Negotiable Intruments

1. Negotiable
Instruments
Act, 1881
Module IV

2. Introduction
• The negotiable instrument is a document by which rights vested in a person can be
transferred to another person in accordance with the provisions of the Negotiable
Instruments Act, 1881.
• The Negotiable Instruments Act does not affect the provisions of Sections 31 and 32 of
the Reserve Bank of India Act, 1934. According to Section 31, no person (other than
Reserve Bank or the Central Government) can draw, accept, make or issue any bill of
exchange or promissory note payable to bearer on demand. Section 32 of the Reserve
Bank of India Act, 1934 provides that if a person issues bills or notes payable to bearer
on demand, or a note payable to bearer he shall be punishable with fine.
The word ‘negotiable’ means transferable from one person to another, and
the term ‘instrument’ means ‘any written document by which a right is
created in favor of some person.’

3. DEFINITION OF A NEGOTIABLE
INSTRUMENT
• “A ‘negotiable instrument’ means a promissory
note, bill of exchange or cheque payable either
to order or to bearer.”
• “An instrument can only be said to be fully
negotiable when the absolute ownership of the
property represented by the instrument vests
in the holder, so that
(1) he is not prejudiced by any defect in his
transferor’s title and
(2) he can sue on the instrument in his own
name.”
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4. MAIN FEATURES OF A
NEGOTIABLE INSTRUMENT
• Freely transferable
• Holder’s title free from defects
• The Holder can sue in his own name
• can be transferred infinitum
• subject to certain presumptions.
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5. PRESUMPTIONS AS TO
NEGOTIABLE INSTRUMENTS
• As to consideration
• As to date
• As to acceptance
• As to transfer
• As to the order of endorsements
• As to lost instruments
• As to holder-in-due course
• As to dishonour
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6. PROMISSORY NOTE
A promissory note is an instrument
in writing (not 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 instrument.
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7. Essentials or Characteristics of a
Promissory Note
1. In writing
2. Promise to pay
3. Unconditional
4. Signed by the Maker
5. Certain Parties.
6. Certain sum of money
7. Promise to pay money only
8. It may be payable in instalments
9. It may be payable on demand or after a definite period

8. BILL OF EXCHANGE
“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.”
Characteristic Features of a Bill of Exchange
• in writing
• must contain an order to pay and not a promise or request
• order must be unconditional
• There must be three parties, viz., drawer, drawee and payee.
• parties must be certain
• must be signed by the drawer
• sum payable must be certain or capable of being made certain
• order must be to pay money and money alone.
• It must be duly stamped
• Number, date and place are not essential. Oral evidence may be obtained as to date and
place of execution.

9. CHEQUE
A cheque is a bill of exchange with two
added features, viz.:
(i) it is always drawn on a specified
banker;
(ii) it is always payable on demand and not
otherwise.
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10. • “All cheques are bills of exchanges but all bills of
exchanges are not cheques”
• It has following similarities:
• Both are the bills of exchange.
• Both have three parties, the drawer, drawee and
the payee.
• The drawer and the payee may be one and the
same person in both the instruments. Both must
written and signed
• Both must contain an unconditional order to pay
a certain sum of money. Both may be endorsed
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11. Distinction between Promissory note, B/E & Cheque

12. Drawer, Drawee, Acceptor, Maker, Payee, etc.:
(i) The party who draws a bill of exchange or a cheque or any other
instrument is called drawer.
(ii)The party on whom such bill of exchange or cheque is drawn is
called the drawee. In other words the person who is thereby
directed to pay is called the drawee.
(iii)The drawee of a bill of exchange who has signified his assent to
the order of the drawer is called the acceptor. The acceptor
becomes liable to the holder after he has signified his assent but
not before.

