Section 13 (1) of the Negotiable Instruments Act states that “ A Negotiable Instruments means a promissory note, bill of exchange or cheque payable either to order or to bearer.”

1. Legal Environment of Business - Module 3 – Part 1
MBA - MG University

2. Prepared By
Manu Melwin Joy
Assistant Professor
Ilahia School of Management Studies
Kerala, India.
Phone – 9744551114
Mail – manu_melwinjoy@yahoo.com
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Please seek permission to reproduce the same in public forms and presentations.

3. • Negotiable instrument – Definition.
• Types of negotiable instrument.
• Characteristics of negotiable instrument.
• Kinds of negotiable instruments.

4. • Bill of exchange, Promissory note, Cheque –
Definition.
• Parties involved.
• Essentials of a Bill of exchange, Promissory
note, Cheque.

5. • Dishonor of negotiable instrument –
Definition.
• Types of dishonor.
• Notice of dishonor.
• Bouncing of cheques.
• Noting and protesting.

6. • Discharge of negotiable instrument –
Definition.
• Different modes of Discharge of negotiable
instrument.
• Material Alteration.
• Acceptor for honor.
• Forged instrument.

7. Definition
Section 13 (1) of the
Negotiable Instruments
Act states that “ A
Negotiable Instruments
means a promissory note,
bill of exchange or cheque
payable either to order or
to bearer.”

8. Types of negotiable instrument
• Negotiable instruments
recognized by statute are
only of three Types:
1. Promissory Notes.
2. Bills of exchanges.
3. Cheques.

9. Characteristics of negotiable instrument
1. Property.
2. Freely transferable.
3. Title of holder free from all defects .
4. Recovery.
5. Presumption.
6. Prompt payment.
7. As good as cash.
8. Transferability.

10. Kinds of negotiable instruments
1. Inland instrument.
2. Foreign instrument.
3. Ambiguous Instrument.
4. Inchoate instrument.
5. Accommodation bills.
6. Fictitious bill.
7. Bearer instrument.
8. Order instrument.
9. Instrument payable on demand.
10.Instrument payable at a future time

11. Bill of Exchange - Definition
• “A bill of Exchange is an
instrument in writing
containing the
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”.

12. Parties of Bill
• The maker of bill of
exchange is called the
Drawer.
• The person who is
directed to pay is called
Drawee.
• The person who will
receive the money is
called the Payee.

13. Essential elements of bill of exchange
• In writing.
• An order to pay - expressed
and unconditional.
• Three parties - drawer,
drawee and payee.
• Signed by the drawer.
• The amount of money to be
paid must be certain.
• Payment-legal tender
money of India.

15. Promissory note - Definition
• A promissory note is an
instrument in writing
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.

16. Parties involved
• 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 payee.

17. Essentials of a promissory note
1. In writing.
2. Promise to pay must be express.
3. Definite and unconditional.
4. To be signed by the maker.
5. Certain in the case of parties.
6. Certainty in the case of sum of
money.
7. Promise to pay money only.
8. Formalities are not necessary.

19. Cheque - Definition
• A cheque is a bill of
exchange drawn upon a
specified banker and not
expressed to be payable
otherwise than on demand
and it includes the
electronic image of a
truncated cheque and a
cheque in the electronic
form.

20. Types of cheque
• Open Cheque.
• Crossed Cheque.

21. Modes of crossing a cheque
• General crossing.
• Special crossing.
• Restrictive crossing.
• Not negotiable crossing.

22. General crossing

23. Special crossing

24. Restrictive crossing

25. Dishonor of negotiable instrument
Definition
• When a negotiable
instrument is dishonored,
the holder must give a
notice of dishonor to all the
previous parties in order to
make them liable on the
instrument. If he fails to do
so, except in cases when
notice of dishonor may be
excused, he forfeits his right
of action against the prior
parties.

26. Types of dishonor
• Dishonor by non
acceptance.
• Dishonor by nonpayment.

27. Notice of dishonor
• How is given? – Notice.
• By whom given? – Holder.
• To whom given? – All parties.
• Mode of notice – Sent by
post.
• The rule for giving notice of
dishonor – Notice to be sent
next day.

28. Bouncing of cheques
• A cheque is said to be
bounced or dishonored
when there is insufficiency
of funds in the drawer’s
account.

29. Noting and protest
• Noting means the recording
of the fact of dishonor by a
notary public upon the
instrument within a
reasonable time after
dishonor.

30. Noting and protest
• Protest - When a
promissory note or bill of
exchange is dishonored by
non acceptance or
nonpayment, the holder
may within a reasonable
time cause such dishonor to
be noted and certified by a
notary public.

31. Noting and protest
• Difference – Noting is
merely a record of the fact
of dishonor. When the
notary public issues a
certificate stating the
particulars regarding the
dishonor, it is called a
protest.

32. Discharge of negotiable instrument
Definition
• An instrument is said to be
discharged when all rights
of action under it are
completely extinguished
and when it ceases to be
negotiated. This would
happen when the party
who is ultimately liable on
the instrument is
discharged from liability.

33. Different modes of discharge of an
instrument
• By payment in due course.
• Any party primarily liable
becoming holder.
• By express waiver.
• By cancellation.
• By discharge as a simple
contract.
• By material alteration.

34. Material alteration
• An alteration which in any
way alters the operation of
the instrument and the
liabilities of the parties
thereto or which alters the
business effect of the
instrument is a material
alteration.
• For example, (1) alteration
of date (2) alternation of
name (3) alteration of
amount etc.

35. Acceptor for honor
• Normally a stranger cannot
accept the bill. But when a
Bill of exchange has been
noted and protested for non
– acceptance or for better
security, any person who is
not already liable on the
negotiable instrument
under reference can accept.
He is called acceptor for
Honor.

36. Forged instrument
• Forgery is the fraudulent making
or alteration of a writing to the
prejudice of another man’s right.
• It may include fraudulently
writing the name of an existing
person, signing the name of a
fictitious person etc. A forged
document confers not title to
the holder.
• For example: On a note for Rs
2000, A forges B’s signature to it
as a maker. X, the holder, who
takes it bonafide and for value
acquires no title to the note. He
can’t sue upon the note.