2. INTRODUCTION
The law relating to negotiable instruments is
contained in the Negotiable Instruments
Act, 1881 which applies and extends to the
whole of India. It is based on English law.
3. Definition:
The word negotiable means ‘transferable by delivery,’ and
the word instrument means ‘a written document by which
a right is created in favour of some person.’
Thus, the term “negotiable instrument” literally means ‘a
written document which creates a right in favour of
somebody and is freely transferable by delivery.’
A negotiable instrument is a piece of paper which entitles a
person to a certain sum of money and which is transferable
from one to another person by a delivery or by endorsement
and delivery.
4. PROMISSORY NOTE
Definition:
According to Section 4, “A promissory
note is an instrument in writing (not being a
bank-note or a currency-note) containing an
unconditional undertaking (a formal pledge or
promise to do something), signed by the maker,
to pay a certain sum of money only to, or to the
order of, a certain person, or to the bearer of the
instrument.”
6. There are primarily two parties involved in a promissory note. They are:
(i) The Maker or Drawer: The person who makes the note
and promises to pay the amount stated therein. In the above
specimen, Sanjeev is the maker or drawer.
(ii) The Payee – the person to whom the amount is payable. In
the above specimen it is Ramesh.
In course of transfer of a promissory note by payee and others,
the parties involved may be –
(a) The Endorser – the person who endorses the note in
favour of another person. In the above specimen if Ramesh
endorses it in favour of Ranjan and Ranjan also endorses it in
favour of Puneet, then Ramesh and Ranjan both are endorsers.
(b) The Endorsee – the person in whose favour the note is
negotiated by endorsement. In the above, it is Ranjan and then
Puneet.
7. PROMISSORY NOTE
1. It must be in writing:
• A promissory note has to be in writing
• An oral promise to pay does not become a promissory
note
• The writing may be on any paper or book
• Illustrations: A signs the instruments in the following
terms:
“I promise to pay B or order Rs. 500”
“I acknowledge myself to be indebted to B in Rs. 1, 000 to be
paid on demand, for value received”
Both the above instruments are valid promissory
notes.
8. PROMISSORY NOTE
2. It must contain a promise or undertaking to pay:
• There must be a promise or an undertaking to pay
• The undertaking to pay may be gathered either from express
words or by necessary implication
• A mere acknowledgement of indebtedness is not a
promissory note, although it is valid as an agreement and may
be sued upon as such
• Illustrations: A signs the instruments in the following terms:
“Mr. B I owe you Rs. 1,000”
“I am liable to pay to B Rs. 500”
9. PROMISSORY NOTE
3. The promise to pay must be unconditional:
• A promissory note must contain an unconditional promise
to pay
• The promise to pay must not depend upon the happening
of some uncertain event, i.e., a contingency or the
fulfillment of a condition
• Illustrations: 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 as soon as I can”
10. PROMISSORY NOTE
4. It must be signed by the maker:
• It is imperative that the promissory note should be
duly authenticated by the ‘signature’ of the maker
• ‘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 intention of
authenticating a document
11. PROMISSORY NOTE
5. The maker must be a certain person:
The instrument must itself indicate with certainty who is the
person or are the persons engaging himself or themselves to
pay
Alternative promisors are not permitted in law because of the
general rule that “where liability lies no ambiguity must lie”
6. The payee must be certain:
Like the maker the payee of a promissory note must also be
certain on the face of the instrument
A note in favour of fictitious person is illegal and void.
12. PROMISSORY NOTE
7. The sum payable must be certain:
For a valid pronote it is also essential that the sum of money promised to
be payable must be certain and definite
The amount payable must not be capable of contingent additions or
subtractions
Illustrations: A signs the instruments in the following terms:
• “I promise to pay B Rs. 500 and all other sums which shall be due to
him”
• “I promise to pay B Rs. 500, first deducting thereout any money which
he may owe me”
The above instruments are invalid as promissory notes because the exact
amount to be paid by A is not certain
8. The amount payable must be in legal tender money of India:
A document containing a promise to pay a certain amount of foreign
money or to deliver a certain quantity of goods is not a pronote
13. 9. The promissory note may be payable on demand or
after a certain definite period of time.
10. A promissory note must be stamped according to
the Indian Stamp act.
PROMISSORY NOTE
14. BILL OF EXCHANGE
Definition:
Section 5 of the Negotiable Instruments Act defines a Bill of
Exchange as follows:
“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.”
Illustration:
Mr. X purchases goods from Mr. Y 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 nothing but a bill of exchange.
15.
16. There are three parties involved in a bill of exchange
(i) The Drawer – The person who makes the order for making payment.
In the above specimen, Rajiv is the drawer.
(ii) The Drawee – The person to whom the order to pay is made. He is
generally a debtor of the drawer. It is Sameer in this case.
(iii) The Payee – The person to whom the payment is to be made. In this
case it is Tarun.
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 Pay to us or
order.
In a bill where a time period is mentioned, just like the above specimen, is
called a Time Bill.
But a bill may be made payable on demand also. This is called a Demand
Bill.
17. Number of parties.
Promise and order
Acceptance
Liability
Relationship
Notice
18. 1. It must be in writing
2. It must contain an order to pay. A mere request to pay on
account, will not amount to an order
3. The order to pay must be express and unconditional
4. It must be signed by the drawer
5. The drawer, drawee and payee must be certain. A bill cannot
be drawn on two or more drawees but may be made payable
in the alternative to one of two or more payees
6. The sum payable must be certain
7. The bill must contain an order to pay legal tender money
only
8. It must comply with the formalities as regards date,
consideration, stamps, etc
19. A cheque is a bill of exchange drawn upon a specified banker
and payable on demand or .-Sec. 6. It is an order to a bank to pay
a stated sum from the drawer's account, written on a specially
printed form.
