NEGOTIABLE
INSTRUMENTS
BY:PARINEET KAUR 229022
RATANJOT SINGH 229023
ISH PAHUL SINGH 229024
RASMEET KAUR 229025
CHHAVI 229026
NEGOTIABLE INSTRUMENTS
The word negotiable means 'transferable by delivery',
and the word instrument means 'a written document by
which a right is created in favour of some person'.
Thus, the term "negotiable instrument" literally means 'a
written document transferable by delivery'.
The law relating to "negotiable instruments" is
contained in the Negotiable Instruments Act, 1881.
The Act extends to the whole of India. The Negotiable
Instruments Act, 1881, has been amended for more than a dozen times so far.
According to Section 13 of the Negotiable Instruments Act 1881, "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 one or some of
several payees" [Sec. 13(2)].
PAYABLE TO ORDER PAYABLE TO BEARER
A note, bill or cheque is payable to order which is Payable to bearer' means 'payable to any person
expressed to be payable to a particular person or whosoever bears it'. A note, bill or cheque is
his order'. payable to bearer which is expressed to be so
For example, (i) Pay A, (ii) Pay A or order, (iii) Pay to payable or on which the only or last endorsement is
the order of A, (iv) Pay A and B, and (v) Pay A or B an endorsement in blank.
are various forms in which an instrument may be Thus, a note, bill or cheque in the form "Pay to A or
made payable to order. But it should not contain bearer," or "Pay A, B or bearer," or "Pay bearer" is
any words prohibiting transfer, e.g., 'Pay to A only' payable to bearer. Also, where an instrument is
or 'Pay to A and none else' is not treated as originally 'payable to order', it may become
'payable to order' and therefore such a document 'payable to bearer' if endorsed in blank by the
shall not be treated as negotiable instrument payee.
because its negotiability has been restricted. For example, a cheque is payable to A. A endorses
It may be noted that documents containing express it merely by putting his signature on the back and
words prohibiting negotiability remain valid as a delivers to B with the intention of negotiating it
document (i.e., as an agreement) but they are not (without making it payable to B or B's order). In the
negotiable instruments. hands of B the cheque is a bearer instrument.
CHARACTERISTICS
Easy negotiability. They are transferable from one person to another without any formality. In other
words, the property (right of ownership) in these instruments passes by either endorsement and delivery (in
case it is payable to order) or by delivery merely (in case it is payable to bearer), and no further evidence
of transfer is needed.
Transferee can sue in his own name without giving notice to the debtor. A bill, note or a cheque
represents a debt, i.e., an "actionable claim and implies the right of the creditor to recover something
from his debtor. The creditor can either recover this amount himself or can transfer his right to another
person. In case he transfers his right, the transferee of a negotiable instrument is entitled to sue on the
instrument in his own name in case of dishonour, without giving notice to the debtor of the fact that he
has become holder.
Better title to a bona fide transferee for value. A bona fide transferee of a negotiable instrument for
value (technically called as a holder in due course) gets the instrument 'free from all defects'. He is not
affected by any defect of title of the transferor or any prior party.
PRESUMPTIONS
Sections 118 and 119 lay down the following presumptions, unless the contrary is proved:
that every negotiable instrument was made, drawn, accepted, endorsed or transferred for consideration;
that every negotiable instrument bearing a date was made or drawn on such date;
that every bill of exchange was accepted within a reasonable time after its date and before its maturity
that every transfer of a negotiable instrument was made before its maturity;
that the endorsements appearing upon a negotiable instrument were made in the order in which they
appear thereon;
that a lost negotiable instrument was duly stamped;
that the holder of a negotiable instrument is a holder in due course; but this presumption would not arise
where it is proved that the holder has obtained the instrument from its lawful owner, or from any person in
lawful custody thereof by means of an offence, fraud or for unlawful consideration and in such a case the
holder has to prove that he is a holder in due course;
that the instrument was dishonoured, in case a suit upon a dishonoured instrument is filed with the court
and the fact of 'protest' is proved.
The above presumptions are rebuttable by the defendant.
PROMISSORY NOTE
A “promissory –note” is an instrument in
writing [not being a bank-note or a
currency-note] containing an
unconditional undertaking, signed by
the maker; to pay a certain sum of
money to a person, or to the order of a
certain person ,or the bearer of the
instrument(as per sec4).
A promissory note is a legal, financial tool declared by a party, promising another party
to pay the debt on a particular day. It is a written agreement signed by drawer with a
promise to pay the money on a specific date or whenever demanded
PARTIES OF PROMISSORY NOTE
Drawer Drawee Payee
A drawer is a person who agrees to pay She/he is an individual, in whose favour the A payee is someone to whom the
the drawee a certain amount of money note is prepared. In usual cases the drawee payment is made.
on the maturity of the promissory note. is also the payee until and unless the
He/she is also known as maker. promissory note is transferred specifically
in favour of the payee. For e.g. Ram is
considered a drawer if he promises to pay
Shyam Rs.5000 (Shyam is the drawee).
