Negotiable Instruments

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.
Features of Negotiable Instruments

Easy Transferability- A negotiable instrument is freely

transferable. Usually, when we transfer any property to
somebody, we are required to make a transfer deed, get it
registered, pay stamp duty, etc. But, such formalities are not
required while transferring a negotiable instrument.

Title- Negotiability confers absolute and good title on the

transferee. It means that a person who receives a
negotiable instrument has a clear and undisputable title to
the instrument. However, the title of the receiver will be
absolute, only if he has got the instrument in good faith and
for a consideration. Also the receiver should have no
knowledge of the previous holder having any defect in his
title. Such a person is known as holder in due course.
Must be in writing- A negotiable instrument must be in writing. This
includes handwriting, typing, computer print out and engraving, etc.

Unconditional Order- In every negotiable instrument there must be an

unconditional order or promise for payment.

Payment- The instrument must involve payment of a certain sum of

money only and nothing else. For example, one cannot make
a promissory note on assets, securities, or goods.

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.
However, if the time of payment is linked to the death of a person, it is
nevertheless a negotiable instrument as death is certain, though the
time thereof is not.
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.

Presumptions- Certain presumptions apply to all

negotiable instruments, for example consideration is
presumed to have passed between the transferor and
the transferee.

Rule of evidence- These instruments are in writing and

signed by the parties, they are used as evidence of the
fact of indebtness because they have special rules of
evidence.
Characteristics of Negotiable Instrument
• Property: The possessor of negotiable instrument is
acknowledged to be the owner of property contained
therein. Negotiable instrument does not simply give
ownership of the instrument but right to property as well.
The property in negotiable instrument can be moved
without any formality. In the case of bearer instrument,
the possessions pass by meager delivery to the
transferee. In case of order instrument, endorsement &
delivery are necessary for transfer of property.

• Title: The transferee of negotiable instrument is called

‘holder in due course.’ A genuine transferee for value is
not affected by any flaw of title on the part of transferor
or of any of the previous holders of instrument.
• Rights: The transferee of negotiable instrument can take legal action
in his own name, in case of dishonor. A negotiable instrument can be
reassigned any number of times till it is attains maturity. The holder of
instrument need not give notice of transfer to the party legally
responsible on the instrument to pay.

• Presumptions: Certain presumptions are applicable to all negotiable

instruments i.e., a presumption that deliberation has been paid under
it. It is not essential to write in promissory note the words ‘for value
received’ or alike expressions for the reason that the payment of
consideration is acknowledged. The words are typically included to
generate additional substantiation of consideration.

• Prompt payment: A negotiable instrument facilitates the holder to

anticipate prompt payment because dishonor refers to the ruin of
credit of all persons who are parties to the instrument.
 Types of Negotiable Instrument

• There are three types of negotiable

instruments & these are:

a) Promissory Note
b) Bill of Exchange
c) Cheque
 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.
(Sec.4)
• The person who makes the promissory note & promises
to pay is called the maker & the person to whom the
payment is to be made is called the payee.
 Specimen of a Promissory Note

Rs. Kanpur, Nov. 17,

1000 2015

Three months after date, I promise to pay Shyam or order the sum of one
thousand rupees, for value received.

To, Stamp
Shyam
Saket Nagar
Sd/- Ram
Kanpur
 Essential elements of a Promissory Note

• Writing:- The instrument must be in writing.

Writing includes print & typewriting and may
also be in pen or ink.

• Promise to pay:- The instrument must contain

an express promise to pay.
The following instrument signed by A is not a
promissory note:
Ex. I am bound to pay the sum of Rs. 500
which I received from you.
• Definite and Unconditional:- The promise
to pay must be definite and unconditional. If
it is conditional or uncertain, the instrument
is invalid.
Ex. I promise to pay B Rs. 500 when he
delivers the goods.
• Signed by the maker:- The instrument must
be signed by the maker otherwise it is
incomplete & of no effect.
• Certain parties:- The instrument must point
out with certainty as to who the maker is &
who the payee is. Where the maker & the
payee can’t be identified with certainty with
the instrument itself, the instrument even if
contain an unconditional promise to pay is
not a promissory note.
• Certain sum of money:- The sum payable
must be certain and must not be capable of
contingent addition or subtraction.
Ex. I promise to pay B Rs. 1000 and all other
sums due to him.
• Promise to pay money only:- The payment
to be made under the instrument must be in
the legal tender money of India. If the
instrument contains a promise to pay
something in addition to money, it cannot be
a promissory note.
Ex. I promise to pay B 20 shares & 10 bonds
of XY limited.
• It may be payable on demand or after a
definite period of time.
 Bill of exchange
• 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
(Sec.5)
 Parties to a bill
a) Drawer:- The person who gives the order to pay or
who makes the bill is called the drawer.
b) Drawee:- The person who is directed to pay is called
the drawee. When the drawee accepts the bill, he is
called the acceptor.
c) Payee:- The person to whom the payment is to be
made is called the payee.
The drawer or the payee who is in the possession of the
bill is called the holder. The holder must present the bill
to the drawee for its acceptance.
When the holder endorses the bill, note or cheque, he
is called the endorser. The person to whom the bill,
note or cheque is endorsed is called the endorsee.
 Specimen of Bill of exchange

Rs. Kanpur, Nov. 17,

1000 2015

Three months after date, pay to Ram or order the sum of one thousand
rupees, for value received.

