The negotiable instruments act_

The Negotiable The Negotiable Instruments Act, 1881Instruments Act, 1881

IntroductionIntroduction

The law relating to negotiable instruments is The law relating to negotiable instruments is contained in the Negotiable Instruments contained in the Negotiable Instruments Act, 1881 which applies and extends to the Act, 1881 which applies and extends to the whole of India.whole of India.

Definition-Negotiable InstrumentDefinition-Negotiable Instrument

Sec 13 (1) of N I Act states that Sec 13 (1) of N I Act states that

““A negotiable instrument means a A negotiable instrument means a promissory note, bill of exchange or promissory note, bill of exchange or cheque payable either to order or to cheque payable either to order or to bearer”. bearer”.

Negotiable InstrumentsNegotiable Instruments

Definition:Definition: The word The word negotiablenegotiable means ‘transferable by delivery,’ and means ‘transferable by delivery,’ and The word The word instrument instrument means ‘a written document by which a means ‘a written document by which a

right is created in favour of some person.’ right is created in favour of some person.’ Thus, the term “Thus, the term “negotiable instrumentnegotiable instrument” literally means ‘a ” literally means ‘a

written document which creates a right in favour of somebody written document which creates a right in favour of somebody and is freely transferable by delivery.’and is freely transferable by delivery.’

A negotiable instrument is a piece of paper which entitles a A negotiable instrument is a piece of paper which entitles a person to a certain sum of money and which is transferable from person to a certain sum of money and which is transferable from one to another person by a delivery or by endorsement and one to another person by a delivery or by endorsement and delivery.delivery.

Types of Negotiable InstrumentsTypes of Negotiable Instruments

Negotiable instruments are of two types which are as Negotiable instruments are of two types which are as follows:follows:

• Negotiable Instruments recognized by status:Negotiable Instruments recognized by status: e.g. Bills of exchange, cheque and promissory notes. e.g. Bills of exchange, cheque and promissory notes.

• Negotiable instruments recognized by usage or Negotiable instruments recognized by usage or customs of trade:customs of trade: e.g. Bank notes, exchequer bills, share warrants, bearer e.g. Bank notes, exchequer bills, share warrants, bearer debentures, dividend warrants, share certificatedebentures, dividend warrants, share certificate

Essential Features of a Negotiable Essential Features of a Negotiable Instrument:Instrument:

1.1.NegotiabilityNegotiability- it means transferability. It can - it means transferability. It can be transferred without any formality.be transferred without any formality.

2. 2. PropertyProperty- The possessor of negotiable - The possessor of negotiable instrument is presumed to be the owner of the instrument is presumed to be the owner of the property contained there in.property contained there in.

3. 3. Equivalent to cashEquivalent to cash- Even though is a - Even though is a document it is as good as cash.document it is as good as cash.

4.4.RecoveryRecovery- The transferee of the negotiable - The transferee of the negotiable instrument can sue in his own name, in case instrument can sue in his own name, in case of dishonor for the recovery of the amount of dishonor for the recovery of the amount with out giving notice to the debtor.with out giving notice to the debtor.

5. 5. ContractContract- A negotiable instrument is a - A negotiable instrument is a contract to pay money.contract to pay money.

6. 6. Prompt paymentPrompt payment-A negotiable instrument -A negotiable instrument enables the holder of the instrument to enables the holder of the instrument to expect prompt payment.expect prompt payment.

7. A negotiable instrument 7. A negotiable instrument can be can be transferred transferred any number of times till it is at any number of times till it is at maturity and the holder of the instrument maturity and the holder of the instrument need not give any notice of transfer to the need not give any notice of transfer to the debtordebtor

Types of negotiable instrumentsTypes of negotiable instruments..A.A. Negotiable instruments recognized by statute.Negotiable instruments recognized by statute.1) Promissory notes1) Promissory notes2) Bill of exchange2) Bill of exchange3) Cheque3) ChequeB.B. Negotiable instruments recognized by custom.Negotiable instruments recognized by custom.1. Money order1. Money order2. Fixed deposit receipts2. Fixed deposit receipts3. Share certificates3. Share certificates4. Postal orders4. Postal orders5. National saving certificates5. National saving certificates

