LLB-II SPECIAL CONTRACTS

1. NEGOTIABLE
INSTRUMENTS
Course: LLB II
Subject : Company Act
Unit: 4

2. Introduction to the Negotiable
Instruments
• Money is the most common medium of exchange in
any advanced society.
• The reason for this is that money has the exchange
value and is also freely transferable.
• The need for some safe and effective substitute for
money leads to the development of the negotiable
instrument

3. Cont…
• Therefore the use of negotiable instruments has
become the order of the day in the business
transactions.
• The laws relating to Negotiable Instruments is
contained in the Negotiable Instruments Act, 1881.
• This law is based almost entirely on the principles of
the mercantile law of England.
• The Act applies to persons resident in India whether
foreign or Indian.

4. Object of the Act
• The main object of the Negotiable Instruments Act is
to legalize the system by which instruments
contemplated by it could pass from hand to hand by
negotiation like any other goods.
• The purpose of the Act was to present an orderly and
authoritative statement of leading rules of law
relating to negotiable Instruments

5. Definition
• The word negotiable means Transferable by delivery
and the word instrument means A written document
by which a right is created in favor of some person.
• According to Justice Willis “ A negotiable
instrument is one the property in which is acquired by
anyone who take it bona fide and for value
notwithstanding any defect of title in the person from
whom he take it.”

6. Examples of Negotiable Instruments
• Bill of exchange
• Promissory notes
• Cheques
• Government promissory notes
• Treasury bills
• Dividend warrants

7. Essential Features of Negotiable
Instruments
• Writing and Signature
• Money
• Freely Transferable
• Notice
• Presumption
• Special Procedure
• Popularity
• Evidence

8. 1.Writing and Signature:-
 NI must be written and signed by the parties according to
the rules relating to Promissory notes, Bill of exchange and
Cheques.
2. Money:-
 NI are payable by legal tender money of India.
3. Freely Transferable:-
 The property in a NI is freely transferable. They can
transform from one person to another by a simple process.
 In the case of order instruments two things are required for a
valid transfer endorsement and delivery.

9. 4.Notice:-
• It is not necessary to give notice of transfer of Ni to the party liable
to pay. The transferee can sue in his own name.
5.Presumption:-
• A NI is always subject to certain presumptions. They will applicable
unless contrary is proved.
6.Special Procedure:-
• It is provided for suits on promissory notes and bill of
exchange.
• A decree can be obtained much more quickly than it can
be in ordinary suits.

10. 7.Popularity:-
• NI are popular in commercial transactions because of
their easy negotiability and quick remedies.
8.Evidence:-
A document which fails to qualify as a NI may
nevertheless be used as evidence of the fact of
indebtedness.
i.e P writes to Q “I.O.U. Rs. 1500. This is not
Promissory note but the document can be used as
evidence to show that P is indebted to Q for Rs. 1500.

11. Classification(Types) of negotiable
instrument
• ACCOMODATION BILL
• FICTITIOUS BILL
• INSTRUMENT PAYABLE ON DEMAND
• BEARER AND ORDER INSTRUMENTS
• AMBIGUOUS INSTRUMENTS
• INLAND AND FOREIGN INSTRUMENT

12.  Accommodation bill
This type of bill of exchange most commonly used in
Australian financial markets. At present, accommodation bills
are a means of providing finance (lending) without necessarily
having an underlying trade transaction (whereas trade bills are
based on specific transactions).Accommodation party to a bill
is a person who has signed a bill as drawer, without receiving
value thereof, and for the purpose of lending his name to some
other person.' The idea behind the accommodation bill is to
lend the weight of the stronger party's name (through
accepting/drawing/endorsing the bill) to another party whose
name is less marketable.
Illustration:
- A is in need of Rs. 5000, approaches friend B to
borrow money.
- B suggests A to draw bill on him which he accepts.
- A gets bill discounted with the banker

13. FICTITIOUS BILL:
A bill is fictitious when both the drawer and payee are
fictitious persons. Where the drawer is also the payee of
the bill, without any intention that payment shall be in
conformity with the instrument, the instrument is
fictitious. Also when payee is non-existing, the
instrument is fictitious. A fictitious bill in the hands of a
holder in due course becomes a good bill. The acceptor is
liable to a holder in due course, if the holder in due
course can show that the signature of the supposed
drawer and that of the first endorser or payee are under
the same hand. The liability of the holder in case of a
fictitious bill is only towards the holder in due course.

14. INSTRUMENT PAYABLE ON
DEMAND:
A promissory note, a bill of exchange in which no
time for payment is specified and Cheque are payable
on demand. Therefore, following are the instruments
payable on the demand:
1} Bills and promissory notes expressed to be
payable ‘on demand’ or ‘at sight’ or ‘on
presentment’;
2} Bills and notes where no time for payment is
specified; and
3} Cheque is always payable on demand.

15. • BEARER AND ORDER INSTRUMENTS:
An instrument is a bearer instrument when the amount
payable thereon is payable to the bearer and he as a holder
and in lawful possession thereof is entitled to enforce
payment due on it.
• 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 then
forward treated accordingly.

16. • INLAND AND FOREIGN 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. Any such instrument not so drawn, made or
made payable shall be deemed to be a foreign instrument.
FOREIGN bills of exchange must be protested for
dishonour when such protest is required by the law of the
place where they are drawn (sec. 104). However, a
foreign bill drawn in India need not be so protested.
Protest in case of inland bill is optional. In case of foreign
bills, it is absolutely essential.

17. Definition of bill of exchange
• “an instrument in writing containing an un
conditional order, signed by the maker, directing a
certain person to pay a certain sum of money only
to, or to othe of a,a certain person or to the bearer
of the instrument

18. Features of bill of exchange
1 it must be in writing
2 Order to pay
3 Un conditional order
4 Signature of the drawer
5 Drawee
6 Parties
7 Certain of amount
8 payment in kind is not valid.
9 Stamping.
10 Can not be made payable to bearer on demand.

