MODULE 3
PROMISSORY NOTE
Section 4 of the negotiable instruments act,1881 states that, “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 only to, or to the order of, a
certain person, or to the bearer of the instrument.”
The person who makes the promise to pay is called the maker, he is the debtor and must sign the
instrument. The person who will get the money is called the payee. For eg. I promise to pay B or
order Rs. 50. In order to constitute a good promissory note, there should be an express promise to
pay the money.
The promise in promissory note is need not to be expressed in any particular form of words, the
language used be such that there should be a written undertaking to pay.
ELEMENTS OF PROMISSORY NOTE
1. The instrument must be in writing.
Case- Roopchand vs. Mahavir Prasad- In this case it was held that promissory note in form of
tape recorder is not a valid promissory note. There is a obligation of promissory note of being in
writing.
2. Undertaking to pay
3. Promise to pay unconditional- No condition should be attached to the promise to pay.
4. Maker must be certain person.
5. Signed by the maker
6. The sum payable must be certain.
7. Promise of payment only in currency
8. Payee must be certain person.
9. A promissory note must be stamped according to Indian Stamp act.
BILL OF EXCHANGE
Section 5 of the negotiable instruments act, 1881 states that, “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.”
A bill of exchange is made between three parties- the drawer, drawee and payee. A person who
makes the bill of exchange is known as the drawer, a person on whom the bill of exchange is
drawn is called the drawee and to whom the amount mentioned in bill of exchange is payable is
called as payee.
ESSENTIALS
A bill of exchange should be in writing.
It should be unconditional
There should be three parties- drawer, drawee and payee
It should be signed by the drawer
Payable money must be certain
TYPES OF BILL OF EXCHANGE
1. Demand Bill- There is no fixed date for payment of such bill. They become payable at
any time.
2. Term Bill- These bills are payable after a specified period of time.
DIFFERENCE BETWEEN BILL OF EXCHANGE AND PROMISSORY
NOTE
Basis Bills of Exchange Promissory Note
Bills of Exchange is a written A Promissory Note is a financial
Meaning document that binds one party instrument in writings issued by the
to pay a certain amount to purchaser of the goods (the debtor) as a
Basis Bills of Exchange Promissory Note
another party on demand or on promise to pay a certain fixed amount to
the expiry of a fixed period of the seller either on demand or on expiry of
time. a certain fixed period.
There are three parties to the
bills of exchange, namely the There are only two parties to a Promissory
Parties
Drawer, the Drawee, and the Note, namely The Drawer and the Payee.
Payee.
It is drawn by the seller or the
Drawer It is drawn by the purchaser or the debtor.
creditor.
Nature It is an order to pay. It is a promise to pay.
It must be accepted and signed
Acceptance No acceptance is needed as such.
by the drawee.
The liability of the drawer is
Liability of secondary. He is liable only
The liability of the drawer is primary.
the Drawer when the drawee does not pay
the amount.
A drawer as The Drawer can be the payee if The Drawer cannot be the Payee as he is
a Payee he retains the bill till the date of the person liable to pay the amount.
Basis Bills of Exchange Promissory Note
maturity.
HUNDIS
Hundi is a negotiable instrument. This word has come out from the Sanskrit word hundi which
means to collect. The RBI describes hundi as an unconditional order in writng made by a person
directing another to pay a certain sum of money to a person named in the order.
In its simplest form, a hundi is a written unconditional order directing the payment of a specific
amount of money to a designated person or bearer. Hundi transactions typically involve two
parties: the drawer, who issues the hundi, and the payee or beneficiary, who receives the
payment. The hundi can be endorsed, enabling it to be transferred to another party, similar to a
promissory note.
Hundis are often used in commercial transactions, particularly in rural areas and among business
communities that have trust-based relationships. They are prevalent in India, as well as other
countries in South Asia and the Middle East. The use of hundis offers several advantages. They
provide a flexible and convenient method of transferring funds across long distances, as they can
be easily transported and redeemed at the designated location. Additionally, hundis are not
subject to the same regulations and formalities as traditional banking systems, making them
popular in areas with limited access to formal financial services.