Promissory NotePromissory Note

DefinitionDefinition::

According to Section 4, “According to Section 4, “A promissory note is A promissory note is an instrument in writing (not being a bank-an instrument in writing (not being a bank-note or a currency-note) containing an note or a currency-note) containing an unconditional undertaking, signed by the unconditional undertaking, signed by the maker, to pay a certain sum of money only maker, to pay a certain sum of money only to, or to the order of, a certain person, or to to, or to the order of, a certain person, or to the bearer of the instrument.” the bearer of the instrument.”

Specimen of a Promissory NoteSpecimen of a Promissory Note

Parties to a Promissory NoteParties to a Promissory NoteThere are primarily two parties involved in a promissory note. They There are primarily two parties involved in a promissory note. They

are:are:(i) The Maker or Drawer: (i) The Maker or Drawer: The person who makes the note and The person who makes the note and

promises to pay the amount stated therein. In the above promises to pay the amount stated therein. In the above specimen, Sanjeev is the maker or drawer.specimen, Sanjeev is the maker or drawer.

(ii) The Payee – (ii) The Payee – the person to whom the amount is payable. In the the person to whom the amount is payable. In the above specimen it is Ramesh.above specimen it is Ramesh.

In course of transfer of a promissory note by payee and others, the In course of transfer of a promissory note by payee and others, the parties involved may be –parties involved may be –

(a) The Endorser – (a) The Endorser – the person who endorses the note in favour of the person who endorses the note in favour of another person. In the above specimen if Ramesh endorses it in another person. In the above specimen if Ramesh endorses it in favour of Ranjan and Ranjan also endorses it in favour of favour of Ranjan and Ranjan also endorses it in favour of Puneet, then Ramesh and Ranjan both are endorsers.Puneet, then Ramesh and Ranjan both are endorsers.

(b) The Endorsee – (b) The Endorsee – the person in whose favour the note is the person in whose favour the note is negotiated by endorsement. In the above, it is Ranjan and then negotiated by endorsement. In the above, it is Ranjan and then Puneet.Puneet.

Essentials of Essentials of Promissory NotePromissory Note

1.1. It must be in writing:It must be in writing:• A promissory note has to be in writingA promissory note has to be in writing• An oral promise to pay does not become a An oral promise to pay does not become a

promissory notepromissory note• The writing may be on any paper or bookThe writing may be on any paper or book• IllustrationsIllustrations: A signs the instruments in the : A signs the instruments in the

following terms:following terms: ““I promise to pay B or order Rs. 500”I promise to pay B or order Rs. 500” ““I acknowledge myself to be indebted to B in Rs. 1, 000 I acknowledge myself to be indebted to B in Rs. 1, 000

to be paid on demand, for value received”to be paid on demand, for value received”

Both the above instruments are valid Both the above instruments are valid promissory notes.promissory notes.


2. It must contain a promise or undertaking to pay:2. It must contain a promise or undertaking to pay:• There must be a promise or an undertaking to payThere must be a promise or an undertaking to pay• The undertaking to pay may be gathered either from express words or by The undertaking to pay may be gathered either from express words or by

necessary implicationnecessary implication• A mere acknowledgement of indebtedness is not a promissory note, A mere acknowledgement of indebtedness is not a promissory note,

although it is valid as an agreement and may be sued upon as suchalthough it is valid as an agreement and may be sued upon as such• IllustrationsIllustrations: A signs the instruments in the following terms:: A signs the instruments in the following terms:

““Mr. B I owe you Rs. 1,000”Mr. B I owe you Rs. 1,000”““I am liable to pay to B Rs. 500”I am liable to pay to B Rs. 500”

The above instruments are not promissory notes as there is no The above instruments are not promissory notes as there is no undertaking or promise to pay. There is only an acknowledgement of undertaking or promise to pay. There is only an acknowledgement of indebtedness.indebtedness.

