Thsi presentation contains types of negotiable instruments, rules and regulations for holder, holder in due course, dishonour etc.

1. Negotiable Instruments Act
Dr. Shruti Ganpule

2. Introduction
• The Negotiable Instruments Act of 1881 came into force on
1st March 1881, and it extends to the whole of India.
• The word “instrument” refers to a written document by virtue
of which a right is created in favour of some individual. The
word “negotiable” indicates transferable from one person to
another in exchange for payment.

3. Introduction
• Section 13 of that legislation indicates that “negotiable instrument”
refers to a promissory note, bill of exchange, or cheque payable to
order or to the bearer.
• The main distinction between a negotiable instrument and other
documents is that, in the case of a negotiable instrument, the transferee
acquires a good title if he receives it in good faith and for
consideration even though the transferor’s title may have a flaw or is
defective.

4. Characteristics of Negotiable Instruments
1. Negotiable instruments are transferable by nature: A negotiable
instrument may be freely transferred as many times as necessary
before maturity. Delivering the instrument is sufficient if it is
“payable to the bearer.” However, if it is “payable to order,” it is
accepted upon endorsement and delivery. The transferee also gains
the ability to transfer the instrument again.

5. Characteristics of Negotiable Instruments
2. Title of the Holder in due course is free from all defects: If the
transferor had gained a negotiable instrument by fraud but the
transferee had acquired it in good faith (bona fide) for value, the
transferee would have a good title with regard to that instrument.
As a result, the title of the transferee in relation to a negotiable
instrument is separate from the title of the transferor.

6. Characteristics of Negotiable Instruments
3. Right to file suit: The transferee of a negotiable instrument can file a
suit in his own name for recovering the amount.
4. Notice of Transfer: It is not necessary for the transferee to give a
notice of transfer to the party liable to pay on the negotiable instrument.
5. Number of transfers: There is no limit for transferring the
negotiable instrument.
6. Prompt Payment: If dishonoured, the credit of all parties is affected.
7. Presumptions are applicable.

7. Presumptions of Negotiable Instruments
• Every negotiable instrument was drawn, accepted, endorsed for
consideration.
• Every negotiable Instrument was made on the date which is mentioned on
it.
• Every negotiable Instrument was accepted within reasonable time after the
date on which it was drawn but before the date of its maturity.
• Every negotiable Instrument was transferred within reasonable time after
the date on which it was drawn but before the date of its maturity.

8. Presumptions of Negotiable Instruments
• Every negotiable instrument is stamped.
• A holder of a negotiable instrument is holder in due course. He has
accepted the instrument for value and in good faith.
• Protest is necessary to prove that the negotiable instrument is
dishonoured.

9. Kinds of negotiable instruments
• Promissory notes
• Bills of exchange
• Cheque
• Bills in sets
• Accommodation bill
• Fictitious bills
• Inchoate instruments
• Ambiguous instruments