CHEQUE
A cheque is general document that orders a payment of money from a bank account.
Section 6 of the Negotiable Instrument Act, 1881 defined cheque as a —“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.”
Drawer- The person who writes the cheque is drawer.
Drawee- The person who is directed to pay is a banker.
Payee- The person who is to receive payment under a cheque.
TYPES OF CHEQUE
Bearer Cheque- The bearer cheque is a type of cheque in which the bearer is authorised to get
the cheque encashed. This means the person who carries the cheque to the bank has the authority
to ask the bank for encashment.
Order Cheque- This type of cheque cannot be endorsed, i.e., only the payee, whose name has
been mentioned in the cheque is liable to get cash for that amount.
Crossed Cheque- In this type of cheque, no cash withdrawal can be done. The amount can only
be transferred from the drawer’s account to the payee’s account.
Stale Cheque- In India, any cheque is valid only until 3 months from the date of issue. So if a
payee moves to the bank to get withdrawal for a cheque which was signed 3 months ago, the
cheque shall be declared a stale cheque.
Post Dated Cheque- If a drawer wants the payee to apply for withdrawal or transfer of money
after the present date, then he/she can fill a post dated cheque.
Ante Dated Cheque- If the drawer mentions a date prior to the current date on the cheque, it is
called ante dated cheque.
Self Cheque- If the drawer wishes cash for himself he can issue a cheque where in place of the
Payee’s name he can write “SELF” and get encashment from the branch where he owns an
account.
Traveller’s Cheque- As the name suggests, the Traveler’s cheque can be used when a person is
travelling abroad where the Indian currency is not used. If a person is travelling abroad, he can
carry the traveller’s cheque and get encashment for the same in abroad countries.
BANK DRAFT
A bank draft is a negotiable instrument that functions like a cheque in terms of payment. The
complete amount of the draft is normally pulled from the requesting payer’s account and stored
in a general ledger account until the beneficiary pays the draft. Bank drafts offer a safe and
secure method of payment to the beneficiary.
DISHONOUR OF CHEQUE
Penalties in case of dishonor of certain cheques for insufficiency of funds in account.
Section 138 of Negotiable Instruments Act, 1881- 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 deemed to have committed an offence and shall be punished with
imprinsonment for 2 years of with fine which may extend to twice the amount of cheque or both.
Conditions for applicability of section 138:
The cheque has been presented to the bank within a period of its validity.
The payee makes the demand for the payment of said amount of money by giving a
notice in writing to the drawer of cheque within 30 days of receipt of information from
the bank regarding the return of cheque unpaid.
The drawer of such cheque fails to make the payment of the said amount of money to the
payee within 15 days of the receipt of said notice.
Secton 141 of Negotiable Instruments Act, 1881- If the person committing an offence under
section 138 is a company, every person who, at the time the offence was committed, was in
charge of, and was responsible to the company for the conduct of the business of the company,
as well as the company, shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly.
SECTION 142
COGNIZANCE OF OFFENCE
Cognizance means police are empowered to make arrest without warrant or prior permission of
court.
Section 142(1)- No court shall take cognizance of any offence punishable under section 138
except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due
course of the cheque
Section 142(2)- such complaint is made within one month of the date on which the cause of
action arises.
SECTION 143
POWER OF COURT TO TRY CASES
Section 143(1)- All offences under this Chapter shall be tried by a Judicial Magistrate of the first
class or by a Metropolitan Magistrate and the provisions of sections 262 to 265 of the CrPC
shall, as far as may be, apply to such trials.
Section 143(2)- The magistrate shall after hearing parties record and order to that effect and
thereafter recall any witness who may have been examined and proceed to hear or re hear the
case in the manner provided by said court.
