MODERN BANKING - The Negotiable Instruments Act

1. MODULE 3
PRESENTED BY TEAM 2

2. THE NEGOTIABLE INSTRUMENT
ACT, 1881
• The word negotiable means "transferable from one person to another
in return for consideration" and an instrument means "A written
document by which a right is created in favor of some person".
• Thus, a negotiable instrument is a document which entitles a person to
a sum of money and which is transferable from one person to another.

3. The term 'negotiable instrument' has been defined as A
'negotiable instrument' means a promissory note, bill of
exchange or cheque payable either to order or to
bearer."
The law relating to negotiable instruments is contained
in the Negotiable Instrument Act, 1881 which applies
and extends to the whole of India.

4. CHARACTERISTICS OF A NEGOTIABLE
INSTRUMENT
• Freely Transferable:- The property in a negotiable instrument passes from
one person to another by delivery
• Consideration:- Every negotiable instrument is presumed to have been
made, drawn, accepted, negotiated or transferred for consideration.
• Date:- Every negotiable instrument bearing date is presumed to have been
drawn on such date.

5. • Recovery:- The holder in due course can si upon a negotiable
instrument in his own name for the recovery of the amount.
• Time of acceptance:- When a bill of exchange has been accepted it is
presumed that it was accepted within a reasonable time of its date
and before its maturity.
• Time of Transfer:- Every transfer of a negotiable instrument is
presumed to have been made before its maturity.

6. PAYING BANKER AND DISHONOR OF CHEQUE
• Paying Banker
Meaning :
The banker who pays by cheque to the customer or the order of the customer is
known as the paying banker.
Duties of Paying banker :
• There must be sufficient funds in the customer’s account on which cheque is drawn.
• The funds should be properly applicable to the payment of such cheque.

7. •Cheque should be properly drawn and should not be
irregular (or) ambiguous
•Cheque should be presented during the banking hours
of the bank
•Cheques should be presented for payment within the
validity period.

8. DISHONOR OF CHEQUE
Meaning :
A ‘dishonourеd chеquе’ is also known as a bouncеd or
rеturnеd chеquе. It occurs whеn thе chеquе issuеr's bank
rеfusеs to honour thе paymеnt duе to insufficiеnt funds or
othеr discrеpanciеs.

9. TYPES OF DISHONOURED CHEQUES :
• Dishonour of negotiable instrument by non-acceptance
• Dishonour of cheque by non-payment
• Dishonour of cheque due to insufficient funds in the
account:

10. PUNISHMENT FOR DISHONOUR OF CHEQUE:
• Imprisonment for 2 years.
• A fine within 15 days of the receipt of the notice.

11. PROMISSORY NOTE
• 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 determinate sum of money to the other (the payee), either at a
fixed or determinable future time or on demand of the payee, under
specific terms. If the promissory note is unconditional and readily salable,
it is called a negotiable instrument.
• A signed document containing a written promise to pay a stated sum to a
specified person or the bearer at a specified date or on demand.
• DEFINITION :According to section 4, 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.

12. PARTIES OF A PROMISSORY NOTE
There are primarily two parties involved in a promissory note. They are
• The maker or drawer: The person who makes the note and
promises to pay the amount stated therein.
• The payee: The person whom the amount is payable.

13. ESSENTIALS OF PROMISSORY NOTE
• It must be in writing.
• It must contain a promise or undertaking to pay.
• The promise to pay must be unconditional.
• It must be signed by the maker.
• The maker must be a certain person.
• The payee must be certain.
• The sum payable must be certain.
• The amount payable must be in legal tender money of india.
• other formalities.

15. BILL OF EXCHANGE
DEFINITION:
Section 5 of the negotiable instrument 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".

16. PARTIES TO A BILL OF EXCHANGE
There are 3 parties to a bill of exchange.
• Drawer:- The person who gives the order to pay or who makes the
bill is called the drawer.
• Drawee:- The person who is directed to pay is called the drawee.
• Payee:- The person to whom the payment is to be made is called the
payee.

17. ESSENTIALS OF BILLS OF EXCHANGE
• It must be in writing.
• It must contain an order to pay.
• The order to pay must be unconditional.
• It must be signed by the drawer.
• The drawer, drawee, payee must be certain.
• The sum payable must be certain.
• The bill must contain an order to pay money only.
• It must comply with the formalities as regards date, consideration,
stamps, etc.
SPECIAL BENEFITS OF BILL OF EXCHANGE
• A Bill of exchange is double secured instruments.
• In case of immediate need of money a bill can be discounted with a bank
by the payee.

19. Discharge of negotiable instruments
• An instrument is said to be discharged when all rights of action under it are
completely extinguished and when it ceases to be negotiable.
Suppose A issues a promissory note to B for Rs10,000, payable on a specific
date. If B receives payment of Rs10,000 from A on the due date, the promissory
note is discharged because all rights of action under it are extinguished.
• This would happen when the party who is ultimately liable on the instrument is
discharged from liability.
Sara issues a cheque to Rakesh for Rs5000. If Rakesh presents the cheque to the
bank, and the bank pays Rakesh Rs5000, Sara is discharged from her liability on
the cheque. This discharge happens when the bank honors the cheque.

20. • In such a case even in holder in due course does not acquire any right
under the instrument
Continuing from the previous example, if Sara cheque to Rakesh is
dishonored by the bank due to insufficient funds, and Rakesh transfers
the cheque to Manoj, who is a holder in due course, Manoj cannot
enforce payment against Sara because Sara has been discharged from
her liability on the cheque.

21. Modes of Discharge
• Payment
when the party liable on the instrument makes payment according to its terms and conditions, the
instrument is discharged
• Debtor as a holder
when the party liable on the instrument makes payment according to its terms and conditions, the
instrument is discharged.
• express waiver- holder gives up his right.
The holder voluntarily gives up their right to enforce the instrument, leading to its discharge.
• cancellation-holder may cancel the instrument.
The holder cancels the instrument, rendering it ineffective and discharged.
• material alteration or lapse of time.
If the instrument undergoes a material alteration without the consent of all parties involved, it is
discharged.