However, if the same promissory note is
transferred in favour of Rohan, then Rohan
becomes the payee.
REQUIREMENTS FOR A VALID
PROMISSORY NOTE
CLASSIFICATIONS OF PROMISSORY NOTES
Personal Promissory Notes – This is a particular Real Estate – This is similar to commercial notes in
loan taken from family or friends. Though people terms of nonpayment consequences. If the borrower
avoid legal writings when seeking a loan from close becomes a defaulter, then the party has the right to
contact, the promissory note shows belief and trust keep the property until the debt is cleared. It is a
in the interest of the borrower. little risky as all the essential details become public,
which can hinder the borrower’s credit history in the
future.
Commercial – Here, the note is made when Investments – The promissory note is occasionally
dealing with commercial lenders such as banks. used to raise funds for the business. It is used as a
Most of the commercial promissory agreement is security purpose and managed by securities laws. It
similar to personal notes. includes terms and conditions related to returns of
investment
BILL OF EXCHANGE
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. (As per Section 5)
Example - Mrs. B owed A ₹80,000 for goods she purchased from him. To settle this, A
drew a bill of exchange instructing B to pay ₹80,000 to him or his order after three
months. However, since Mr. A owed Mr. C ₹80,000 for goods he had bought from Mr.
C, he endorsed the bill to Mr. C. Now, Mr. C holds the bill and will receive the ₹80,000
from Mrs. B when the payment is due.
PARTIES OF BILL OF EXCHANGE
DRAWER DRAWEE PAYEE
The person who makes the bill. The person who is directed to The person to whom the payment
Mr. A in the earlier example is pay the amount mentioned in the is to be made.
the drawer because he is the bill. The payee can be the drawer or
one instructing Mrs. B to pay. The drawee becomes liable to someone else if the bill is
pay once they accept the bill. endorsed to another party.
In the earlier example, Mrs. B is In the earlier example, Mr. C
the drawee, as she is asked to becomes the payee after Mr. A
pay ₹80,000. endorses the bill to her.
ESSENTIALS OF BILL OF EXCHANGE
A bill of exchange must be in writing.
It is an order to make payment.
The order to make payment is unconditional.
The maker of the bill of exchange must sign it.
The payment to be made must be certain.
The date on which payment is made must also be certain.
The drawer, drawer and payee must be certain.
The amount mentioned in the bill of exchange is payable either on demand or on the
expiry of a fixed period of time.
It must be stamped as per the Indian Stamp Act, 1899.
ADVANTAGES OF BILL OF EXCHANGE
Legal Document- It is a legal document, and if the drawee fails
to make the payment, it will be easier for the drawer to recover
the amount legally.
Discounting Facility- In cases where the drawer is in immediate
need of money, the bill can be converted into cash by discounting
it from a bank by paying some nominal charges.
Endorsement Possible- This bill of exchange can be exchanged
from one individual to another for the adjustment of the debt.
TYPES OF BILL OF EXCHANGE
Documentary Bill- In this, the bill of exchange is supported by the relevant documents that confirm the
genuineness of sale or transaction that took place between the seller and buyer.
Demand Bill- This bill is payable when it demanded. The bill does not have a fixed date of payment,
therefore, the bill has to be cleared whenever presented.
Usance Bill- It is a time-bound bill which means the payment has to be made after a specific time period.
Inland Bill- An Inland bill is drawn and payable in the same country and not in any other foreign country.
This bill is opposite to the foreign bill.
Clean Bill- This billof exchange without any supporting documents.
Foreign Bill- A bill of exchange that is drawn in one country or jurisdiction and is payable in another.
Accommodation Bill- An accommodation bill is a bill of exchange that is drawn and accepted without any
actual transaction or consideration between the parties involved. It is used to provide financial support or
credit to another party.
Trade Bill- This kind of bill is specially related only to trade.
DISTINCTION BETWEEN PROMISSORY NOTE
AND BILL OF EXCHANGE
and the
and the endorsees.
endorsees.
DISTINCTION BETWEEN PROMISSORY NOTE
AND BILL OF EXCHANGE
Points of Distinction Promissory Note Bill of Exchange
Number of Parties Two parties: Maker and Payee. Three parties: Drawer, Drawee, and Payee.
The drawer and payee can be the same person (e.g., "Pay to
Maker and Payee The maker cannot be the payee.
me or my order").
Nature of Instrument Contains a promise to pay. Contains an order to pay.
Acceptance No acceptance required; signed by the maker. Requires acceptance by the drawee before payment.
Liability is secondary and conditional (arises only if the drawee
Nature of Liability Liability is primary and absolute.
does not honor the bill).
