Negotiable instruments are legal documents that can be transferred between parties as a form of payment. Common examples include cheques, promissory notes, and bills of exchange. Cheques allow parties to transfer money from a bank account, while promissory notes and bills of exchange facilitate credit transactions. Negotiable instruments must meet certain legal requirements to be enforceable, such as being in writing, containing an unconditional order of payment, and specifying the amount to be paid. Misusing these instruments by forgery, fraud, or bouncing payments can result in legal penalties like fines and imprisonment according to Nepali law. Proper use of negotiable instruments is important for commercial and financial transactions.

1. Unit - 6
Legal provision relating to Negotiable instrument

3. To be contd….
- Negotiable instruments are legal documents that can be transferred from one person to
another as a form of payment or as a means of obtaining credit.
- These instruments are usually in the form of a written promise to pay a certain amount of
money, and they can be transferred by endorsement or delivery.
- Some common examples of negotiable instruments include cheques, promissory notes, and
bills of exchange.
- The concept of negotiable instruments is important in commercial and financial transactions
because they provide a way for parties to transfer money without the need for physical cash.
- These instruments are also easily transferable, making them a convenient way for businesses
to obtain credit or for individuals to pay bills.
- One of the key characteristics of negotiable instruments is that they are enforceable by law.
This means that if one party fails to honor their obligations under the instrument, the other
party can take legal action to recover the funds owed to them.
- Overall, negotiable instruments play an important role in facilitating commerce and financial
transactions, and understanding their use and legal implications is essential for anyone
involved in these activities.

6. 1. Cheque
- Cheque is an instrument in writing containing an unconditional order, addressed
to a banker, sign by the person who has deposited money with the banker,
requiring him to pay on demand a certain sum of money only to or to the order
of certain person or to the bearer of instrument
- A cheque is an order to a bank to pay a stated sum from drawer's account,
written on a specially printed form. There are three parties Drawer, Drawee and
Payee.
- The cheque is a payment instrument for any business transaction.
- For obtaining cheque one should have a bank account. The amount deposited by
any account holder can be withdrawn with cheque by self or by ordering bank to
make payment to any other third party as well considering the types of cheque.

7. Types of cheque
1. Bearer Cheque
When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is
called a bearer cheque. The bearer cheque is payable to the person specified therein or to any
other else who presents it to the bank for payment. However, such cheques are risky, this is
because if such cheques are lost, the finder of the cheque can collect payment from the bank.
2. Crossed Cheque
Crossing of cheque means drawing two parallel lines on the face of the cheque with or without
additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed cheque
cannot be encashed at the cash counter of a bank but it can only be credited to the payee's
account.

8. 3. Post-Dated Cheque
If a cheque bears a date which is yet to come (future date) then it is known as
post-dated cheque. A post dated cheque cannot be honoured earlier than the date
on the cheque.
4. Stale Cheque
If a cheque is presented for payment after six months from the date of the cheque
it is called stale cheque. A stale cheque is not honoured by the bank.

9. Features of cheque
1. Cheque is an instrument in writing
A cheque must be in writing. It can be written in ink pen, ball point pen, typed or even printed.
Oral orders are not considered as cheques.
2. Cheque contains an unconditional order
Every cheque contains an unconditional order issued by the customer to his bank. It does not
contains a request for payment. A cheque containing conditional orders is dishonoured by the
bank.
3. Cheque is drawn by a customer on his bank
A cheque is always drawn on a specific bank mentioned therein. Cheque drawn by stranger are
of no meaning. Cheque book facility is made available only to account holder who are
supposed to maintain certain minimum balance in the account.
4. Cheque must be signed by customer
A cheque must be signed by customer (Account holder) . Unsigned cheques or signed by
persons other than customers are not regarded as cheque.
5. Cheque must be payable on demand
A cheque when presented for payment must be paid on demand. If cheque is made payable
after the expiry of certain period of time then it will not be a cheque.

10. 6. Cheque must mention exact amount to be paid
Cheque must be for money only. The amount to be paid by the banker must be certain. It must
be written in words and figures.
7. Payee must be certain to whom payment is made
The payee of the cheque should be certain whom the payment of a cheque is to be made i.e.
either real person or artificial person like joint stock company. The name of the payee must be
written on the cheque or it can be made payable to bearer.
8. Cheque must be duly dated by customer of bank
A cheque must be duly dated by the customer of bank. The cheque must indicate clearly the
date, month and the year. A cheque is valid for a period of three months from the date of issue.
9. Cheque has 3 parties : Drawer, Drawee & Payee
1.Drawer : A drawer is a person, who draws a cheque.
2.Drawee : A drawee is a bank on whom a cheque is drawn.
3.Payee : A payee is a person in whose favour a cheque is drawn.

