A brief introduction on negotiable instruments act (1881)

1. NEGOTIABLE
INSTRUMENTS ACT
1881

2. INTRODUCTION
 ‘Instrument ‘ means any written document by which a right is created in favour of some
person.
 “negotiable” – means whereby rights in an instrument can be transferred by one person
to another

3. CONTD-
 Thus, a negotiable instrument is a document by which rights vested in a person can be
transferred to another person in accordance with the provisions of the Negotiable
instruments Act 1881

4. NEGOTIABLE INSTRUMENT
ORIGIN : In the year 1881.
Applicability : Applicable in entire India except the State of Jammu & Kashmir.
Scope: Deals with law relating to three specific instruments, viz. Promissory note, Bill
of exchange and cheque.

5. MEANING
 There are certain documents which are freely used in commercial transactions and
monetary dealings.These documents, if they satisfy certain conditions are known as
“Negotiable Instruments.”
 A Negotiable instrument is a method of transferring a debt from one person to another.

6. S 13
• A negotiable instrument means a promissory note, a bill of exchange or a cheque
payable either to order or to the bearer, whether the words ‘order’ or ’bearer’ appear on
the instrument or not

7. Kinds of negotiable instrument
Negotiable instrument
By STATUTE .
1) Promissory note.
2) Bill of exchange.
3) Cheque.
Not negotiable instruments: Share certificate, bill of lading, postal order.

8. CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT
• Freely transferable: The property in a negotiable, instrument passes from one person to
another by a simple process, i.e., by mere delivery if it is payable to bearer, and by
indorsement and delivery if it is payable to order.
• Holder’s title free from all defects: The holder in due course (one who acquires the
instrument in good faith and for consideration) gets it free from all defects.
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
order or promise for payment

9. CONTD-
Example: S sells certain goods to B. B gives a promissory
note to S for the price. He refuses to pay the promissory
note, claiming that the goods are not according to
order.
If S sues B on the note, B’s defence is good.
But if he negotiates the note to H, a holder in due course,
B’s defence will be of no avail.

10. PROMISSORY NOTE
Sec.4
“A promissory note is an instrument in writing containing an unconditional
signed by the maker to pay a certain sum of money only to or to the order of a
of a certain person or to the bearer of the instrument”.
.

11. PARTIES
MAKER : The person who makes the promissory note and promises to pay is called the
Maker.
PAYEE : The person to whom the payment is to be made is called the Payee.
HOLDER: The holder is either the payee or someone to whom he may have indorsed
(transfer) the note is known as Holder.
ENDORSER: The person who indorses the note to another is called the Endorser .
ENDORSEE: The person to whose favour the note is endorsed is called the Endorsee

12. ESSENTIALS OF THE PROMISSORY NOTES
1. It must be in writing .
2. It must contain a promise or undertaking to pay a definite sum of money.
3. The promise to pay must be unconditional.
4. It must be signed by the maker.
5. The payee must be identified & must be certain.
6. The sum payable must be certain.
7. The amount payable must be in legal tender in money of India.
8. Other formalities – like date, place ,& stamp must be mentioned.

13. EXAMPLE
a) I promise to pay Ram or order Rs.2000{PN}
b) I acknowledge myself to be indebted to Shiva in Rs.5000 to be paid on demand, for value received.{pn}
c) I am liable to Arnold Rs.3000 {Not PN}
d) I have taken Rs.10000 from John to whom I am accountable for the same with interest. {Not PN}
b) I promise to pay Rs.10000 to George seven days after his marriage with Julie. {Not PN}

14. FORMAT OF PROMISERY NOTE
Rs. 1,000 Delhi, February10,2009
Three months after date I promise to pay Shyam or
order the sum of one thousand rupees, for value received.
To,
Shyam
222, Ashok Vihar
Delhi-110052

15. BILL OF EXCHANGE
Sec.5 :
“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.”

16. PARTIES
DRAWER: The person who makes the bill of exchange is called drawer.
DRAWEE: The person who is directed to pay is called drawee.
PAYEE: The person to whom the payment is to be made is called payee.
ACCEPTOR: When the drawee accepts the bill is called acceptor.

