Negotiable Instruments
F-204: Law and Practice of Banking
Definition of Negotiable Instruments
• A negotiable instrument is a transferable document
which pass freely from hand to hand and thus form an
integral part of the modern business mechanism.
• The law relating to negotiable instruments is contained
in the Negotiable Instrument Act, 1881.
• Negotiable Instrument Act merely states that a
negotiable instrument means a promissory note, bill
of exchange or cheque.
• Section 13 does not prohibit any other instrument
which satisfies the essential features of negotiability
Essential Features of Negotiable Instruments
• The negotiable instruments are easily transferable
from person to person
• A negotiable instrument confers absolute and
good title on the transferee, who takes it in good
faith
• Such holder of negotiable instrument, possesses
the right to sue upon the instrument in his own
name and can recover the amount from the party
liable to pay thereon
Types of Negotiable Instruments
Negotiable instruments fall under two categories
▪ Negotiable instruments by statute
▪ Promissory notes
▪ Bill of exchange
▪ Cheque
▪ Negotiable instruments by custom or usage
▪ Government promissory notes
▪ Delivery orders
▪ Railway receipts
Exceptional cases of Negotiable Instruments
• If a cheque is payable to a specified person
only and not to his order or the bearer, it can’t
be transferred to any other person and hence
it losses its negotiability
• If a cheque is crossed ‘Not Negotiable’ it can’t
be transferred
Definitions of Negotiable Instruments
• Promissory note: A promissory note is an instrument
in writing containing an unconditional undertaking,
signed by the maker, to pay a certain sum of money
only to, or to the order of certain person, or to the
bearer of the instrument.
• Drawn and signed by the debtor
Definitions of Negotiable Instruments
• 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 order of, a
certain person or to the bearer of the instrument.
Kinds of Bill of Exchange
• Inland and Foreign Bills
• Time and Demand Bills
• Trade Bills and Accommodation Bills
• Clean Bills and Documentary Bills
Definitions of Negotiable Instruments
• Cheque: A cheque is a bill of exchange drawn on a
specified banker and not expressed to be payable
otherwise than on demand.
Features of Promissory note, Bill of Exchange, Cheque
• Instruments in writing
• Unconditional order/promise
• The drawee of a cheque or bill
• The amount of the instrument must be certain
• The instrument must be payable either ‘to order’ or ‘to
bearer’
• The payee must be a certain person
• The payee may be more than one person
• The time of payment
• Signature of the drawer/promisor
• Delivery of the instrument is essential
Holder and Holder in due course
• Holder: Holder of a promissory note, bill of exchange
or cheque means any person entitles in his own name
to the possession thereof and to receive or recover the
amount due thereon from the parties thereto.
• Holder in due course: Holder in due course means any
person who, for consideration, became the possessor
of a promissory note, bill of exchange or cheque, if
payable to bearer, or the payee or endorse thereof if
payable to order, before the amount mentioned in it
became payable, and without having sufficient cause
to believe that defect existed in the title of the person
from whom he derived his title.
Endorsements
• An instrument may be negotiated in any of the
following two ways:
▪ By Delivery
▪ By Endorsement and Delivery
• Definition of Endorsement: 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.
• Endorser and Endorsee
Legal Provisions regarding Endorsements
• Effect of Endorsement
• Endorser
• Time
• Endorsement for a part of the amount
• The legal representative of a deceased person
cannot negotiate by delivery only
General Rules regarding the Form of Endorsements
• Signature of the endorser
• Spelling
• No addition or omission of initial of the name
• Prefixes and suffixes to be excluded
• Illiterate person
• Agent
• Joint stock
• Liquidator
• Executor
Kinds or types of Endorsement
• Endorsement in Blank
• Endorsement in Full
• Conditional Endorsement
• Restrictive Endorsement
• Endorsement ‘Sans Recourse’
• Facultative Endorsement
Presentment of Negotiable Instruments
• Presentment for Acceptance
• Presentment for Sight
• Presentment of Negotiable Instruments for
Payment
Rules Prescribed for Presentment for Payment
• Negotiable instruments must be presented for
payment at maturity
• Presentment for payment must be made within
usual hours of business
• Installment payment
• Specified place and reasonable time
• If specified place is not mentioned, present at the
place of the business
• Delay or non-presentment of instrument
Dishonor of Negotiable Instruments
• Dishonor by Non-acceptance
• Dishonor by non-payment