Drawer has an immediate relation with the acceptor, not the
Maker's Position Maker has an immediate relation with the payee.
payee.
The acceptor may accept the bill conditionally under certain
Conditional Terms Must contain an unconditional promise to pay.
circumstances.
Payable to Bearer Cannot be drawn 'payable to bearer.' Can be drawn 'payable to bearer' (except on demand).
Notice of dishonor must be given to all prior parties, including
Notice of Dishonor No notice necessary to the maker upon dishonor.
the drawer and endorsers.
Provisions related to bills (e.g., presentment for Specific provisions regarding presentment, acceptance, and
Applicability of Provisions
acceptance) do not apply. drawing in sets are applicable.
CHEQUE
A cheque is a written(must be in writing-
either printed or handwritten), dated(without a
date, the cheque is considered invalid), and
signed(by the person issuing the cheque)
instrument that orders a bank(essentially an
order from the drawer instructing the bank to
pay from the drawer’s account) to pay a
specific sum of money(The amount of money to be paid is clearly mentioned in both words and numbers
on the cheque) to the bearer or a specified individual.
According to Section 6 of the Negotiable Instruments Act, 1881, a cheque is a bill of exchange drawn on
a specified banker and not expressed to be payable otherwise than on demand.
PARTIES OF A CHEQUE
Drawer Drawee Payee
The drawer is the person or entity who The drawee is the bank or financial institution on The payee is the person or entity
writes and signs the cheque. The drawer is which the cheque is drawn. In other words, the who is entitled to receive the
typically the owner of the bank account drawee is the bank that holds the drawer’s payment from the cheque. The
from which the payment is to be made. account and is responsible for paying the cheque
payee’s name is usually written on
The drawer gives an order to their bank amount when it is presented.
(the drawee) to pay a specified amount
the cheque, and they are the one
The drawee must verify the details of the
to the person mentioned on the cheque . cheque, such as the signature of the drawer, who either cashes the cheque or
The drawer ensures that they have the sufficiency of funds in the drawer’s deposits it into their bank account.
sufficient funds in their bank account for account, and the validity of the cheque >
the cheque to be honoured. If all the details are in order, the drawee bank
If the cheque is dishonoured due to processes the payment and transfers the
insufficient funds, the drawer can face funds to the payee.
legal consequences under Section 138 of If any detail is incorrect, such as a mismatch
the Negotiable Instruments Act. in the signature or insufficient funds, the
drawee can dishonour the cheque.
REQUIREMENTS FOR A VALID CHEQUE
REQUIREMENT EXPLANATION EXAMPLE
A cheque must be in writing. Cheques that are oral or A cheque written on a bank-issued cheque leaf or any similar
Written Instrument verbal instructions are not valid. medium is acceptable.
A cheque cannot be contingent upon any external condition. Pay ₹5,000 to Mr. Shah" is an unconditional order, whereas
Unconditional Order to Pay It must contain an unconditional order to pay. "Pay ₹5,000 to Mr. Shah if it rains tomorrow" would not be valid
If Mr. Kapoor forgets to sign the cheque, it will not be honored
Signature of the Drawer The cheque must be signed by the drawer.
by the bank.
The cheque must be drawn on a specific banker (a bank or A cheque that is drawn on State Bank of India is valid, but one
Specifies a Banker financial institution). It cannot be drawn on any other entity. drawn on an informal credit provider or lender is not.
A valid cheque must bear a date. Cheques without a date or If the cheque is dated March 1, 2024, it is valid until May 31,
Date with post-dated/stale dates cannot be processed 2024.
The payee must be clearly mentioned. It can either be a A cheque made out to "Mr. Shah" or "Bearer" is valid, but one
Payee Must Be Identified specific person or made payable to "bearer" without a payee mentioned is not.
The amount to be paid must be clearly mentioned in both
If a cheque states "₹5,000" and "Five thousand rupees only" but the
Amount in Figures and Words figures and words. If there is a discrepancy between the
figures show "₹50,000," the bank will honor ₹5,000.
two, the amount written in words will be considered.
TYPES OF CHEQUES
Bearer Cheque- A bearer cheque is one where the payment is made to the person who presents the cheque to the bank,
regardless of their identity. The word “bearer” is written on the cheque. Bearer cheques are typically used for cash withdrawals
at the bank counter.
Order Cheque- An order cheque is made payable to a specific person or entity whose name appears on the cheque. The bank
verifies the identity of the payee before making the payment. They are commonly used when the drawer wants to ensure that
only the named individual or organization can encash the cheque.
Crossed Cheque- Crossed cheque has two parallel lines drawn across its face, indicating that the cheque cannot be cashed
at the bank counter. Instead, the payment is to be credited to the payee’s bank account. This cheque type ensures secure
transactions, as it cannot be encashed directly but must be deposited into a bank account.
