Banking law

1. NEGOTIABLE INSTRUMENT

2. Meaning of Negotiable instruments
• Meaning : According to section 13a of the act negotiable instrument means a
promissory note and bill of exchange or cheque payable either to order or to
the bearer whether the word order or there appeared on the instrument or not
• the term negotiable instrument means a written document which creates a
right in the favour of some person and which is freely Transferable .
• the two conditions of Negotiable Instrument are:
• are the instrument should be freely Transferable by delivery or by endorsement
by the custom of trade
• the person who obtains it in good faith for value should get it free from all
defects and be entitled to recover the money of the instrument in his own name

3. Types of Negotiable instruments
• Section 13 of Negotiable Instruments Act states that a negotiable
instrument is a promissory note bills of exchange or cheque payable
either to order or bearer Negotiable Instruments recognised by
statute are
• promissory note
• bill of exchange
• Cheques
•

4. Promissory note
• Section 4 of Negotiable Instrument Act defines a promissory note is an
instrument in writing containing an unconditional undertaking signed by
the maker to pay a certain amount of money only to or to the order of a
certain person or to the bearer of the instrument examples:
• I promise to pay Rahul rupees 500 ( promissory note )
• I promise to pay Arjun rupees 500 and all other sums that shall be due to
him( not promissory note )
• Mr Advait i o u*(I Owe YOU ) rupees 1000(not promissory note )
•

5. Essential elements
• It must be in writing :a mere verbal promise to pay is not a promissory note
• it must certainly be an Express promise for clear understanding to pay
• promise to pay must be unconditional : a conditional undertaking destroys the
negotiable character of a negotiable instrument therefore the promise to pay
must not depend upon happening of some event it must be payable absolutely
• the instrument must be signed by the maker
• The payee must be certain: the instrument must point out with certainity the
person to whom the promise has been made . the payee may be of the
ascertained by name or by designation

6. • The promise should be to pay money and money only :money
means legal tender money in and not old in rare coins
• The amount should be certain :
• Other formalities : The Other formalities regarding the number ,
place, date, consideration etc usually found given in the promissory
note but are not essential in the law
•

7. Parties of Promissory note
• The maker or the drawer : the person who makes the note and promises
to pay the amount stated
• payee : the person to whom the amount is payable in the above specimen
it is Ramesh
• the Endorser : who endorses the note in favour of another person in
above pesamal if Ramesh endorses it in the favour of Ranjan and Ranjan
also entoss is it in the favour of Punit then Ramesh and Ranjan both are
and doses
• the endorsee the person in whose favour the note is negotiated by
endorsement in above decimal it is Ranjan and then Punit
•

8. Bills of exchange
• Section 5 of the act defines “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 amount of money only to
or to the order of a certain person or to the bearer of the
instrument”
•

9. Essentials of bills of exchange
• It must be in writing
• it must can contain an unconditional order to pay
• it must be signed by the drawer
• there must be three parties to the instrument and the parties must
be certain
• The order must be to pay a certain sum of money
• It must comply with the formalities such as date , stamp etc

10. Parties in bill of exchange
• The drawer: the drawer is the person to whom the debt is due he is
the maker of the bill
• the drawee : the drawee is the person who is directed to pay the
amount of the bill the drawing has to accept the bill of exchange and
make it a legal one and he is not liable until and unless he has
accepted it
• the payee : the payee is the person to whom or to whose order the
amount of the instrument is payable
•

11. Benefits of Bill of exchange
• In case of immediate requirement , the bill may be discounted with
the bank
• It is a double secured instrument , incase the drawee fails to make the
payment ,the holder of the instrument may look to the drawer for the
payment .

12. Types of bills
• Inland bills : A bill is named as an inland bill if it is drawn in India on a
person residing in India , whether payable in or outside India
• it is drawn in India on a person residing outside India but payable in
India
• EXAMPLES : a bill is drawn by a Merchant in Delhi on a person in
London but it is payable in India it is an inland bill
• a bill is drawn by a Merchant in Delhi on a Merchant in Chennai it is
accepted for payment in Japan the bill is an inland bill

13. • FOREIGN BILL : A bill which is not an inland bill is a foreign bill .the
following are the foreign bill
• bill drawn outside India but it is made payable in India
• a bill drawn outside India on any other person residing outside India
• a bill drawn in India on a person residing outside India but made
payable outside India
• a bill drawn outside India and made payable outside India
• a bill drawn outside India on a person residing in India