To, Shyam
Saket Nagar
Kanpur

Stamp

In case of need Accepted Sd/- Krishna

with Indian Bank, Shyam
Kanpur
Essential elements of Bill of Exchange

a) It must be in writing.

b) It must contain an order to pay.

c) The order must be unconditional.

d)It requires three parties i.e., the drawer,
the drawee & payee.

e) The parties must be certain.

f) It must be signed by the drawer.
g) The sum payable must be certain.
h) It must contain an order to pay money only.
i) The formalities like number, date, place,
consideration etc are usually found in an
instrument although they are not essential in
law but a bill must be affixed with the
necessary stamp.
 Difference between Promissory
note & Bill of exchange
Promissory Note Bill of Exchange

There are two parties. There are three parties.

It contains an unconditional promise to It contains an unconditional order to

pay. pay.
The maker of the note is the debtor & The drawer of the bill is the creditor
he who directs the drawee (his debtor) to
himself undertakes to pay. pay.
The liability of the maker of a note is The liability of a drawer of a bill is
primary & absolute. secondary & conditional.

A note cannot be made payable to the In a bill, the drawer & the payee may be
maker himself. one & the same person.
 Cheque
• A cheque is a bill of exchange drawn upon a
specified banker and payable on demand and it
includes the electronic image of a cheque or a
cheque in the electronic form.
• A cheque in the electronic form means, “Cheque
which contains the exact mirror image of a proper
cheque and is generated, written & signed in a
secure system ensuring the minimum safety
standard with the use of digital signature”.
• Cheque maturity date is of 3 months from the date
of issue.
 A cheque is the species of a bill of
exchange but it has the following two
additional qualifications:
a) It is always drawn on specified banker.
b) It is always payable on demand.
All cheques are bill of exchange but all bill
of exchange are not cheque. A cheque
must have all the essential elements of a
bill of exchange but it doesn’t require
acceptance as it is intended for
immediate payment.
Speciment of Cheque
Difference between a bill of
exchange and a cheque
Bill of exchange Cheque
It may be drawn on any person It is always drawn on a banker.
including a banker.

It must be accepted before the drawee A cheque requires no acceptance.

to make payment upon it.

It may be payable on demand or after It is always payable on demand.

the expiry of a certain period after date
or sight.

A bill is never be crossed. A cheque may be crossed.

A bill except in certain cases must be A cheque doesn’t require any stamp.
stamped.
 Crossing of Cheques
• Open Cheque:- A cheque which is
payable in cash across the counter of
the bank is called an open cheque.
When such a cheque is in circulation, a
great risk attends it. If it’s holder looses
it, it’s finder may go to the bank and get
payment unless its payment has already
been stopped.
 Crossed Cheque
• A crossed cheque is one in which two
parallel transverse lines with or without
the words ‘& Co.’ are drawn. The payment
of such a cheque can be obtain only
through banker. Thus, crossing is a
direction to the drawee banker to pay the
amount of money on a crossed cheque
generally to a banker so that the party
who obtains the payment of the cheque
can be easily traced.
 Types of crossing
• There are two types of crossing:
• a) General Crossing:- A cheque is said to be
crossed generally where it bears across its
face an addition of
• i) The words “and company” or any
abbreviation thereof between two parallel
transverse lines
either with or without the words
“not negotiable”.
• ii) Two parallel transverse lines simply either
with or without the words “not negotiable”.
(Sec. 123)
Specimen of General
Crossing
 b) Special Crossing
• Where a cheque bears across its face in
addition of name of the banker either with
or without the words “not negotiable”, the
cheque is deemed to be crossed
specially. (Sec. 124)
Specimen of special
crossing
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.
 Dishonour of Cheques
DEFINITION

The Negotiable Instruments Act, 1881 makes the dishonour

of cheques a criminal offence.

Section 138 of NIA provides that the dishonour of the

cheques for the reasons:

a. “insufficiency of funds” and

b. Signature on the cheque does not match that in the bank
records.
KINDS OF DISHONOUR OF CHEQUE

1. Dishonour by non-acceptance.

S.91[14] of the Act speaks of dishonour by non

acceptance. Presentment for acceptance is required
only in the case of a bill of exchange. Usually
acceptance and payment go together and this usually
happens in case an instrument is payable after sight,
thus often it is difficult to distinguish the two because
dishonour by non-payment is usually dishonour by non-
acceptance, and thus it is only this bill of exchange
which can be dishonoured by non-acceptance and not a
cheque as in the case of a cheque no acceptance is
required to be taken to the banker and cheques are
mainly instruments payable at sight.
2. Dishonour by non-payment is said to be
dishonoured.

The second kind of dishonour, is that of dishonour by non-

payment. A negotiable instrument is said to be dishonoured
by non-payment when the drawee of a cheque makes default
in payment upon being duly required to pay the same.
EFFECTS OF DISHONOUR OF CHEQUE

1. Taking of legal action - The payee/holder can take action against the
drawer of such a bill may take action on the exact time of dishonouring of
the bill. Thus the holder need not wait for the bill to mature and then to
take action for dishonouring the same.

2. When a cheque is said to be dishonoured it loses its basic

characteristic of negotiability with immediate effect.

3. On dishonouring of a cheque, nothing prevents the holder thereof to

present it again particularly on being asked by the drawer of the cheque.

4. Mere dishonouring of cheques does not give rise to a cause of action in

favour of the complainant but it accrues only after the issue of demand
notice and failure of the drawer to make the payment.
The Negotiable Instruments (Amendment) Bill,
2017

The Negotiable Instruments (Amendment) Bill 2017 has

been introduced in the Lok Sabha earlier this year on Jan
2nd, 2018. The bill seeks for amending the existing Act, The
bill defines the promissory note, bill of exchanges and
cheques. The bill also specifies the penalties for dishonor of
cheques and various other violations related to negotiable
instruments.

As per a recent circular, upto INR 10,000 along with interest

at the rate of (6% - 9%) would have to be paid by an
individual for cheques being dishonored.