Negotiable instrument

NEGOTIABLE INSTRUMENT
(PROMISSORY NOTES, BILLS OF EXCHANGE AND CHEQUES)

INTRODUCTION
• A NEGOTIABLE INSTRUMENT is a document that guarantees
payment of a specific amount of money to a specified person (payee).
• According to section 13 of The Negotiable instrument Act, 1881-
A “negotiable instrument” means a promissory note, bill of exchange or
cheque payable either to order or to bearer. It may be made payable to
two or more payees jointly, or it may be made payable in the
alternative to one of two, or one or some of several payees.

ESSENTIAL CHARACTERISTICS OF NEGOTIABLE INSTRUMENT
 in writing form;
Should be signed;
Freely transferable from one person to another Person;
Holder title is free from defects;
Unconditional promise or order to pay;
Sum payable, time of payment, and the payee must be certain;

INTRODUCTION TO NEGOTIABLE INSTRUMENT ACT, 1881
• The law relating to Negotiable Instrument (Promissory Notes, Bills of
Exchange and Cheques) is defined in The Negotiable Instrument Act,
1881.
• Preamble of The Negotiable Instrument Act, 1881:
It is expedient to define and amend the law relating to promissory notes,
bills of exchange and cheques.
• It shall come into force on the first day of March, 1882.
• It extends to the whole of India

• It contains 17 chapters, including 147 sections.
CHAPTER CHAPTER NAME SECTIONS
I PRELIMINARY 1 TO 3
II NOTES,BILLS AND CHEQUES 4 TO 25
III P A R T I E S T O N O T E S, B I L L S A N D C H E Q U E S 26 TO 45A
IV NEGOTIATION 46 TO 60
V P R E S E N T M E NT 61 TO 77
VI PAYMENT AND INTEREST 78 TO 81
VII DISCHARGE FROM LIABILITY ON NOTES,BILLS AND
CHEQUES
82 TO 90

CHAPTER CHAPTER NAME SECTIONS
VIII NOTICE OF DISHONOUR 91 TO 98
IX N O T I N G A N D P R O T E S T 99 TO 104A
X R E A S O N A B L E T I M E 105 TO 107
XI ACCEPTANCE AND PAYMENT FOR HONOUR AND
REFERENCE IN CASE OF NEED
108 TO 116
XII C O M P E N S A T I ON 117
XIII S P E C I A L R U L E S O F E V I D E N C E 118 TO 122
XIV C R O S S E D C H E Q U E 123 TO 131 A
XV B I L L S I N S E T S 132 and 133
XVI I N T E R N A T I O N A L L A W 134 TO 137
XVII PENALTIES IN CASE OF DISHONOUR OF CERTAIN
CHEQUES FOR INSUFFICIENCY OF FUNDS IN THE
ACCOUNTS
138 TO 147

INTRODUCTION
• The term “NEGOTIABLE” in a negotiable instrument refers to the fact
that they are transferable to any person. If it is transferred, the new
holder obtains the full legal title to it.
When a promissory note, bill of exchange or cheque is transferred to
any person, so as to constitute that person the holder thereof, the
instrument is said to be NEGOTIATED.

Modes of Negotiation
Payable to
bearer
By delivery
Actual constructive
Payable to
order
By indorsement
Indorsement
in blank
Indorsement
in full
By delivery

TYPES OF NEGOTIABLE INSTRUMENT
According to the Act, Negotiable instrument has three types-
1. Promissory Note
2. Bill of Exchange
3. Cheque

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 only to, or to the order of, a
certain person, or to the bearer of the instrument.

PROMISSORY NOTE
 Essentials for a Valid Promissory Note:
A promissory must be in writing form;
The promise to pay must be definite and unconditional. If the promise to
pay is coupled with a condition, it is not a promissory note;
The amount (sum of money) must be certain or not vague;
The maker of the pro-note must be certain. The instrument should show
who exactly is liable to pay. The name of the maker should be written
clearly and ascertainable on seeing the document;

PROMISSORY NOTE
• Essentials for a Valid Promissory Note :
The promise should be to pay money;
It should be dated;
It should be signed by the maker;
The promissory note may be payable on demand or after a certain definite
period of time;
The money must be payable to definite person or to his order to the bearer;
The draft must be accepted for payment by the party to whom the promise
is made;

PROMISSORY NOTE
• Essentials for a Valid Promissory Note :
There are only two parties to a Promissory Note, one is the maker or
the payer and another one is the payee.
* The person who makes the note is known as the maker . The maker of a
promissory note is bound to pay the amount thereof at maturity according to
the apparent tenor of the note, In default of such payment as aforesaid, such
maker is bound to compensate any party to the note for any loss or damage
sustained by him and caused by such default (sec. 34 of the Negotiable
Instrument Act, 1881).
** The payee to whom the promise is made.

