The document discusses key aspects of negotiable instruments under the Negotiable Instruments Act 1881. It defines negotiable instruments as documents that allow the transfer of rights from one person to another. The Act recognizes promissory notes, bills of exchange, and cheques as negotiable instruments. It outlines essential characteristics like being freely transferable and certain presumptions that apply. The document also explains key parties and elements of promissory notes, bills of exchange, and cheques.

1. The Negotiable Instruments Act
1881

2. Introduction
• The word negotiable means transferable from
one person to another and the term
instrument means any written document by
which a right is created in favour of some
person. Thus the negotiable instrument is a
document by which the right vested in a
person can be transferred to another person
in accordance with the Negotiable
Instruments Act 1881.

3. Negotiable Instrument
• According to Section 13(i) “ a negotiable instrument means a
promissory note, bill of exchange or cheque payable either on
order or to bearer”.
• An instrument may be negotiable either by
1. Statute : Promissory Notes , bills of exchange and cheques
are negotiable instruments under Negotiable Instruments
Act 1881 .
2. By Usage : Bank Notes , Bank Drafts , scripts, treasury Bills etc

4. Characteristics
• It is freely transferable
• Better title
• Right to sue
• A negotiable instrument can be transferred any number of
times till its maturity
• A negotiable instrument is subject to certain presumptions
• Presumptions – certain presumptions as to
consideration, reasonable time etc., apply to all negotiable
instruments.

5. Presumptions
1. Consideration : Every negotiable instrument is deemed to
have been drawn and accepted , endorsed, negotiated, or
transferred for consideration
2. Date : Every negotiable instrument must bear the date on
which it is made or drawn
3. Acceptance : Every Bill of exchange was accepted within a
reasonable time after the date mentioned therein and before
the date of its maturity
4. Transfer : Every transfer should be made before the expiry

6. Promissory Notes
• Section 4 defines it as, “ 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”.
• The person who makes the promissory note is called the
maker.
• The person to whom payment is to be made is called the
payee. e.g. –
• I promise to pay B or order rs. 500
• I promise to pay B Rs.500 on D’ death, provided D leaves me
enough to pay that sum

7. Essentials of Promissory Note
• It must be in writing
• It must contain express promise to pay’
• The promise to pay must be unconditional
• It must be signed by maker
• The maker must be certain- It must describe the name &
designation of the maker, sum of money
• There are 2 parties involved i.e. maker and the payee
• The payee must be certain- It is essential that it must contain
a promise to pay some person ascertained by name or
designation.
• The sum payable must be certain
• The promise should be to pay money and money only
• A currency note is not a promissory note

8. Egs of Promissory Note

9. • (a) “Mr. B, I.O.U. (I owe you) Rs. 500”
• (b) “I am liable to pay you Rs. 500”.
• (c) “I have taken from you Rs. 100, whenever
you ask for it have to pay”

10. Bill of Exchange
• Section 5, is defined as “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”.
• Parties to bill of exchange :
• Drawer – The person who makes/orders to pay bill of exchange.
• Drawee – The person who is directed to pay on bill. On acceptance
he becomes acceptor.
• Payee – The person to whom the payment is to be made.
• Drawer & Payee can be the same person.
• X sells goods worth Rs. 2000 to Y & allow him 3 months time to pay
the price. X then draws a bill on Y “ Three months after date, pay to
my order the sum of Rs. 2000 for value received”. X is drawer . Y is
Drawee.

11. Essential of Bills of Exchange
• It must be in writing
• It must contain an order to pay and a promise or request
• The order must be unconditional
• There must be 3 parties i.e. : drawer, drawee, and payee
• The parties must be certain
• It must be signed by the drawer
• Number, date and place are not essential

12. Bill of Exchange

13. • (a) “I shall be highly obliged if you make it
convenient to pay Rs.1000 to Suresh”.
• (b) “Mr. Ramesh, please let the bearer have
one thousand rupees, and place it to my
account and oblige”
• there is no order to pay, but only a request to
pay
• “Please pay Rs. 500 to the order of ‘A’.

14. Cheques
• Section 6, defines it as “ A cheque is a bill of exchange drawn
on a specified banker & not expressed to be payable
otherwise than on demand”.
• It is always drawn on a bank
• It is payable to bearer on demand
• Parties To Cheque:
1. Drawer – who makes the cheque
2. Payee – to whom payment is to be made
3. Drawee – Bank .

15. Meaning of Crossing of Cheque
• Crossing of a cheque is a unique feature associated with a
cheque affecting to a certain level the responsibility of the
paying Banker and also its negotiable Character.
• Crossing of a Cheque is a direction to a particular Banker by
the Drawer that Payment should not be made across the
Counter. The payment on the crossed Cheque can be collected
only through a Banker.
• Crossing of the Cheque is affected by drawing two parallel
Transverse lines .
• The Cheque that is not crossed is an open Cheque.

16. Cheque

17. Types of cheque
• There are two types of cheque:
1. Open cheque – those which can be encashed across the
counter of the bank. Liable to great risk if stolen or lost.
Finder can get payment from bank.
2. Crossed cheque – which bears two transverse lines with or
without the words “ & co.”