10. Section 4. “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.
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11. Section 4. “Promissory Note”
• Illustrations
(a) “I promise to pay B or order Rs. 500.”
(b) “I acknowledge myself to be indebted to B in Rs.1,000, to
be paid on demand, for value received.”
(c) “Mr. B, I.O.U. Rs.1,000.”
(d) “I promise to pay B Rs. 500 if he delivers me my bike on 1st
January next.”
(e) I promise to pay Mr. A Rs. 10,000 after marriage of Mr. P and Ms.
Q
The instruments marked (a) and (b) are promissory notes. The
instruments marked (c) and (d) are not promissory notes.
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12. Specimen of a Promissory Note
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13. Essential features
• An instrument is a promissory note if there are present the following elements:-
1. Writing : The first essential is that all negotiable instruments must be in writing.
An oral engagement to pay a sum of money is not an instrument, much less
negotiable.
2. Promise to pay : Secondly, it must contain a promise to pay. A mere
acknowledgement of debt is not a promissory note. “I.O.U., E.A. Gay, the sum of
seventeen dollars for value received.” Has been held not to be a promissory note. A
mere receipt for money does not amount to a promissory note, even though it might
contain the terms of repayment.
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14. Essential features
• 3. Unconditional : Thirdly, the promise to pay the money should be
unconditional, or subject only to a condition which according to the
ordinary experience of mankind is bound to happen.
• I will pay Mr. B a sum of Rs. 50,000 if he marries my daughter.
• I promise to pay a sum of Rs. 25,000 to Mr. X once he sells his house to
Mr. D .
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15. Essential features
4. Money only and a certain sum of money:
• Fourthly, the instrument must be payable in money and money only. If the instrument
contains a promise to pay something other than money or something in addition to money, it
will not be a promissory note. The sum of money payable must also be certain. Negotiable
instruments are meant for free circulation and if they are value is not apparent on their face,
their circulation would be materially impeded.
• I promise to pay Mr. A a sum of Rs. 10,000 and balance 30 days after the date.
• I promise to pay Mr. P a sum of Rs. 20,000 and rest of the amount will be paid in terms of
50 kg of grains.
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16. Essential features
5. Certainties of parties:
• The parties to the instrument must be designated with
reasonable certainty. There are two parties to a promissory
note, viz , the person who make the note and is known as
the maker and the payee to whom the promise is made.
Both the maker and the payee must be indicated with
certainity on the face of the instrument.
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17. Essential features
6 Signed by the maker:
• The promissory note should be signed by the maker. Signature may be on any
part of the document. It shows that he has acknowledged or agreed to pay the
certain sum of money to the certain person on the given date.
• If the document is not signed, it is not considered as a negotiable instrument.
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18. 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.”
Illustration:
Mr. X purchases goods from Mr. Y for Rs. 1000/-
Mr. Y buys goods from Mr. S for Rs. 1000/-
Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be nothing but a bill of
exchange. 18

19. Specimen of Bill of Exchange
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20. Parties to 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.
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.
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21. Accommodation bill
• A
• B
Mutual help
• B
• Banker
Bill
discounting • B will pay to A
• A will pay to
banker
Honour bill

22. 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 payable on demand without any days of grace.
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23. Section 6 : “Cheque”
 “ a cheque in the electronic form” means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and signed in a
secure system ensuring the maximum safety standards with the use of digital
signature (with or without biometrics signature) and asymmetric crypto
system
 “ a truncated cheque” means a cheque is truncated during the course of a
clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in
writing.
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24. 25

25. Bill and Cheque Compared
• A cheque does not require acceptance, in ordinary course it is never accepted;
it is not intended for circulation, it is given for immediate payment, it is not
entitled for days of grace.”
• “In addition it is to be noted a cheque is presented for payment, whereas a bill
in the first instance is presented for acceptance unless it is a bill on demand. A
bill is dishonoured by non-acceptance, this is not so in case of a cheque
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26. Bill and Cheque Compared
• Acceptance is not necessary to create liability to pay as between the drawer and
the drawee bank. The liability depends on contractual relationships between the
bank and the drawer, its customer. Other things being equal, in particular if the
customer has sufficient funds or credit available with the bank, the bank is
bound either to pay a cheque or dishonour it at once….It is different in case of
an ordinary bill; the drawee is under no liability on the instrument until he
accepts; his liability on the bill depends on the acceptance of it.”
• A cheque is always to be made payable on demand, whereas an ordinary bill of
exchange can be made payable after a fixed period.
• A cheque is exempted from stamp duty, but a promissory note as well a bill of
exchange attracts stamp duty under the Indian Stamp Act, 1899. 27