PROMISSORY NOTE
• Illustrations:
A Signs instruments in the following terms:
a. “I promise to pay B or order Rs. 500.”
b. “I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on
demand, for value received.”
c. “Mr. B, I O U Rs. 1,000.” (An IOU is abbreviated from the phrase “I owe
you“)
d. “I promise to Pay B Rs. 500 and all other sums which shall be due to him.”
e. “I promise to Pay B Rs. 500, first deducting thereout any money which he
may owe me.”

PROMISSORY NOTE
• Illustrations:
A Signs instruments in the following terms:
f. “I promise to Pay B Rs. 500 seven days after my marriage with C.”
g. “I, promise to Pay B Rs. 500 on D's death, provided D leaves me
enough to pay that sum.”
h. “I promise to Pay B Rs. 500 and to deliver to him my black horse
on 1st January next.”
The instruments respectively marked (a) and (b) are promissory notes.
The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not
promissory notes.

BILL OF EXCHANGE
 According to section 5 of The Negotiable instrument Act, 1881-
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.

BILL OF EXCHANGE
 Essentials for a Valid Bill of Exchange:-
It must be in writing;
The promise to pay must be unconditional;
The money must be payable to definite person or to his order to the bearer;
The draft must be accepted for payment by the party to whom the promise
is made;
It must be dated;
It must contain an order to pay a certain sum of money;
It should be properly stamped;

BILL OF EXCHANGE
 Essentials for a Valid Bill of Exchange :-
There are generally three parties to a Bill of Exchange
1. Drawer
2. Acceptor
3. Payee
• The party which makes the order is known as the Drawer.
• The party which accepts the order is known as the Acceptor.
• The party to whom the amount has to be paid is known as the Payee.
*The drawer and the payee may be the same.

BILL OF EXCHANGE
 Features of Bill of Exchange:-
Parties involved to a ‘Bill of exchange’ according to Section 7 of the
Act
1. “Drawer” and “Drawee”:—
The maker of a bill of exchange or cheque is called the “drawer”; the
person thereby directed to pay is called the “drawee”.
2. “Drawee in case of need”:—
When in the Bill or in any indorsement thereon the name of any person
is given in addition to the drawee to be resorted to in case of need, such
person is called a “drawee in case of need.”

BILL OF EXCHANGE
Act
3. “Acceptor”:—
After the drawee of a bill has signed his assent upon the bill, or, if there are
more parts thereof than one, upon one of such parts, and delivered the same,
or given notice of such signing to the holder or to some person on his behalf,
he is called the “acceptor”.

BILL OF EXCHANGE
Act
4. “Acceptor for honour”:—
When a bill of exchange has been noted or protested for non-acceptance
acceptance or for better security, and any person accepts it supra protest for
honour of the drawer or of any one of the indorsers, such person is called an
“acceptor for honour”

BILL OF EXCHANGE
Act
5. “Payee”:-
The person named in the instrument, to whom or to whose order
the money is by the instrument directed to be paid, is called the
“Payee”

BILL OF EXCHANGE
Important terms:-
According to Section 108 of the Act, Acceptance for honour:—
When a bill of exchange has been noted or protested for non-acceptance
or for better security, any person not being a party already liable thereon
may, with the consent of the holder, by writing on the bill, accept the same
for the honour of any party thereto.

BILL OF EXCHANGE
According to Section 99 of the Act, Noting:—
 When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment, the holder may cause such dishonour to be
noted by a notary public upon the instrument, or upon a paper attached
thereto, or partly upon each.
 Such note must be made within a reasonable time after dishonour, and
must specify the date of dishonour, the reason, if any, assigned for such
dishonour, or, if the instrument has not been expressly dishonoured, the
reason why the holder treats it as dishonoured, and the notary's charges.

BILL OF EXCHANGE
According to Section 100 of the Act, Protest:—
When a promissory note or bill of exchange has been dishonoured by non-acceptance
or non-payment, the holder may, within a reasonable time, cause such dishonour to be
noted and certified by a notary public. Such certificate is called a protest.
 According to Section 100 of the Act, Protest for better security:—
When the acceptor of a bill of exchange has become insolvent, or his credit has been
publicly impeached, before the maturity of the bill, the holder may, within a
reasonable time, cause a notary public to demand better security of the acceptor, and
on its being refused may, within a reasonable time, cause such facts to be noted and
certified as aforesaid. Such certificate is called a protest for better security.