19. Parties to bill of exchange
1 Drawer
2 Drawee
3 payee

20. Promissory Notes
• Meaning Of Promissory Notes(sec. 4)
• A ‘promissory note’ is an instrument in
writing(not 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.
• The person who makes the promissory note and
promises to pay is called the ‘maker’. The person
to whom the payment is to be made is called the
‘payee’.

21. Essential elements of a promissory
note
1. It is an instrument in writing.
2. It is a promise to pay
3. Signed by the maker
4. Other formalities
5. Definite and unconditional promise
6. Promise to pay money only
7. Maker must be a certain person
8. Payee must be certain
9. It cannot be made payable to bearer on demand

22. Parties to a promissory note
• Maker
• Payee
• holder

23. Cheque
• According to Sec 6 define that a cheque as “ a bill of
exchange drawn on specified banker and not
expressed to be payable otherwise than on demand”
• “All Cheque are bill of exchange but All bill of
exchange are not a cheque”

24. Essential characteristics of Cheque
• In writing
• Express order to pay: not request to pay
• Definite & Unconditional order
• Order to pay certain sum: total of money
• Order to pay money only
• Three Parties: Drower,Drawee,Payee
• Drawn upon specified banker
• Payable on Demand(other wise not)

25. Parties to a Cheque
• Drawer: The person who os depositor of money in
bank.
• Drawee: It is a banker on whom the cheque has
been drawn.
• Payee: The person who is received the payment of
cheque.

26. Difference between cheque & Bill of
exchange
Cheque Bill of exchange
1.Always drawn on bank 1. Usually drawn on person or firm
2. Always pay on demand 2.It may be pay on demand or
expiry period
3.It dosen’t require stampe 3.It must require stamped
4.It can be crossed 4.It can’t be crossed
5.Notice of dishonor is not require 5. Notice of dishonor is require
6.Only banker can be drawee 6.Any one can be drawee include
banker

27. Crossing of Cheques
• “A cheque is said to be crossed when two
transverse parallel lines with or without any
words are drawn across its face of left corner.”
• Crossing may be written stamped or printed.
• Crossing is a direction to paying banker to pay the
money to whose name in the cheque not to the
holder at counter.

28. Types of Crossing
1. General crossing:- where a cheque bear across
its face two parallel transvers lines with or
without any words ‘and company’ or not
negotiable written in between two parallel line.

29. Cont…
• 2. Special Crossing: where a cheque bears across
its face an addition of the name of a banker with
or without words not negotiable.
• When it done make the payment only to the
banker in whose favor it has been crossed.
• Special crossing cheque safe than the general
crossing.

30. Cont…
• 3.Restrictive crossing: In recent practices of
crossing a cheque with words ‘Account Payee’
or ‘Account Payee only’.
• This crossing is only a direction to collecting
banker that the proceeds are to be credited
only to the A/c of payee named in the cheque.

31. Bank Draft and Demand Draft
• Demand draft is drawn by one branch of the same bank
instructing the latter to pay is specified sum of money to a
named payee or his order.

32. Features
1) It is drawn by a bank’s branch on another branch.
2) It cannot be made payable to baearer.
3)It’s payment can’t be stoppal or countermanded.
4) It is always payable on demand.

33. Discharge of Negotiable Instrument
Mode of Discharge of an Negotiable Instrument
1) By payment:-
If the maker or accepter makes payment to the holder of
the instrument at or after maturity in good faith and
without notice, the instrument is discharged.
2) By Canceliation:-
If the holder of an instrument cancels acceptor’s name
with intent to discharge him.
3) By party primarily liable becoming Holder:-
If the acceptor of a bill exchange becomes its holder at
or after maturity in his own right.

34. Cont…
4) By Express waiver:-
when the holder of an Negotiable Instrument at or
after its maturity absolutely and unconditionally
renounces in writing.
5) By Discharge as a simple contract:-
A Negotiable Instrument may be Discharged in the
same way as any other contract for the payment of
money.

35. Parties to Negotiable Instrument
• Meaning of Holder
• According to section 8 holder means a person,
• Who is entitled in his own name to the
possession of the Instrument and
• Who has also the Right to receive or recover
the amount due thereon from the parties to
thereto

36. Following Person consider the holder
of Negotiable Instrument
• A person whose name appear on an instrument
• The endorsee of a cheque is called a holder
• Where negotiable instrument is in the name of a
partner of a firm, it becomes holder
• Any person who is in the possession of such
instrument is the holder

37. Following Person not consider the
holder of Negotiable Instrument
• A thief or a finder of an instrument is not a holder
though he is an possession of an instrument
• A person obtaining the instrument under forgery
is not a holder

38. Holder in due course
• Meaning
• For valuable consideration
• Becomes the possessor of a negotiable
instrument payable to bearer or the endorsee
or payee thereof
• Before the amount mentioned in the
document becomes payable

39. A holder in due course a person must
possesses the following qualification
• He must be a holder
• He must be a holder for valuable
consideration
• He must have become the holder of NI before
its maturity
• He must have become holder in good faith

40. Competence of parties
• Minor
• Persons of unsound mind
• Joint stock company
• Agent
• Partnership firm

41. Liability of parties to negotiable
instrument
• Liability of drawer
• Liability of drawee of cheque
• Liability of maker of note and acceptor of bill
• Liability of endorser
• Liability of prior parties to a holder in due course
• Discharge of endorsers liability

42. References
• Avtar Singh : Contract Act, Eastern
• Krishnan Nair : Law of Contact, Orient