13. Holder, Holder for value and Holder in due
course
a holder of a negotiable instrument is “a person entitled in his own name to the
possession thereof and to receive or recover the amount due thereon from the parties
thereto.”
Thus, a person who has obtained the possession of an instrument by theft or under a
forged endorsement is not a holder as he is not entitled to recover the
amount of the instrument.
“Holder for value” means, as regards all parties prior to himself, a holder of an
instrument for which value has at any time been given.
A ‘holder in-due-course’, on the other hand, is “a person who for consideration became
the possessor of a promissory note, bill of exchange or cheque, if payable to bearer, or
the payee or endorsee thereof, if payable to order, before the amount mentioned in it
becomes payable and without having sufficient cause to believe that any defect existed
in the title of the person from whom he derived his title”

14. • Where a person receives a negotiable instrument without consideration, he may
be a holder but will not be called as a holder in due course.
• The title of holder of a negotiable instrument is always subject to the title of its
transferor whereas a holder in due course acquires a better title than that of its
transferor.
• So, where a lost negotiable instrument is transferred to a person who takes it,
say, without consideration and thus becomes the holder, will not be entitled to
enforce his claim against its real owner.
• But, if he is a holder in due course, he will be able to establish his claim even
against the real owner of that instrument.

15. Privileges of a Holder in Due Course
• In case of Inchoate Instrument
• In case of fictitious bill
• In case of conditional instrument or ‘escrow’
• In case of instrument obtained by unlawful means or for unlawful
consideration
• In case original validity of the instrument is denied
• In case Payee’s capacity to endorse is denied
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16. Distinction between a holder and a holder in due course
On the basis of consideration:
A holder may become the possessor or payee of an instrument even without
consideration, whereas a holder in due course is one who acquires possession for
consideration.
on the basis of good faith: A holder in due course as against a holder, must have become
the payee of the instrument in good faith i.e., without having sufficient cause to believe
that any defect existed in the transferor’s title.
On the basis of better title than transferor: A holder can never get a better title than that
of the transferor whereas holder in due course can acquire a better title than that of the
transferor.
Negotiation, endorsement, etc
Endorsement denotes appropriate writing on the back or face or on a slip of paper
annexed thereto or signing for the same purpose a stamped paper, of an instrument so as
to transfer the right, title and interest therein to some other person.

17. Classification of Instruments
Bearer and Order instruments (bearer- whoever is holding the instrument, Order-
particular name is mentioned generally)
Inland and foreign instrument (Inland- made and executed within India, Foreign-
made, drawn or payable not within India.)
Ambiguous and inchoate bills ( Ambiguous- nature of the instrument is
determined by the holder, Inchoate- incomplete instrument)

18. Type based on Payment
Instruments payable on demand (“at sight” or “presentment”) (The expression “on
demand” does not imply any actual demand is to be made; it is only a technical
expression meaning “immediately payable”)
Time Bills (“after sight”) (payable at fixed period after sight) (contains the time or day
for payment for any day after its execution.)
Maturity (the date on which it falls due; maturity on the third day after the day on
which it is expressed to be payable; Three days are allowed as days of grace)

19. Negotiation
when a negotiable instrument is transferred to any person with a view to make
the person holder thereof, the instrument is deemed to have been negotiated.
It may be transferred in either of the two ways, viz.,
(1) by negotiation under the Negotiable Instruments Act,1881; and
(2) by assignment of the instrument
When a negotiable instrument is transferred by negotiation, its transferee, if
holder in due course, gets a better title than its transferor.
On the other hand, when the transfer is made by way of assignment, the assignee
has only those rights which the assignor possessed.