14. • TIME BILL : A bill payable after a fixed time is termed as a time bill in
other words 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 bill: a bill drawn and accepted for genuine trade transaction is
termed as a trade bill

15. • 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
• example : Ais in need of money for three months he induces his friend B to
accept bill of exchange drawn on him for rupees 1000 for 3 months the bill
is drawn and accepted the bill is an accommodation will get the bill
discounted from his bankers immediately paying small sum as discount
then he can use the funds for 3 months and then just before maturity he
may remit the money to B who will meet the bill on maturity
• In above example A is the Accomodated Party while B is the
accommodating party

16. • Cheque is an instrument in writing containing an unconditional
order, address to a Banker, signed 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 a certain person or to the
bearer of the instrument”
•

17. Features of cheque
• cheque is an instrument in writing: it can be written in
ink pen ball pen
• cheque contain an unconditional order
• cheque is drawn by a customer on his bank: cheque book facility is
made available only to the account holders who are supposed to
maintain certain minimum balance in the account check must be
signed by the customer that is the account holder
• Cheque must contain mention exact amount to be paid : it must be
written in figures and in words

18. • payee must be certain to whom the payment is made the payee of the
cheque should be certain whom the payment of cheque is to be made that
is either the 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 the bearer
•Cheque must be signed by the customer : a cheque
must be signed by the account holder . Unsigned cheques or signed by
other persons are not regarded as cheques
• Cheque must be duly dated by the customer of the
bank : a cheque must indicate a date , month or year . A cheque is valid
for a period of 3 months from the date of issue

19. Cheque has three parties
•Drawer : a drawer is a person who draws a
cheque
• drawee : a drawee is a bank on whom the
cheque is drawn
•Payee : a pay is a person in whose favour a
cheque is drawn
•

21. Types of cheques
• Bearer cheque : when the words “or bearer” appearing on the face of
the cheque are not cancelled the cheque is called as the bearer
cheque
• the bearer cheque is payable to the person who presents it to the
bank for payment
• However such cheque are very risky this is because if the cheques are
lost the finder of the cheque can collect the payment from the bank
•

23. • Order cheque : When the word “bearer” appearing on the face of the
cheque is cancelled and when in its place the word “or order” is
written on the face of the cheque the cheque is called as an order
cheque
• such cheque is payable to the person specified there in as the payee
or to anyone else to whom the check is endorsed

25. • Uncrossed or open cheque : when the cheque is not crossed it is
known as an open cheque or an uncrossed cheque
• the payment of such cheque can be obtained at the counter of the
the bank
• Crossed cheque: crossing of a cheque means drawing two parallel
lines on the face of the cheque with or without additional words like
“account payee” or “not negotiable”
• a crossed cheque cannot be encashed at the counter of the bank but
it can only be credited to the payee’s account

27. • Anti dated cheque : if a cheque bears a date earlier than the date on
which it is presented to the bank it is called as an Anti dated cheque
such a cheque is valid upto three months from the date of the cheque
• post dated cheque: if a cheque bears a date which is yet to
come (future date) then it is known as a post dated cheque a post
dated cheque cannot be honoured earlier than the date on the
cheque

28. •stale cheque : if a cheque is presented for the payment after 3
months from the date of the cheque it is called as the stale cheque a
stale cheque is not honoured by the bank
•

29. CROSSING OF CHEQUE

30. CROSSING OF CHEQUE
• Meaning :Crossing of cheque means drawing two parallel
transverse lines on the left hand top corner of a cheque
• crossing on cheque is the direction to the paying banker
by the drawer that payment should not be made across
the counter
• a cheque bearing such crossing is called as the crossed cheque and can be
paid through a Banker
• the cheque without such crossing is is referred to as an open cheque
which may be encashed at the counter of the paying banker
•

31. Objectives of Crossing
• It prevents the payment to the wrong full holder
• it a shot the safe payment to the genuine receiver
• it assume safety in circulation
• safe transition of money from sender to receiver
•

32. Types of
crossing
General
Crossing
Special
Crossing

34. types of crossing
•general crossing according to Section 123 where a cheque
bears across his face and addition of the words “and company” or any
Abbreviation their of between two parallel tongue transverse lines
simply either with or without the words “not negotiable” that
addition Shall be deemed a crossing and the check shell Deemed to
be crossed generally
•