27. Post dated cheque
• A post dated cheque remains a bill of exchange till the date written on
the face of it. On that date it becomes a cheque. One of the effects is
that liability for criminal prosecution under Section 138 would not be
attracted and 3 months period would be reckoned from the date
appearing on the cheque.
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28. Section 7 “Drawer” “Drawee”
• The maker of a bill of exchange or cheque is called the “drawer”, the person thereby directed to pay is
called the “drawee”
• “Drawee in case of need” - When in the bill or in any endorsement thereon the name of any person is
given in addition to the drawee to be resorted to in case of need - such person is called a “Drawee in case
of need”.
• “Acceptor” – After the drawee of a bill has signed his assent upon the bill, he is called the “Acceptor”.
• “Acceptor for Honour” – When a bill of exchange has been noted or protested for non-acceptance or for
better security and any person accepts it, supra protest for the honour of the drawer or of any one of the
endorsers, such person is called an “acceptor for honour”.
• “Payee”- The person named in the instrument, to whom or to whose order the money is buy the
instrument directed to be paid, is called the “payee”
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29. Pay Order
•A pay order is not a cheque. It is issued by one
branch of a bank to another branch of the same
bank or under arrangement, to another bank with
a direction to credit the amount to the account of
the party on whose demand it is issued.
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30. Section 6 : “Cheque”
• “ a cheque in the electronic form” means a cheque which contains the exact
mirror image of a paper cheque, and is generated, written and signed in a secure
system ensuring the maximum safety standards with the use of digital signature
(with or without biometrics signature) and asymmetric crypto system
• “ a truncated cheque” means a cheque is truncated during the course of a
clearing cycle, either by the clearing house or by the bank whether paying or
receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.
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31. Section 9 – “Holder In Due Course”
• Holder in due course means any person, who for consideration became the
possessor of a promissory note, bill of exchange or cheque if payable to the
bearer,
• The phrase “in good faith and for value” has been split up by Section into four
elements all of which must concur to make a holder in due course. They are:
(1) The holder must have taken the instrument for value
(2) He must have obtained the instrument before maturity
(3) The instrument must be complete and regular on its face
(4) He must have taken the instrument in good faith and without notice of any
defect either in the instrument or in the title of the person negotiating it to him.
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32. Rights of Holder in Due course
• Presumptions
• Gets better title than that of the transferor.
• Instrument is purged or cleansed.
• Privileges in case of inchoate stamped instruments
• Liability of all prior parties
• Rights in case of fictitious bill
• Estoppel against denying capacity of payee to endorse

33. Section 15 – Endorsement
• When the maker or holder of a negotiable instrument signs the same,
otherwise than a 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 stamp paper intended to be completed as a negotiable instrument, he is said
to endorse the same, and is called the “endorser.”
• The endorsement of a negotiable instrument followed by delivery transfers to
the endorsee the property therein with right to further negotiation.
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34. • In an act of endorsement, there are mainly two persons - Endorser and
Endorsee who initiate the act overall.
• The person to whom the instrument is being endorsed is known as the
endorsee.
• While the person who is making the endorsement is known as the endorser.
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35. • Types of Endorsements:
• Blank or General Endorsement.
• Full Endorsement or Special Endorsement.
• Conditional Endorsement.
• Restrictive Endorsement.
• Partial Endorsement.
• Facultative Endorsement.
• Endorsement Sans Recourse
• Sans Frias Endorsement
• Forged Endorsement
• Negotiation Back
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36. • Blank or General Endorsement
• An endorsement is said to be blank or general when the endorser
puts his signature only on the instrument and does not write the
name of anyone to whom or to whose order the payment is to be
made.
• The effect of a blank endorsement is to cover the order instrument
into bearer. For all purposes of negotiation, it becomes a bearer
instrument.
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37. • Endorsement in Full / Special -
An endorsement is 'special' or in 'full' if the endorser, in addition to his
signature also mentions the name of the person to whom or to whose order the
payment is to be made.
There is direction added by endorser to the person specified called the endorsee,
of the instrument who now becomes its payee. Payee is entitled to sue for the
money due on the instrument.
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38. • Conditional Endorsement -
• The conditional endorsement is negotiation which takes effect on the
happening of a stated event, or not otherwise.
• The endorser of a negotiable instrument may, by express words in the
endorsement, exclude his own liability thereon depending upon an event.
• He may make such liability or the right of the endorsee to receive the amount
due thereon which depends upon the happening of a specified event, although
such event may never happen.
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39. • Restrictive endorsement
• Restrictive endorsement seeks to put an end the principal characteristics of a
Negotiable Instrument and seals its further negotiability.
• This may sound a little unusual, but the endorsee is very much within his
rights if he so signs that its subsequent transfer is restricted.
• This prevents the risk of unauthorized person obtaining payment through
fraud or forgery and the drawer losing his money.
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40. • Endorsement Sans Recourse
• Sans Recourse which means without recourse or reference. As such when the
property in a negotiable instrument is transferred sans recourse, the endorser,
negatives his liability and excludes himself from responsibility to all
subsequent endorsees.
• It is one of the usual form of qualified endorsement and virtually prohibits
negotiation since the endorser says in effect.
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41. • Facultative Endorsement
• Facultative Endorsement is an endorsement where the endorser waives some
right to which he is entitled.
• For example, the endorsee is liable to give notice of dishonor to the endorser
and normally failure to give notice will absolve (exclude) the endorser from
his liability.
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42. • Sans Frias Endorsement
• Sans Frias Endorsement is an endorsement where the endorser waives
endorsee or any other holder from payment of expenses which may have
incurred on bill. For example, notice of dishonor to the endorser, expenses of
noting and protesting.
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43. 45