20. 1. “Negotiation” can be effected by mere ‘delivery’ if the instrument is a bearer
one and by ‘endorsement and delivery’ in case it is an order instrument;
‘Assignment’ requires a written document signed by the transferor.
2. In “Assignment” the title of the transferee is always subject to the title of its
transferor even though he took the assignment for value and in good faith. In case
of “Negotiation”, a holder in due course gets a better title than its transferor.
3. Consideration is always presumed in case of negotiable instruments; in case of
“Assignment” the transferee must prove consideration for the transfer.
4. An Assignment does not bind the debtor unless a notice of the assignment has
been given to him and he has expressly or impliedly assented to it. But no
information of the transfer of a negotiable instrument has to be given to the
debtor.
Distinction between Transfer by Negotiation and Transfer by
Assignment

21. NEGOTIATION BY MERE DELIVERY & NEGOTIATION BY
ENDORSEMENT AND DELIVERY
a bill or cheque payable to bearer is negotiated by mere delivery of the instrument. Delivery
may be actual or constructive.
Actual delivery means change of actual possession. It is a constructive delivery when the
possession is given to the transferee’s agent, clerk or servant on his behalf.
In case of negotiation by mere delivery, the transferor incurs no obligation to any party
other than the immediate transferee.
Instruments payable to a specified person or to the order of a specified person can be
negotiated only by endorsement and delivery. If an instrument payable to order is
transferred
without endorsement, it is merely assigned and not negotiated and the holder thereof shall
not be entitled to the rights of a holder in due course.

22. Endorsement/Indorsement
A negotiableinstrument payable otherwise than to bearer can be negotiated only
by endorsement and delivery.
An endorsement is “When 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 annexed thereto..... he is said to endorse
the same and is called the endorser.”
The word ‘indorsement’ is said to have been derived from Latin ‘in’ which means
‘upon’ and ‘dorsum’ meaning ‘the back’.
Thus, usually the indorsement is on the back of the instrument; though it may be
even on the face of it.
Where no space is left on the instrument, the endorsement may be made on a slip
of paper attached to it.

23. Essentials of a Valid Endorsement
1. It must be written on the instrument itself and be signed by the indorser.
2. It must be of the entire instrument
3. Where a negotiable instrument is payable to the order of two or more
payees or endorsees who are not partners, all must endorse unless the
one enforcing has authority to endorse for the others.
4. Where in a negotiable instrument payable to order, the payee or endorsee
is wrongly designated or his name is misspelt, he should sign the
instrument in the same manner as given in the instrument.
5. Where there are two or more endorsements on an instrument, each
endorsement is made in the order in which it appears on the instrument,
until contrary is proved.

24. Kinds of Endorsements
Conditional Endorsement (Transfer dependent upon the fulfilment of a stated
condition.)
Endorsement in Blank (endorser just puts his signature without specifying the
endorsee)
Endorsement in Full (along with endorser’s signature, the name of the endorsee is
specified)
Restrictive Endorsement (prohibits the further negotiation of a negotiable
instrument.)
Endorsement ‘Sans Recourse’ (by express words in the endorsement exclude his own
liability thereon)
Facultative Endorsement (endorser waives his right to receive notice of dishonour)
Partial Endorsement (endorsed for part of the amount; not valid)

25. CHEQUE
• A cheque, in essence, is an order by the customer of the bank
directing his banker to pay on demand, the specified amount, to or to
the order of the person named therein or to the bearer.
• The Act defines a cheque as a bill of exchange drawn on a specified
banker and not expressed to be payable otherwise than on demand.
• It includes a truncated cheque and a cheque in the electronic form.

26. FEATURES OF A CHEQUE
a cheque must be
(i) in writing;
(ii) contain an unconditional order to pay;
(iii) drawn on a specified banker;
(iv) for a certain sum of money;
(v) the payee must be a definite person;
(vi) amount must be written both in figures and words;
(vii) It must be dated.
(viii)It always payable on demand

27. CROSSING OF CHEQUES
• Crossing on a cheque is a direction to the paying banker by the
drawer that payment should not be made across the counter.
• The payment on a crossed cheque can be collected only through a
banker.
• crossing of a cheque is effected by drawing two parallel transverse
lines with or without the words ‘and company’ or any abbreviation
thereof.
• A cheque having the cross mark such as ‘X’ is not generally regarded
as a crossed cheque.
• A cheque that is not crossed is called an open cheque.
• crossing of cheques serves as a measure of safety against theft or
loss of cheques in transit.