• Where A signs the instrument in the following terms:Where A signs the instrument in the following terms:““I acknowledge myself to be indebted to B in Rs. 1, 000, to be paid on demand, I acknowledge myself to be indebted to B in Rs. 1, 000, to be paid on demand, for value received,” there is a valid promissory notefor value received,” there is a valid promissory note


3. 3. The promise to pay must be unconditional:The promise to pay must be unconditional:• A promissory note must contain an unconditional promise to payA promissory note must contain an unconditional promise to pay• The promise to pay must not depend upon the happening of some The promise to pay must not depend upon the happening of some

uncertain event, i.e., a contingency or the fulfillment of a conditionuncertain event, i.e., a contingency or the fulfillment of a condition• IllustrationsIllustrations: A signs the instruments in the following terms:: A signs the instruments in the following terms:

““I promise to pay B Rs. 500 seven days after my marriage with C”I promise to pay B Rs. 500 seven days after my marriage with C” ““I promise to pay B Rs. 500 as soon as I can”I promise to pay B Rs. 500 as soon as I can”

• The above instruments are not valid promissory notes as the payment is The above instruments are not valid promissory notes as the payment is made depending upon the happening of an uncertain event which may made depending upon the happening of an uncertain event which may never happen and as a result the sum may never become payablenever happen and as a result the sum may never become payable

4. It must be signed by the maker:4. It must be signed by the maker:• It is imperative that the promissory note should be duly authenticated by It is imperative that the promissory note should be duly authenticated by

the ‘signature’ of the makerthe ‘signature’ of the maker• ‘‘Signature’ means the writing or otherwise affixing a person’s name or a Signature’ means the writing or otherwise affixing a person’s name or a

mark to represent his name, by himself or by his authority with the mark to represent his name, by himself or by his authority with the intention of authenticating a documentintention of authenticating a document


5. The maker must be a certain person:5. The maker must be a certain person: The instrument must itself indicate with certainty who is the The instrument must itself indicate with certainty who is the

person or are the persons engaging himself or themselves to payperson or are the persons engaging himself or themselves to pay Alternative promisors are not permitted in law because of the Alternative promisors are not permitted in law because of the

general rule that “where liability lies no ambiguity must lie”general rule that “where liability lies no ambiguity must lie”

6. The payee must be certain:6. The payee must be certain: Like the maker the payee of a pronote must also be certain on Like the maker the payee of a pronote must also be certain on

the face of the instrumentthe face of the instrument A note in favour of fictitious person is illegal and voidA note in favour of fictitious person is illegal and void A pronote mad epayable to the maker himself is a nullity, the A pronote mad epayable to the maker himself is a nullity, the

reason being the same person is both the promisor and the reason being the same person is both the promisor and the promiseepromisee


77. The sum payable must be certain:. The sum payable must be certain: For a valid pronote it is also essential that the sum of money promised For a valid pronote it is also essential that the sum of money promised

to be payable must be certain and definiteto be payable must be certain and definite The amount payable must not be capable of contingent additions or The amount payable must not be capable of contingent additions or

subtractionssubtractions IllustrationsIllustrations: A signs the instruments in the following terms:: A signs the instruments in the following terms:

• ““I promise to pay B Rs. 500 and all other sums which shall be due to I promise to pay B Rs. 500 and all other sums which shall be due to him”him”

• ““I promise to pay B Rs. 500, first deducting thereout any money which he I promise to pay B Rs. 500, first deducting thereout any money which he may owe me”may owe me”

The above instruments are invalid as promissory notes because the The above instruments are invalid as promissory notes because the exact amount to be paid by A is not certainexact amount to be paid by A is not certain

8. 8. The amount payable must be in legal tender money of India:The amount payable must be in legal tender money of India: A document containing a promise to pay a certain amount of foreign A document containing a promise to pay a certain amount of foreign

money or to deliver a certain quantity of goods is not a pronotemoney or to deliver a certain quantity of goods is not a pronote

Bill of ExchangeBill of Exchange Definition:Definition:

Section 5 of the Negotiable Instruments Act defines a Bill of Exchange Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as follows:as follows:

““A bill of exchange is an instrument in writing containing an A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain 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 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.”certain person or to the bearer of the instrument.”

