Negotiable Instrument

1. NEGOTIABLE
INSTRUMENTS ACT, 1881
LEGAL ASPECTS OF
BUSINESS

2. INTRODUCTION TO NEGOTIABLE
INSTRUMENTS ACT, 1881
The Negotiable Instruments Act was enacted, in India, in 1881. Prior to
its enactment, the provision of the English Negotiable Instrument Act were
applicable in India, and the present Act is also based on the English Act
with certain modifications. It extends to the whole of India except the State
of Jammu and Kashmir. The Act operates subject to the provisions of
Sections 31 and 32 of the Reserve Bank of India Act, 1934.
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3. MEANING OF NEGOTIABLE
INSTRUMENT
The word negotiable means ‘transferable by delivery’, and word
instrument means ‘a written document by which a right is created in
favour of some person. Thus, the term “negotiable instrument” means “a
written document transferable by delivery”.
According to Section 13 (1) of the Negotiable Instruments Act,
“A negotiable instrument means a promissory note, bill of exchange, or
cheque payable either to order or to bearer”. “A negotiable instrument
may be made payable to two or more payees jointly, or it may be made
payable in the alternative to one of two, or one or some of several
payees” [Section 13(2)].
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4. FEATURES OF NEGOTIABLE
INSTRUMENTS
 Writing and Signature
 Money
 Freely Transferable
 Title of Holder Free from all Defects
 Notice
 Presumption
 Special Procedure
 Popularity
 Evidence
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5. TYPES OF NEGOTIABLE
INSTRUMENTS
There are two types of Negotiable Instruments:
1. Instruments Negotiable by Statute:
The Negotiable Instruments Act mentions only three kinds of
negotiable instruments (Section 13). These are:
1. Promissory Notes
2. Bills of Exchange, and
3. Cheques
2. Instruments Negotiable by Custom or Usage:
There are certain other instruments which have acquired the
character of negotiability by the usage or custom of trade. For
example: Exchequer bills, Bank notes, Share warrants, Circular notes,
Bearer debentures, Dividend warrants, Share certificates with blank
transfer deeds, etc.
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6. PROMISSORY NOTES
Section 4 of the Act defines, “A promissory note is an
instrument in writing (note being a bank-note or a currency note)
containing an unconditional undertaking, signed by the maker, to pay a
certain sum of money to or to the order of a certain person, or to the bearer
of the instruments.”
The person who makes the promissory note and promises to pay
is called the maker. The person to whom the payment is to be made is
called the payee.
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7. CHARACTERISTICS OF A
PROMISSORY NOTE
 It is an Instrument in Writing
 It is a Promise to Pay
 Signed by the Maker
 Other Formalities
 Definite and Unconditional Promise
 Promise to Pay Money Only
 Maker must be a Certain Person
 Payee must be Certain
 Sum Payable must be Certain
 It may be Payable on Demand or After a Definite Period of Time
 It cannot be Made Payable to Bearer on Demand
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8. PARTIES TO A PROMISSORY NOTE
 Maker:
Maker is the person who promises to pay the amount stated in the
note.
 Payee:
Payee is the person to whom the amount of the note is payable.
 Holder:
He is either the payee or the person to whom the note may have been
endorsed.
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9. SPECIMEN OF PROMISSORY
NOTE
Rs. 10,000
Lucknow
April 10, 2013
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the sum of Rupees Ten
Thousand, for value received.
To,
Shri Ramesh,
B-20, Green Park,
Mumbai.
(Maker)
Stamp
Sd/-
Ram
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10. BILL OF EXCHANGE
According to Section 5 of the act, 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”. It is also called
a Draft.
Special Benefits of Bill of Exchange:
 A bill of exchange is a double secured instrument.
 In case of immediate requirement, a Bill may be discounted with a bank.
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11. ESSENTIAL ELEMENTS OF BILL
OF EXCHANGE
 It must be in Writing.
 Order to pay
 Drawee
 Signature of the Drawer
 Unconditional Order
 Parties
 Certainty of Amount
 Payment in Kind is not Valid
 Stamping
 Cannot be made Payable to Bearer on Demand
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12. PARTIES TO A BILL OF
EXCHANGE
 Drawer:
The maker of a bill of exchange is called the drawer.
 Drawee:
The person directed to pay the money by the drawer is called the
drawee.
 Payee:
The person named in the instrument, to whom or to whose order the
money are directed to be paid by the instruments are called the payee.
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13. SPECIMEN OF BILL OF
EXCHANGE
Rs. 10,000
Mumbai
April 10, 2013
Three months after date pay to Ram (Payee) order the sum of Ten Thousand Rupees, for value
received.
To,
Sushil
B-20, Green Park,
Lucknow - 226020.
Stamp
Sd/- Ram
In case of need with
Canara Bank, Delhi.
(Drawer)
(Drawer)
Accepted
Sushil
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14. CLASSIFICATION OF BILL OF
EXCHANGE
 Inland and Foreign Bills [Section 11 and 12]
 Inland Bill:
 It is drawn in India on a person residing in India whether payable in or outside India;
or
 It is drawn in India on a person residing outside India but payable in India.
 Foreign Bill:
 A bill drawn in India on a person residing outside India and made payable outside
India.
 Drawn upon a person who is the resident of a foreign country.
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15. CLASSIFICATION OF BILL OF
EXCHANGE (Cont.…)
 Time and Demand Bills:
 Time Bill: A bill payable after a fixed time is termed as a time bill. A bill
payable “after date” is a time bill.
 Demand Bill: A bill payable at sight or on demand is termed as a demand bill.
 Trade and Accommodation Bills:
 Trade Bill: A bill drawn and accepted for a genuine trade transaction is
termed as “trade bill”.
 Accommodation Bill: A bill drawn and accepted not for a genuine trade
transaction but only to provide financial help to some party is termed as an
“accommodation bill”.
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16. CHEQUE
According to Section 6 of the act, A cheque is “a bill of exchange
drawn on a specified banker and not expressed to be payable otherwise
than on demand”. A cheque is also, therefore, a bill of exchange with two
additional qualification:
 It is always drawn on a specified banker.
 It is always payable on demand.
Special Benefits of Bill of Exchange:
 A bill of exchange is a double secured instrument.
 In case of immediate requirement, a Bill may be discounted with a bank.
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17. ESSENTIAL ELEMENTS OF A
CHEQUE
 In writing
 Express Order to Pay
 Definite and Unconditional Order
 Signed by the Drawer
 Order to Pay Certain Sum
 Order to Pay Money Only
 Certain Three Parties
 Drawn upon a Specified Banker
 Payable on Demand
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18. PARTIES TO A CHEQUE
 Drawer:
Drawer is the person who draws the cheque.
 Drawee:
Drawee is the drawer’s banker on whom the cheque has been drawn.
 Payee:
Payee is the person who is entitled to receive the payment of a cheque.
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19. SPECIMEN OF CHEQUE
Pay ……………………………………………………………………………………………………………......
……………………………………………………………………………………………………. Or Bearer
Rupees ……………………………………………………………………………………………………………
……………………………………………………………………………………………Rs.
Kapoorthala Bagh,
Mumbai – 400033
IFSCode:MAHB0000316
A/c No.
“ΙΙ473792ΙΙ” 000240000 000000 10
SHANKAR GAJARE
Signature
Please sign above
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D D M M Y Y Y Y