44. • Crossing of Cheque
• A crossing is an instruction to the paying banker to pay the amount of cheque
to a particular banker and not over the counter.
• The crossing of the cheque secures the payment to a banker.
• The crossing of a cheque ensures security and protection to the holder.
• Types of Crossing
• Open cheque or bearer cheque
• Crossed cheque
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45. • General Crossing – cheque bears across its face an addition of two parallel
transverse lines.
• Special Crossing – cheque bears across its face an addition of the banker’s
name.
• Restrictive Crossing – It directs the collecting banker that he needs to credit
the amount of cheque only to the account of the payee.
• Non-Negotiable Crossing – It is when the words ‘Not Negotiable’ are written
between the two parallel transverse lines.
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46. General Crossing
In the case of general crossing on the cheque, the paying banker will pay money
to any banker. For the purpose of general crossing two transverse parallel lines at
the corner of the cheque are necessary.
Thus, in this case, the holder of the cheque or the payee will receive the payment
only through a bank account and not over the counter. The words ‘and Co.’ have
no significance as such.

47. Special Crossing
In special crossing, the cheque bears across its face an addition of the banker’s
name, with or without the words ‘not negotiable’.
In this case, the paying banker will pay the amount of cheque only to the banker
whose name appears in the crossing or to his collecting agent.

48. Restrictive Crossing
• This type of crossing restricts the negotiability of the cheque. It directs the
collecting banker that he needs to credit the amount of cheque only to the
account of the payee, or the party named or his agent.
• Where the collecting banker credits the proceeds of a cheque bearing such
crossing to any other account, he shall be guilty of negligence.
• Also, he will not be eligible for the protection to the collecting banker under
section 131 of the Act.

49. Not Negotiable Crossing:
In this type of crossing the words ‘Not Negotiable’ are written between the two
parallel transverse lines across the face of the cheque.
The Not Negotiable Crossing does not mean that the cheque is non-transferrable.
One of the important features of a negotiable instrument is that a person who
receives it in good faith, without negligence, for value, before maturity and
without knowing the defect in the title of the transferor, gets a good title to the
instrument.
But, Not Negotiable Crossing takes away one important feature of negotiable
instrument. In this case, the transferee does not get the rights of the holder in due

50. Dishonor of Negotiable Instruments:
a. Dishonor by No Acceptance
b. Dishonor by Non payment
a. Dishonor by Non acceptance:
• If the bill is presented to the drawee but he refuses to accept within 48 hours.
• Drawee is a fictitious person and he can not be traced.
• When the drawee is incompetent to contract.
• When the acceptance by the drawee is qualified.
• When there are more than one drawee and one of them refuses to accept.