IllustrationIllustration::Mr. X purchases goods from Mr. Y for Rs. 1000/-Mr. X purchases goods from Mr. Y for Rs. 1000/-

Mr. Y buys goods from Mr. S for Rs. 1000/- Mr. Y buys goods from Mr. S for Rs. 1000/- Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be

nothing but a bill of exchange.nothing but a bill of exchange.

Specimen of Bill of ExchangeSpecimen of Bill of Exchange

Parties to a Bill of ExchangeParties to a Bill of ExchangeThere are three parties involved in a bill of exchangeThere are three parties involved in a bill of exchange(i) The Drawer – (i) The Drawer – The person who makes the order for making The person who makes the order for making

payment. In the above specimen, Rajiv is the drawer.payment. In the above specimen, Rajiv is the drawer.(ii) The Drawee – (ii) The Drawee – The person to whom the order to pay is made. The person to whom the order to pay is made.

He is generally a debtor of the drawer. It is Sameer in this case.He is generally a debtor of the drawer. It is Sameer in this case.(iii) The Payee – (iii) The Payee – The person to whom the payment is to be made. The person to whom the payment is to be made.

In this case it is Tarun.In this case it is Tarun.

The drawer can also draw a bill in his own name thereby he himself The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words in the bill would be becomes the payee. Here the words in the bill would be Pay to Pay to us or orderus or order. .

In a bill where a time period is mentioned, just like the above In a bill where a time period is mentioned, just like the above specimen, is called a specimen, is called a Time BillTime Bill. .

But a bill may be made payable on demand also. This is called a But a bill may be made payable on demand also. This is called a Demand BillDemand Bill..

Essentials of a Bill of ExchangeEssentials of a Bill of Exchange

1.1. It must be in writingIt must be in writing2.2. It must contain an order to pay. A mere request to It must contain an order to pay. A mere request to

pay on account, will not amount to an orderpay on account, will not amount to an order3.3. The order to pay must be unconditional The order to pay must be unconditional 4.4. It must be signed by the drawerIt must be signed by the drawer5.5. The drawer, drawee and payee must be certain. A bill The drawer, drawee and payee must be certain. A bill

cannot be drawn on two or more drawees but may be cannot be drawn on two or more drawees but may be made payable in the alternative to one of two or more made payable in the alternative to one of two or more payeespayees

6.6. The sum payable must be certainThe sum payable must be certain7.7. The bill must contain an order to pay money onlyThe bill must contain an order to pay money only8.8. It must comply with the formalities as regards date, It must comply with the formalities as regards date,

consideration, stamps, etcconsideration, stamps, etc

Difference between pronote and bill of Difference between pronote and bill of exchangeexchange

1.1. Two partiesTwo parties

2.2. Unconditional promise to Unconditional promise to paypay

3.3. Maker of a note is the dr. Maker of a note is the dr. & he himself undertakes to & he himself undertakes to paypay

4.4. Liability of maker is Liability of maker is primary.primary.

5.5. A pro-note cannot be made A pro-note cannot be made payable to the maker payable to the maker himself.himself.

6.6. A note requires no A note requires no acceptanceacceptance

1.1. Three partiesThree parties

2.2. Unconditional order to payUnconditional order to pay

3.3. The drawer of a bill is the The drawer of a bill is the creditor who directs the creditor who directs the drawee (his dr.) to paydrawee (his dr.) to pay

4.4. Liability of maker or Liability of maker or drawer is secondary.drawer is secondary.

5.5. Drawer and payee may be Drawer and payee may be same.same.

6.6. It must be accepted by It must be accepted by draweedrawee

ChequeCheque

A cheque is the means by which a person A cheque is the means by which a person who has fund in the hand of a bank who has fund in the hand of a bank withdraws the same or some part of it.withdraws the same or some part of it.

A cheque is a kind of bill of exchange but it A cheque is a kind of bill of exchange but it has additional qualification namely-has additional qualification namely-

1- it is always drawn on a specified banker 1- it is always drawn on a specified banker andand

2-it is always payble on demand without any 2-it is always payble on demand without any days of grace.days of grace.

