2. The Negotiable Instruments
Act, 1881
Act - Act No.26 of 1881
Enacted by - Parliament of india
Date enacted - 9 December 1881
Date commenced - 1 March 1882
The Act extends to the whole of India.
The Act is to regulate commercial transactions
3. Background to development of
negotiable instruments
Merchants had to pay for purchases with precious
metals – this was burdensome, there was always a
risk of theft or destruction (eg. Shipwreck).
Merchants began writing orders to each other.
Legal rules impeded them, e.g. the nemo dat rule
—’lit you cannot give what you do not have’, you
cannot transfer better title to goods than you have.
To overcome nemo dat, an exception developed for
negotiable instruments—these can be transferred
from one person to another and the transferee
receives good title (in fact the transferee can receive
better title than the transferor.)
4. Negotiable Instruments
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.’
So 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.
5. Types of Negotiable Instruments
Negotiable instruments are of two types
which are as follows:
• Negotiable Instruments recognized by
status:
e.g. Bills of exchange, cheque and
promissory notes.
• Negotiable instruments recognized by
usage or customs of trade:
e.g. Bank notes, exchequer bills, share
warrants, bearer debentures, dividend
6. 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.”
8. Parties to a Bill of Exchange
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.
9. 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.
10. Essentials of a Bill of Exchange
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 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 money
only
8. It must comply with the formalities as regards
date, consideration, stamps, etc
11. Cheque
A cheque is the means by which a person
who has fund in the hand of a bank
withdraws the same or some part of it.
A cheque is a kind of bill of exchange but it
has additional qualification namely-
1- it is always drawn on a specified banker
and
2-it is always payble on demand without any
days of grace.
12. Definition
A “cheque” is a bill of exchange drawn on
a specified banker and not expressed to be
payable otherwise than on demand.
‘Cheque’ includes electronic image of a
truncated cheque and a cheque in
electronic form. [section 6].
13. The definition is amended by Amendment
Act, 2002, making provision for electronic
submission and clearance of cheque. The
cheque is one form of Bill of Exchange. It is
addressed to Banker. It cannot be made
payable after some days. It must be made
payable ‘on demand’.
14. Essential characteristics of a
Cheque
In writing
Express order to pay
Definite and unconditional order
Signed by drawer
Order to pay certain amount
Order to pay money only
Drawn upon a specified banker
Otherwise Payable on demand
16. Parties involved
Drawer—Person who Signe the cheque
Drawee—Bank on which cheque is being
drawn
Payee—Person to whom cheque is being
paid
17. Types of cheque
Order cheques
One person or more is specified on the cheque as
payee or endorsee
Negotiated by endorsement and delivery
Bearer cheque
(converted to order cheque by deleting 'or bearer')
No person is specified in the cheque as payee or
endorsee, or the words 'to bearer' appear on the
cheque
Negotiated by delivery
Crossed cheques
Specific direction to the drawee financial institution
not to pay the cheque over the counter
18. Differences between a bill of
exchange and cheque
Bill of exchange Cheque
• Payable on demand, or at a • Payable on demand
fixed or determinable future
date
• Drawn on anyone • Drawn on a financial
institution
• Can’t be crossed • Can be crossed
(always negotiable)
• Continuing security • Presented for payment
within a reasonable time
19. •Obligation from • Ongoing relationship
acceptance of bill
•Substantial trading • Day-to-day transactions
transactions
• It should be stamped •Not required
• Accepted before the drawee •Not require any acceptance
can be made liable upon it.
•. Electronic image cannot •Electronic image can use
be use