20. TYPES OF A CHEQUE
 Bearer Cheque
 Cross Cheque
 Cheque Crossed Specially
 Restrictive Crossing (A/c Payee Only)
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21. NEGOTIATION
According to section 14 of the Act, ‘when a promissory note, 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.’ The main
purpose and essence of negotiation is to make the transferee of a
promissory note, a bill of exchange or a cheque the holder there of.
Negotiation thus requires two conditions to be fulfilled, namely:
 There must be a transfer of the instrument to another person; and
 The transfer must be made in such a manner as to constitute the
transferee the holder of the instrument.
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22. MODES OF NEGOTIATION
 Negotiation by delivery (Sec. 47):
Where a promissory note or a bill of exchange or a cheque is
payable to a bearer, it may be negotiated by delivery thereof. Example:
A the holder of a negotiable instrument payable to bearer, delivers it to
B’s agent to keep it for B. The instrument has been negotiated.
 Negotiation by endorsement and delivery (Sec. 48):
A promissory note, a cheque or a bill of exchange payable to order
can be negotiated only be endorsement and delivery. Unless the holder
signs his endorsement on the instrument and delivers it, the transferee
does not become a holder. If there are more payees than one, all must
endorse it.
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23. ENDORSEMENT [SECTION 15]
The word ‘endorsement’ in its literal sense means, writing on the
back of an instrument. But under the Negotiable Instruments Act it means,
the writing of one’s name on the back of the instrument or any paper
attached to it with the intention of transferring the rights therein. Thus,
endorsement is signing a negotiable instrument for the purpose of
negotiation. The person who effects an endorsement is called an ‘endorser’,
and the person to whom negotiable instrument is transferred by
endorsement is called the ‘endorsee’.
Who may Endorse / Negotiate [Section 51]:
Every Sole maker, drawer, payee or endorsee, or all of several joint
makers, drawers, payees or endorsees of a negotiable instrument may
endorse and negotiate the same if the negotiability of such instrument has
not been restricted or excluded as mentioned in Section 50.
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24. ENDORSEMENT (Cont….)
Essentials of a Valid Endorsement:
 It must be on the back or face of instrument or on a slip of paper
annexed thereto.
 It must be signed by the endorser.
 It must be completed by the delivery of the instrument.
 It must be made by the holder of the instrument.
Kinds of Endorsement:
 Blank or General Endorsement
 Full or Special Endorsement
 Partial Endorsement
 Restrictive Endorsement
 Conditional Endorsement
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