51. Dishonor of Negotiable Instruments:
a. Dishonor by No Acceptance
b. Dishonor by Non payment
b. Dishonor by Non Payment:
Every negotiable instrument is required to be presented for payment. It is treated as dishonored
in the following circumstances:
1. A cheque is not presented for payment to the banker within 3 months of the date.
2. A promissory note is not presented for payment to the maker
3. A bill of exchange is not presented for payment

52. Liabilities of Parties to the Negotiable Instrument:
Depends upon the principle of suretyship. Some parties are liable as principal debtors and
others are liable as sureties or guarantors.
Principal Debtors:
1. The maker of promissory note
2. The drawer of a cheque
3. The drawer of a bill until its acceptance.
The liability of other parties is secondary and arises only when the principal debtor fails to pay
on the instrument.
However, in case of surities, each prior party is liable to pay to the each subsequent party.

53. • Noting: Noting is the authentic and official proof of presentment and dishonor of a negotiable
instrument. Notary public makes a formal demand for acceptance or payment upon the bill or
promissory note to the acceptor or maker. If the bill is not still accepted or paid, it is treated
as dishonoured by the notary public. This process is called as noting.
• Noting must be done by the notary public within the reasonable time.
• Notary Public is an officer appointed by the Government for the process of noting and
protesting. If a suit is filed against the dishonoured instrument, the notary public can give
evidence against non acceptance or non payment.
• Particulars of Noting:
• The fact of dishonor, The date of disnonour, The noting charges.
• If the instrument is not expressly dishonoured, the reason why the payee is treated it as
dishonoured.

54. Protest:
• Protest is the formal certificate of dishonor, issued to the holder by the notary public. This
certificate is based upon the noting.
• Protest is not compulsory for inland bills.
• In case if a suit is filed against dishonor of a negotiable instrument, the court presumes it as
dishonoured till the drawee disproves it.
• If the drawee of the bill becomes insolvent, the holder may ask for better security from the
acceptor, so that the bill will not be dishonored. In such case, the notary public presents the
bill to the acceptor for better security. If the acceptor refuses to do so, this fact is noted and
protested by the notary public. This process is called as protest for better security. However,
the holder has to wait till the date of maturity and see whether the instrument is really
dishonored.

55. Contents of Protest:
1. The instrument and its literal transcript.
2. The name of the person for whom and against whom the instrument is protested.
3. The fact and reason of dishonor
4. The signature of the notary public
5. In the case of acceptance for honour, the names of the persons by whom and for whom the
instrument is accepted.
6. In the case of payment for honour, the names of the persons by whom and for whom the
instrument is to be paid.

56. Notice of Protest:
• Notice of protest is to be given by the notary public or by the holder.
• It should be given to all the prior parties who are required to be held liable.
• It should be given to the holder or to the authorized agent or to the legal representative of a
deceased person.
• The notice of dishonor may be oral or written. A written notice may be sent by post to the
proper address of the parties.
• The notice must include the fact of dishonor, the time and reason of dishonor and the name of
the person who has dishonored it.
• The notice must be give within a reasonable time.
• The notice may be written in any language, vernacular or English.

57. Notice of dishonor (all previous points are applicable)
Notice of dishonor is not necessary in the following circumstances:
1. When the right to receive notice of dishonor is expressly waived.
2. When the drawer of cheque is countermanded the cheque.
3. When the party charged could not suffer any damage for want of notice.
4. When the party to whom the notice is to be served could not be traced.
5. When notice could not be given due to unavoidable circumstances.
6. When one of the drawers is also acceptors.