2. 2
Introduction
• The law relating to negotiable instruments
is contained in the Negotiable Instruments
Act, 1881.
3. 3
Definitions
The word ‘negotiable’ means ‘transferable
by delivery’ and ‘instrument’ means ‘a
written document by which a right is
created in favor of some person or persons’.
Thus, the term negotiable instrument
literally means a written document which
creates a right in favor of somebody and is
freely transferable.
4. 4
Continued…
According to Section 13 of the Negotiable
Instruments Act,
“A negotiable instrument means a
promissory note, bill of exchange or cheque
payable either to order or to bearer”.
Eg - Promissory note, Cheque and a Bill of
exchange,etc.
5. 5
Characteristics of Negotiable
Instruments
• Free Transferability
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: endorsement
(i.e., signature of the holder) and delivery.
6. Continued…
o Unconditional:
A negotiable instrument contains an
unconditional promise or order to pay some
money.
Therefore, if payment of money is conditional to
the completion of some conditions, then, it is not
a valid negotiable instrument.
6
7. 7
Continued…
• 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.
8. 8
Continued…
• Presumptions:
Certain presumptions apply to all negotiable
instruments.
Consideration: 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.
9. 9
Continued…
• Presumptions:
Certain presumptions apply to all negotiable
instruments.
• Date: In case of a negotiable instrument,
it is to be presumed that, the negotiable
instrument was drawn on such date as is
mentioned on the face of the negotiable
instrument.
10. 10
Continued…
• Title:
The general principle as regards the transfer of
property, that is, no one can give a better title than he
himself has, is not applicable in case of negotiable
instruments.
If the transferor had obtained a negotiable
instrument by exercising fraud, but the transferee
obtains that negotiable instrument in good-faith
(bona-fide) for value, then the transferee shall
enjoy a good title as regards that negotiable
instrument.
11. 11
Continued…
• Time of Transfer:
Every transfer of a negotiable instrument was
made before its maturity.
12. 12
Types of Negotiable Instruments
Negotiable instruments are of two types which
areas follows:
• Negotiable Instruments recognized by status:
e.g. Bills of exchange, promissory notes, and
cheque.
13. 13
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.
Eg - Ms. Karina purchases goods from Ms. Sabrina for Rs. 1000/-
Ms. Sabrina buys goods from Ms. Tina for Rs. 1000/-
Then Ms. Sabrina may order Ms. Karina to pay Rs. 1000/- to
Ms. Tina which is be nothing but a bill of exchange.
14. 14
Bill of Exchange
• Bill-of-Exchange (Section 5 of the Negotiable
Instruments Act, 1881):
1. There are three (3) parties involved in a bill of
exchange: the drawer, the drawee and the
payee;
2. It must be in writing, duly signed and
accepted by its drawee and properly
stamped;
3. There must be an order to pay;
4. It must be un-conditional;
5. The amount and the parties must be certain.
17. Promissory Note
Promissory note means a signed document
containing a written promise to pay a stated
sum to a specified person at a specified date
or on demand.
A promissory note, sometimes referred to as a note
payable, is a legal instrument (more particularly, a
financial instrument and a debt instrument), in which
one party (the maker or issuer) promises in writing to
pay a determinate sum of money to the other (the
payee), either at a fixed date or on demand of the
payee.
17
18. 18
Specimen of a promissory note
Rs. 5000/- Pune November 28, 2010
Three moths after the date, I promise to pay Mr. Vijay
of Mumbai or order a sum of Rupees Fifty Thousand for
value received.
To
Mr.
Address………..
…………… Stamp
Mumbai Signature of Mr. Ajay
19. 19
Essential characteristics of a
Promissory Note
• It must be in writing, duly signed and
properly stamped.
• There must be an undertaking or
promise to pay; mere acknowledgement
of indebtedness is not enough.
• It must not be conditional.
• It must contain a promise to pay money
and money only.
20. 20
Essential characteristics of a
Promissory Note
• The parties to a promissory note, that is,
the maker and the payee, must be certain.
• It is payable on demand or after a certain
date.
• The sum payable must be certain.
21. 21
Cheque
A cheque or check (American English)
is a document that orders a bank to
pay a specific amount of money from a
person's account to the person in
whose name the cheque has been
issued.
The maker of a bill of exchange or Cheque
is called the “Drawer"; the bank thereby
directed to pay is called the "Drawee".
24. 24
Essential characteristics of a
Cheque
• There are three (3) parties involved in a cheque:
the drawer, the drawee bank and the payee;
• It must be in writing and it must be signed by the
drawer;
• The payee is always certain;
• It is always payable on demand;
• It must bear a date, otherwise it is invalid, and
shall not be honored by the bank;
• A cheque can be bearer, order or crossed.
25. 25
Types of Cheques:
a. Open Cheque
In such a cheque, it is possible to get the cash, over
the counter of the bank.
b. Bearer Cheque
It is somewhat similar to an open cheque; in case
of a bearer cheque, any person holding or bearing
the cheque, can be made payment of the amount
mentioned in the cheque.
26. 26
Types of Cheques:
c. Crossed Cheque:
Generally speaking, open cheques are open to
risk and it is dangerous to issue an open cheque,
however, this risk can be avoided by using a
crossed cheque which would only be credited into
the bank account of the payee.
A cheque can be crossed by drawing two parallel
lines across the cheque on the left-hand side top
corner of the cheque and with/without writing
“Account Payee” or “Not Negotiable”.
27. 27
Types of Cheques:
d. Order Cheque:
It is a cheque which is payable to a particular
person and in such a cheque the word bearer
may be cut or cancelled;
e. Electronic Cheque:
It is a cheque which contains the exact mirror
image of the cheque and it is generated in a
secured system, ensuring safety standards with
the use of digital signatures.