Difference between bill of exchange and Difference between bill of exchange and chequecheque

Bill of ExchangeBill of Exchange1. A bill of exchange may 1. A bill of exchange may

be drawn on any personbe drawn on any person2. A bill must be accepted 2. A bill must be accepted

by the drawee before by the drawee before making payment upon itmaking payment upon it

3. A bill is entitled to 3 3. A bill is entitled to 3 days of gracedays of grace

ChequeCheque1. But a cheque is always 1. But a cheque is always

drawn on a bankdrawn on a bank

2. But a cheque does not 2. But a cheque does not require acceptancerequire acceptance

3. A cheque is not entitled 3. A cheque is not entitled to any days of graceto any days of grace

4. A bill may be payable 4. A bill may be payable on demand or after the on demand or after the expiry of a certain expiry of a certain periodperiod

5. No need to crossed5. No need to crossed

6. A bill must be stamped6. A bill must be stamped

7. A payment of a bill 7. A payment of a bill cannot be cannot be countermandedcountermanded

8.A bill may be noted or 8.A bill may be noted or protested for dishonourprotested for dishonour

4. But a cheque is always 4. But a cheque is always payable on demand.payable on demand.

5. A cheque may be 5. A cheque may be crossedcrossed

6. A cheque does not 6. A cheque does not require any stamprequire any stamp

7. Payment may be 7. Payment may be countermanded by the countermanded by the drawerdrawer

8. Not required8. Not required

THANK YOUTHANK YOU

•

TYPES OF INSTRUMENTTYPES OF INSTRUMENT

1.Transfer- Bearer , Order1.Transfer- Bearer , Order2. Location- Inland , Foreign2. Location- Inland , Foreign3. Payment- Demand , Time3. Payment- Demand , Time4. Others- Accomodation, 4. Others- Accomodation, Fititous, Ambiguous, InchoateFititous, Ambiguous, Inchoate

Types of ChequesTypes of ChequesTwo Types:Two Types:1. Open Cheques: 1. Open Cheques: An open cheque is one which is payable in cash An open cheque is one which is payable in cash

across the counter of the bankacross the counter of the bank

2. Crossed Cheques: 2. Crossed Cheques: A crossed cheque is one which has two short A crossed cheque is one which has two short parallel lines marked across its face. It can be paid only to another parallel lines marked across its face. It can be paid only to another banker.banker.

The advantage of crossing is that it reduces the danger of The advantage of crossing is that it reduces the danger of unathorised persons getting possession of a cheque and cashing it. unathorised persons getting possession of a cheque and cashing it.

A crossed cheque can only be cashed through a bank of which the A crossed cheque can only be cashed through a bank of which the payee of the cheque is a customer.payee of the cheque is a customer.

3.3. Marking of chequesMarking of cheques

TYPES OF A CHEQUETYPES OF A CHEQUE Bearer ChequeBearer Cheque Cross ChequeCross Cheque

Cheque Crossed SpeciallyCheque Crossed Specially

Restrictive Crossing (A/c Payee Only)Restrictive Crossing (A/c Payee Only)

and Company

& Co

Not Negotiable

and Co.

Not Negotiable

A/C SBIBank of India

Bank of India

Not Negotiable

A/C PAYEE ONLY

Bank of IndiaA/C PAYEE

Not Negotiable

A/C PAYEE

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DISHONOUR OF A CHEQUE ON DISHONOUR OF A CHEQUE ON GROUNDS OF INSUFFICIENCY OF GROUNDS OF INSUFFICIENCY OF

FUNDSFUNDS The drawer, under Sec. 138, may be punished The drawer, under Sec. 138, may be punished

with imprisonment upto 2 years (earlier I year) or with imprisonment upto 2 years (earlier I year) or with a fine up to twice the amount of the cheque with a fine up to twice the amount of the cheque or with both. following conditions must be or with both. following conditions must be satisfied:satisfied:

Insufficiency of funds Insufficiency of funds Payment against an enforceable debtPayment against an enforceable debt Cheque should be presented to the paying bank Cheque should be presented to the paying bank

within the validity period within the validity period Payee to serve Default Notice, demanding Payee to serve Default Notice, demanding

payment within 30 days payment within 30 days

DishonorDishonor It may be by non acceptance or non paymentIt may be by non acceptance or non payment A bill of exchange can be dishonored by non A bill of exchange can be dishonored by non

acceptance in the following ways-acceptance in the following ways- Does not accept 48 hours from the time of Does not accept 48 hours from the time of

presentmentpresentment drawee is fictitious persondrawee is fictitious person Drawee has become insolvent or deadDrawee has become insolvent or dead Drawee is incompetentDrawee is incompetent

DischargeDischarge

““Discharge means release from obligation”.Discharge means release from obligation”. By PaymentBy Payment By express waiverBy express waiver By cancellationBy cancellation By material alteration or lapse of time.By material alteration or lapse of time.

THANK YOUTHANK YOU

NegotiationNegotiation

One of the essentials feature of a negotiable One of the essentials feature of a negotiable instrument is its transferability. A instrument is its transferability. A negotiable instrument may be transferred negotiable instrument may be transferred from one person to another in either of the from one person to another in either of the followings way-followings way-

1-By negotiation1-By negotiation2-By assignment2-By assignment

NegotiationNegotiation

The transfer of an instrument by one party to The transfer of an instrument by one party to another so as to constitute the transferee another so as to constitute the transferee a holder is called Negotiation.a holder is called Negotiation.

Negotiation means as the process by which Negotiation means as the process by which a third party is constituted the holder of the a third party is constituted the holder of the instrument so as to entitle him to the instrument so as to entitle him to the possession of the same and to receive the possession of the same and to receive the amount due thereon in his own name.amount due thereon in his own name.

Modes of negotiationModes of negotiation By delivery By delivery Ex-A the holder of a negotiable instrument Ex-A the holder of a negotiable instrument

payble to bearer , delivers it to B’s agent payble to bearer , delivers it to B’s agent to keep it for B. The instrument has to keep it for B. The instrument has negotiated.negotiated.

By endrosementBy endrosement

AssignmentAssignment

When a holder of a bill note or cheque When a holder of a bill note or cheque transfer the same to another, he in fact transfer the same to another, he in fact gives his right to receive the payment of gives his right to receive the payment of the instrument to the transferee.the instrument to the transferee.

Holder & Holder in due courseHolder & Holder in due course Holder means any person entitled in his Holder means any person entitled in his

own name to the possession a promissory own name to the possession a promissory note bill of exchange or cheque and to note bill of exchange or cheque and to recover or receive the amount due recover or receive the amount due thereon from the parties thereon. A holder thereon from the parties thereon. A holder must therefore have the possession of the must therefore have the possession of the instrument and also the right to recover instrument and also the right to recover the money in his own name.the money in his own name.

““Holder in due course means any person Holder in due course means any person who for consideration became the who for consideration became the possessor of a promissory note, billl of possessor of a promissory note, billl of exchange or cheque, if payble to the exchange or cheque, if payble to the bearer or the payee or indrosee there of ,if bearer or the payee or indrosee there of ,if payble to the order before the amount payble to the order before the amount mentioned in it became payble , and mentioned in it became payble , and without having sufficient cause to believe without having sufficient cause to believe that any defect existed in the title of the that any defect existed in the title of the person from who he derived his title’person from who he derived his title’

Difference between holder and Difference between holder and holder in due courseholder in due course

Meaning-holder means any person entitled in his own Meaning-holder means any person entitled in his own name possession of the instrument in other hand holder name possession of the instrument in other hand holder in due course a holder who takes the instrument in good in due course a holder who takes the instrument in good faith for consideration before it is overdue and without faith for consideration before it is overdue and without any notice of defect in the title of the who transferred it to any notice of defect in the title of the who transferred it to him.him.

Consideration-Consideration- Title-Title- Liability-sue to all the parties by holder in due courseLiability-sue to all the parties by holder in due course MaturityMaturity

Law

The negotiable instruments act_