JYOTI SAINI, BCOM LLB(HONS.)

1. NEGOTIABLE
INSTRUMENTS:DEFINITION,ESSENTIAL
FEATURES OF NEGOTIABLE
INSTRUMENTS , PROMISSORY NOTES,
BILLS OF EXCHANGE

2. NEGOTIABLE INSTRUMENT: MEANING
 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. Thus, the term “negotiable
instruments” means “a written document transferable by delivery.
 Negotiable Instruments are written contracts whose benefit could be
passed on from its original holder to a new holder. These
instruments are transferable signed documents which promises to
pay the bearer/holder the sum of money when demanded or at any
time in the future.
 These instruments are transferable. The final holder takes the funds
and can use them as per his requirements.

3. NEGOTIABLE INSTRUMENT ACT,1881
 The Negotiable Instruments Act was enacted, in India, in 1881.
Prior to its enactment, the provision of the English Negotiable
Instrument Act were applicable in India, and the present Act is
also based on the English Act with certain modifications. It
extends to the whole of India.
 The act provides for the settlement of payments in business as
the freely pass from holder to holder in due course due to easy
transferability.
 It provides legal protection to different mercantile instruments.
 The act regulates different types of negotiable instruments .
 The act gives definition of promissory note, bills of
exchange,cheque and parties to the negotiable instruments

4. DEFINITION OF NEGOTIABLE
INSTRUMENT
 According to Black's Law Dictionary, Negotiable instrument is a written and signed unconditional promise
or order to pay a specified sum of money on demand or at definite time payable to order or bearer.
 In the words of Justice, Willis, A negotiable instrument thus possesses two qualities:
(i)The right of ownership contained in the instrument can be transferred from one person to another by mere
delivery or sometimes by endorsement and delivery, and
(ii)The transferee who takes the negotiable instrument in good faith and for consideration (technically known as
a holder in due course) gets a good title to the same even though the title of the transferor is defective.
 According to Negotiable Instrument Act ,1881 A 'negotiable instrument' means a promissory note, bill of
exchange or cheque payable either to order or to bearer.

5. FEATURES OF NEGOTIABLE INSTRUMENTS
 The time of payment must be certain- It means that the
instrument must be payable at a time which is certain to arrive. If
the time is mentioned as ‘when convenient’ it is not a negotiable
instrument.
 The payee must be a certain person- It means that the person in
whose favor the instrument is made must be named or described
with reasonable certainty. The term ‘person’ includes individual,
body corporate, trade unions, even secretary, director or chairman
of an institution. The payee can also be more than one person.
 Signature- A negotiable instrument must bear the signature of its
maker. Without the signature of the drawer or the maker, the
instrument shall not be a valid one.
 Delivery- Delivery of the instrument is essential. Any negotiable
instrument like a cheque or a promissory note is not complete till
it is delivered to its payee. For example, you may issue a cheque
in your brother’s name but it is not a negotiable instrument till it
is given to your brother.
 Easy transferable/negotiability- A negotiable instrument is can be
transferred freely without any formality.
 Absolute Title- a person who receives a negotiable instrument has a clear
and undisputable title to the concerned instrument. However, the title of
the receiver will be absolute, only if he has got the instrument in good
faith and for a valid consideration.
 Written form:A negotiable instrument must be in writing. This includes
handwriting, typing, computer print out and engraving, etc.
 Unconditional Order- In the negotiable instruments, an unconditional
order or promise for payment must be mentioned. ·
 Payment- The instrument should have considered payment of a certain
sum of money only and nothing else. To say, one cannot make a
promissory note on assets, securities, or goods, etc.

6. PRESUMPTIONS AS TO NEGOTIABLE
INSTRUMENTS
3.Time of transfer: Unless the contrary is presumed it shall
be presumed that every transfer of a negotiable instrument
was made before its maturity.
4.Time of acceptance: Unless the contrary is proved, every
accepted bill of exchange is presumed to have been accepted
within a reasonable time after its issue and before its
maturity. This presumption only applies when the acceptance
is not dated; if the acceptance bears a date, it will prima facie
be taken as evidence of the date on which it was made.
Sections 118 and 119 of the Negotiable Instrument
Act,1881 lay down certain presumptions which the
court presumes in regard to negotiable instruments.
Until the contrary is proved the following
presumptions shall be made in case of all negotiable
instruments:
1.Consideration: It shall be presumed that every
negotiable instrument was made drawn, accepted or
endorsed for consideration.
2.Date: Where a negotiable instrument is dated, the
presumption is that it has been made or drawn on such
date, unless the contrary is proved.