17. FORMAT OF BILL OF EXCHANGE
Rs. 500 Siliguri,21 Feb.2018
Three months after the date pay to Ram or order the sum of Five Hundred rupees , for value received.
To,
Shyam
235,Subhash marg
delhi-110006.
In case of need with Accepted
Canara Bank, Siliguri Shyam Sd/-
STAMP
KRISHNA

18. ESSENTIALS FEATURES OF BILL OF EXCHANGE
1. It must be in writing.
2. It must contain an order to pay a definite sum of money.
3. The order to pay must be unconditional.
4. It must be signed by the drawer (who draw money).
5. The drawer, the drawee &the payee must be identified & must be certain.
6. The sum payable must be certain.
7. The bill must contain an order to pay the money in legal tender in India.
8. It must contain the formalities like date, place & stamp etc.

19. PROMISSORY NOTE AND BILL OF EXCHANGE
PN
(i) There are two parties
(ii) Contains an unconditional promise
(iii) Liability of maker or drawer is
primary and absolute.
(iv) No notice of dishonour is required
BOE
(i) Three parties
(ii) Contains an unconditional order
(iii) Liability is secondary of the drawer
and conditional.
(iv) Notice must be given.

20. CHEQUE
Sec.6 :
“ A cheque is a bill of exchange drawn on a specified banker & not expense to be
payable on a specified banker & not expense to be payable otherwise than on
demand & it includes the electronic image of a truncated cheque & a cheque in the
electronic form.

21. FORMAT OF CHEQUE
No.…….. Date………..2010
Pay…………………………………………………………or bearer the sum of Rs…………………………………
Rs…………………
A/c No LF No Sd/-
PUNJAB NATIONAL BANK
Subzi Mandi,Delhi -110007
“5777100” 111013035”

22. PARTIES
DRAWER: The person who makes a cheque is called Drawer.
DRAWEE: The person who is directed to pay is called Drawee.
PAYEE: The person to whom the payment is to be made.

23. ESSENTIAL FEATURES OF CHEQUE:
1. It is always drawn by a bank & not by any other institutions.
2. It always payable on demand.
3. A cheque can be bearer, order or crossed.
4. The drawee, that is, the banker named must honour the cheque by making payment to the
payee when the cheque is presented for payment to the banker at his office during the usual
office hours, provided the cheque is properly and validly drawn and the drawer has sufficient
funds to his credit.
5. The signature on the cheque must tally with the specimen signature of the concerned
drawer.
6. A cheque must be dated.

24. CROSSING OF CHEQUES
 GENERAL CROSSING - Where a cheque bears across its face an addition of the words
“and company” or any abbreviation thereof, between two parallel transverse lines, or of
two parallel transverse lines simply, either with or without the words “not negotiable”,
that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed
generally. [section 123]
 SPECIAL CROSSING - Where a cheque bears across its face an addition of the name of
of a banker,either with or without the words “not negotiable”, that addition shall be
deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be
crossed to that banker. [section 124].

25. CONTD -
 PAYMENT OF CHEQUE CROSSED GENERALLY OR SPECIALLY - Where a cheque is
crossed generally, the banker on whom it is drawn shall not pay it otherwise than to
a banker. Where a cheque is crossed specially, the banker on whom it is drawn
shall not pay it otherwise than to the banker to whom it is crossed, or his agent for
collection. [section 126].
 CHEQUE BEARING “NOT NEGOTIABLE” - 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 the person from
whom he took it had. [section 130].
 Thus, mere writing words ‘Not negotiable’ does not mean that the cheque is not
transferable. It is still transferable, but the transferee cannot get title better than
what transferor had.

26. HOLDER
Sec.8
The Holder of a Promissory note, B.O.E or CHEQUE means any person entitled in his
own name to the possession thereof, and to receive or recover the amount due
from the parties thereto. Where the note, bill or cheque is lost or destroyed, its
the person so entitled at the time of such loss or destruction.

27. HOLDER
1) The person must be entitled to receive payment or receive the amount by filling a
suit in his own name against other parties to negotiate the instrument giving a valid
discharge.
2) In case instrument is lost from the person who was entitled to receive the payment,
the subsequent finder does not become it’s owner. Only the person who was
to receive the payment initially is the real owner.
3)The person must have a legal right to possess the instrument in his own name.

28. HOLDER IN DUE COURSE
Sec.9
Any person who for consideration becomes the possessor of the promissory note,
or Cheque before the amount mentioned in it becomes payable & without having
sufficient cause to believe that any defect existed in the title of the person from
he derives his title.

