Negotiable Instruments Act ,1881 - Legal Environment of Business
Negotiable Instruments Act ,
‘Negotiable' means transferable from one person to
‘Instrument’ means any written document by which
a right is created in favour of some person.
‘Negotiable Instrument’ means a document
transferable from one person to another.
An instrument may be negotiable
(1) Statute - Promissory notes, bills of exchange and cheques are
negotiable instruments under the Negotiable Instruments Act, 1881
(2) By usage - Bank notes, bank drafts, share warrants, bearer
debentures, dividend warrants, scripts and treasury bills
Characteristics of a Negotiable Instrument:
Freely transferable by delivery or by endorsement
Holder's title free from defects
The Holder can sue in his own Name
A negotiable instrument can be transferred infinitum
A negotiable instrument is subject to certain
Kinds of Negotiable Instruments;
The Act recognizes the following three types of negotiable
Bills of Exchange
Promissory Note is an instrument in writing (not
being a bank 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 parson or to the bearer of the instrument.
Parties to a promissory note:
i. The Maker
ii. The Payee
Essentials of a Promissory Note:
• In writing
• Promise to pay
• Signed by the Maker
• Certain Parties
• Certain sum of money
• Promise to pay money only
• Number, place, date etc
• It may be payable in installments
• may be payable on demand or after a definite period
• It cannot be made payable to bearer on demand or even
payable to bearer after a certain period
• It must be duly stamped under the Indian Stamp Act
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 instrument.
Parties to a Bill of Exchange:
i. The drawer
ii. The drawee (also called the acceptor)
Types of Bill of Exchange:
Essentials of a Bill of Exchange:
1 It must be in writing.
2. It must contain an order to pay and not a promise or
3. The order must be unconditional.
4. There must be three parties, viz., drawer, drawee and
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain or capable of being
8. The order must be to pay money and money alone.
9. It must be duly stamped as per the Indian Stamp Act.
10. Number, date and place are not essential.
A cheque is a bill of exchange drawn on a specified
banker, and not expressed to be payable otherwise
than on demand.
Parties to a cheque:
i. The drawer
ii. The drawee
iii. The payee
Essentials of a Cheque:
i. Always drawn on a specified banker.
ii. Always payable on demand.
iii. It does not require acceptance.
iv. It may be made payable to drawer himself.
v. Must be dated.
vi. Valid for 6 months.
vii. No acceptance of cheque is required
viii. Cheque is not required to be stamped.
Bill of Exchange and Cheque distinguished
Cheque Bill of Exchange
It must be drawn only on a banker. It can be drawn on any person including a
The amount is always payable on demand The amount may be payable on demand or af-
ter a. specified time
The cheque is not entitled to days of grace. A usance bill is entitled to three days of grace.
Acceptance is not needed. A bill payable after sight must be accepted.
A cheque can be crossed Crossing of a bill of exchange is not possible.
Notice of dishonour is not necessary. Notice of dishonour is necessary to hold the
parties liable thereon..
A cheque is not to be noted or protested in
case of dishonour.
A bill is noted or protested to establish dishon-
The protection given to the paying banker in
respect of crossed cheques is peculiar to this
No such protection is available in the case of
Promissory Note and Bill of Exchange
Promissory Note Bill of Exchange
There are only two parties – the maker
(debtor) and the payee (creditor).
There are three parties – the drawer, the
drawee and the payee- although any two of
these capacities may be filled by one and the
A note contains an unconditional promise by
the maker to pay the payee.
It contains an unconditional order to the
drawee to pay according to the drawer`s
No prior acceptance is needed. A bill payable `after sight` must be accepted by
the drawee or his agent before it is presented
The liability of the maker or drawer is primary
The liability of the drawer is secondary and
conditional upon non-payment by the drawee
No notice of dishonour need be given. Notice of dishonour must be given by the
holder to the drawer and the intermediate
endorsers to hold them liable thereon.