18. Why Crossing of Cheque is being used
• The important usefulness of a crossing cheque is that it cannot be
covered at the counter but can be collected only by a bank from the
drawee bank.
• Crossing provides a protection and safeguard to the owner of the
cheque as by securing payment through a banker it can be easily
detected to whose use the money is received. Where the cheque is
crossed the paying banker shall not pay it except to a banker.
• A special crossing makes the cheque more safe than a general
crossing because the payee or holder cannot receive payment
except through the banker named on the cheque.

19. Who can cross a Cheque
1. The drawer of a Cheque
2. Holder of the Cheque
3. The Banker in whose favor the cheque has been crossed
specially

20. Dishonour of the Cheque on the
grounds of Insufficiency of Funds
• Section 138 to 142 of the Negotiable
Instruments Act provide for Criminal Penalties
in event of Dishonour of Cheques for
Insufficiency of Funds. The drawer under
Section 138 may be punished with
imprisonment upto 2 years or with a fine
twice the amount of the Cheque or with Both.

21. Holder and Holder in due course
• Holder is a person who is entitled in his own name to
the possession of the negotiable instrument and to
recover the amount thereon.
• Holder in due course is a person who came into
possession of the instrument on payment of
consideration and without knowledge of the fact that
the erstwhile owner had a defective title.
• The holder in due course has a better title than the
holder.

22. Privileges of a holder in due course
• He can sue every prior party to the negotiable
instrument if the instrument is not duly
satisfied.
• When the holder endorses such instrument
further, the new owner has a good title unless
he is party to fraud.
• The burden of proving his title does not lie
upon the holder in due course.

23. Meaning of Endorsement
• When a maker or holder writes the person’s name on the face
or back of the instrument & puts his signatures thereto for the
purpose of negotiation, it is called ‘endorsement’.
• Person who signs – endorser
• To whom it is endorsed – endorsee.
• A legal term that refers to the signing of a document which
allows for the legal transfer of a negotiable from one party to
another.
• When an employer signs a check, they are endorsing the
transfer of money from the business accounts to the account
of the employee.

24. Essentials of valid endorsement
1. On the back or face of the instrument.
2. Must be made by maker or holder.
3. Must be properly signed by the endorser.
4. It must be for the entire negotiation instrument.
5. No specific form of words are necessary for endorsement.

25. Kinds of endorsement
1. Blank or general endorsement – where endorsee simply puts
his signature on the back of the instrument without writing
name of the person in whose favor the instrument is
endorsed.
2. Special or full endorsement – An endorsement with the
direction to pay amount mentioned in the instrument to a
specified person or his order & the endorser writes his
signature under it.
3. Partial endorsement – When an endorser is willing to
transfer to an endorsee only a part of the amount of the
instrument. Such an endorsement does not operate as a
negotiation of the instrument.

26. • Restrictive endorsement – An endorsement is said to be
restrictive if it prohibits or restricts the further negotiability of
the instrument. The holder of such an instrument can only
receive the payment but he cannot negotiate it further. An
instrument can be made restrictive only by expressed words.
• Conditional endorsement – It limit the liability of the
endorser. E.G. – “ Pay A or order on his marrying B”.

27. Effects of Endorsement
• The property in instrument is transferred from
endorser to endorsee.
• The endorsee gets right to negotiate the instrument
further.
• The endorsee get the right to sue in his own name to
all other parties.

28. Promissory Note Bill of Exchange
1. It contains a promise to pay. 1. It contains an order to pay.
2. It is presented for payment 2. It is required to be accepted either
without any previous by the drawee or by some one else
acceptance by the maker. on his behalf, before it can be
presented for payment.
3. It cannot be made payable to
the maker himself. The maker 3. The drawer and payee or the
and the payee cannot be the drawee and the payee may be the
same person. same person.
4. There are three
4. In the case of a promissory
parties, drawer, drawee and payee.
note there are only two
parties, the maker and the 5. A bill of exchange cannot be
payee. drawn conditionally, but it can be
accepted conditionally with the
5. A promissory note can never consent of the holder.
be conditional.
6. A notice of dishonour must be
6. In case of dishonour no notice given in case of dishonour of a Bills
of dishonour is required to be of Exchange.
given by the Holder

29. Cheque Bill of exchange
1. Drawee: Cheque can be drawn 1. The drawee may be any person.
only on a banker. 2. A bill may be drawn payable on
2. Time of payment: A cheque is demand or on expiry of certain
payable on demand. period after date or sight.
3. Grace period: Cheque is payable 3. While calculating maturity three
on demand and no grace period is day’s grace is allowed.
allowed. 4. A notice of dishonour is required.
4. Notice of dishonour: Notice of 5. Bills require presentment for
dishonour is not necessary. acceptance and it is better to
5. Acceptance: A cheque is not present them for acceptance even
required to be presented for when it is not essential to do so.
acceptance. It needs to be 6. A bill of exchange cannot be
presented only for payment. crossed.
6. Crossing: A cheque may be 7. A bill may be drawn for any period.
crossed.
7. Validity period: A cheque is usually
valid for a period of six months.