Essentials features of Cheque
1. A cheque must fulfil all the essential requirements of a bill
of exchange.
2. A cheque may be payable to bearer or to order but in either
case it must be payable on demand.
3. The banker named must pay it when it is presented for
payment to him at his office during the usual office hours;
provided the cheque is validity drawn and drawer has
sufficient funds to his credit.
20. 4. Bill and notes may be written entirely by hand. There is no
legal bar to cheques being hand-written. Usually, however.
banks provide their customers with printed cheque forms
which filled up and signed by the drawer. ‘
5. The signature must tally with the specimen signature of the
drawer kept in the bank. .
6. A cheque must be dated. A banker is entitled to refuse to
pay a cheque which is not dated. A cheque becomes due for
payment on the date specified on it.
21. 7. A cheque drawn with a future date is valid, but it is
payable on and after the date specified. Such cheques are
called post dated cheques.
8. A cheque may be presented for payment after the due date
but if :here is too much delay the bank is entitled to consider
the circumstance suspicious and refuse to honour the cheque.
The period after which a cheque is considered too old, or
stale varies according to custom from place to place. It is
usually six months in Indian cities.
9. In some certain circumstances the bank is not bound to pay
the cheques. (See ch. 6)
22.
23. Open Cheque
An open cheque is basically an uncrossed cheque. This cheque can be
encashed at any bank, and the payment can be made to the person
bearing the cheque and is normally used for a cash transaction.
24. Crossed Cheque
On the Crossed cheques, two lines are made on the top right of the
cheque. Amount mentioned on the cheque is only transferred to the bank
account of the payee. No cash payment is made.
25. There are different modes of crossing a cheque. The
simplest mode of cross is to put two parallel lines
across the face of tire cheque. This is called General
Crossing. A cheque crossed generally will be paid to
any bank through which it is presented. When the
name of bank is written between the parallel lines, it
is called Special Crossing. A cheque crossed specially
will be paid only when it is presented for collection
by the bank named between the parallel lines. Such
crossing affords a greater measure of protection
against loss.
26. Bill of exchange can be drawn upon any person including
bank. But cheque can only be drawn upon a bank. Thus, every
cheque is a bill of exchange, but every bill of exchange is not a
cheque.
Except under certain circumstances, bill of exchange requires
acceptance. Cheque does not require acceptance.
A cheque is always payable on demand. Acceptor of bill of
exchange is allowed a grace period of three days.
Drawer of bill is discharged from liability if the bill is not
presented in due time. But drawer of cheque is discharged
when he suffers damage owning to delay in presenting the
cheque.
A cheque may be crossed but no provision for crossing a bill
exists.
27. Cheque does not require to be stamped. But bill of exchange
does.
If a bank fails to pay a cheque, it is not necessary to give notice
of dishonour to the drawer to make him liable to compensate
payee. But in bill of exchange, it is necessary to give notice of
dishonour.
Payment of a cheque may be countermanded (revoked) by the
drawer. Payment of bill cannot be countermanded.
28. 1. Writing and Signature
Negotiable Instruments must be written and signed by the parties
according to the rules relating to Promissory Notes, Bills of Exchange
and Cheques.
2. Money
Negotiable Instruments are payable by legal tender money of India. The
liabilities of the parties of Negotiable Instruments are fixed and
determined in terms of legal tender money.
3. Negotiability
Negotiable Instruments can be transferred from one person to another by
a simple process. In the case of bearer instruments, delivery to the
transferee is sufficient. In the case of order instruments two things are
required for a valid transfer: indorsement (i.e., signature of the holder)
and delivery. An instrument may be made non-transferable by using
suitable words, e.g., "Pay to X only."
29. 4. Title
The transferee of a negotiable instrument, when he fulfils
certain conditions, is called the holder in due course. The
holder in due course gets a good title to the instrument even in
cases "here the title of the transferor is defective.
5. Notice
It is not necessary to give notice of transfer of a negotiable
instrument to the party liable to pay. The transferee can sue in
his own name.
30. 6. Presumptions
Certain presumptions apply to all negotiable instruments.
Example : it is presumed that there is consideration. It is not necessary
to write in a promissory note the words "for value received" or similar
expressions because the payment of consideration is presumed. The
words are usually included to create additional evidence of
consideration. (See. p. 340)
7. Special Procedure
A special procedure is provided for suits on promissory notes and bills of
exchange. (The procedure is prescribed in the Civil Procedure Code). A
decree can be obtained much more quickly than it can be in ordinary
suits.
31. 8. Popularity
Negotiable instruments are popular in commercial transactions because
of their easy negotiability and quick remedies.
9. Evidence
A document which fails to qualify as a negotiable instrument may
nevertheless be used as evidence of the fact of indebtedness.
Example : P writes to Q "I. O. U. Rs. 500·'. This is not a promissory
note, but the document can be used as evidence to show that P is
indebted to Q for Rs. 500.
32. A Bill of Exchange is sometimes called a Draft. A Bill of Exchange
drawn by a bank is called a Banker's Draft. Banker's Drafts are of two
kinds:
(i) from one office to another of the same bank and
(ii) from one bank to another
some rules as a crossed cheque. The characteristic features of Bank
Drafts are stated below :
(i) It is drawn by a banker upon its branch or upon another bank.
(ii) It is payable on demand.
(iii) It cannot be payable to bearer.
(iv) It cannot be stopped or countermanded, except by order of the
Court
