Act, which provides imprisonment for two years
or with fine which may extend to twice the amount
of the cheque, or with both.
 In case of dishonour of cheque the drawer of it may
be prosecuted under sections 417 and 420 of the
Indian Penal Code, 1960 (IPC). However, it all
depends on the circumstances of each case. Every
dishonour of a cheque is not cheating.

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