BILL OF EXCHANGE
 Supra Protest:-
It is a legal maxim which refers to a third person who accepts a
protested bill or contract on behalf of another. This maxim is used
mainly in case of contracts or bill where honoring is done for the
benefit of the principal or the drawer.

PROMISSORY NOTE VS BILL OF EXCHANGE
S.NO. BASIS PROMISSORY NOTE BILL OF EXCHANGE
1. DEFINITION 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 only to, or to the order of, a
certain person, or to the bearer of the
instrument.
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
2 Issued by Creditor debtor
3 Nature of
instrument
Promise to pay money An order for making payment
4 Parties Two parties- maker and payee Three parties- drawer,
drawee/acceptor and payee

PROMISSORY NOTE VS BILL OF EXCHANGE
S.NO. BASIS PROMISSORY NOTE BILL OF EXCHANGE
5. acceptance Does not require any acceptance. It is
signed by the person who is liable to
pay.
Needs an acceptance from
drawee
6. liability Liability of drawer is primary and
absolute.
Liability of drawer is
secondary and conditional.
7 Is it Payable to
drawer/maker
The same person cannot be drawer and
payee.
Yes, the same person can be
drawer and payee.

CHEQUE
 A “cheque” is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand
 it includes the electronic image of a truncated cheque and a cheque in the
electronic form.
 “a cheque in the electronic form” means a cheque drawn in electronic form
by using any computer resource and signed in a secure system with digital
signature with or without biometrics signature and asymmetric crypto
system or with electronic signature, as the case may be.

CHEQUE
“a truncated cheque” means a cheque which is truncated during the course of a
clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.
 “clearing house” means the clearing house managed by the Reserve Bank of
India or a clearing house recognized as such by the Reserve Bank of India.
“asymmetric crypto system”, “computer resource”, “digital signature”,
“electronic form” and “electronic signature” shall have the same meanings
respectively assigned to them in the Information Technology Act, 2000.

CHEQUE
Important Points
Validity: 3 months from the date of issue of Cheque.
MICR Code:-
• MICR is acronym for Magnetic Ink Character Recognition.
• It is highly advanced character recognition technology (CRT) used by Banks to
verify Cheques for clearance.
• It is used for other bank documents as well.
• A MICR code is placed at the bottom of Cheque.
• An MICR code is a 9-digit code.

CHEQUE
Important Points
MICR Code:-
• It comprises of 3 parts:
o The first three digits represent the city (City Code). They are aligned
with the PIN code we use for postal addresses in India.
o The next 3 digits represent the bank (Bank Code).
o The last 3 digits represent the branch (Branch Code).
• The MICR code is located on the bottom of a cheque leaf, next to the
cheque number.
•

CHEQUE
Important Points
 IFSC (Indian Financial System Code):-
IFSC code is used by electronic payment system applications such as
real-time gross settlement (RTGS), NEFT and Centralised Funds
Management System (CFMS).
This code is mandatory for fund transfers from one bank account to
another.
Every bank branch will have a unique code and no two branches
(even of the same bank) will ever be the same.
In an IFSC code, the first 4 digits of the IFSC represent the bank and
last 6 characters represent the branch. The 5th character is zero.

CHEQUE
Important Points
 cheque number
A cheque number is a 6-digit number uniquely assigned to each
cheque leaf.
It is written on the left-hand side at the bottom of the cheque.
It is advisable to check, i.e., count and check the number on each
cheque leaf in a new cheque book when you receive it from the bank.
This is to ensure that no cheque is missing from the cheque book.
b ..
Rea at:

CHEQUE
 Parties to a Cheque
Here are three parties involved in a cheque. They are as follows:-
1. Drawer :
 Drawer is the party who draws the cheque upon a specified banker.
 He is the maker of the cheque.
 He is the account holder who draws the cheque for drawing money from
his bank account.
 He is the person who issues cheque directing the bank to pay a certain
sum of money to a certain person or to the bearer.
 Thus, the person who signs the cheque is known as drawer.

CHEQUE
2. Drawee :
 Drawee is the party upon whom the cheque is drawn.
 Drawee is the bank.
 It is the party to whom the drawer gives order to pay the amount to the
person named on the cheque or his order to the bearer.
 When the bank follows the order and pays the amount of the Cheque
then the cheque is said to be honored.
 In case of refusal of the order, the cheque is said to be dishonored.

CHEQUE
3. Payee:
 Payee is the party who presents the cheque for payment.
 He is the person who receives money from bank.
 He is the party in favour of whom cheque is issued.
 The payee is the person whose name is mentioned on the cheque.
 If the cheque is made payable to self, the drawer himself becomes the
payee.