7. PROMISSORY NOTE:SECTION 4
 A promissory note is a legal instrument (more particularly a
financial instrument), in which one party (the maker or
issuer) promises in writing to pay a definite sum of money to
the other(payee) , either at a fixed or determinable future time
or on demand of the payee under specific terms.
 Section 4 of Negotiable Instruments Act,1881 “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.

8. ESSENTIALS OF PROMISSORY NOTE
 It must be in writing and signed by the maker.
 B. There must be an undertaking or a promise to pay.
 C. Such a promise must be unconditional.
 D. The promise must be in respect of payment of money only
 E. The amount payable must be certain.
 F. The payee must be certain.
 G. It should be dated
 H. It is payable on demand or after a certain definite period.
 I. The rate of interest

9. PARTIES TO THE PROMISSORY NOTE
 Drawer: A drawer is a person who agrees to pay the drawee a
certain amount of money on the maturity of the promissory note.
He/she is also known as maker.
 Drawee: She/He is an individual, in whose favour the note is
prepared. In usual cases the drawee is also the payee until and
unless the promissory note is transferred specifically in favour of
the payee.
 Payee: A payee is someone to whom the payment is made.Most
of the times, the payee and drawee are the same people to whom
the cash is paid.

10. TYPES OF PROMISSARY NOTE
 NON-INTEREST BEARING NOTE: They are promissory notes which do not carry any interest rate
with it. The amount that will be paid at the time of maturity is equal to the face value of the promissory
note.
 INTEREST-BEARING NOTE: Promissory notes which carry an interest rate with it. The amount that
will be paid at the time of maturity is the sum of the face value & interest.
 DEMAND PROMISSORY NOTE: A demand note is theoretically due from the moment it is
executed. A demand note is not payable, however, until its holder makes demand to its maker for
immediate payment. After the holder of a demand note has called the note payable, the maker has an
obligation to pay the balance of the note immediately. If not so paid, the note may be the subject of a
legal action to enforce the payment of the indebtedness evidenced by the note.

11. BILLS OF EXCHANGE:SECTION 5
 Bill of exchange means a bill drawn by a person directing another person to pay
the specified sum of money to another person.
 Wharton ‘s law lexicon Dictionary defines Bill of exchange as under :- “As
an unconditional order in writing, addressed by one parson to another, signed
by the person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain in money
to or to the order of a specified person, or to bearer.”
 According to Section 5 of 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. The definition of a bill of exchange is very similar to that of a
promissory note.

12. Essentials of bills of exchange
A. A bill of exchange must be in writing.
B. Must contain an order to pay.
C. Order contained in the bill should be unconditional.
D. Bill must be signed by the drawer.
E. Drawee must be certain
F. Sum payable must be certain.
G. Instrument must contain an orded to pay money and money only.
H. Payee must be certain.

13. Parties to bills of exchange
 Drawer or Maker: Drawer is the person who draws (or makes) the Bill.
He is the person who is entitled to receive the money (i.e. the Creditor).
He is required to sign the bill and send it to the drawee for acceptance.
 Drawee: Drawee is the person on whom the bill is drawn. He is the
person who owes the money. The Drawee has to accept the bill of
exchange drawn by the drawer. Acceptance is done by signing his name
across the face of the bill.
 Payee: Payee is the person to whom the money is payable. In most cases
the drawer of the bill is himself the payee.
 Drawee in case of need: If the drawer has a doubt that the original
drawee will not accept or dishonour the bill, he may write the name of
another person for accepting the bill in case the original drawee does not
accept it

14. HOLDER AND HOLDER IN DUE COURSE
A holder in due course (HDC) is a person who acquires
the negotiable instrument bonafide for some consideration,
whose payment is still due..
Thus, a person claim to be a ‘holder in due course’ should
satisfy the following conditions.
o He must acquire the instrument for a consideration.
o The instrument acquired should be before it is matured
for payment.
o It is most important that the holder in the course had
no cause to believe that any defect existed in the title
of a person from whom he has acquired the instrument
Holder refers to a person; we mean the payee of the
negotiable instrument, who is in possession of it. He/She is
someone who is entitled to receive or recover the amount
due on the instrument from the parties thereto.
A person is said to be a holder of negotiable instrument if
he satisfies the following two conditions:
o He should be entitled to possess the instrument in his
own name e.g. legal custody of an instrument.
o He should have a right to receive or recover the
amount due on the instrument from the party liable to
pay.