11. • Double writing.
• Dual script (language).
• Dual Ink
• Amount in words and figures not matched
• Signature different from sample specimen card in system
• Insufficient Fund
• Stamp missing in company accounts
• Post dated cheques i.e. presenting the cheque before the date mentioned in
cheque
• Expired cheque
• Torn and obsolete cheque
• Cheque registered as lost in bank’s system
Validity and Dishonored of cheque

12. • Demand Draft or DD can is a negotiable instrument, in which the drawee
bank is assumed to make the payment in full, whenever the DD is
presented by the payee, to the bank for payment.
• A demand draft is an instrument issued by the bank in favour of the
beneficiary and used for the transfer of money. But the person has to
visit the bank branch to apply for the demand draft.
• It is issued by the bank in favour of the recipient to transfer money from
one bank branch to another, located outside the city.
• Here, the role of the drawee bank is like a guarantor, which assures the
release of payment on presentment of the document or collect the
money from his/her bank via clearing mechanism.
Draft

15. • A bill of exchange is an unconditional negotiable instrument ordering the
drawee to pay a certain sum of money to payee addressed in the instrument.
• It is issued by the drawer and accepted by the drawee.
• Fixed payment date of making payment to the payee is written in the bill of
exchange.
• It is an acknowledgment prepared by the creditor to show the indebtedness of
the debtor who accepts it for payment.
BILL OF EXCHANGE

17. Features of Bill of Exchange
• An instrument which a creditor draws upon his debtor.
• It carries an absolute order to pay a specified sum.
• The sum is payable to the person whose name is mentioned in the bill or
to any other person, or the order of the drawer, or to the bearer of the
instrument.
• It requires to be stamped, duly signed by the maker and accepted by the
drawee.
• It contains the date by which the sum should be paid to the creditor.

18. Differences Between Cheque and Bill of Exchange
1. An instrument used to make payments, that can be just transferred by hand delivery
is known as the cheque. An acknowledgment prepared by the creditor to show the
indebtedness of the debtor who accepts it for payment is known as a bill of
exchange.
2. The drawer and payee are always different in the case of a cheque. In general,
drawer and payee are the same persons in the case of a bill of exchange.
3. The stamp is not required in cheque. Conversely, a bill of exchange must be
stamped.
4. A cheque is payable to the bearer on demand. As opposed to the bill of exchange, it
cannot be made payable to the bearer on demand.
5. The cheque can be crossed, but a Bill of Exchange cannot be crossed.
6. There is no days of grace allowed in cheque, as the amount is paid at the time of
presentment of the cheque. Three days of grace are allowed in the bill of exchange.
7. A cheque does not need acceptance whereas a bill needs to be accepted by the
drawee.

19. Promissory note
• A promissory note is an unconditional promise to pay put into writing by a person or
entity and signed by the borrower or person making the promise.
• A promissory note refers to a financial instrument that includes a written promise from
the issuer to pay a second party – the payee – a specific sum of money, either on a
specific future date or whenever the payee demands payment (depending on the terms
of the note).
• The promissory note should include all terms that relate to the indebtedness, including
when and where the note was issued, the principal amount the issuer owes, what the
interest rate on the note is, and when the note reaches maturity (becomes due).
• Promissory notes are often created between a borrower and a lender in which the
borrower promises to pay the lender a specific amount of money by the specified date.
• Promissory notes are debt instruments. They can be issued by financial institutions.
However, they can also be issued by small companies or individuals. They enable a
person or a business to obtain financing without going through a bank. The issuer of the
note simply must be willing to carry it until maturity and be willing and able to provide
the funds specified in the agreed-upon terms laid out in the note.

22. Impact and legal actions for misusing cheque
• Not to obtain or issue cheques, cheque-books or bank statements in an unauthorized
manner:
(1) No one shall demand or obtain a cheque, cheque-book or account statement of other
person in an unauthorized manner or by misleading in any manner or by giving an
impression that he/she is the true holder of the same.
(2) No one shall, in an unauthorized manner, provide a cheque, cheque-book or account
statement to other person or institution without the request of the concerned person in
writing.
• Not to make unauthorized withdrawals or payments:
While withdrawing or making payment from an account maintained with a bank or financial
institution, no one shall;
(a) withdraw money, in an unauthorized manner, from other person's account,
(b) withdraw money by stealing a cheque held by other person or by obtaining the same in any
other manner,
(c) transfer fund, in an unauthorized manner, from customer's account or make unauthorized
payment there from,
(d) obtain or make cash payment by getting any sort of fake or other person's bills of exchange,
cheque, draft or other similar instruments in an unauthorized manner.

23. • Determination of Compensation:
The compensation payable in case of dishonour of a Negotiable Instrument, by
any party liable to the Holder or any endorsee shall be determined as follows:-
(a) The Holder is entitled to the amount, together with the expenses properly
incurred in presenting, noting and protesting it.
(b) An endorser who, being liable, has paid the amount due on the same is
entitled to the amount so paid with interest from the date of payment until
realization thereof.
• Penalty:
In case any person who deliberately transfers a Cheque by drawing it to some
body that he/she does not bear deposit in the Bank or even if there is a deposit
which is not sufficient, and if the Cheque thus transferred is dishonoured due to
lack of sufficient deposit when the Cheque is presented to the concerned Bank
for the payment, the amount mentioned in the Cheque as well as interest on it
shall be caused to be recovered to the Holder from the Drawer and he/she shall
be punished with an imprisonment up to Three months or a fine up Three
Thousand Rupees or both.

24. Impact and legal actions for misusing promissory note
A promissory note is a legal document that contains a promise to pay a certain
amount of money to a specific person or entity. In Nepal, misusing a promissory
note is considered a serious offense, and it can result in legal action.
• If a person uses a promissory note to obtain goods or services without intending
to pay, they can be charged with fraud. The punishment for fraud in Nepal can
include imprisonment and fines.
• Additionally, if a person falsely creates a promissory note or alters an existing
one, they can be charged with forgery. The punishment for forgery in Nepal can
include imprisonment and fines.
• In order to avoid legal issues related to promissory notes, it is important to use
them responsibly and only for their intended purpose. If you suspect that
someone has misused a promissory note or engaged in fraudulent or illegal
activities related to promissory notes, you should report the matter to the
appropriate authorities.

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