N.i. act 010814

NEGOTIABLE
INSTRUMENTS ACT
-Prof. Bijoy B Bhattacharyya
Dean, Banking
Welingkar Institute of Management
Development & Research

Questions
1. ‘A’ draws a cheque payable to ‘B’ or
bearer. The cheque is lost by ‘B’. ‘C’ gets
the cheque. Who is the holder?
A/B/C/ Nobody as the cheque is a lost one.
2. A Cheque is drawn in favour of ‘B’ who has
already expired. Who is the holder?

Questions
3. ‘A’ gets a cheque on the road which
is drawn payable to ‘B’ or order.
Representing himself as ‘B’, ‘A’
endorses the cheque to ‘C’ who
accepts in good faith and for
valuable consideration. Can ‘C’
recover the amount of the Cheque?

Questions
4. The following is not a Negotiable
Instrument:
a) S/B A/C withdrawal slip b) Treasury
Bill c) Certificate of Deposit d) Fixed
Deposit Ceertificate
5. A cheque for Rs.30,000/- is received
for payment in a current account with
balance of Rs.30,000/-. Will the
cheque be paid?

Questions
6. Where a Cheque bears a special
crossing it can be paid only……
a) through a bank account
b) only through a bank account in drawee
bank
c) only through the bank named in crossing
d) C or its agent for collection.

Questions
7. A crossed cheque can be opened
only by
a) holder in due course
b) any holder
c) drawer
d) Manager of the branch

Questions
8. A cheque is not capable of giving
better title to the transferee than
that of the transferor if it is ……
a) crossed account payee
b) crossed not negotiable
c) drawn by an agent
d) post dated

Questions
9. A customer has a joint SB A/c. (E or S) with
balance of Rs.30,000 and also a current account
in his individual name with balance of
Rs.50,000. A cheque of Rs.35,000 is presented
in clearing in his SB account. You should……
a) pass the cheque by creating overdraft in his SB A/c
b) return the cheque
c) an amount of Rs.5,000 can be transferred from current
account to pass the cheque
d) the cheque can be debited to current account and customer
be informed of this.

Questions
10.Public Holiday under N.I. Act 1881
can be declared by…..
a) Central Govt.
b) State Govt.
c) RBI
d) a or b
e) a or b or c

• The Negotiable Instruments Act of
1881.
• "negotiable instrument" means a
promissory note, bill of exchange or
cheque payable either to order or to
bearer.

• Section 31 of Reserve Bank of India
Act, 1934 : No person other than
Reserve Bank or Central Govt., can
draw, accept, make or issue any bill
of exchange or promissory note
payable to bearer on demand.

SEC.13
Meaning of Negotiable Instruments
• It means Promissory Note, Bill of
Exchange and cheque payable to
order or bearer.
• Examples of Negotiable Instruments
– Bank Draft
– Certificate of Deposit
– Commercial Paper
– Treasury Bill
– Share Warrant
– Dividend Warrant Welingkar Institute of Management

Characteristic Features of Negotiable
Instrument
• Negotiability
– The instrument is freely transferable
• by delivery if it is payable to bearer and
• by endorsement and delivery if it is payable
to order.
– A person (transferee) taking the
instrument bonafide for value (known as
a holder in due course) gets an absolute
title to the instrument notwithstanding
any defect in the title of the transferor
or any prior party. Welingkar Institute of Management

• Warehouse Receipts, B/Ls – satisfy
the first feature but not the second –
not a negotiable instrument.
• LIC Policy, Mate’s Receipt, Airways
bill, FD Receipt etc – not even the
first condition.

SEC.4
Promissory Note
What is a Promissory Note ?
• An instrument in writing
• Signed by the maker
• Containing an
unconditional undertaking
to pay
• A certain sum of money
• To or to the order of a
certain person or to the
bearer of the instrument
• Promise or order to pay is
not “conditional”. Sum
payable may be certain.

DPN / UPN
• DPN – payable immediately
• Usance – after a definite period of
time.