Section 143(3)- Every trial under this section shall be conducted as expeditiously as possible and
an endeavour shall be made to conclude the trial within six months from the date of filing of the
complaint.
SECTION 144
MODE OF SERVICE OF SUMMONS
According to this section, A Magistrate issuing a summons to an accused or a witness may direct
a copy of summons to be served at the place where such accused or witness ordinarily resides or
carries on business or personally works; for gain, by speed post or by such courier services as are
approved by a Court of Session.
SECTION 146
BANK`S SLIP PRIMA FACIE EVIDENCE OF CERTAIN FACTS
The Court shall, in respect of every proceeding under this Chapter, on production of bank’s slip
or memo having thereon the official mark denoting that the cheque has been dishonoured,
presume the fact of dishonour of such cheque, unless and until such fact is disproved.
SECTION 147
OFFENCES TO BE COMPOUNDABLE
Every offence punishable under this act shall be compoundable.
CASES
Dashrath Rup Singh Rathore vs State of Maharashtra- The supreme court held that the
complaint under section 138 of negotiable instrument act can be filed in any court within whose
jurisdiction the cheque was dishonoured by bank or where payee has his place of business.
NMTC Limited vs. Michel Chemical & Pharma Pvt. Ltd.- The supreme court held that notice
under section 138 of NI act must be served within 30 days from the date of receiving the
information from bank regarding dishonor of cheque & any delay beyond this period will render
the complaint invalid.
Kusum Ingots & Alloys Limited vs. Tena Peterson securities Limited- The supreme court
held that the cheque issued as a gift or for any other purpose which does not constitute a legally
enforceable debt or liability will not attract the provision of section 138 of negotiable instrument
act.
PYQ
Q. What is goldsmith`s notes(2014) 1 marks
Ans. Goldsmiths' notes were promissory notes or cash notes that bankers gave to customers as a
receipt for money. The term originated in London, where goldsmiths were the first bankers.
Q. Define Hundi(2014,2017,2019) 1 marks
Q. What is meant by negotiable instrument(2014,2019) 1 marks
Ans. A negotiable instrument is a signed document that promises to pay a specific person or
entity a certain amount of money. The amount must be fixed and certain. The instrument must be
paid on demand or by a specific date.
Q. When did negotiable Instrument act come into force(2015) 1 marks
Ans. Negotiable Instrument act came into force on 1st March 1882.
Q. Define promissory note(2016) 1 marks
Q. State the difference between bill of exchange and promissory note(2017) 1 marks
Q. Define bill of exchange(2018) 1 marks
Q. Define cheque(2019,2022) 1 marks
Q. State two kinds of negotiable instruments(2020) 1 marks
Q. Explain the different kinds of dishonor of cheques(2020) 4 marks
Q. What do you mean by traveler`s cheque(2018,2022) 4 marks
Q. What is the difference between bill of exchange and cheque(2022) 4 marks
Q. In which condition a minor can be party to a negotiable instrument(2018) 4 marks
Ans. In general, minors are not considered legally competent to enter into contracts, including
those involving negotiable instruments. A negotiable instrument is a document that promises
payment to a specified person or the bearer. Examples include promissory notes, bills of
exchange, and checks.
However, there are a few exceptions where a minor may be allowed to be a party to a negotiable
instrument:
1. Necessaries: If the negotiable instrument represents a contract for necessaries (essential
goods and services required for a minor's well-being), a minor may be held responsible.
In such cases, the minor is typically only liable to the extent of the value of the
necessaries provided.
2. Benefit of the Minor: If the contract is for the minor's benefit, they may be allowed to
enforce it. This could include situations where the minor is receiving education, medical
care, or other benefits.
Q. Write a short note on dishonouring of cheques(2016,2019) 4 marks
Q. Discuss criminal liability of dishonor of cheque(2014,2017) 4 marks
Q. Explain essential features of bill of exchange(2015) 4 marks
Q. What do you mean by dishonor of cheque? Discuss the criminal liability on dishonor of
cheques(2022) 8 marks