short features of this act

1. Negotiable Instruments Act, 1881

2. Meaning of Negotiable instruments
 Term ‘Negotiable’  transferable.
 Term ‘Document’  in writing.
 Act does not specifies  what is negotiable instrument.
 S. 13 states  “A negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer.”
Characteristics of a negotiable Instrument
1. Writing  in writing & signed as per rules of the instruments.
2. Payable by money  the legal tender  must be specific & certain.
3. Unconditional promise or order  promissory note (unconditional promise),
Cheque (unconditional order) to pay.
4. Freely transferable  delivery or endorsement  till the final settlement of
payment.
5. Property  person in possession  having property rights & entitled to the
amount (holding value for goods – ‘holder in due course’.
6. Presumptions  unless it is actually paid  for consideration, date, signature etc.
7. Essentials of contract  such as capacity, consideration, free consent, lawful
object.

3. Promissory Note
 S. 4 states  “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.”
Essential of a valid promissory note
1. In writing
2. Parties  minimum two parties  promisor (paying person) & promisee (payment
receiving person).
3. Pressed promise to pay  no acknowledgement (wordings must convey a promise to
pay)  “I promise to pay Rs. 1000/- on demand” & not “I, owe you Rs. 100/-
4. The promise to pay must be unconditional  conditions may or may not happen.
5. Must contain promise to pay in terms of money only  some thing with money or other
than money  not a valid promissory note.
6. The sum payable to be certain  amount must be specific.
7. Parties certain  identifiable as  maker (promisor) & payee (promisee or receiver).
8. Must be signed  maker signs it.
9. Must bear the stamp  as per Indian Stamp Act, 1899.
10. Other formalities  date, place, consideration etc  if lacking  it becomes invalid.
11. Intention & delivery  intention to make & delivered to the payee.
12. Essentials of contract  such as capacity, consideration, free consent, lawful object.

4. Kinds of promissory notes
1. Promissory note payable on demand  no specific time of payment 
when ever payee demands.
2. Promissory note payable after date  fixed future date.
3. Joint Promissory note  made by two or more persons  jointly liable
(maker)  only one action on non-payment by payee.
4. Joint & Several promissory note  made by two or more persons 
Individual & jointly liable (maker)  multiple action on non-payment by
payee  against all, any, some or one after another.
5. Inland & Foreign promissory note  promisor, promisee, payee in India
(Inland) & promisor, promisee in India but payee not in India or promisee
& payee not in India (foreign).

5. Bills of Exchange
• S. 5 states  “An instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay certain sum of money only to or to
the order of a certain person or to the bearer of the instrument.”
Essential of a valid promissory note
1. Number of parties  drawer (draws), drawee (makes payment) & payee (entitled
to payment).
2. In writing
3. Expressed order to pay  order by drawer to the drawee to pay.
4. Unconditional
5. Order to pay money only
6. Certain sum of money
7. Instrument must be  signed.
8. Instrument must bear  stamp
9. Other formalities  date, place, consideration etc  if lacking  it becomes
invalid.
10. Intention & delivery  intention to make & delivered to the payee.
11. Essentials of contract  such as capacity, consideration, free consent, lawful
object.

6. Kinds of Bills of Exchange
1. Bill of exchange payable on demand
2. Bill of exchange payable after date
3. Inland & foreign bill of exchange
4. Accommodation bill of exchange  not supported by trade transactions.
5. Bills in sets  for foreign bills (in case lost)  numbered  drawer signing all the
sets only one set is stamped & signed by the drawee.
6. Drawee in case of need  when accepted by other person or in case if the drawee
fails to pay on the due date.
Acceptor & Acceptance
 S. 7 states “After the drawee of a bill has signed his assent upon the bill, or if there
are more parts thereof than one, upon one such parts, and delivered the same, or
give notice of such signing to the holder or to some person on his behalf, he is
called the acceptor.”
 Acceptance for honour  bill dishonoured by non-acceptance  not liable party
can accept it  in place of drawee.
 Payment for honour  bill noted & protested (notary public)  third party not liable
willing to pay.