ESSENTIAL CHARACTERISTICS OF CHEQUE
 in writing;
drawn on banker;
an unconditional order to pay;
an order to pay a certain sum;
signed by the drawer and should be dated:;
payable on demand
valid for 3 months from the date of issue of Cheque;
payable to the drawer himself;
Banker is liable only to the drawer;
not require acceptance

TYPES OF CHEQUE
Types of Cheque
Order
cheque
Bearer
cheque
Crossed
cheque
Counter
cheque
Stale
cheque
Post dated
cheque
Travelers’
cheque
Bankers
Cheque

HOLDER AND HOLDER IN DUE COURSE
Section 8 of this Act defines-
The “holder” of a promissory note, bill of exchange or cheque means any
person entitled in his own name to the possession thereof and to receive or
recover the amount due thereon from the parties thereto. Where the note,
bill or cheque is lost or destroyed, its holder is the person so entitled at the
time of such loss or destruction.
A person is called the holder of a negotiable instrument if the following
conditions are satisfied:
• He must be entitled to the possession of the instrument in his name and
under a legal title.
• He must be entitled to receive or recover the amount from the parties
concerned in his name.

Section 9 of this Act defines-
“Holder in due course” means any person who for consideration became the
possessor of a promissory note, bill of exchange or cheque if payable to bearer, or
the payee or indorsee thereof, if payable to order, before the amount mentioned in
it became payable, and without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title.

Essentials to become holder in due course
he must be a holder;
Paid valuable and lawful consideration to acquire the
instrument;
He must acquire the instrument before maturity;
Obtained the instrument in good faith;
The instrument must be complete and regular on face of it;

Classification of negotiable instrument
Bearer
Instrument and
order
Instrument
Inland
Instrument and
Foreign
Instrument
Inchoate
Instrument and
Ambiguous
Instrument
Demand
Instrument and
Time
Instrument

CLASSIFICATION OF NEGOTIABLE INSTRUMENT
1. Bearer Instrument and Order Instrument (Section 13)
A promissory note, bill of exchange or cheque is payable to
bearer which is expressed to be so payable or on which the only
or last indorsement is an indorsement in blank. Such instrument
can be
Where a promissory note, bill of exchange or cheque, either
originally or by indorsement, is expressed to be payable to the
order of a specified person, and not to him or his order, it is
nevertheless payable to him or his order at his option.

2. Inland Instrument and Foreign Instrument (Section 11 and 12)
Section 12 defines Inland instrument—
A promissory note, bill of exchange or cheque drawn or made in India, and
made payable in, or drawn upon any person resident, in India shall be deemed
to be an inland instrument.
 Section 13 defines Foreign instrument —
Any such instrument not so drawn, made or made payable shall be deemed to
be a foreign instrument.

S.no. The bill drawn Drawn on a person Payable Type of
Instrument
in India outside
India
resident in
India
Resident
outside
India
In India Outside
India
1 yes - yes - yes - inland
2 yes - yes - - yes inland
3 yes - - yes yes - inland

S.no. The bill drawn Drawn on a person Payable Type of
Instrument (bill)
in India outside
India
resident in
India
Residing
outside
India
In India Outside
India
1 - yes - yes - yes foreign
2 - yes yes - - yes foreign
3 - yes yes - yes - foreign
4 - yes - yes yes - foreign

3. Ambiguous Instrument and Inchoate Instrument (Section 17 and 20)
Section 17 defines Ambiguous instruments—
Where an instrument may be construed either as a promissory note or bill of
exchange, the holder may at his election treat it as either, and the instrument shall
be thenceforward treated accordingly.
Section 20 defines Inchoate Stamped Instruments—
Where one person signs and delivers to another a paper stamped in
accordance with the law relating to negotiable instruments then in force in
India, and
either wholly blank or having written thereon an incomplete negotiable
instrument,
he thereby gives prima facie authority to the holder thereof to make or
complete,

Section 20 defines Inchoate Stamped Instruments—
as the case may be, upon it a negotiable instrument, for
any amount specified therein and not exceeding the
amount covered by the stamp.
The person so signing shall be liable upon such
instrument, in the capacity in which he signed the same,
to any holder in due course for such amount.
no person other than a holder in due course shall recover
from the person delivering the instrument anything in
excess of the amount intended by him to be paid
thereunder.

4. Demand Instrument and Time Instrument
Section 19 defines “Instruments payable on demand”—
A promissory note or bill of exchange, in which no time for payment is specified,
and a cheque, are payable on demand.
Time instrument
An instrument in which the time for payment is specified is known as time
instrument. The time instrument may be payable-
a. On a specified day or
b. After a specified period or
c. Certain period after sight or
d. On the happening of an event which is certain to happen.
An instrument in which the time for payment is specified is known as time instrument. The time instrument may be payable-

Negotiable instrument

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