29. WHEN DOES A PERSON BECOMES A HOLDER IN DUE
COURSE
Before the amount mentioned in the instrument becomes payable.
1) Without having sufficient cause to believe that any defect exists in the title of the
person from whom, he derives his title
2) He becomes a possessor of a promissory note, b.o.e or cheque .
3) If it is payable to the bearer.
4) Consideration has passed from him.
Illustration:- A is a payee for a valuable consideration of a bill payable to order. He gets
this instrument from B without knowledge of any defect in B’s title & its maturity.
In this e g. A is a holder in due course.

30. CONTD -
A holder of a negotiable instrument will not be a holder in due course if:-
a) he has obtained the instrument by gift or by illegal method.
b) he has obtained the instrument after its maturity.

31. PRIVILEGE OF HOLDER IN DUE COURSE
1)Inchoate stamped instrument:A person, who has signed & delivered to another a
stamped but otherwise inchoate instrument , is precluded from asserting, as against a
holder in due course, that the instrument has not been filled in accordance with the
authority given by him, the stamp being sufficient to cover the amount(sec.20).
2) Liability of prior parties: Every prior party to a negotiable instrument is liable thereon
to a holder in due course until the instrument is duly satisfied (sec.36).

32. CONTD -
3) Fictitious payee: Where a bill is drawn payable to the drawer’s order in fictitious
name & is indorsed in the same hand as the drawer’s signature, the acceptor is not
relieved from liability to any other holder in due course, on the plea that the drawer
fictitious(sec.42).
4) Conditional delivery: If a bill or not is negotiated to a holder in due course, the other
parties to the instrument cannot avoid liability on the ground that the delivery of the
instrument was conditional or for a special purpose only.

33. CONTD -
5) Instrument cleansed of all defects: Once a negotiable instrument passes through
the hands of a holder in due course, it gets cleansed of its defects provided the
holder was himself not a party to the fraud or illegality which affected the
instrument in some stage of its journey.Thus any defect in the title of the transferor
will not affect the rights of the holder in due course even if he had knowledge of the
prior defect provided he himself is not a party to the fraud.
Example: A, by fraud, induces B to make a promissory note in his favour. He indorses
indorses the note to C, who take it as a holder in due course. C subsequently indorses
indorses the note to A, for value. A cannot sue B on the note as he himself is a party to
party to the fraud .

34. HOLDER AND HOLDER IN DUE COURSE
 A holder can obtain an instrument
without consideration
 If an instrument is inchoate, a holder of
such instrument cannot get good title in
the instrument
 A holder need not bother about the
defect, if any in the title of the
instrument
 Obtains an instrument with
consideration and for value.
 Holder in due course acquires a good
title even if the instrument is inchoate.
 Holder in due course who acquires an
instrument knowingly the defect of the
title.

35. DISHONOUR (S 92)
A negotiable instrument is said to be dishonoured by
non-payment when the maker, acceptor or drawee, as
the case maybe makes default in payment upon being
duly required to pay the same.
Dishonour by non payment
Dishonour by non acceptance

36. BOUNCING OF CHEQUES (S 138- S142)
 A cheque is said to be bounced or dishonored by non-payment when the drawer of the
cheque makes default in the payment upon being duly required by the same.
 If a cheque is dishonoured even when presented before expiry of 3 months, the payee
or holder in due course is required to give notice to drawer of cheque within 30 days
from receiving information from bank..
 The drawer should make payment within 15 days of receipt of notice.
 If he does not pay within 15 days, the payee has to lodge a complaint with Metropolitan
Magistrate or Judicial Magistrate of First Class, against drawer within one month
from the last day on which drawer should have paid the amount.

37. CONTD -
 The penalty can be upto two years imprisonment or fine upto twice the amount of
cheque or both. The offence can be tried summarily. Notice can be sent to drawer by
speed post or courier. Offence is compoundable.
 It must be noted that even if penalty is imposed on drawer, he is still liable to make
payment of the cheque which was dishonoured.Thus, the fine/imprisonment is in
addition to his liability to make payment of the cheque.

38. DISCHARGE FROM LIABILITY
 By payment
 By cancellation
 By release
 By non-presentment for acceptance of a bill of exchange
 By material alteration