7. Cheques
• S. 6 states – “a bill of exchange drawn on a special banker and not
expressed to be payable than on demand and it includes the electronic
image of a truncated cheque and a chapter in the electronic form.”
Essential of a cheque
1. Cheque as a bill of exchange  essential of bills of exchange.
2. Drawn on a special banker
3. Payable on demand
4. No stamp
5. Acceptance  not required.
6. Payable to bearer
 Cheque in the electronic form  converted in digital form  mirror image.
 Truncated cheque (substitute)  shortened version of cheque  for
processing convenience by the banker or clearing house.
 Overdue, stale or Out of date cheque  three years from the due date of
issue  should be presented within the reasonable time.

8. Types of Cheque
1. Bearer cheque  open cheque  payable across the counter.
2. Crossed cheque  top left corner  payment made to the banker
 to trace out party receiving payment.
i. General crossing  payment made through the banker  with or
without words.
ii. Special crossing  drawee banker making payment to the bank or the
collection agent  mentioned in the crossing  ‘Not negotiable Bank
of India’.
iii. Restrictive crossing  words  ‘a/c payee’ or ‘a/c payee only’ 
amount credited to the payees account only.
 Crossing after issue  by the holder or banker into  from general to
special & add words like ‘not negotiable’.
 Cheque bearing ‘not negotiable’  still negotiable  defect in title of
transferor leading to defect in the title of transferee.

9. Criminal penalties in case of dishonour of a cheque
 Cheque  lawful enforceable debt  dishonours (inadequate funds) 
holder should give notice (demanding payment )  to drawer (within )
month from the date of dishonour)  from the date of the notice payment
should be made by the drawee  within 15 days  failing to do so  can
be penalised  2 years imprisonment or fine up to twice the amount of the
cheque or both.
Classification of the negotiable instruments
1. Bearer instrument
2. Order instrument
3. Inland instrument
4. Foreign instrument
5. Instrument payable on demand
6. Time instrument  after date, after sight, after certain event.
7. Ambiguous instrument  constructed as promissory note or bill
8. Inchoate instrument  incomplete instrument  ‘pay to ___ or order

10. Terms
1. Fictitious bill  when drawee or payee or both are
fictitious  acceptor is liable to the holder in due course
 holder can prove that the signature & handwriting of
the drawer and the first endorse (payee) are same.
2. Escrow  security for custody purpose only  to fulfill
certain condition or task  non fulfillment of the
condition or task  does not leads to the liability & does
not effects the rights of the holder.

11. Negotiation
 S. 14 states – “when a promissory not, bill of exchange or cheque is
transferred to any person, so as to constitute that person the holder
thereof, the instrument is said to be negotiated.”
 Negotiation  third party in possession of the instrument 
becomes the holder & entitled to receive payment.
 Types of Negotiations 
1. Negotiation by delivery  payable to the holder or bearer  no
need of endorsement (signing).
2. Negotiation by endorsement & delivery  signing the instrument
for the purpose of transfer
 Effect of negotiation (value of value for goods)  holder get the title
of goods  even the title is defective (not in forgery).

12. Endorsement
• S. 15 states – “when the maker of a negotiable instrument signs the same,
otherwise than as such maker, for the purpose of negotiation, on the back or
face thereof or on a slip of paper annexed thereto, or so signs for the same
purpose a stamped paper intended to be completed as negotiable
instrument, he is said to endorse the same, and is called an “endorser”. The
person to whom the instrument is endorsed is called the “endorsee”.
Essential of endorsement
1. Holder  writes or signs on the  back or face or the separate paper or
stamp paper.
2. Instrument endorsed and delivered to  the endorsee.
3. Endorsement  must be genuine.
 Who can endorse  holder, maker, drawer or endorsee (individually or
jointly), payee.
 Effect of the endorsement  endorsee gets property & further negotiable
rights (unless specifically restricted).

13. Kinds of endorsement
1. Endorsement in blank (general Endorsement)  instrument is
signed but the name of the Endorsee is left blank.
2. Endorsement in full (Special Endorsement)  signs and direct to
pay to the order of the specified person.
3. Restrictive Endorsement  Pay B only sd/A.
4. Partial Endorsement  partial payment received and remaining
endorsed to the payee.
5. Conditional Endorsement  X will be paid only after reaching
Mumbai.
6. Endorsement Sans Recourse (Sansfrais)  endorser by expressed
words  excludes his liability in the event of  dishonour.
7. Facultative Endorsement  endorser waives  some rights he is
entitled to  pay B, or order. Notice of dishonour waived.’ sd/ A.