36. • SPECIAL CROSSING : Where to cheque bears across its face an
addition of the name of a Banker either with or without the words “not
negotiable “that addition shall be deemed as crossing and the cheque shall
Deemed to be crossed specially and to be crossed to that banker
• the special crossing on the cheque is a direction to the paying banker to
pay the cheque only through the bank mentioned in the crossing and not
through any other bank therefore the cheque crossed specially becomes
more safe than generally crossed cheque the bank to whom a cheque is
specially crossed may appoint another banker as his agent for the
collection of such cheque
•

37. Double Crossing
• A specially crossed cheque is to be collected only through the bankers
specified there in. Therefore a specially crossed cheque cannot be crossed
specially again to another bank so cheque cannot be crossed specially
twice
• however there is an exception to this rule for a specific purpose if the
banker on whom a cheque is specially crossed does not have a branch at
the place of the paying banker, he may cross the cheque specially to
another bank of who act has its agent for the purpose of the collection of
the cheque in such case the banker crossing it again must specify that
banker on whom it has been specially cross again shall act as the Agent of
the first banker for the purpose of the collection of the cheque
•

38. Liability of the paying banker on the crossed
cheque
• liability to the true owner of the cheque : if the crossed
cheque is lost by the true owner and it's finder gets the payment at the counter of the
paying banker, the true owner will be entitled to recover the amount of the cheque from
the person who received the payment from the bank. whatever is the loss suffered by
the true owner on the expenses incurred by him will be reimbursed by the banker
•
Not negotiable crossing : if the cheque bearing “not
negotiable crossing” is transferred for consideration and there is no defect
in the title of any previous transfer the cheque remains valid it is the direction given to
the collecting banker to be very careful in respect of such crossed cheque the collecting
banker should accept such cheque for collection only when the holders title is absolutely
clean
•

39. • account payee crossing: a cheque bearing account payee
crossing Gives additional safety to the pay it gives the direction to the
collecting Bank to collect the proceeds of the cheque only for the
payee and for no one else
• crossed cheque is safer than bearer
cheque : when a cheque is crossed , the holder cannot
encash it at the counter of the bank . Encashment at the counter
is only possible in case of open cheque

40. Endorsement – its
essentials and types

41. Endorsement - Meaning and Concept
• Under Section 15 of Indian Negotiable Instruments Act 1881 when
the maker for the holder of Negotiable Instrument signs it,
otherwise then as maker for the purpose of negotiation , on the back
for face there off or on a slip of paper annexed there to or so signs for
the same purpose a stamped paper intended to be completed as
negotiable instrument he is said to have endorse the same is called
endorser
•

42. Essentials of valid endorsement
•It must be in writing
• signature is must
• compulsory delivery : after endorsement its delivery is must
otherwise it is incomplete as per section 31 and endorsement means
endorsement by delivery
• place of endorsement: generally it is done on the
backside of the instrument on a slip and next to it but if it is done on sleep
then some part of sign must come on the instrument
•

43. •endorsement for full amount as per section 56 it should
be done for the full amount return partial one is illegal
• endorsement in the favour of one person
separate endorsement in favour of two persons from one instrument
cannot be done but joint endorsement can be done and it is also legal

44. Types of Endorsement
Types
Blank/general Full / Special Partial Restrictive San recourse

45. • Blank or general endorsement – In this the endorser only puts his
signature . The endorser the does not mentions the name of the
endorsee .
• The effect of such endorsement is to make cheque a bearer cheque
• Therefore the order cheque can be made a bearer cheque by putting
down a blank endorsement .

46. • Special Endorsement – Where the endorser puts his sign and
writes the name of the person who will receive the payment.
• This type of endorsement not only contains the name of the
endorser but the name of endorsee also
• Restrictive endorsement : when an endorsement restricts the
transferability or negotiability of ca cheque .
• The most common restrictive endorsement is the phrase FOR
DEPOSIT ONLY

47. • PARTIAL ENDORSEMENT : it is the one which means to transfer to
cheque only for a part of its value .
• For eg the cheque is of 27000 rs and endorser only wants to endorse
the part of it like 12000.
• Legally such endorsement is not valid
• San recourse Endorsement : in this type of endorsement , the
endorser refuse to accept any liability on the instrument to any
subsequent party in case of dishonour