SEC.22, 23, 24
Calculation of Due Date / Maturity
• “At Sight” / ”On presentment” means
on demand.
• “After Sight” means after
presentment.
• Days of grace : 3rd day after the date
on which it is expressed to be
payable.

SEC.5
Bill of Exchange
What is a Bill of Exchange?
• An instrument in writing.
• Signed by the maker
• Containing an
unconditional order.
• Directing a certain person
to pay.
• A certain sum of money
• To or to the order of a
certain person or to the
bearer of the instrument

Bill of Exchange & Promissory Note
• A bill of exchange is an order to pay
money, while,
• A promissory note is a promise
/undertaking to pay money.

SEC.6
Cheque
• It is a bill of exchange
• Drawn on a specified banker
• Payable on demand

DEMAND DRAFT
• An order to pay money drawn by one
office of a bank upon another office
of the same bank for a sum of
money payable to order on demand
is called Demand Draft.
• It is a negotiable instrument and has
all the features of a bill of exchange.
• A demand draft remains valid for 3
months from the date of the
instrument. Welingkar Institute of Management

Parties to a Negotiable Instrument
• Parties to a Promissory Note
– Maker (the person who promises to pay)
– Payee (the person to whom the
payment has to be made)

• Parties to a Bill of Exchange
– Drawer (a person who orders to pay)
– Drawee (a person who is directed to
pay)
– Payee (the person to whom the
payment is to be made)
• All usance bills need to be ‘Accepted’
by the drawee.

• Parties to a Cheque
– Drawer (the account holder who draws
the cheque.)
– Drawee (the bank)
– Payee (the person in whose favour the
cheque is drawn)
• The drawee of a cheque cannot be
anybody other than a bank.

CHEQUE - Definition
• A Cheque is a bill of exchange drawn
on a specified banker and not
expressed to be payable otherwise
than on demand and it includes the
electronic image of a truncated
cheque and a cheque in the
electronic form.

CHEQUE
• Payment of Cheque
• Date of the Cheque
– Stale cheque
– Post dated cheque
• Payee of the cheque
– Minor
– Insolvent
– A Company / Corporation / Govt.
Department
• Amount mentioned in the cheque
• Drawer’s Signature

CHEQUE
• Order / Bearer
• Crossing of Cheque – General / Special
(Sec.123/124/126).
• Sec.123 – When a cheque bears across its face
an addition of the words “and company” or any
abbreviation thereof, between two parallel
transverse lines or two transverse lines simply,
either with or without the words “not negotiable”,
that addition shall be deemed to be a crossing
and the cheque shall be deemed to be crossed
generally.
• Account Payee

Biil of Exchange Cheque
Cannot be drawn payable to
bearer on demand.
Drawee anybody.
Can be made demand / usance.
No crossing.
Usance bills need acceptance
Possible
Only a bank
Only on demand
Crossing
Do not require acceptance

Payment of Cheque
• Apparent tenor – Date, crossing,
endorsement, name of payee,
amount as an apparent on the
instrument.
• Banker statutorily obliged to honour
customers’ cheque subject to :
• i) sufficient funds of the drawer in
his hands
• ii) properly applicable to the
payment of the cheque.
• In default must Welingkar Institute compensate. of Management

• Sec 8 : “Holder” of a promissory
note, B/E or Cheque means any
person entitled in his own name to
the possession thereof and to receive
or recover the amount due thereon
to the parties thereto.

• Holder – SEC.8 Holder should be
entitled to receive the amount – e.g.
if the payee is insolvent, the holder
of the cheque is the official
liquidator.
– He must be entitled to possess the
document.
– He should be entitled to receive the
amount.
• Holder in due course – SEC.9
– Development & Research
Consideration

• Holder Holder in due course
Consideration not Consideration
essential essential
Actual possession Actual possession
may not be there before maturity
essential
Defective transferor’s Good title even if
title passes defective transferor’s title is
title defective

Payment in due course ( Sec 10 )
• Banker paying a cheque must ensure that
payment is payment in due course.
• In accordance with apparent tenor of the
instrument
• In good faith and without negligence to any
person in possession of the instrument.
• Under circumstances not giving a ground to
believe that the person receiving payment is not
entitled to payment of the amount (Sec.10).