Post-Dated Cheque- A post-dated cheque is one where the drawer specifies a future date for the cheque to be cashed. The
bank will not honour the cheque before the written date. Common in business transactions where payments are scheduled for
future dates.
Stale Cheque- A stale cheque is a cheque that has not been presented for payment within three months of its issue date.
After three months, the cheque becomes invalid and cannot be cashed. The cheque must be reissued by the drawer if it
becomes stale.
Self-Cheque- A self-cheque is one where the drawer writes the word “self” in place of the payee’s name, indicating that they
intend to withdraw money from their own account. Used by individuals to withdraw cash from their own bank accounts.
CASE STUDY
INDIAN BANK ASSOCIATION & ORS VS. UNION
OF INDIA & ANR (21 JANUARY 2014)
Court: Supreme Court of India
Judgment Date: January 21, 2014
Bench: Justice K.S. Radhakrishnan, Justice Vikramajit Sen
Case No.: Writ Petition (Civil) No. 18 of 2013
BACKGROUND
This case deals with issues arising under Section 138 of the Negotiable Instruments Act, 1881,
concerning dishonored cheques due to insufficient funds. The petitioners, led by the Indian
Bank Association, sought the Supreme Court’s intervention for setting guidelines to
streamline the legal processes for cheque dishonor cases. The petitioners included major
banking institutions such as Punjab National Bank, raising concerns about delays in resolving
cheque dishonor cases, which directly impacted the recovery of public funds.
The petitioners requested the Court to address delays in cases under Section 138 by
introducing procedural reforms for expediting trials, ensuring efficiency in court
proceedings, and ultimately improving trust in the negotiable instruments system.
KEY ISSUES RAISED
Delay in Trial of Cheque Dishonor Cases: The petitioners argued that the delays in
disposing of Section 138 cases hindered the banking industry’s ability to recover funds.
Summary Trial Procedures: Despite amendments aimed at enabling faster trials of cheque
dishonor cases, various magistrates across India were not uniformly adopting the mandated
procedures, resulting in inefficiencies.
Need for Guidelines: The petitioners requested that the Supreme Court lay down
procedural guidelines for the uniform and speedy resolution of cases under Section 138 of
the Negotiable Instruments Act.
LEGAL PROVISIONS INVOLVED
Section 138, Negotiable Instruments Act, 1881: Deals with dishonor of cheques due to
insufficient funds.
Sections 143-147, Negotiable Instruments Act (Amendment, 2002): Introduced to ensure
speedy trials for cheque dishonor cases and made the offense compoundable.
Sections 261-265, Criminal Procedure Code (CrPC), 1973: Relating to the summary trial
procedures that should be adopted for cases involving dishonored cheques.
COURT’S OBSERVATIONS
Impact of Delayed Trials: The Court acknowledged that the delays in resolving cheque
dishonor cases had negative consequences on the banking industry and overall financial
trust.
Uniformity in Trial Procedures: The Court noted that the 2002 amendments to the
Negotiable Instruments Act were introduced to expedite trials through summary procedures.
However, there was a lack of uniform implementation across courts.
Legal Safeguards: The Court reaffirmed that Section 138 ensures that cheque dishonor is
punishable with imprisonment or a fine to maintain the credibility of cheques. However,
procedural delays were diluting the efficacy of this provision.
COURT’S RULING
Scrutiny of Complaints: On receiving a complaint Expeditious Hearings: The examination-in-chief,
under Section 138, courts should scrutinize the cross-examination, and re-examination of the
accompanying affidavit and documents. If found in complainant should be completed within three
order, summons should be issued immediately. months. Witnesses may submit affidavits, and all
Service of Summons: Courts must ensure that parties should be available for cross-examination.
summons are properly addressed and served Day-to-Day Trial: The trial should be conducted
through multiple means, including email and postal continuously from day to day until its conclusion,
service. Assistance from local police may also be unless there are justifiable reasons for adjournment.
sought for proper service. Recording Evidence: The Court reiterated that
Early Application for Compounding: The Court evidence on affidavit is permissible for
encouraged compounding (settling) of offenses at complainants, reducing the need for physical
an early stage. Courts should pass orders for appearances. This is in line with Section 145 of the
compounding if the accused applies for it during Negotiable Instruments Act.
the first hearing.
CONCLUSION
The Supreme Court’s ruling in Indian Bank Association & Ors vs. Union of India &
Anr addressed the longstanding issue of delayed trials in cheque dishonor cases.
By introducing specific guidelines, the Court emphasized the need for efficiency
and uniformity in handling these cases to maintain trust in financial transactions
involving negotiable instruments. The ruling underscored the importance of
adhering to the summary trial procedures outlined in the Criminal Procedure Code,
thus expediting justice and reducing the burden on the judicial system.
THANK YOU
FOR YOUR ATTENTION