• Amount in figures and words
different (Sec.18)

Sec 31
• The drawee of a cheque having
sufficient funds of the drawer in his
hands properly applicable mto the
payment of such cheque must pay
the cheque when required to do so,
and in default of such payment, must
compensate the drawer for any loss
or damage caused by such default
• Applies to only a Bank

Sec 31
2.The liability of drawee of cheque is to make
payment, when there is
a) Sufficient funds
b) Property applicable for payment
c) Required so by drawer
d) All of Above
e) None

Sec 31
• Liability of the paying bank :
• To honour the cheque drawn on its account, if sufficient
balance other than stop payment, death,
garnishee/attachment order, earmarked, setoff, not clear
balance Protection available to paying bank in case of
forged endorsements (not forged signature), material
alteration.
• The drawee of a cheque having sufficient funds of the
drawer in his hands properly applicable to the payment of
such cheque must pay the cheque when duly required so to
do, and, in. default of such payment, must compensate the
drawer for any loss or damage caused by such default.

SEC 123 to 131
Payment of crossed cheques
• Types of crossing
– General Crossing, Account Payee
– Special Crossing, not negotiable

• Sec 123: A cheque bearing across its
face two parallel, transverse lines ,
the cheque is deemed to be crossed
generally

• Sec. 124 : The essential feature of a
special crossing is the addition of the
name of a bank on the face of the
cheque. Two parallel line or the
words “not negotiable” may or may
not be there.

• Sec 130 : “ A person taking a cheque
crossed generally or specially bearing
in either case the words ‘not
negotiable’ shall not have and shall
not be capable of giving a better title
to the cheque than that which the
person from whom he took it, had”

• 131. Non-liability of banker receiving payment of
cheque
• A banker who has in good faith and without
negligence received payment for a customer of a
cheque crossed generally of specially to himself
shall not, in case the title to the cheque proves
defective, incur any liability to the true owner of
the cheque by reason only of having received
such payment.

Sec. 131
• Conditions for protection
• Collecting banker should have acted
in good faith
• Without negligence
• Receive payment for a customer
• Cheque should be crossed generally
of specially

Sec : 138
• Where any cheque drawn by a person on an account
maintained by him with a banker for payment of any amount
of money to another person from out of that account for the
discharge, in whole or in part, of any debt or other liability,
is returned by the bank unpaid, either because of the
amount of money standing to the credit of that account is
insufficient to honour the cheque or that it exceeds the
amount arranged to be paid from that account by an
agreement made with that bank, such person shall be
deemed to have committed an offence and shall without
prejudice to any other provisions of this Act, be punished
with imprisonment for 2["a term which may extend to two
year"], or with fine which may extend to twice the amount of
the cheque, or with both:
• Welingkar Institute of Management

Conditions necessary for section 138
• Valid consideration
• To be presented within validity
period and cheque should be
returned unpaid / dishonoured.
• Payee to give written notice to
drawer demanding payment within
30 days of receiving intimation of
dishonour
• Drawer to be given 15 days’ time to
make payment
• On expiry of 15 days, cause of action

• G.M.Mittal Stainless Steel Vs.
Nagarjuna Investment (1997) 90
Comp. Case – Closure of Account
• M/S. Electronics Trade and
Technology Vs. M/S. Indian
Technologists and Engineers (P) Ltd.
ISJ Banking 1996, SC 129 – Stop
Payment
• Sadanandan Bhadran Vs. Madhavan
Sunil Kumar Welingkar – Cheque Institute of Management
can be
presented any number of time during

Indorsement
• When the maker or holder of a
negotiable instrument signs the
same, otherwise than as such 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
stamped paper intended to be
completed as a negotiable
instrument, he is said to indorse the
same, and is Development called & Research
the “Indorser”.

THANK YOU

N.i. act 010814

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